No dollars and no sense

When Russia counts the economic cost of the Ukraine invasion, will it prove Sun Tzu — who said that no country has ever profited from protracted warfare — right?
Thursday 10 March 2022
McDonald's is one of many companies that temporarily closed down their operations in Russia

To date, 124 companies have either announced limited or full sanctions against Russia, and the list keeps growing every day. Apple, Shell, Netflix — these are the brands that we use every day and take for granted that they’d always be around. When taking only Accenture’s decision into account, their decision to close will affect some 2,300 ordinary Russians, who found out just a few days ago that they were going to be jobless.

As Russia becomes increasingly isolated, the financial hit has been significant. The prevailing wisdom in 2019, when Russia’s severance from the SWIFT network was merely being discussed, was that this alone would cause a 5% hit — or US$84 billion — to its GDP, to say nothing of the US$150 billion in capital flight that accompanied western sanctions in 2014 alone. While this year’s tally remains uncounted, JP Morgan says its GDP will contract by 7%.


Former Russian Prime Minister Dmitry Medvedev previously called the move to axe Russia from SWIFT an “act of war” in 2019.


Russia is heavily reliant on petroleum exports, with the commodity making up almost half of its annual revenue. Being cut off from SWIFT is a severe blow as it cannot settle US-dollar-denominated hydrocarbon trades.

But even as this article is being written, Russia’s petroleum woes show no sign of slowing down. Countries are banning the supply of technologies that are important to Russia’s refineries, people won’t buy its unsanctioned crude oil even at record discounts, many of the world’s oil majors are pulling out of deals and joint ventures with it. Germany, Europe’s biggest economy, has withheld licensing of one Nord Stream 2, one of its major natural gas pipelines.

Russia’s brand is becoming so anathema that it is driving private companies to outpace official sanctions. The world’s three-biggest container lines, MSC, Maersk and CMA CGM, are suspending shipping to Russia. Airlines are banning flights to and from the country, foreign companies are leaving in droves, and even Russia’s lone F1 driver’s contract has been terminated.


How Long Will It Be Cold?

The Russian financial weather forecast has been bleak of late. As they say, it never rains, but it pours. Dire times are ahead for Russia and the country with which it shares a long and bloody history.

While Russia’s sovereign debt acquires ‘junk’ status and its ruble slips ever lower, and interest rates creep up, the prognosis remains grim for the man on the street whose savings are being wiped out in a matter of days while the price of goods only increases.

With a disruption on this scale coming so soon — and so happening so rapidly — after the supply chain chaos of the pandemic, desperate times are ahead for Russia.

Older Russians might find this reminiscent of the Cold War. In the past, the Soviets were cut off from the western, industrialised nations of the world. They projected absolute conviction in their supremacy to the rest of the world, but life on the inside was a different story.


As the new Iron Curtain draws over Russia, ordinary Russians will bear the brunt of an isolated, heavily militarised country. Photo from Unsplash by Steve Harvey


Early advances in the space race put the world on notice that Russia had arrived on the world stage — Russia still lays claim to have put the first animal, man and woman in space. However, as the decades of the Cold War progressed, it simply failed to outpace and outspend the Western Bloc.

Productivity and wages were so low in Soviet Russia that they joked, “We pretend to work, and they pretend to pay us.” Russians alive today can remember when they used to queue for food. Even then-Russian president Boris Yeltsin was so gobsmacked at something as trivial as a supermarket aisle when he visited Houston in 1989 because of the undeniable and sheer contrast in prosperity.

The short-term effect of the sanctions might cause today’s Russians to see a steep drop in their standards of living. The fact that the sanctions are coming from a broad range of nations — and not just from the US, through which Putin’s captive media could easily persuade his people to unite against — is signalling to the Russian people that the official Russian state media narrative is not quite right.

But how long will this sentiment last? If financial devastation turns into skyrocketing unemployment and trade disruptions turn into food rationing and starvation, will anti-war principles prevail? Will sensible Russians remain so reasonable?


A Global Tit for Tat

According to Professor Olga Chyzh, Assistant Professor of Political Science at the University of Toronto, the sanctions levelled against Putin’s oligarchs are unlikely to lead to regime change.

“To bring regime change, sanctions must prevent the leader from distributing rents to the winning coalition, [i.e.] elites will remove the leader who is no longer useful to them. Putin’s winning coalition roughly consists of two groups of elites: oligarchs and strongmen,” she tweeted recently.

The oligarchs, as she explains, are allowed to control the state’s powerful industries. They have a one-directional relationship with the leader of the state — Putin. If Putin goes, so will they. The strongmen, who have the closest personal connection to Putin, are ideologically conservative and hostile towards the west. 

