On Thursday, the dollar index, which illuminates global financial conditions, touched a record high of 109.98. It has appreciated nearly 14 per cent in six months. In its wake the Japanese yen is yo-yoing at a record low of 141 to the dollar, the euro hovering around 99, the sterling teetering at 1.15 and the rupee is testing levels of 80 to the dollar. In sharp contrast, and ironically, the one currency which has done well is the Russian rouble, which has appreciated from 104 to 60 roubles for a dollar since February.
The factoid illustrates how the doctrine of economic sanctions as an instrument of deterrence has impacted Russia and the world. The war in Ukraine is now 192 days old and continues unabated. Over 9 million Ukrainians are estimated to have been forced to flee since February 24. The death toll depends on who is telling the story and is in the tens of thousands. It is unclear if there will be a winner! What is clear and indisputable is that the cost of sanctions has resulted in the globalisation of pain.
The inadequacy of sanctions and how they played out on Russia and other countries is reflected in the IMF’s July review of global growth. The IMF trimmed global growth from 3.6 per cent in April to 3.2 per cent, downgrading growth in all major economies, including the US, the UK, Germany, France, Canada, Japan, Italy, Spain and India. The notable exception : Russia – its GDP growth was upgraded by 2.5 per cent. Indeed, IMF Chief Economist Pierre-Olivier Gourinchas explained that higher energy prices kept Russia afloat despite Western sanctions.
The sanctions were defined in superlatives -- as ‘unprecedented’ and ‘like none the world had seen before’ -- and were imposed by the US, EU, and other NATO allies within hours of the launch of Russia’s ‘special military operation’. A parade of punitive measures followed, triggering the weaponisation of trade and finance. For the global economy, just recovering from the pandemic and burdened by the excesses of easy money, it was verily the exacerbating last straw. The consequence is manifest in the food, fuel and cost of living crisis haunting developed and developing economies.
The price of natural gas in Europe is now estimated to stay around $ 500 per barrel of oil equivalent. Household energy bills in the UK could shoot up five times to 5000 pounds a year. Gasoline prices across the world are fuelling rhetoric and rage. Countries are scampering to install LNG terminals, seek new supplies of gas and extend the lifespan of nuclear power plants. Emerging economies – particularly net importers of energy such as India – face the double whammy of imported inflation and widening current account deficits.
The irony of ironies is that as the world struggles with the energy crisis, Russia’s earnings from fuel exports are expected to shoot up by 38 per cent to over $ 347 billion. Thanks to the opportunity created by sanctions, higher volume of exports of fuels and rising prices. Indeed, Russia is said to be considering parking its surplus earnings from energy exports, as much as $ 70 billion, in the Chinese Yuan.
On Friday, the Group of Seven (G7) Finance Ministers came up with another round of measures. They agreed “to impose a price cap on Russian oil aimed at slashing revenues for Moscow’s war in Ukraine while avoiding price spikes.” The critical details – on which countries are willing and what the per barrel price cap would be – are yet to be decided. In effect, the contours and content of this grand measure are just as vague as the idea itself.
Newton’s law predicates every action triggers an opposite, even if not an equal reaction. Almost on cue, Russian energy behemoth Gazprom has declared that the supply of natural gas through the key pipeline Nord Stream will not be resumed due to ‘technical problems’. The implications are dire. The IMF’s World Outlook of July cautioned that “A complete cessation of exports of Russian gas to European economies in 2022 would significantly increase inflation worldwide through higher energy prices”.
It is true that Russia’s action of invading Ukraine demanded a response from the global community of nations. Equally, it is also worth considering that previous episodes of sanctions have not yielded the intended results. It cannot be that the dependence of Europe on Russia for energy was unknown. Nor is it a mystery that Russia and Ukraine formed a large part of the global food basket. The harsh fact is that in an inter-dependent globalised economy, measures such as sanctions are ineffective against major trading nations.
It has been argued, and there is much lather about it, that sanctions will eventually debilitate Russia and its war machine. Eventually! The phrase eventually has a seductive allure for the long term. The here and now fact is that sanctions have been less than effective and have got the global economy on the edge of a recession. More pertinently, as this column has argued, the fracturing of the global economic architecture emboldens China and weakens the rule-based world order.
The voting pattern in the United Nations, particularly on Russia’s invasion reveals fault lines. What is persuasive for some is not as persuasive for many. The global economy is a far more complex space than when sanctions were first conceived. The experience of the past and of the last six months calls for a re-think on the idea of sanctions as an instrument of deterrence. There is nothing like context to clarify the question. Can sanctions be the answer if China moves on with its ambitions to annexe Taiwan?
Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
shankkar.aiyar@gmail.com