The economic war has broken out for good and is expected to escalate. The consequences are already visible and will intensify, as the confrontation has the character of a marathon.
The West’s economic power is undoubtedly far greater than that of Russia, which means that sanctions – the “economic war” as the Kremlin has called it – will have far-reaching consequences. To such an extent that, as many predict, they will even lead Russia to bankruptcy.
This does not mean, however, that the West will not “suffer” – both from the consequences of its own sanctions and from Russia’s retaliation. Thus, in practice, the financial conflict is more like a marathon than a speed race, as the consequences will gradually escalate over time.
The crisis will not be paid for mainly by the “rich” – such as the Russian oligarchs who, despite their anxiety, have already found refuge in Dubai and other “paradises” – but the middle- and low-income citizens. Either they live in Ukraine or in Russia or in Europe, which will be hit harder than anyone else in the West in this conflict.
But what are the realistic blows that Russia will be able to deal, directly or indirectly – knowing, at the same time, that it will have a cost of them, as the currency is in dire need? Here are some of the most important.
1. The energy
The first and obvious concerns energy. As is well known, Russian gas covers almost 40% of European imports (and in some countries even 100%), while the corresponding figure for oil exceeds 25%. In fact, Putin himself has already hinted that he can turn off the taps on both Nord Stream 1 and other pipelines.
Of course, the Commission claims that according to its plan, the “27” have sufficient reserves until the end of winter, while they are able to reduce by two thirds their dependence on Russia by the end of the year. Even so, if the Kremlin implements its threat, energy costs (along with inflation) will continue to rise sharply, with implications for households, businesses and government budgets.
2. The Agriculture
Agriculture is another industry in which war and Russian sanctions can make a big difference. And this can be done with the lack and accuracy in the international markets of both basic foodstuffs and the raw materials required for their production.
Russia and Ukraine account for about one third (29%) of total world wheat exports. Thus, it is obvious that the decision already taken by the governments of both warring countries to drastically reduce as well as suspend exports for the next several months will cause a lot of upheaval.
At the same time, Russia is seriously considering “freezing” fertilizer exports to countries that have imposed sanctions on it and focusing solely on those who have supported or taken a neutral stance, such as China, India, Pakistan and Turkey. Such a move would have serious and direct consequences for production costs (which have already risen significantly due to energy), as Russia has an 18% share of the potash market, and a 20% and 15% share of those of ammonia and urea, respectively.
3. The minerals and rare earths
Something similar is happening in the metals and precious metals sector. Just a few facts are enough to prove what a decision by Russia to pull a “handbrake” on its production and exports will mean.
It is worth noting, for example, that the Russian gas and oil embargo announced this week by Joe Biden does not include uranium. This is because Russia’s mines are the main feeder of American reactors, while they also cover a significant part of European demand. And this means, in practice, that if Russia decides to stop exporting, it will cause problems in their operation and the energy shock will intensify.
As for titanium, a metal vital to aeronautics and other industries, Russia is the largest “player” in the international market. So, the American Boeing may have already announced that it stops buying from it, but the European Airbus says that it will do everything it can not to be deprived of it.
Also, as the war rages in Ukraine, two of the major neon growers, who make up almost half of the world consumed, have been forced to shut down. This is not something that, in turn, will be seen very quickly in the semiconductor industry, as neon is a key element in the lasers used in their construction.
4. Western investments in the state
At the same time, all indications are that the assets of foreign companies leaving the Russian market, either voluntarily and out of fear for their future or because they are under pressure from their governments, may be easy prey for Moscow.
Indeed, according to Putin’s United Russia party, the first steps have already been taken by companies involving more than 25% of foreign groups based in “unfriendly countries” (as those who support Western sanctions have been called). ), to be able to be placed under state supervision. This, in turn, can be seen as a first step towards their nationalization, dealing a major blow to companies that have invested billions in Russia over the past three decades.
Something similar applies to banks. Here, at stake is their “opening” to the Russian market, which amounts to several tens of billions of dollars and euros – with many already starting to spend it on “losses” on their balance sheets.
The aviation industry needs special mention. As some know, the total number of commercial aircraft in Russia is around 1,000. Of these, about 80% have been acquired in the form of leasing (long-term lease). As European companies have the lion’s share in this process, they are reasonably concerned that their aircraft may be confiscated and never returned.
The EU has the biggest problem
Based on all the above, it is undoubtedly confirmed that Europe and the Europeans are the ones who will “suffer” the most from the economic war. This, in turn, will call into question the post-pandemic recovery process, while intensifying pressure on both governments and the ECB for emergency “packages” of support.
This, after all, has already been demonstrated in the discussions that took place at the extraordinary summit in Versailles. Only not everyone seemed to realize how serious things were and were ready to take action.
