Putin’s chicken game with the West
The author is an editorial writer of the JoongAng Ilbo.
The Russian invasion of Ukraine has sent the global economy into unexpected turmoil. The Russian economy has fallen into a crisis due to international sanctions led by the United States. Russia’s central bank and other lenders have been removed from the swift messaging system for international payments. Foreign businesses have suspended operations in Russia. Livelihoods have become devastated. Russians fight for daily necessities due to the shortage of groceries. Yet the war shows no sign of subsiding. It is becoming a game of chicken between Russia and the West. Upon discovering hundreds of civilian bodies buried in mass graves in Bucha, a suburb of the capital Kyiv, after the pullout of Russian forces, the Western societies are ramping up economic sanctions. The shockwave on the global economy is also worsening.
The Russian-Ukraine war is impacting the global economy as much as the U.S.-China conflict and the Covid-19 pandemic. The dollar has come under challenge and European Union members have been forced to change their energy portfolio. A food crisis is in the making due to a dramatic jump in grain prices. Russian President Vladimir Putin remains defiant against reinforced sanctions. The Kremlin also threatened to nationalize the assets of foreign companies leaving the country.
The authoritarian measures have only accelerated the flight out of Russia by foreign companies and their reshoring wave. Due to repeated threats to the global supply chains, countries are moving to establish their own supply chains in strategic goods like semiconductors. The Financial Times observed Putin’s war is changing the business model of the global economy of the past 30 years, as the world is vying to weaponize resources and accelerating reshoring for economic security.
In the face of a national default crisis, the Kremlin demanded export payments in rubles. The move was thought to be in vain against the strong dollar. But the opposite phenomenon is happening. The ruble, which fell to 150 against the dollar at the onset of the war, has recovered to 80. Paul Krugman, a Noble Prize-winning professor of economics at The Graduate Center, City University of New York, found that Putin forces may be doing poorly on the battlegrounds, but the country is faring well on the economic front. The Russian central bank yanked up the policy rate from 9.5 percent to 20 percent to prevent capital flight and protect the currency’s value.
But how long Russia can be sustained through such makeshift artificial measures is uncertain. European countries like France and Italy with a large amount of Russian debts are becoming worried. Experts predict China and Russia to accelerate their battle against dollar hegemony even after the Russian war ends. The International Monetary Fund (IMF) also predicts a challenge to the greenback’s dominance of the global reserve currency as a result of the sanctions on Russia. “The dollar would remain the major global currency … but fragmentation at a small level is certainly quite possible,” said Gita Gopinath, first deputy managing director at IMF. The phenomenon — trade partners paying in currencies other than the dollar — could be temporary on the belief that the dollar will remain as the dominant reserve, but as IMF has taken notice, the latest events and developments could spread to a currency war.
Wars in the 20th century have in essence evolved around energy. Japan attacked Hawaii and started the Pacific War after the U.S. announced a ban on oil exports to “aggressor countries,” including Japan, on July 26, 1941. The U.S. and other global powers are led into the conflicts in the Middle East due to oil reserves there. The western alliance led by U.S. President Joe Biden hinges on energy security. The FT highlighted Germany’s conundrum. Germany has been speeding up a phase-out of nuclear reactors under the chancellorship of Angela Merkel. It enhanced renewables in return, but had to turn to Russian natural gas due to insufficiency of power from renewable energy sources. Berlin had built the Nord Stream 2 gas pipeline to increase gas supplies from Russia.
Putin’s invasion of Ukraine has ruined the plan for Germany. It suspended the construction of the Nord Stream 2 pipeline. Pipeline operators are on the brink of going bankrupt. The $11 billion 10-year project is to build a 1,200-kilometer pipeline between Russia and Germany. Lubmin, the coastal area north of Germany with 2,041 population hosting the pipeline, has become a “disaster tourisma” with people coming to see the deserted area following the suspension of the project.
The FT pointed out that Europe must wean itself off Russian energy to end Putin’s influence. The U.S. has pushed out its strategic reserves to calm jittery allies. It has been persuading oil producers of the Middle East and South America to increase output, but they are not easily moved. Even if the U.S. increases supplies to Europe, shipping is an issue. A Europe used to Russian gas pipelines is lacking storage for fuel from other areas.