After the initial hesitation the west have come out all guns blazing with the sweep of sanctions against Russia. The most biting of those would be the sanctions that restrict the Russian Central Bank from deploying its $640 bn in reserves.
Yet the central bank has just about $12 billion of cash in hand — an astonishingly small amount, he said. As for the rest of Russia’s foreign exchange reserves, roughly $400 billion is invested in assets held outside the country. Another $84 billion is invested in Chinese bonds and $139 billion is in gold. The central bank could trade in some of those bonds for renminbi, which would enable it to buy goods from China, but not from other countries. It could also sell gold, although... there will be few buyers for the massive tons that Russia has on hand.
It follows measures to remove some Russian banks from the international system of payments, SWIFT. This would seriously limit Russia's ability to transact with any financial institutions globally. This is the joint statement of the western countries. These actions could have a devastating impact on the currency. As an analyst put it, the SWIFT sanctions have effectively closed Russia's capital account.
The impact on the currency was immediate. It collapsed 29% against the dollar, forcing the Bank of Russia to double interest rates to 20% from 9.5%, besides releasing an additional $7 bn from reserves and closing down the Moscow stock exchange.
In this context, listing out some implications of the invasion.
1. In the aftermath of the collapse of the Berlin Wall, the west made arguably the biggest strategic mistake of the last fifty years in expanding NATO into Eastern Europe over-riding strong protests from Moscow. I have blogged about it here last week. John Meairshamer's article in the Foreign Affairs magazine is a must read. He says in a new New Yorker interview
I think all the trouble in this case really started in April, 2008, at the nato Summit in Bucharest, where afterward nato issued a statement that said Ukraine and Georgia would become part of nato. The Russians made it unequivocally clear at the time that they viewed this as an existential threat, and they drew a line in the sand. Nevertheless, what has happened with the passage of time is that we have moved forward to include Ukraine in the West to make Ukraine a Western bulwark on Russia’s border. Of course, this includes more than just nato expansion. nato expansion is the heart of the strategy, but it includes E.U. expansion as well, and it includes turning Ukraine into a pro-American liberal democracy, and, from a Russian perspective, this is an existential threat.
The NATO expansion into the Russian near-abroad may have been the original sin.
2. It does appear that Putin may have bitten off more than he can chew and has pushed himself into a corner. There does not appear any satisfactory enough exit path for him from where things stand,
Mr. Putin has in the past shown skill in brinkmanship. During invasions of Georgia in 2008 and Ukraine in 2014, Rodric Braithwaite, who was British ambassador to Moscow when the Soviet Union collapsed said, “he knew perfectly well when to stop, and got what he wanted both times.” This time, Mr. Putin has significantly raised the stakes and left himself with no easy off-ramp. He can send the troops home, claiming he has gained the attention of Western leaders, as well as an American promise to talk about European security. Yet given that he is demanding a new security treaty he won’t get, a tame de-escalation risks a loss of face.
Putin is clearly not doing himself any favour by not only not de-escalating but ramping up the invasion and making it clear that he wants to conquer and topple the Ukrainian government. Given how it looks now, a face-saving exit for Putin looks very difficult. The invocation of the N-word and raising the spectre of a nuclear war is a clear sign of desperation in the Russian camp.
3. There are at least four ways in which the invasion may have benefited China. For one, it may have shattered the post-war consensus that countries do not unilaterally invade another. This would naturally embolden China as it weighs its Taiwan options. Now that the redline on unilateral invasions have been crossed, any Chinese incursion into Taiwan will not be breaking some forbidden ground. Two, it has strengthened the alliance between Russia and China, and also that relationship is now defined on China's terms. Three, it has distracted the global attention towards Russia and given China more space to strategise and formulate its options. Four, the brazen nature of the Russian aggression may ironically give the pro-Chinese interests in US the opportunity to contrast China favourably with Russia and push their pro-China agendas.
