Written by Andrey Yashlavsky

Translated by Elizaveta Ovchinnikova

4 March 2022




Anti-Russian restrictions threaten the West itself with serious economic challenges

The sanctions pressure of the West on Russia in connection with the Special Military Operation in Ukraine does not weaken. But the most severe punitive measures are not hitting only our country. Western economic analysts have taken care of calculating what it costs them to tinker with Kiev’s support. It turned out that the sanctions announced to Russia can hit the purse of European capitalists hard – and they are already hitting.


– Of course, all military conflicts end one day, even if sometimes not for a long time, – says President of the All-Russian public organisation ‘IPA Russian Section’, Doctor of Law, Professor, Honoured Lawyer of Russia, Lieutenant-General Yury Zhdanov. – However, they always have a serious impact on the world economy. Renowned economist Nouriel Roubini writes in a recent article that it is tempting to think that the war in Ukraine will have only a minor economic and financial impact globally, given that Russia represents merely 3% of the world economy. According to Roubini, the world has entered a geopolitical depression that will have massive economic and financial consequences well beyond Ukraine.

– Global depressions often lead to new wars...

– A ‘hot war’, according to Roubini, between major powers is now more likely within the next decade. As the new ‘cold war’ rivalry between the US and China continues to escalate, Taiwan, too, will increasingly become a potential flashpoint.

– Where is Ukraine and where is Taiwan. What is the connection?

– Washington has instructed its European ‘lapdogs’ to restrain Russia in order not to be distracted from the fight against the main competitor, as they believe, China. But America’s vassals are unlikely to cope with their task – they have been crushed. A major risk, according to Nouriel Roubini, now lies in the fact that political analysts may underestimate the implications of this geopolitical regime shift.

The events in Ukraine are not just another minor, economically and financially inconsequential conflict of the kind seen elsewhere in recent decades. This conflict triggers a massive negative supply shock in a global economy that is still reeling from COVID-19 and a year-long build-up of inflationary pressures. The shock will reduce growth and further increase inflation at a time when inflation expectations are already becoming unanchored.

– Are there any signs of that shock already?

– Western experts, at least, see them. In their opinion, short-term financial market impact of the military conflict is already clear. Safe government bond yields will fall for a while and then rise after inflation becomes unmoored. Oil and natural gas prices will spike further, as will many other commodity prices as both Russia and Ukraine are major exporters of raw materials and food. Safe haven currencies such as the Swiss franc will strengthen, and gold prices will rise further.

The economic and financial fallout from the conflict and the resulting stagflationary shock will of course be largest in Russia and Ukraine, followed by the European Union, owing to its heavy dependence on Russian gas. But even the US will suffer. Because world energy markets are so deeply integrated, a spike in global oil prices – represented by the Brent benchmark – will strongly affect US crude oil prices. While a small cohort of energy firms will reap higher profits, households and businesses will experience a massive price shock, leading them to reduce spending. So, the US economy will suffer a sharp slowdown.

– It turns out that Western countries themselves are deepening the crisis by imposing sanctions against Russia, isn’t it?

– Yes, and therefore Roubini believes that sanctions against Russia inevitably will hurt not only Russia but also the US, the West, and emerging markets.

– Does the West understand that sanctions against Russia will turn into a boomerang?

– The West does not rule out the possibility that Russia will respond to new Western sanctions by sharply reducing oil production in order to drive up global oil prices. Such a move would yield a net benefit for Russia so long as the additional increase in oil prices is larger than the loss of oil exports, according to Roubini. He also believes that Putin knows that he can inflict asymmetrical damage on Western economies and markets, because he has spent the better part of the last decade building up a war chest and creating a financial shield against additional economic sanctions.

– What exactly, according to Western experts, could threaten the Western economy?

– Stagflation – when stagnation, unemployment and inflation grow along with the decline in production.

– Perhaps, the economic problems will be solved also by politicians?

– Of course, especially since these problems were created by the politicians themselves. Roubini believes that the US will try to mitigate the increase in gasoline prices by drawing down its Strategic Petroleum Reserves, and by nudging Saudi Arabia to use its spare capacity to increase its own ‘black gold’. But, Roubini continues, these measures will have only a limited effect, because widespread fears of further price spikes will result in global hoarding of energy supplies.

Under these circumstances, Roubini contemplates, the US will feel even more pressure to reach a ‘modus vivendi’ with Iran – another potential source of oil – on reviving the 2015 nuclear deal. But Iran is effectively allied with China and Russia, and its leaders know that any deal they do today could be tossed aside in 2025 if Donald Trump or a Trump wannabe comes to power in the US. A new nuclear deal with Iran is thus unlikely. Worse, in the absence of one, Iran will continue to advance its nuclear program, heightening the risk that Israel will launch a strike against its facilities. That would deliver a double-whammy negative supply shock to the global economy. The upshot is that various geopolitical constraints will severely limit the West’s ability to counter the stagflationary shock inflicted by the conflict in Ukraine.

– Perhaps, the consequences of the COVID-19 pandemic will also have their impact?

– According to Roubini, the ‘knock-on effects’ will strike a massive blow to global confidence at a time when the fragile recovery from the pandemic was already entering a period of deeper uncertainty and rising inflationary pressures. The knock-on effects of the Ukraine crisis – and from the broader geopolitical depression it augurs – will be anything but transitory.

– Does anyone else in the West share Roubini’s pessimistic forecasts?

– Yes, they do. In many ways, similar conclusions are contained in a recent article in the Financial Times on how events in Ukraine will hit the global economy. The main conclusion of the article: this conflict has shattered hopes of a strong global economic recovery from coronavirus at least in the short term. The increased geopolitical tensions are set to exacerbate high inflation and supply chain bottlenecks. And if energy prices continued to soar, it could tip the global economy into a new recession.

Economists also warned about the pressures on businesses exposed to supply chains in which Russia plays a crucial but little-known role, such as the production of critical raw materials.

– What is it about?

– About such a ‘little-known trifle’, such as, for example, palladium. They stress that Russia supplies about 40 per cent of the world’s palladium, a key component of catalytic converters in petrol-powered vehicles as well as electronic devices.

– What about energy carriers? It is doubtful that Europe, with all its desire, would be ready to switch to ‘green’ energy.

– And it won’t be able to for a long time. Europe is highly dependent on gas from Russia and cannot quickly find alternative supplies if pipelines are cut. With a mild winter coming to an end and storage levels across Europe higher than had been expected by some energy analysts, the issue of gas supplies has become less acute but will return later in the year if the crisis continues. Financial analysts believe that the more immediate concern is the impact of the crisis on the price of oil, gas and other commodities.

According to experts, a sharp rise would add to inflation and hit consumers. According to some forecasts, oil prices could rise to $120-140 per barrel in a worst-case scenario.

Western experts are already aware that the Ukrainian crisis, which the West diligently created and inflated, means not only the break of the entire world order, but also the formation of a new world economy, a new financial system, which may eventually differ qualitatively from the existing ones. And far from in favour of the West – Yury Zhdanov concludes.