A dangerous stand-off



By Ricardo Evangelista


The last couple of years certainly have not been boring, at least in the sense implied by this old Chinese proverb: May you live through interesting times. COVID killed millions, disrupted long established orders, and left behind a legacy of economic problems whose scale we are only starting to appreciate. Debt levels have gone through the roof, while inflation, after a decades-long hibernation, is once again rearing its ugly head. As the acute phase of the pandemic fizzles out, a new economic paradigm is starting to take hold, with central banks around the world moving to tighten monetary policies in efforts to control spiking inflation.

If that was not enough, another crisis is brewing in Eastern Europe, threatening to disrupt the geopolitical balance of that continent and even further afar, for that matter, throwing a massive spanner into the works of the global economic recovery. Russia’s menacing accumulation of troops and military equipment on the border with Ukraine looks ominous, with Western powers warning that Moscow is about to unleash an attack that may ultimately lead to complete control over Ukraine. Such a scenario, at the time of writing, is yet to be confirmed, as the Russian president continues to hold his cards guardedly without revealing his true end game, maintaining doubts over whether he is bluffing or not.

Moscow demands guarantees that NATO will not further expand eastwards, leaving Ukraine ultimately unable to escape Russia’s sphere of influence. According to some analysts, this is what the conflict boils down to: Vladimir Putin sees the full embracing of western-like democracy by Ukraine as an existential threat to his regime and wishes to avoid it at all costs. Whether or not such an assessment is fair and correct, only the Russian president can say.

One thing is certain: Europe is experiencing the most serious military build-up since at least the end of the Cold War, and, should the stand-off evolve into full-blown armed conflict, the consequences will be serious. Repercussions are difficult to quantify but will surely include an array of undesirable economic outcomes for all side. As soon as the first Russian soldier crosses the border, the European Union (EU), the US and others will impose an economic blockade on Russian exports, as such a move is one of the few non-military retaliatory tools available to the West.

However, Russia is among the top three global exporters of oil, natural gas, wheat, iron and several other commodities and, if the imposition of such sanctions would be very damaging for the economy of the Eurasian giant, it would also, in a strictly economic sense, be an act of self-harm for the West. The ongoing commodities super-cycle would intensify, with record price levels recently reached likely to climb even higher. Energy costs would almost surely spike, compounding the rise in the cost of living faced by families and denting the confidence of businesses to invest. Potentially, we may be heading towards a new recession.

The stakes are high. So far, diplomatic efforts have proven fruitless, with both sides unwilling to step back. The next days and weeks will determine if, as we finally see light at the end of the COVID tunnel, another crisis awaits. Let’s hope not.


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