4. It may also have decisively reversed the attenuation of memories in Europe about the Cold War and antipathy towards Russia. The egregious nature of the invasion, with its bombardments and casualties, and the invocation of the possibility of a nuclear war (a World War III) have meant that on the issue of engaging with Russia, for European countries the clock has been set back to 1991. The invasion has united Europe as never before and entrenched in the current generation a narrative about the physical threat that Russia poses. The scale of military supplies, a reflection of the popular support in the west, is unprecedented,
The Dutch are sending rocket launchers for air defense. The Estonians are sending Javelin antitank missiles. The Poles and the Latvians are sending Stinger surface-to-air missiles. The Czechs are sending machine guns, sniper rifles, pistols and ammunition. Even formerly neutral countries like Sweden and Finland are sending weapons. And Germany, long allergic to sending weapons into conflict zones, is sending Stingers as well as other shoulder-launched rockets. In all, about 20 countries — most members of NATO and the European Union, but not all — are funneling arms into Ukraine to fight off Russian invaders and arm an insurgency, if the war comes to that.
As mentioned in the previous point, this too is playing into China's hands. The western strategic attention will now be focused on the threat in their neighbourhood, one which was thought to have receded in the last three decades. At best, the American and European geo-political focus will now be divided equally between Russia and China. This alone will provide the Chinese with significant space in its domestic and foreign policy realms.
In fact, John Mearsheimer echoes these concerns when he says,
We should be pivoting out of Europe to deal with China in a laser-like fashion, number one. And, number two, we should be working overtime to create friendly relations with the Russians. The Russians are part of our balancing coalition against China. If you live in a world where there are three great powers—China, Russia, and the United States—and one of those great powers, China, is a peer competitor, what you want to do if you’re the United States is have Russia on your side of the ledger. Instead, what we have done with our foolish policies in Eastern Europe is drive the Russians into the arms of the Chinese. This is a violation of Balance of Power Politics 101.
5. On the other hand, the near unanimity and sweep of western sanctions against Russia may serve as a subtle message to China. The intensity of sanctions matter because China is watching it closely. Any slackness would have only emboldened China in its own ambitions to invade Taiwan.
The sanctions will seriously hurt Russia, and may well have put the country a couple of decades back. An action like ejecting Chinese banks from SWIFT is now a strong possibility. The impact on the much more interconnected Chinese economy will be larger. While the Chinese will redouble efforts to prop up an alternative to SWIFT, it's unlikely to become even meaningful enough anytime in the foreseeable future. A shut down of the Chinese capital account can seriously hurt the country. The weaponisation of SWIFT, only a remote possibility for long, is now a reality.
Similarly, the internal resistance being put up by a weak Ukraine ought to raise concerns in China. More than a week into its invasion, and as the Russian bombardment intensifies and casualties mount, Russia is no closer to the end-game. The WSJ has a China-Taiwan analogy,
Taiwan has its own advantages compared with Ukraine. China would have to carry out an amphibious assault across a 90-mile-wide sea channel, landing in heavily populated areas guarded by sea mines and coastal missile batteries. By contrast, most of the Russian soldiers invading Ukraine simply rode over the border on flat roads. Assuming Chinese invaders did establish a toehold in Taiwan, they would face a similar dilemma to Russia’s—how to seize power without destroying the place that Communist propaganda describes as part of the motherland.
It's one thing to invade, another thing to take control, and an entirely different thing to retain control. The orders of difficulty increases exponentially.
5. It remains to be seen as to how the western corporate world would react to a Chinese invasion of Taiwan. In case of Russia, there has been boycott of Russian vodka by retail chains, suspension of shipping services to Russian ports, exits from joint ventures with Russian firms by even big energy companies, withholding of components and parts by the likes of Daimler, suspension of all business activities by even automobile makers, cancellation of projects like Nordstream 2, restraint on investments in Russia, divestment of its holdings of Russian companies by the $1.3 bn Norwegian sovereign wealth fund, and even boycott of Russian artists and athletes. The latest has been news of even consumer brands joining the sanctions,
Apple has suspended sales of its products in Russia... Apple said it would pause all product sales and block access to state media outlets Russia Today and Sputnik from the iPhone’s App Store outside the country. Carmaker Ford on Tuesday told its Russian joint venture partner that it was suspending operations in the region until further notice, while athletic outfitter Nike paused orders through its website and mobile app in the country, saying it could no longer guarantee deliveries. Boeing on Tuesday said it would suspend large operations in Russia, as well as the provision of parts, maintenance and technical support services for Russian airlines. It had already closed its office in Kyiv, which has over 100 employees, and paused operations at its Moscow training campus. Walt Disney and Warner Bros delayed the release of new films in Russian cinemas earlier in the week...
