In the last few days Ukraine is hurtling towards becoming an international conflict. Russia’s shift in invasion objectives from seizing the capital Kyiv to overrunning the Eastern border region of Donbas, has made the war go into a slow-motion that may continue for years. Militarily and financially, the US and NATO have been increasingly drawn into the conflict that may go nuclear; and the world is bracing for the economic reverberations that are to follow.
The Western allies have no boots on the ground, but they are almost there. President Joe Biden, after delivering two lots of $800 million in military aid to Ukraine, has moved Congress for sanction of $33 billion in military, economic and humanitarian support. Germany, which had so far kept out from supplying military equipment to conflict areas, has agreed to send high-tech Geopard anti-aircraft artillery. The British are moving an additional 8,000 troops to frontline NATO countries.
Russia has flagged the military gear being moved to Ukraine and promised ‘swift retribution’. It has cut off gas supplies to Poland and Bulgaria, and threatened Europe with more fuel sanctions. What started as a limited war to make Ukraine a satellite, buffer-state, has ratcheted up to a full scale European conflict. In the process, it has reunited NATO and even drawn in the non-aligned like Switzerland, Finland and Sweden. The latter two are now pitching for NATO membership, thus creating a 1,300-km Russia-NATO border via Finland.
Paying for Russia’s war
On the flip side, NATO has miscalculated the lasting power of the Russians. The slew of economic sanctions, it was thought, would bring Vladimir Putin to sue for truce. In reality, Russia has been preparing for western sanctions for years since it annexed Crimea in 2014. The uncomfortable truth is Europe, paying for Russian fuel, is bank-rolling Putin’s military adventure.
European Union countries import about a quarter of their oil and about 45% of their gas consumption from Russia. As sanctions kicked in, prices of both oil and gas shot up; and so, though import volumes tapered down, Russia made a killing nearly doubling its revenues from export of its fossil fuels.
According to an analysis of cargo movements by the Centre for Research on Energy and Clean Air (CREA), quoted by ‘The Guardian’, Russia earned about €62 billion from exports of oil, gas and coal in the two months since the invasion began. The EU’s share in this revenue was €44bn over the past two months, compared with €140bn for the whole of last year, or roughly €12bn a month. This is despite crude oil shipments from Russian ports declining by 30%.
Despite all the rhetoric of finding alternative energy supplies by Germany and other countries, Europe is still heavily dependent on Russian oil and gas. Germany has been the biggest importer paying €9bn for imports during the period. Despite commitments by big oil companies like BP and Shell to exit Russia, data showed these companies continued to service high volumes of old contracts.
The cost of a long war
If revenues continue to flow, what’s stopping Russia from continuing its assault on Ukraine? In which case, what will be the long-term cost of the war? As resources are diverted to military budgets and energy prices climb, national growth and family incomes will bear the brunt. A few days ago, the World Trade Organization cut this year’s growth forecast to 2.8% from 4.1% before the war, saying the conflict had inflicted “a severe blow” on the world economy.
The US consumer is already reeling from higher energy prices, which are up 20-30%, while shortage of food will hit the rest of the developing world. Ukraine, known as the bread basket of Europe, accounted for 11.5% of the world’s wheat output. This year, war has laid waste its entire crop. The World Bank warned this week that the conflict had caused the worst spike in commodity prices in 50 years. For the developing world, rising grain prices in nations afflicted by poverty and poor nutrition, shortage of food and expensive supplies will make it a life-and-death issue for millions.
But the frightening new scenario is that the goals of the war have changed. From a limited conflict to defend Ukraine’s sovereignty, the western allies now see the war as one that will trigger a major shift in the balance of power; one that will end with a seriously depleted Russia on the world stage.
US Secretary of Defense Lloyd Austin, on his recent visit to Kyiv, defined NATO’s long-term target as: “We want to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine.” The hawkish British foreign secretary Liz Truss said NATO must prepare “for the long haul” and called for the arming of the western Balkan states, non-NATO states Georgia and Moldovia to resist Russian “expansionism”.
Russia having lost the plot for installing a pro-Moscow regime in Kyiv and being pushed back militarily, is now desperately looking at a face-saving ‘victory’ in the Donbas. However, if the current indecisive war continues with the depletion of the Russian military machine, the nuclear threat and a full scale conflagration will become real.