“If anything, [the strongmen] view the looming Russia’s isolation and the forced return of the oligarchs to Russia as a benefit. Autarky and isolation facilitate repression, and further strengthens their position,” she says.

While the oligarchs stand to lose access to their vast foreign wealth, they still have plenty of it in the country. The financial sanctions on Russia, argues the professor, are more detrimental to the government bureaucracy.

“It is a matter of weeks before the state can no longer pay its employees—doctors, teachers, administrator[s], but also the police, the military-industrial complex, and the military itself. No new tanks, destroyers, or [artillery], and no soldiers to shoot them either.”

But that’s not to say the pain won’t be felt both ways. The sanctions are going to reshape the global petroleum trade, and that will hurt regional airlines who are so eager to get back to business as usual after two terrible financial years.

Since petroleum makes up 30% of Russia’s GDP and some 50% of its federal budget, it is a little curious, then, that it invaded Ukraine in 2014, just one short year after Ukraine announced that it would partner with Shell to exploit its massive shale gas deposits to the east — that on top of natural gas discoveries in the Black Sea, signalling massive potential reserves there.

As of this writing, oil has surged to its highest price since 2008, and AirAsia has reintroduced fuel surcharges to offset this rising cost. Airlines in Japan, the Emirates and China have also followed suit.


During the last Cold War, Russian airspace was also heavily restricted. Airlines flew the long way around the country, and nervous Russian military pilots shot down this Korean Airlines in 1983 by mistake. Photo from Wikimedia Commons


The Europeans have also found out the hard way how untenable reliance on a geopolitical rival for natural gas, which makes up a significant portion of the European energy mix, can be. A supply crunch in 2021 saw record-high electricity prices that intermittent renewables like wind and solar could not remedy, and Germany had — and will continue — to make up for the shortfall by burning literal tonnes of coal.

It has already fast-tracked the construction of two new LNG terminals to facilitate imports from the Americas, while other European countries like France, the UK, Finland, the Czech Republic, Slovakia, Poland and Hungary are all currently building or are seriously considering building nuclear plants to improve their energy independence.

Fortunately, ASEAN is not so reliant on Russian energy. However, the foreign affairs scene is not so fortunate. The ASEAN bloc is not — and perhaps cannot — act in concert against Russia, owing to its diverse individual relationships with the country. 

Contrast for example, what Singapore and Vietnam have done: Vietnam, being a key trading partner with — and reliant on — Russia, abstained from voting on a UN resolution to condemn Moscow, whereas more western-oriented Singapore has sanctioned four of its banks.


The world is about to experience a new era of Sino-Soviet relations as the two countries become more financially integrated — if only out of sheer need. Photo from Unsplash by Nick Fewings


Even as Moscow looks to accelerate its integration with the Chinese financial system in the short term, such as with transitioning from the Visa and MasterCard payment systems to a UnionPay-based one, and more sanctions pile on the purchasing of Russian oil, ASEAN countries will have to contend with a reordering of the global economic order in the next few months.


Where’s the Exit Sign?

The problem is that Putin is all out of options, with no opportunity left for a dignified withdrawal of troops and a mea culpa.

At first, he said he would not invade, and then he did. His intelligence experts said the war would be over in 48 hours, only it did not, and the Russian military faced fierce resistance.

Knowing that his economy is in peril, Putin’s only two options are one, losing both the war and his economy or two, winning the war and losing his economy. Surely the latter is preferable since the world has made him an utter pariah — better a pyrrhic victory than deescalate to face total defeat.

But even if Putin takes over Ukraine, Russia will find itself back at square one because it will immediately acquire even more NATO members along its border besides Latvia and Estonia, adding Poland, Slovakia, Hungary, and Romania, which are all NATO members.

Fortunately for Putin, NATO is not willing to risk a nuclear standoff with an increasingly desperate Putin. While it is sending equipment, it is not committing the boots on the ground that the Ukrainians need to overwhelmingly beat back the Russians currently encircling its territory.

There was earlier mention that the short-term costs of the war are utter economic devastation for Russia. It will also be extremely costly for a militarily victorious Russia to finance an occupying army in Ukraine, not to mention having millions of pissed-off and motivated Ukrainian insurgents along and within its border.

But what about its long-term prospects, say, over a few decades, after Putin has exited stage left and the next few generations forget the raw horrors of this conflict, while the oil-rich waters and bountiful mineral wealth of Ukraine are firmly under Moscow’s control?

Russia’s end game for this conflict might very well be its short-term demise and Putin’s political suicide — and if the chaotic fall of the Soviet Union is any indication, the world will hold its collective breath again while the political survivors fight over who will control Russia and its nuclear arsenal.