THE UKRAINE TRAP

  • Sanctions are not hurting Russia, but the war is taking a toll on US and EU economies.
  • February 24 marks the one-year anniversary of the Russia-Ukraine war.
  • Although it was believed this was going to be a one-sided battle, the US and its allies stepped in with weapons for Ukraine and sanctions against Russia.
  • Around $300 billion of Russia’s gold and foreign exchange reserves are frozen by sanctions.
  • The embargo on Russian oil by the US and its allies is still in place.
  • Russian access to the SWIFT financial transaction processing system has been stopped.
  • Multinationals such as McDonald’s, KFC, Adidas, British American Tobacco etc have closed down their operations in Russia.
  • People thought Russia would crumble economically.
  • After all, the $2 trillion Russian economy is minuscule in comparison to the US and its allies with a combined market size in excess of $30 trillion.
  • But the Russians are showing no signs of economically caving in.

Russian economy holding strong

  • In fact, there are signs of the Russian economy performing better.
  • As per estimates by the IMF, Russia is expected to grow by 2. 1% in 2024, in comparison to 1% for the US, 1. 6% for the Euro area (27 countries), and 0. 9% for Japan.
  • The other big economies such as China and India, which have not imposed any sanctions and continue to buy oil from Russia, are expected to grow at 4. 5% and 6. 8%, respectively.
  • In fact, companies of Chinese and Indian origins such as ANT group, China Communications Construction Company, JSW Steel, State Bank of India etc, continue to do and expand business in Russia.
  • Besides China and India, Russia continues to trade aggressively with countries in Africa and Latin America.
    The sanctions by the West seem to have little impact on Russia.
  • It was therefore no surprise to see the Russian ruble appreciate the most during the month of June last year, hitting 52. 3 to the dollar, strongest since May 2015.
  • The annual inflation rate in Russia fell to 11. 9% in December 2022 from 12% in the previous month.
  • Inflation is slowing for the eighth consecutive month and reached its lowest since February 2022 when the war started.

Woes for Europe

  • Meanwhile, in the Euro region the growth rate is plummeting, jobs are hard to come by, and inflation rates are going through the roof.
  • As of December 2022, inflation rate in the EU region was 10. 4%, with some countries such as Latvia, Lithuania, Hungary, Estonia and Poland witnessing inflation rates in excess of 15%.
  • Before the war started, almost 40% of the total energy demand in Europe (especially natural gas) was met by Russia.
  • But sanctions have affected the supply of Russian energy.
  • And a substitute for this is costlier US energy (both natural gas and gasoline), which means Europe has to shell out more.
  • This means an aggravating budget deficit for European governments.
  • A higher budget deficit can be sustained only if the economy is growing.
  • However, economic growth is continuously falling in the Eurozone.
  • Government debt as a percentage of GDP rose from 83. 8% in 2019 to 96. 4% in 2022.
  • Higher energy and food prices engendered by the war are likely to push the deficit higher by another 2%.
  • Moreover, slower GDP growth, an aging population, war and higher energy prices are making it difficult to increase tax realisation in the Eurozone.

US burning its fingers

  • In the US, inflation is showing no signs of retreat. It hit a historic high of 9. 1% in June 2022, the highest recorded during last 40 years.
  • It is presently around 6. 5%, this is much higher than the Fed target of 2%.
  • And this is in spite of repeated rate hikes.
  • The higher allocation of money to the defence sector and expenditure on the Ukraine war mean the US government is spending too fast without any commensurate increase in economic output.
  • For fiscal 2023, the defence budget has been increased to $857 billion, which constitutes more than a third of the total budget.
  • Meanwhile, rate hikes and inflation in the US and Europe have led to a fall in real wages.
  • This has led to an increase in labour agitations – train workers in France and the UK, energy sector workers in Norway, and aviation workers in various budget airlines in the US.
  • Tightening monetary policy and continuation of the war are going to see many more such labour agitations.
  • Russia can survive this war economically thanks to China and India.
  • What seems to be a zero-sum game for Europe is proving to be a positive-sum game for Russia, China and India.
  • What seems to be a war of ideology – democracy versus autocracy – is proving to be an expensive proposition for Western allies.

SOURCE: THE TIMES OF INDIA, THE INDIAN EXPRESS

 

About ChinmayaIAS Academy - Current Affairs

Check Also

Genocide Convention

  The United Nations Convention on the Prevention and Punishment of the Crime of Genocide, …

Leave a Reply

Your email address will not be published. Required fields are marked *

Get Free Updates to Crack the Exam!
Subscribe to our Newsletter for free daily updates