Indian Economist: Western Sanctions Will Create Two 'Trading Blocs', Won't Hit Russia in Long-Term
14:54 GMT 23.03.2022 (Updated: 17:14 GMT 12.04.2023)
© REUTERS / DADO RUVIC / FILE PHOTO: Illustration shows Russian flag and natural gas pipeline
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The western economic sanctions against Russia in the wake of Moscow's military operation in Ukraine are bound to have ripple-effects across the major economies.
There is widespread acknowledgement among the US, European Union and other western allies that economic sanctions against Russia are like a double-edged sword and could affect the post-COVID global economic recovery.
US President Joe Biden this month acknowledged that domestic inflation is a direct consequence of the west’s economic retaliation against Russia.
A UK parliamentary committee warned on Wednesday that the British public wasn’t immune to the economic consequences of sanctions against Russia.
The concerns of inflation and effect on markets are even more pressing in the developing economies like India and China. Both the Hang Seng (Hong Kong) and the Shanghai Composite Indices dropped to a 20-month low this month on account of the uncertainty created by the Ukrainian crisis.
Indian foreign minister S Jaishankar warned in Parliament this month that the “Ukraine conflict has major economic implications.”
“Its impact on energy and commodity prices is already visible. The disruption of the global supply chain is expected to be significant,” stated Jaishankar.
Sputnik caught up with eminent Indian economist Dr Arun Kumar, who is presently the Malcolm S. Adiseshiah Chair Professor at the Institute of Social Sciences, New Delhi. Kumar has also taught economics at India’s premier Jawaharlal Nehru University for over three decades until 2015.
Sputnik: How effective, in your view, are the western sanctions against Russia? Will Russia be able to weather these western sanctions?
Dr Arun Kumar: One must look at the effects of these economic sanctions in the short, medium and long-term. When one looks at the immediate impacts, the open global economic architecture, which involves trade and financial transactions, has been disrupted.
In the immediate aftermath of these western sanctions, we saw the Russian currency rouble trading at a lower value, Moscow Stock Exchange dropping as well as reports of shortages of certain products in the Russian market.
However, I believe Russia will be able to weather these short-term impacts.
Importantly enough, Russian energy exports, including oil and natural gas, have been kept out of these sanctions. It is clear by now that the European Union (EU) can’t do without Russian oil and gas. Then, we have the possibility of China increasing its energy purchases from Russia in the near-future, since it has a massive requirement. In the case of India, we are seeing that even it has taken up offers of cheaper crude offered by Russia.
In the medium to long term, Russia’s earnings from export of its energy products are not going to be affected. At least two Russian banks have been deliberately left out of western sanctions in order to continue the energy trade between Europe and Russia.
I also don’t see Moscow facing any balance-of-payments crisis due to these sanctions in the future. At the same time, Russia’s trade account surplus will also enable it meet to weather these sanctions without much difficulty.
Then, if one looks at the freezing of Russian Central Bank’s overseas funds, a point to note is the current trade account surplus enjoyed by Moscow. Technically, the central bank will continue to accrue interest due to this trade account surplus.
So, in a way, the western sanctions won’t affect much of Russia’s export revenues or the imports. The only immediate impact that Russians could feel might related to shortage of some products, including imported luxurious products, but even that is likely to be met by China in the future.
Lastly, the western companies who are threatening to leave Russia can’t withdraw their capital or dissolve their holdings easily. A big question for the western companies would be to find buyers for their stake in order to leave Russia (The Moscow Stock Exchage is all set to re-open for trading on 24 March).
Sputnik: Could these sanctions also prove to be counter-productive for the west as well as affect other nations?
Dr Kumar: Russia has been a major global supplier of oil and natural gas, fertilisers as well as critical minerals such as palladium and nickel (used as an ingredient in stainless steel).
Now, an export ban on some of these commodities as part of sanctions has driven up global prices and effected inflation in major economies, which are already in the process of recovering from effects of COVID-19.
We are already witnessing anxiety among commodity traders and market analysts who have been anticipating rise in prices of fertilisers, energy as well as certain minerals such as palladium.
I also envisage serious bottlenecks emerging in global supply chains due to disruptions caused by these sanctions.
A major long-term impact of these sanctions could be the creation of two blocs like during the Cold War. However, the difference would be that these blocks will be on financial lines, rather than ideological one as during the Cold War. We are moving towards a situation where Russia, China and maybe Iran among others will form their own financial bloc, while the western nations led by the US will be part of another trading bloc.
Another implication would be that developing nations like India will increasingly feel the pressure of joining either of the bloc.
Ultimately, these separate economic blocs would also mean that Russia would largely be able to survive the long-term impact of these western economic sanctions as it would try to make up for the lost market share internationally in other non-western markets.
Sputnik: Will the global economic growth suffer? Could we expect a rise in inflation?
Dr Kumar: The factors that I have mentioned—shortage of raw materials, increased prices and supply side disruptions—will lead to inflation across the world in the short to medium term. Inflation means that the purchasing power parity (PPP) of households will also take a hit. These factors have the potential to affect the growth rate across major world economies.
It will take time for the major economies to adjust to the new economic realities, but I believe that would also depend on how long the war lasts and how long the sanctions stay. But the demarcation of the global economy into two economic blocs is certain.
Sputnik: How would India be affected in these emerging economic realities?
Dr Kumar: There will be inflation in all the major economies in at least the short-term and India is no exception (The Indian government marginally increased the fuel prices on 22 March after a gap of 137 days on back of record-high crude benchmark costs).
One could also expect low- and medium-income nations to feel the pinch of rising food prices, since both Ukraine and Russia are major producers of wheat. In India, we already have huge stockpiles of wheat and other food reserves that may cushion us from the blows of rising food prices.
But, then, one must take into account the role of speculators in driving up prices. Even though India is well-placed in terms of stockpiles, the domestic speculators are bound to speculate on the commodities market as a result of global food shortages.
The government must remain alert to check the level of speculation on the Indian market in order to prevent the prices from rising.
Sputnik: How can India respond to the economic crisis?
Dr Kumar: As a response to the global economic effects, the best option for India will be to continue staying neutral, since it has major commercial dealings with both Russia and the US. With Russia, there is a strong defence component to the relationship that’s crucial for New Delhi.
But a major challenge for Russia to sustain these economic ties with India would be how China views these relations between Moscow and New Delhi. If there is any Chinese pressure on Russia in the future as a result of increased economic reliance of Moscow on Beijing is what one has to wait and watch.
15 March 2022, 22:33 GMT
However, India is also a major partner for America, at least as far as the Indo-Pacific region is concerned. One can expect increased pressure from the west on India to draw down its defence and other commercial ties with Moscow, as we are already seeing now.
Sputnik: What are your thoughts about the prospect of establishing a rupee-rouble trading mechanism between Russia and India? How feasible is the proposal, should India want to deepen its energy and commercial ties with Moscow?
Dr Kumar: The rupee-rouble trading mechanism had been in existence previously (during the Cold War era). We can carry out trade in our own currencies by choosing a reference point. Now, the complexity involved is in choosing the reference currency.
If the rouble continues to drop as compared to dollar, then the other option will be to make Chinese yuan the reference currency. But for that to happen, the economic ties between China and Russia will have to first adjust to the new economic realities.
Another factor here would be about the relative strength of rouble in non-dollar denominators, since the rouble may further drop vis-à-vis the dollar.
The actual strength of the rouble would depend on the productivity and cost of production of the Russian economy.
So, both the countries will have to develop a parity in non-dollar denominators in order to re-engage in rupee-rouble mechanism.
