This is a guest post from Chaturbhuj (a law student at National Law University, Jodhpur, India) and Hridyanand Ojha (a law student at Institute of Law, Nirma University, Ahmedabad, India)
Introduction
The Russian invasion of Ukraine has triggered Europe’s largest land conflict since 1945. This conflict presents a severe danger to global trade. The developed world’s response to Russia’s invasion, including sanctions on Russian banks and trade, is expected to produce significant disruptions in global trade and financial links with far-reaching consequences. It is more than simply a negative influence on oil and natural gas.
It is noted that Russia is a large producer of basic and precious metals in addition to being an energy powerhouse, on the other hand, Ukraine is a major agricultural exporter in the globe. The authors seek to sketch out the potential consequences of Russia’s invasion of Ukraine on global trade flows. The authors attempt to lay down the possibilities of global trade disruptions and raise a question on the effectiveness of economic sanctions.
Decoupling continues and sanctions prove to be an imperfect tool
Sanctions have been seen as a key weapon of public policy that sparked much debate in recent years due to their increasing usage by the West. These enormous economic and social costs imposed on targets are designed to bring about a change in policy or activity by the target country, entities, or individuals. The question arises whether these sanctions have been effective.
Concerning the Ukraine problem, western economic sanctions aimed at punishing Russia date back to 2014. There have been various sets of sanctions and export controls enacted by the United States (US), the European Union (EU), and the United Kingdom (UK) in response to actions taken by the Russian Federation in Ukraine and surrounding areas. In March 2014, the US imposed the first wide-ranging set of sanctions blacklisting banks and certain wealthy individuals. The list also included unspecified individuals whose actions have been found to undermine Ukraine’s democratic institutions and process and established government authority in the Crimean region without the authorization of the Ukrainian government. In addition, on March 17, 2014, the US, the EU, and Canada joined the first wave of sanctions the day after the Crimean pseudo-referendum. The sanctions imposed on Russia on March 17 were the broadest imposed on the country since the Soviet Union’s demise in 1991. As a result, Australia, Albania, Iceland, Montenegro, and Ukraine joined the US and EU in sanctioning Russia following its takeover of Crimea.
The second wave of sanctions on Russia came in 2014 when the Council of Europe froze Russia’s delegation’s voting privileges. In the prolongation of the second wave, the US barred several Russian officials from conducting business within its borders, and on the same day, on April 28, 2014, the EU announced further travel restrictions against 15 people.
In reaction to the intensifying conflict in Donbas, the third round of sanctions was imposed to paralyze Russia. The US and the EU joined the third wave, imposing transaction bans and sanctioning further persons. The third wave is still ongoing, with a huge list of sanction measures. Following Russia’s invasion of Ukraine on February 24, 2022, two nations that had not previously participated in sanctions, South Korea and Taiwan, imposed sanctions on Russia.
Economic sanctions imposed by the West to punish Russia for its invasion of Ukraine did not seem to bring intended change in Russian policies. As a result, these sanctions added a new layer of uncertainty to a global economy already warped by the coronavirus outbreak and a decade of ultra-low interest rates. We agree with Professor Susan Aaronson that economic and financial penalties have been used by countries for decades, but they prove to be imperfect weapons. Denying Russia from having normal trade relations is not the optimal solution to the ongoing violence. We need to remind Russia’s leader that when you undermine the rule of international law, you cannot expect the rule of law in international trade. As with sanctions, the price of Russian goods will increase in these markets and the world will be affected. Therefore, the attempt to decouple Russia, the world’s 11th biggest economy and source of one-sixth of all commodities from the trading system fails and has no precedence in the trade liberalization age.
Analyzing the implications of the Russian Invasion on Global Trade: Who will suffer?
Following the pandemic, a recovery could be seen occurring in global supply chains and economic growth, however, the new sanctions have put all that in question. Meanwhile, the Russian invasion of Ukraine has already knocked financial markets and the worldwide economy hard.
Both Russia and Ukraine are major exporters not only of natural gas and oil but also of a wide variety of commodities. Russia is the 16th-largest goods exporter in the world, with petroleum, coal, gas, gems and precious metals, and iron and steel as the top five products. Ukraine is 48th with steel, coal, fuel, petroleum products, grain, and iron ore making up the top five products.
