Russia-Ukraine War, the US Sanctions, and its Economic Implications

As the Ukrainians offer their blood and their lives in order to safeguard their democracy, we should not allow powerful capitalists to accrue profits as the working class suffers the consequences.

Russia’s disastrous efforts to become a great power once again, after its embrace of capitalism, have turned the country into a supplier of raw materials to more powerful economies. While it is true that Russia may have the most sizable army in Europe, the fact remains that, economically, it has not been able to recover from the loss of the many regions that constituted the old Soviet Union. According to the World Bank, Russia happens to be just the 11th largest economy in the world, not only surpassed by the United States, China, and Japan, and the European powers of Italy, France, the United Kingdom, and Germany, but even India and South Korea have eclipsed Russia as formidable emerging markets.

Russia’s claim status of being a massive power is predicated on its collection of nuclear weapons, its economic role of acting as a petrol pump for Europe, and an army that is distant from engulfing all before it in Ukraine. According to Jan Toporowski, a professor of Economics and Finance at SOAS, it is to avoid the use of this weaponry that the power bearers in Europe and North America have favored the use of economic sanctions as tools, the goal being that the concomitant destitution in Russia as a result of sanctions may erode and weaken the national pride that Russia is bolstering through its war on Ukraine, and the constricting financial conditions might increase the possibility of a mutiny in the Russian elite. For anyone not living in the Kremlin, it is hard to evaluate the possibility of this mutiny. While it’s true that added impoverishment will have crucial consequences, its effect will mostly be on the wealthier middle classes. This middle class would feel strongly disadvantaged as a result of payment restrictions on imported goods and the joys of traveling abroad. While there are some reports of Chinese banks putting down the request of Russian customers for letters of credit, because of the fear that this may cause them to lose facilities offered by US banks, the fact remains that Russia has access to the Chinese international payments network. In addition to this, the Indian government is also working towards building a system for the exchange of rouble-rupee payments, although just like the Chinese, the Indian banks will also take into consideration the probable US retaliation. In order to stabilize the rouble exchange rate after it plummeted to almost half of its pre-war value against the US dollar, the Russian foreign exchange regulations have demanded that traders submit 80% of their foreign earnings for conversion into roubles, and the Russian government has also demanded that Russian oil will be sold in return for a payment in roubles.

However, according to experts, there’s a lot of journalistic hyperbole behind the narrative on foreign exchange restrictions. Toporowski says that “the demand for payment in roubles is actually a requirement to deposit dollars in Sberbank or Gazprombank to buy the roubles required to pay for oil. And the obligation placed on traders to surrender dollars means that the Russian foreign exchange market has in effect been brought onto the balance sheet of the Russian central bank, where the central bank decides the rate at which it buys those compulsorily exchanged dollars.”

On the commodity markets, there is speculation about the emergence of a two-tier system in which energy and raw materials are paid a relatively high official price, but such products from Russian sources are charged half the price. In a similar vein, Russian customers can expect to spend far more on imported items than the market price outside of Russia. Food costs in the Middle East, where food is already deficient, are already soaring and will continue to climb as the war crisis affects Ukrainian agriculture. The disruption of the global supply chains is accompanied by the disintegration of low-cost offshore manufacturing: Volkswagen temporarily halted production of electric cars in its Zwickau factory in early March due to a lack of supplies from Ukraine.

Our corporate leaders, on whose insight our economic well-being supposedly relies, have declared a new inflationary age in world economic affairs due to these extraordinary swings in worldwide markets. As the war entered its fifth week, Larry Fink, the world’s largest asset manager, while addressing his shareholders, at the end of March, declared that the Russian invasion of Ukraine has put a stop to the globalization we have enjoyed over the last three decades and that a large-scale reorientation of supply chains will inevitably lead to inflation. The assessment of Fink can be attributed to the disruption he had in mind of the cross-border supplies due to the war and the disgust that Americans and Europeans have come to feel towards doing business with Russia. 

But Fink’s idea of globalization can be challenged. Globalization is not reducible to the ‘global supply chains,’ which ensure low-cost raw materials to assembly sites on the margins of industrial hubs. But underlying this lies a global payment system that is required to organize trade and settle debt obligations across countries. SWIFT, or the Society for Worldwide Interbank Financial Telecommunications, is a global network of 11,000 institutions that handles the majority of cross-border payments. Despite the fact that it is purportedly a cooperative of member banks, it has agreed to exclude a number of Russian banks from its messaging system, which was used to make cross-border payments. Sberbank and Gazprombank, on the other hand, have escaped expulsion from the payments system so far since German oil and natural gas importers pay for their imports through Sberbank and Gazprombank. However, in Germany and Austria, as a result of anti-Russia sentiment, pressure is mounting to put an end to such imports. But until the imports exist, the banks through which they are paid remain essential for the transfer of these payments.

