War And The Economy

The impact of the Russia-Ukraine war on the world economy

- Puja Mehra

Economic interdependence between countries - through trade, and flow of people and money was to have made war obsolete - for decades we lived with this belief. By sending forces to attack Ukraine, Russian President Vladimir Putin started what could be the biggest European conflict since World War II. He may or may not have overestimated Russia's military might. He certainly would have expected to attract western powers' economic sanctions stiffer than those slapped on Russia after he had annexed Crimea in 2014. But the confidence that he can pull off the stunt without significant costs or risk of escalation probably came from Europe's dependence on Russian energy, especially gas (nearly 40 per cent of its consumption). Did Putin miscalculate in assuming that Europe's dependence on Russia is Moscow's insurance against ratcheting up of sanctions by western powers? Russia's economy is not that large. It's half that of California.

The Russian central bank built up a war chest of more than $630 billion, helped in no small measure by gas prices that went up in the run up to the attacks, as reserves in the European Union ran low- chiefly because through 2021 deliveries from Russia flowed at only one quarter their normal rate. The western powers are retaliating through financial and economic markets. The European Union (EU) and US are trying to corner Putin by isolating Russia from the global financial system. The EU, UK, US, Canada and other countries banned all transactions with Russia's central bank. The G7economies' France, Germany, Italy, Japan, the UK, the US and the European Union central banks have stopped buying rubles. They have also disconnected select Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) cross-border banking messaging system.