Russia Export – Import Balance
Ukraine Export – Import Balance
Source: World Integrated Trade Solution (2019)
Among the countries that Russia exports to, there are the US, Turkey, Netherlands, Italy, Germany, China, Belarus, and more than 187 others. More than 90% of Finland’s nickel imports come from Russia, and the country supplies nearly half of Turkey’s aluminum imports. Statistics do not leave behind the US and the UK and make them one of the largest buyers of Russian pig iron and gold in 2020. That accounted for three-quarters of its overall imports of the metal that year and represented 19% of its domestic production.
On the other hand, Ukraine exports to the US, Turkey, Russian Federation, Poland, Netherlands, Italy, India, Hungary, France, Egypt, Germany, China, Switzerland, Belarus, and 169 other countries. In addition, Turkey and Egypt import more than 50% of their wheat from Russia and Ukraine, while India and China import sunflower and cotton-seed oils from Ukraine. As of 2019, Russia and Belarus provided Brazil and China with at least 30% of their fertilizer imports for the year, worth a total of $4.3 billion. The US and India were also major buyers.
A closer look at what the world gets from Russia and Ukraine indicates that trade is likely to be disrupted given Russia’s invasion of Ukraine and its longstanding relationship with stricter sanctions by western states. Consequently, the prices of many commodities beyond oil will be on the rise, and most developing and least-developing countries will be the sufferers.
Will Russia be able to run away safely from the consequences resulting from sanctions? Will Russia survive without nearly half of the world’s trade? The answer comes in the negative. Russia is a major buyer of chemical products, equipment and transport, foodstuffs, and agricultural products and has significant imports from Asia and countries from other regions such as China, Germany, the US, Belarus, and Italy. In any case, disruption of trade could leave a dent in Russia’s economy, regardless of China’s stance.
In reverse, for a few countries and products, Russia and Ukraine are major customers. Russia imported more than $5 billion worth of fur coats, clothing, and accessories from China in 2019 and 2020. In the same line, Ecuador sells almost 20% of its bananas, worth more than $600 million annually to Russia. This poses a risk of demand that could be hurt by future sanctions and other economic fallout. The country is also a key market for Finnish nuclear-reactor parts.
Russian Federation Country Growth vs World Growth vs GDP Growth
Source: World Integrated Trade Solution (2019)
Ukraine Country Growth vs World Growth vs GDP Growth
Source: World Integrated Trade Solution (2018)
In the above graphs, Russia and Ukraine are compared with global growth, indicating a dent. A two-way road exists: first, the world suffered, not Russia and Ukraine, between 2006-08; and second, possibly when Russia and Ukraine suffered, so did the world at large. COVID-19 approached, and countries’ growth slowed along with the global economy. Russia’s invasion of Ukraine leaves the world in doubt and with unknown outcomes. Considering sanctions announced so far, the sanctions will harm Russian businesses. More specifically, export curbs due to economic sanctions will limit the access of Russia to foreign markets.
And it is not just natural gas or oil that is imported to other countries. In total, over 130 economies have at least one good or commodity that is largely imported from Russia or Ukraine. Sanctions imposed so far are focused on Russia’s financial sector, individuals, and certain trades while giving a pass to the country’s two commodities, oil, and natural gas. Bypassing the energy sector is unlikely to stop the snarl of global trade while sending stock prices soaring and gas prices inching up.
This invasion disrupts global trade beyond oil and natural gas. The invasion of Ukraine may upset the supply chains of wheat, barley, corn, rye, precious metals etc. In all likelihood, countries that primarily supply commodities to Russia and Ukraine will also suffer. A rise in oil and natural gas prices in Europe will disrupt the exports of other countries, as consumers will not spend as much on other goods and services. There are more factors affecting global trade than simply oil and natural gas. The Russia-Ukraine conflict is shattering a leg of global trade which was previously broken by the COVID-19.
Conclusion
Following the pandemic, global supply chains and growth had been in recovery mode, but now all of that is under threat due to the conflict and harsher sanctions. The impact of the Russia-Ukraine conflict will be felt badly across the world in terms of currency volatility, commodities, security, sanctions, and trade disruption. As Jacob Kirkegaard said, “We are now entering an era of geopolitical risk at an entirely new level. Many of the supply chain issues that are still with us from the pandemic are going to be exacerbated by this.”
With a rapid turn of events in Ukraine, additional sanctions are highly probably in the future. Global supply will always be at the mercy of everything, as the Butterfly Effect describes. The longer the conflict drags on, the worse this will impact global trade. Now the question arises, whether countries are prepared to confront the implications of labor shortages, global supply disruption, and inflation. Lastly, let us not forget that we are still learning how to live with Covid-19’s effects.
