The conflict in Ukraine has had significant negative consequences for all economies in the world. The key link in the transmission process was the economic war against Russia which was initiated by the United States and its “allies” such as the European Union. The gratuitous appropriation of half of Russia’s foreign exchange reserves and the disconnection of several Russian banks from the SWIFT system by the United States and its “allies” did not lead to a financial collapse in Russia. Nor did it lead the government of the Russian Federation to accept a settlement of the conflict in Ukraine that was acceptable to the United States.
As a result, the United States and its “allies” had two options: engage in an impartial diplomatic process to settle the conflict in Ukraine or intensify economic warfare against Russia. This last option was chosen. But there are two significant problems with this escalation option: first, most countries other than the “allies” of the United States have decided to disassociate themselves from the economic war against Russia; second, Russia is an indispensable supplier of raw materials and defense equipment to the world.
Consequently, subsequent rounds of economic warfare against Russia were less significant. However, there have been active discussions about the measures taken by the European Union to reduce Russian energy supplies (both oil and natural gas) to Europe. The European Union, previously had announcement that its coal imports from Russia will be phased out, but the deadline has been pushed back. Russian natural gas is used for electricity generation, as an input for industrial processes and for domestic purposes (for cooking, heating, etc.). All of this is happening despite the fact that if it did, there would be disastrous consequences. repercussions of economic activity on European economies, including a significant drop in economic activity and a marked rise in inflation. This will be the case since there are no feasible substitutes for European Union countries to Russian energy (and even more so in the case of natural gas) for the next few years. As a result, more and more European buyers of Russian natural gas have joined or are in the process of complying with Russian demands for payment of its natural gas in roubles. The economic crisis in the countries of the European Union will also be further accentuated by the massive influx of Ukrainian refugees.
Within the European Union, the recent attempt to ban imports of Russian oil has been resolutely opposite by a number of member countries, including Hungary. Similarly, shipping companies based in Greece have vetoed any bans by the European Union on using their tankers to transport Russian oil to countries outside the European Union.
Even if alternatives to Russian energy for European countries are found over time, they will be more expensive. This will reduce the price competitiveness of European (mainly German) exports. The number of German exports that are price-inelastic (ie based on quality competitiveness) and therefore relatively immune to this price increase will depend on several factors. First, Russian energy is likely to be redirected to China at discounted prices, which will significantly widen the price gap between Chinese and German exports to an extent likely to erode the price inelasticity of German exports. . Second, if China moves up the “technology ladder,” the number of German exports of manufactured goods whose demand is inelastic to price changes will decline over time. Third, Japan, despite being an “ally” of the United States, has been less willing than the European Union to engage in economic warfare against Russia. Consequently, the price competitiveness of its exports will be less impacted than Germany. Therefore, Japanese exports could start to compete with German exports, especially in those high-tech sectors where they substitute for each other.
German companies could seek to stem this decline in export price competitiveness by squeezing wages. But this compression will reduce output, employment, capacity utilization, investment and technical change unless there is explosive growth in German exports due to wage compression. But this explosive growth in German exports is unlikely to materialize in a global economy that has been affected by both the Covid-19 pandemic and the conflict in Ukraine. In such a situation, importing countries whose production is an alternative to Germany will tend to erect tariff and non-tariff barriers to these German exports.
In such a scenario of stagnation and inflation, even the most reliable euro-denominated government securities, those of the German government, as far as international finance is concerned, will become less attractive compared to alternative financial assets. This will likely cause the euro to depreciate against the US dollar and other financial assets considered relatively safe by international finance. An increase in the interest rate on these German public securities in an attempt to maintain the confidence of international finance will accentuate economic stagnation.
But the rhetoric about stepping up the economic war on Russia, which is doomed but emanating from many quarters of the European Union, sometimes sounds more strident. than in the United States. However, the majority minority opposition to “aiding” the military conflict in Ukraine is informed by the cynical right-wing demagoguery in the United States. If we safely exclude “ideological motives” such as “the war against Ukraine is a war against Europe as a whole”, then such a position of intensifying the economic war against Russia in the Union European still needs to be explained.
It is in the objective strategic interest of the elites of the United States to weaken the economies of the countries of the European Union, in particular that of Germany. This is the case since such a weakening will diminish the strategic autonomy of the countries of Europe and will force them to become “more reliable allies” of the United States. In a world where the The strategic gap between China and Russia keeps narrowing the United States will need more “reliable allies”.
For example, the vehement US opposition to Nordstream 2, the direct undersea gas pipeline from Russia to Germany, emanated from such a position. Nordstream 2 would have bypassed Eastern European countries over which the United States has more “leverage”. Consequently, the ability of the United States to strategically influence Germany would have diminished somewhat. Similarly, the United States did not allow the Normandy format (involving France, Germany, Russia and Ukraine) to come to a diplomatic solution to the conflict in Ukraine because such a resolution would have led to its mitigation strategic. It sowed the seeds of war in Ukraine.
Within the countries of the European Union, there are political entities/individuals that actively promote the objective strategic interests of the United States. This includes governments, political parties, bureaucracies of the European Union and the North Atlantic Treaty Organization. “intellectuals”, etc. This is the case, even though some of these individuals subjectively see themselves as working to uphold the principles and practices of “Western Civilization”.
This disjointed nature of the political economy of the countries of Europe is one of the main reasons why self-destructive political proposals can become quasi-hegemonic. Therefore, it is both facetious and misguided to claim that such policies are adopted or sought after since governments in Europe feel “morally obligated” to act because of the ongoing conflict in Ukraine. However, the Zelensky administration in Ukraine, organized by the United States, formulates its public position in terms of “European solidarity”. This public facade, which cannot be publicly contradicted in any European country, given the disarticulated political economy there, is the means by which the United States can exercise its coercive influence over what remains of strategic autonomy in Europe.
Recently, the Zelensky administration has blocked the transit of Russian natural gas transits through one of the gas pipelines linking Russia to Europe. It is possible that this decision was organized by the United States. In addition, the Russian government has sanctioned the company that manages the Polish section of the Yamal pipeline between Russia and Europe. This process of escalation, if not controlled and reversed, will have a negative impact on European economies. But this will require a renewed strategic autonomy in Europe and, in the first place, in Germany and France. This resurgence could also initiate a process of engagement that could allow for a negotiated diplomatic solution to the conflict in Ukraine. But this will require a political settlement with the disjointed political economies of various countries in Europe. Such a process of re-articulation will be strengthened if the left in European countries actively organizes itself to shape its contours.
C. Saratchand is a professor in the Department of Economics, Satyawati College, University of Delhi.