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Russia's invasion of Ukraine has had economic ramifications

When the battle in Ukraine ends, the entire humanitarian, economic, geopolitical, and strategic consequences will take time to fathom, but it is currently being played out live online in the social media age.

Russia's invasion of Ukraine has had economic ramifications
Russia's invasion of Ukraine has had economic ramifications

Some points have previously been established.

The advantages of a traditional military offensive were exaggerated, while the defensive capabilities of a globalised economy were undervalued.

The current economic and financial war waged by the US and its allies against Russia is unique in contemporary history. Since perestroika in the late 1980s, Russia's economic progress has been based on increased economic interdependence with the rest of the globe. Withdrawing that reliance costs Russia a lot of money, and it's just going to become worse.


Russia's economy, which is only slightly larger than Australia's, suddenly appears to be considerably smaller. According to some calculations, if the battle continues until next year, all of Russia's revenue gains since 1989 will be wiped out. That would return Russia to the Soviet era, when the Eastern Bloc was free of Western 'coercion,' as well as the wealth that would have come with it. Foreign investment has always carried the danger of sovereign risk from appropriation, but it's now obvious that sovereign risk also includes the risk that your own government will continue to follow international conventions.

China and India, the world's two most populous countries, are on the fence over Ukraine's incursion. India appears to be on the verge of purchasing Russian gas at a reduced price. China is unsure of what to do and is attempting to remove itself from the problem. Strategic alliances may prove to be less robust in the long run than economic alliances.

The strategic issue of the Ukraine situation, according to Australian Prime Minister Scott Morrison, is to unite against the depredations of a 'arc of tyranny.' The evidence of international political reality and behaviour does not support a political dichotomy of autocracies and democracies that explains how the world is responding to Russia's invasion of Ukraine. The concept is basic and lacking of strategic legitimacy, and Australia's regional backyard in East Asia is brimming with a diverse range of 'autocracies' that have nothing to do with Russia's escalation into aggressiveness. Indonesia, Australia's close neighbour and a democracy with a population of 273 million people, is another democratic country that, like democratic India, has refrained from criticising Russia.

With the task of chairing the G20 this year, Indonesia may choose to be cautious in its approach to Moscow. Inviting Vladimir Putin to the G20 summit in 2022 could result in a boycott by the G7. Given the precedent of Russia's expulsion from the G8 following its invasion of Crimea, moving to a G19 (a G20 without Russia) may be a viable alternative, since the weight of global opinion makes Beijing and New Delhi less likely to block such a move. However, any suspension of Russian participation in this year's G20 will require careful management of collective diplomacy and effort on the part of Indonesia.

It may be impossible for the G20 to host a country that is engaged in an aggressive war from which the rest of the world has clearly separated itself.
The current crisis appears to be bolstering the notion that autarky is synonymous with safety for some. The idea holds that the world is a dangerous place, and that the only way for countries to avoid becoming victims of economic coercion is to embrace "self-reliance" or limit interdependence to allies.
'This premise is dangerous and incorrect,' argue Shiro Armstrong and Tom Westland in this week's lead storey, 'it will only lead to further violence in a world where major powers are permitted to act with impunity.'

In fact, increasing economic interdependence is a path to both wealth and security. Nothing can prevent extremely irrational leaders from making bad decisions, but trade reduces the likelihood of conflict. Economic weapons used collectively in extreme situations, such as the current one, can reinforce rather than destroy the existing free economic order. Using economic influence unilaterally is akin to setting fire to your own home in the hopes that the fire will spread to your adversary's. When all is said and done, communal use is a completely other storey.
Unilateral sanctions nearly always backfire, as Armstrong and Westland explain: "the global economy is huge, and there are always alternative customers or sellers." When sanctions are agreed upon and implemented as a group effort, they are effective and justifiable.

Too many people have focused on Chamberlain's appeasement of Hitler as the major lesson of the interwar years. The die had already been cast by Munich. It came after a far longer period of Germany's economic decoupling as it constructed the 'Reichsmark bloc,' shedding the economic ballast that would have favoured commerce over invasion.
The implications of World War I's peace hint to crucial lessons for post-conflict reconstruction.

According to Armstrong and Westland, "economic warfare, like any other struggle, requires an exit strategy." It is necessary to have a "clear and credible exit from sanctions in order to reconstruct both Ukraine and Russia." They warn that while the "world must not reward aggression," "for very practical reasons, generous support must be waiting for Russia to stave off entrenching nationalism and extremism, thus avoiding a tragic repeat of Sèvres in 1919, when a defeated Germany was condemned so severely that it turned to revenge, rather than rebuilding its sense of the world."

The US-initiated Biden-Xi virtual summit last weekend shows that the US is intent on entangling Beijing in an attrition battle with Moscow. If China were to significantly breach the international embargoes against Russia, that endeavour would be badly jeopardised — but there is currently little indication that Beijing is willing to risk its own interests in doing so. Given how much more intertwined China is into the global economy, if it were to be effectively subjected to such economic isolation, it would suffer a fate far worse than Russia's.

The US and its allies are putting pressure on President Xi, who appears to have more clout and reason to act than anybody else when it comes to persuading Mr Putin to back down. However, there are significant risks for China in mediation, including the potential of being caught in a web of double-dealing and Putin's intransigence wreaking even greater havoc on US-China ties.
Without a shared grasp of the economic costs of brokering a European peace, Washington and Beijing will continue to speak at odds.

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