Global Economic Realignment? Possible Consequences of Russian Sanctions
The Russian military’s deployment of offensive troops into Ukraine after eight years of warfare between the Ukrainian government and pro-Russian separatists sparked a massive international response of condemnation, especially in Europe and North America. As Russian troops fortified the positions of the Donbas and Luhansk separatists before advancing on the southeastern half of the country and its capital, Kyiv, these feelings of outrage turned into concrete sanctions that have damaged the Russian economy to a previously unseen level. These economic responses in recent months have effectively cut off Russia from much of the Western part of the global economy. Russia and its people have suffered immensely due to these sanctions. However, these immediate outcomes could also enable unintended consequences in the long term as the world sees a fundamental realignment of global power towards Asia.
Source: IAI News
While Western sanctions on Russia have indeed shocked its economy and pose many immediate problems for the country in terms of imported goods, domestic currency values on the international market, and even the possibility of national default, economists debate whether these circumstances will grow to the point of destabilizing Russian society. For the Russian economy’s most pressing issue, the potential debt default, a recent argument states that the inability of the Russian central bank to pay a $650 million bill on two bonds held in American banks marks the beginning of an intense crisis for the country. However, the United States and other Western countries have hurt the conventional payment of these debts by both freezing Russian foreign currency reserves and rejecting payments in rubles, making it impossible for Russia to transact by usual means.
Unlike when the Bolsheviks took power and canceled Russian imperial debts, Russia's inability to pay off debts today does not come from a lack of economic will but conscious interference in the ability to transact with parties that the country owes. This treatment of Russia’s outstanding debts suggests that Western countries are purposefully setting Russia up to fail as a means of retaliation for the war in Ukraine. It is highly possible that the inability to pay off hundreds of millions of dollars of debt will form a pretext for the seizure of part of the hundreds of billions of dollars of Russian reserves that currently lie frozen in Western banks.
Other indicators suggest that the economic impact to Russia caused by sanctions may not be as painful as initially expected. Sources such as the World Bank have estimated that its economy is expected to contract by around 10% this year, which is devastating but not existentially dangerous overall. By contrast, The Economist finds that the economy of Ukraine will contract by around 45%. In addition, the Russian ruble has reached a 2-year high against the US dollar after the currency's initial downturn, a result of effective financial policy responses. The fact that Russia is (alongside Ukraine) among the world's largest exporters of edible crops also implies that nationwide starvation is unlikely in the foreseeable future. Stripped of various luxuries, but not key essentials, many people in Russia who follow the country's state media may turn their overall displeasure away from national leaders to Western governments, deepening animosities on the European continent.
Internationally, these economic actions of various actors in Western countries put into question the credibility of their financial institutions. If a non-Western country is considering storing its economic assets in a Western nation but could possibly engage in policy behavior that these nations may strongly object to, then this country may not consider working with a Western financial institution. Although Western institutions hold an immense amount of power over the global financial system, this power is disproportionate compared to the world's population and ideological makeup. Western socioeconomic systems and values are a minority compared to the rest of the world's, yet the persistence of liberal internationalist thought has given Western countries a precedent to act as global arbiters of conduct. In the case of Russia, even traditionally neutral Switzerland has joined its European neighbors in placing sanctions on the country. But the increasing unpopularity of this arbitrative posture, with Russia as the latest example of it in action, and the rise of various economies in Asia over the past few decades have likely started a shift away from the current economic center of mass in the West.
In the East, China has become a leader in offering an alternative to Western countries not only socioeconomically but also in its approach to international business. The country habitually provides investment lending to virtually any interested party, though often under strict collateral policies for related development projects if these parties are unable to successfully pay back their loans. Ideology has meant little for the Chinese in this regard, assisting parliamentary republics like Pakistan to Islamic theocracies like Saudi Arabia. This policy of openness has started to be appreciated by all kinds of actors due to the sanctions placed on Russia by Western countries, seeing the Chinese as a viable (but not total) economic alternative to the West.
In the case of Saudi Arabia in particular, a traditional ally of the United States, this theocracy’s leaders have recognized the need to shift away from reliance on Western currencies given the possibility of facing a similar situation as Russia. To this end, they have reportedly initiated talks with China over using the yuan to transact oil. Even India, a typical rival of China and the world’s largest democracy by population, has felt a similar concern. This country, for example, could likely abandon the dollar in favor of its own rupees to purchase oil from Russia. Countries of various ideological tendencies have sensed a danger in “putting all your eggs in one basket” and have started to adjust their economic policies accordingly. Meanwhile, the IMF has also acknowledged such challenges to the U.S. dollar. Although many in the West see placing sanctions on Russia to be righteous, these wider international perceptions cannot be overlooked.
Responses to Western sanctions on Russia may represent the beginning of a larger trend or merely a series of isolated examples. But within an increasingly multipolar world, the economic leverage and credibility of Western countries could stand to weaken over growing skepticism from various other international actors with an increasing global influence.