The US Federal Reserve provides currency swap facilities to a number of other central banks, including those in Europe, as well as Japan, Mexico, Brazil, and South Korea, allowing them to obtain dollars that are required as backing in many international transactions. Central banks outside the United States that benefit from these facilities will, obviously, steer clear of endangering their access to currency exchange facilities by permitting commercial banks to make transfers that circumvent the sanctions placed by the US. This comes on top of the freezing of up to 40% of Russian funds that lie in international markets, immediately after the invasion of Ukraine.

Because it is the system that allows money and capital to travel between countries, it won’t be wrong to claim that this international payments system, and not just the supply chain, lies at the heart of what is known as globalization. This international financial connection underpinned the globalization imagined by Anthony Giddens and Zygmunt Bauman in the years following the breakup of the Soviet Union, when Francis Fukuyama rejoiced at the so-called end of history. The World Trade Organization and the International Monetary Fund, however, did eventually accept Russia and China. Arguably, the development of free trade and international payment systems was, for the most part, very regional, as evinced by the creation of the European Union in Europe and its Single European Market, and in North America with the North Atlantic Free Trade Agreement (followed in 2020 by the US Mexico Canada Agreement), as well as other regional arrangements in the cone of South America, West Africa, Southern Africa, and South-East Asia. The majority of the world’s population, particularly in India, China, and the world’s poorer countries, does not use international payments and lives in countries where cross-border trade and related payments are strongly regulated. Only a privileged elite in these countries with financial assets in offshore territories such as Mauritius and the Caribbean can find the international payment system useful. As Toporowski argues, globalization always promised more than it could deliver.

Before the Ukraine War, this system of regional trade and payment sectors had already developed ruptures and cracks. The most dramatic example has been Great Britain’s decision to leave the European Union. But probably the most major contribution to this rupturing has been the deployment of economic penalties by the US as an alternative to military interventions. US banks play a crucial role in the global financial system. Dollar-based foreign exchange swaps are provided as security for credit transactions in other currencies by US commercial banks. As a result, the international banks lack the ability to circumvent US sanctions without washing their hands off the access to the foreign exchange swap facilities with US banks that foreign banks require to carry on their business. Because of this banking clout, most banks around the world will comply with US sanctions as not doing so is economically disadvantageous. 

The implications of economic sanctions that are put in place for the support of Ukraine are going to have drastic consequences globally. The cost of living will skyrocket in practically every country on the planet, worsening the inflation of prices that were already growing prior to the war. However, there’s going to be another significant impact that is as severe as inflation. For example, let us consider the demand for luxury imported goods in Russia, like cars made in Germany or French brewery products. The availability of these products in Russia would not come to an end, but instead, the cost of them would soar, primarily due to the decline of the Russian rouble in comparison to the Euro. When it comes to the question of oil trade, traders will aim at buying Russian oil at a very reduced price, in devalued roubles perhaps because of sanctions, but refined products like petrol will be delivered at a price above the much higher price for non-Russian oil.

To conclude, economic sanctions against Russia are contributing to a significant shift of income from workers and middle-class consumers to international trade profits. It adds to the armaments industry’s earnings boost as governments around the world enhance their military capacities and supply to Ukraine’s soldiers. This change in distribution occurs at a point when in the aftermath of the Covid pandemic, capitalist corporations are increasing their prices to recuperate revenue that was dissipated as a result of government-led covid control measures. It is imperative, though difficult, to prevent profiteering from economic and military warfare, led by the present forces of global capitalism. It can, however, be taxed, as similar profits were in the United Kingdom and the United States during WWII, to cover the costs of aid to Ukraine, refugee protection and rehabilitation, and health-care rebuilding, as well as to safeguard the basic needs of the poorest. While the Ukrainians have paid with their blood and lives to preserve their democracy; the working class throughout the globe and the already struggling people must not have to pay for the profits that the forces of global capitalism are producing from the war. 

Original article is written by Jan Toporowski at Common Dreams (Jan Toporowski is a Professor of Economics and Finance at SOAS, University of London, Visiting Professor of Economics at the University of Bergamo, Italy, and Professor of Economics and Finance at the International University College, Turin, Italy)