Russia’s invasion of Ukraine could change the global economic game

But the long-term consequences of the war could be deeper. Even before Russian President Vladimir Putin sent tanks and missiles to Ukraine, years of deteriorating US-China relations and failed global trade talks had blocked closer integration of financial and trade flows. that had been anticipated at the height of globalization.

The sequel is unlikely to mirror the distinct blocks of the Cold War. Even as the global economic order fractures, no rival ideology vies for supremacy. And China’s harsh authoritarian turn under President Xi Jinping coexists with extensive trade ties with the United States, Europe and Japan. But governments, businesses and investors are all adjusting to a new reality.

“It’s the end of one era and the beginning of another, which is a less complete form of globalization than what we had in the immediate post-Cold War era,” said Michael Smart, Rock’s chief executive. Creek Global Advisors. “We need to think differently about what we mean by the global trading system. There are certain requirements that, if you don’t meet them, you don’t belong. You can’t be in the club.

In just over a week, Western allies imposed one of the fastest sanctions campaigns in modern history against Russia. (Luis Velarde/The Washington Post)

As the US, Europe, Canada, Britain and Japan unite to punish Russia with unprecedented financial sanctions, the war has sparked a ‘major geopolitical realignment’ similar to the aftershocks of the attacks 9/11 terrorists, according to Citibank analysts.

Virtually overnight, most major Russian banks were blocked from transferring money across borders. The Moscow Stock Exchange has been closed for a week. Russian customers are cut off from many of the most advanced technologies in the world.

On Friday, Russia’s isolation deepened when the country’s communications regulator blocked access to Facebook, one of the few news sources the government already did not control, saying it had discriminated against Russian media.

In Washington, leading Democrats and Republicans have begun demanding that the United States stop importing oil from Russia, a move that would worsen Moscow’s financial situation if European nations follow suit. Meanwhile, the International Monetary Fund warned on Saturday that the war and rapidly accumulating sanctions against Russia “would have a serious impact on the global economy”.

Russia’s financial exile caps more than a decade of erosion of globalization, which began with the 2008 financial crisis and continued with the rise of Xi in 2012, the trade war between the United States and China which began in 2018 and the repeated failures of diplomats to agree on trade liberalization. . The coronavirus pandemic, which has highlighted the risk of ocean supply lines and restricted international travel, has further reduced cross-border connections.

Together, Russia and Ukraine account for 3% of global production, according to JPMorgan Chase. Putin’s brutal invasion of its neighbor will have broad economic repercussions, however, economists and government officials have said.

“There is a chance – increasing with every human rights outrage committed by Putin – that Russia will be shut out of the global economy for a long time. … You take out that big part of the global economy and go back to the situation we had during the Cold War when the Soviet bloc was pretty much closed,” said Maury Obstfeld, professor of economics at the University of California, Berkeley. “But that doesn’t mean the rest of the world can’t be tightly integrated in terms of trade and finance.”

Expectations of a lasting era of peace and prosperity were high in the early 1990s. After the demise of the Soviet Union in December 1991, Russia embarked on a series of disorderly economic reforms, including the creation of the country’s leading stock market, and welcomed foreign investors.

China, meanwhile, was also following a market-oriented path that relied on access to foreign technology, capital and executives.

From the outset, many American officials saw a connection between political freedom and economic freedom. In 2000, as Congress debated China’s entry into the World Trade Organization, President Bill Clinton saw trade ties herald “a very profound change,” including in the country’s political system.

“By joining the WTO, China is not just agreeing to import more of our products; it is accepting to import one of the values ​​most dear to democracy: economic freedom”, Clinton said at the time. “The more China liberalizes its economy, the more it will fully unleash the potential of its people – their spirit of initiative, their imagination, their remarkable entrepreneurial spirit. And when people are empowered not only to dream but to achieve their dreams, they will demand a greater voice.

Hopes for the steady advancement of free markets and free peoples have proven unrealistic. Overall, democracy is broken. Poverty is on the rise.

The number of countries considered “not free” by the non-profit organization Freedom House and those whose average annual economic growth is less than 3% have increased in parallel.

Even before the pandemic pushed the developing world deeper into poverty, around 70% of the world’s countries were experiencing below-average growth, about three times the 2008 figure, according to the World Bank. Undemocratic rule has also spread across much of the globe.

In 2020, for the first time in more than two decades, global poverty has increased, according to World Bank data. The Russian recession will intensify this trend, including in the Central Asian republics that were once part of the Soviet Union. Remittances from Central Asian migrant workers working in Russia make up around 30% of the Kyrgyz Republic and Tajikistan’s economy and are almost certain to fall as Russia plunges into a deep recession and the ruble sinks .

“We came out of this benign era some time ago. But this [war] brought it home with great force,” said World Bank Chief Economist Carmen Reinhart. “The golden age of globalization ended with the global financial crisis of 2008.”

Global trade and financial ties have also plateaued.

According to data from the CPB Netherlands Bureau for Economic Policy Analysis, an independent research institute, global trade volumes would be almost twice as high today if they had continued on their trajectory from 2000 to 2008.

Similarly, major cross-border financial flows have virtually stagnated even as the global economy has grown by around 30% since 2008. Major banks now have $31.1 trillion in foreign exposure, a little more than the $30.4 trillion at the start of 2008, according to Bank data. for international settlements in Basel, Switzerland.

According to MSCI research, financial markets that rose and fell at nearly the same pace increasingly went their own way. Ten years ago, markets in different regions moved together about 80% of the time. Today, the correlation is just over 50%, reflecting “a less globalized economy,” according to Peter Zangari, global head of research and product development at MSCI.

It’s not that globalization is over. But it will be different.

“It closes the door to a chapter that never had a strong intellectual foundation,” said economist Joseph Stiglitz of Columbia University. “It won’t be the same. What we are going to see is a process of disconnection, of disengagement. But it’s going to be slow, especially in the case of China.

Indeed, since 2018, the United States has limited the flow of high-tech goods to China and increased tariffs on Chinese imports. Chinese authorities, watching the United States and its allies deliberately plunge Russia into a deep recession, should step up efforts to become more self-sufficient in the production of goods such as semiconductors.

The United States, too, is moving in this direction with President Biden’s “made in America” ​​initiative designed to boost domestic manufacturing.

China’s economy, however, is 10 times larger than Russia’s and is much more closely tied to the outside world, making it unlikely that Beijing or its trading partners will seek a full divorce.

The immediate impact of the war on the US recovery is likely to be limited. Last year, total US two-way trade with Russia and Ukraine was $40 billion, and Wall Street banks have less than $15 billion at stake in loans to borrowers Russians.

But there will be collateral damage from the sweeping US and allied sanctions that have cut most of Russia’s ties to global trade and finance. Gasoline prices in the United States, which have currently averaged $3.84 a gallon for nine years, could soon hit $4, according to Capital Economics.

Russia is also a major producer of other raw materials, including wheat and industrial metals. The price of palladium, which is used to make catalytic converters, has risen more than 60% this year for automobiles.

Further supply chain disruptions will also put upward pressure on inflation. Federal Express and United Parcel Service have both halted shipments to and from Russia. Maersk, the giant ocean freight carrier, stopped accepting new bookings this week for goods bound for Russia, causing cargo to back up at terminals across Europe.

“Freight is being delayed and our already congested transshipment centers are under increasing pressure,” Maersk said in a notice to customers. “This is a global impact, and not just limited to trade with Russia.”

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