The economics of the Ukraine war

The war may last longer than anticipated. Wars are easier to start than to end. [Courtesy] 

Ukraine has refused to get off the headlines. After two weeks, the capital Kyiv is still in Ukrainian hands and the pincer movement has not subdued the country.

Remember Shaka, the Zulu military strategist? Some say the cathedrals in Kyiv could be the only thing keeping the city from being overrun by Russian forces.

You can’t destroy the origin of the Orthodox Church, which is deeply entrenched in Russian and Ukrainian minds. 

The war may last longer than anticipated. Wars are easier to start than to end. The Mau Mau war lasted eight years against all predictions, while World War II lasted six years.

I have a hunch that once Kyiv falls and a new regime is in power, Russia will end the war. 

But resistance from the Ukrainians could prolong the conflict. Some suggest that war profiteers would love such a scenario.

One concern is that other countries would be sucked into the conflict. There is already a rumour that Belarus could join in. It’s another question when the 2.5 million Ukrainian refugees will return and start their lives again.

Let’s leave the military aspect of the war to military experts and focus on the economic part, specifically the sanctions. 

Unwilling to confront Russia on the battlefront, the West (read the US and her allies) has resorted to economic sanctions.

Servicemen of the Ukrainian National Guard take positions in central Kyiv, Ukraine February 25, 2022. [Reuters/Gleb Garanich]

They range from banning Russian banks from the SWIFT financial-messaging system to closing businesses that have links to Moscow.  

Russia has curiously asked the West to wait for its response to the sanctions.

My guess is that many Western businesses in Russia will be nationalised. 

This prospect has left my head spinning. As the Cold War ended, Western firms were waiting in the wings to get into Russia.

While we saw the end of the Cold War as a natural trajectory of history, the West saw it as an opportunity to expand their business into new frontiers and make money as we watched, mesmerised by the fall of the Berlin wall.

 Looking at the Western firms leaving Russia, it’s evident that they have made lots of money.

Question is: Why didn’t we invest in the former Soviet republics like westerners?

We also failed to invest in China after Chairman Mao opened up the economy in 1978.

Think of it, Nike has 116 stores in Russia, while Adidas has over 500.

Burger King has 800 outlets and McDonald’s about 850, according to online data.

Major Western banks, manufacturers and retailers have invested heavily in Russia over the years. Facebook, sorry Meta, has millions of users in Russia. Does this explain why former US President Donald Trump did not want to annoy Russia (read Putin)?  They would have continued doing business silently if the current crisis had not happened. It is likely that they repatriate their profits home.

Many multinationals make more money abroad than at home. Closing businesses in Russia will be felt in the countries where the firms are domiciled. 

Russia seems to understand that the hunter and the hunted both get exhausted. 

Ukrainian servicemen are seen next to a destroyed armored vehicle, which they said belongs to the Russian army, outside Kharkiv, Ukraine February 24, 2022. [Reuters]

While closing businesses will lead to loss of investments and jobs for the Russians, the westerners and easterners (such as the Japanese) will also lose their profits.  

Russia is a mature market with 144 million citizens. The firms could return after the Ukrainian conflict dies down, but the shareholders will feel the effect in the meantime.

Politicians could also burn their fingers as voters lose jobs through disinvestment in Russia. 

The sector to watch closely is energy.

Russia is among the world’s top producers of oil, gas and other strategic minerals like platinum, gold and iron ore. Add rare earth metals. Europe gets 40 per cent of its gas from Russia.

Would Russia switch off the gas to protest the sanctions? Would that be another response to sanctions? Russia can only watch as gas and oil prices go through the roof, disrupting Western economies.

The US is far and can develop its shale gas or import oil from South America or Canada. Europe, however, is more beholden to Russia for its oil and gas. Why is Russia not bothered about her energy markets? Could China and perhaps India be alternative markets?

What of the former Soviet republics? There is no shortage of takers for Russian oil and gas. Beyond the bombs, it would be interesting to watch how the sanctions play out.

Who will blink first? Could the sanctions make Russian bolder and more self-reliant? Remember South Africa during the apartheid era. Sanctions are also hard to police.

Closer home, what has been our economic response to Russia’s invasion of Ukraine. What do we export or import from Russia?

Some have argued persuasively that we ought to have started exporting our oil by now. We would have got a windfall from the rising oil prices.