Apple’s move to block Russia Today and Sputnik came after Facebook, YouTube and TikTok blocked them in Europe, while Google has removed Russian state media outlets from its News search results. Customers are unable to make purchases from the Russian version of Apple’s online store, which shows products including the latest iPhones as “currently unavailable”. Apple said on Tuesday that it had stopped exporting products to Russia last week. It has also followed Google Maps in disabling live traffic updates on its mapping app in Ukraine, which some had feared could present a risk to civilians by highlighting crowded areas.
It's most certain that things will be different in case of China, whose market is orders of magnitude bigger and lucrative. For example, last year, Russia made up about 2% of the more than 220 million iPhones sold globally and less than 1% of Apple's global services revenue. The western corporates are not only unlikely to volunteer with any such public spiritedness but also likely to resist and subvert government efforts to sanction China.
The not-so-old history of Cold War has meant that the vestiges of western animosity towards Russia can easily be recalled. This too has contributed to the strength of the support for sanctions.
6. Now that the invasion has happened, it should serve as a welcome reminder to a generation of western European population that peace in Europe cannot be taken for granted. Vladimir Putin's actions have shaken a continent out of its comfort zone. The implications will manifest in several ways.
An immediate impact has been the u-turn in Germany's post-war foreign policy. Apart from sending troops and weapons to Ukraine, the German Chancellor has announced a massive 100 bn euros fund to modernise the military and meet its NATO commitment to spend 2% of GDP on defence. There has been bipartisan consensus and massive public support to both send German troops and equip Ukraine. The fear of instability due to wars is back.
The invasion has so far displaced over half a million people. They'll start reaching Western Europe in the days ahead. And they could remain a matter of lingering concern and reminder long even after things settle down.
Brent crude, the international oil marker, rose as much as 9 per cent to an eight year high of above $113 a barrel before trimming gains. In a sign that pressure in commodities was not limited to oil, European natural gas prices surged 50 per cent on Wednesday to an all-time high of €185 a megawatt hour.
But nearly two weeks into President Vladimir V. Putin’s invasion of Ukraine — Europe’s largest land war since 1945 — the image of a Russian military as one that other countries should fear, let alone emulate, has been shattered. Ukraine’s military, which is dwarfed by the Russian force in most ways, has somehow managed to stymie its opponent. Ukrainian soldiers have killed more than 3,000 Russian troops, according to conservative estimates by American officials.Ukraine has shot down military transport planes carrying Russian paratroopers, downed helicopters and blown holes in Russia’s convoys using American anti-tank missiles and armed drones supplied by Turkey, these officials said, citing confidential U.S. intelligence assessments. The Russian soldiers have been plagued by poor morale as well as fuel and food shortages. Some troops have crossed the border with MREs (meals ready to eat) that expired in 2002, U.S. and other Western officials said, and others have surrendered and sabotaged their own vehicles to avoid fighting... Russia’s military, at 900,000 active duty troops and two million reservists, is eight times the size of Ukraine’s... But with each day that Ukrainian President Volodymyr Zelensky holds out, the scenes of a frustrated Russia pounding, but not managing to finish off, a smaller opponent dominate screens around the world. The result: Militaries in Europe that once feared Russia say they are not as intimidated by Russian ground forces as they were in the past.
Ironically, in its victory, Russia may have exposed its underlying military weakness.
2. Another implication of the Ukraine invasion and the attendance supply-chain disruptions may be a strong reinforcement of the need to diversify and develop resilience.
“The longer-term implications of this war are that we will see a faster de-globalization and a more fundamental move away from the — above all German — doctrine that economic interests often stand above foreign or security policy interests,” Carsten Brzeski, an economist at the Dutch bank ING, said in an email. “As a consequence, China could become less important as an export market for European carmakers.”China has become the world’s largest and fastest-growing car market and a crucial source of profit for most large automakers and suppliers, including U.S. companies like General Motors and Tesla. Volkswagen sells more than half the cars it makes in China, and the country accounts for about one-third of sales for BMW and Mercedes-Benz. China has also become a crucial source of refined lithium required for electric car batteries, as well as a major manufacturer of the batteries.
The decoupling from China may gather pace in the aftermath of the Ukraine invasion.
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