The European Economy under Russia’s Threats
Early morning on February 24th 2022, Russia invaded Ukraine. While Russia first invaded Ukraine in 2014, and annexed the Crimean Peninsula from Ukraine, this time, the invasion of Ukraine by Russia was considered by the international community to be an act of aggression. The invasion triggered the largest refugee crisis in Europe since World War II, more than four million Ukrainians have left the country and a quarter of the population has been displaced. In response to this invasion, the international community imposed a number of economic sanctions on Russia, in an aim to limit its power and influence in Ukraine. Economic sanctions, as defined by the Council on Foreign Relations, are “the withdrawal of customary trade and financial relations for foreign- and security-policy purposes. Sanctions may be comprehensive, prohibiting commercial activity with regard to an entire country … or they may be targeted, blocking transactions by and with particular businesses, groups, or individuals.” These sanctions have been imposed by many, such as the United States, the European Union, and G7.
Vladimir Putin, president of Russia, has mentioned that Russia invaded Ukraine in the sole purpose of denazifying Ukraine, as well as protect its citizens who have been facing humiliations and genocides by the Kyiv regime. Ukraine has a long history with neo-nazis. Indeed, Azov is a far-right military group that has been accused of harboring neo-Nazi and white supremacist ideology. The group is now part of Ukraine's armed forces. However, Putin’s claim to denazify Ukraine was quite an interesting and bold statement given that the current president of Ukraine is Jewish, and lost relatives in the Holocaust.
This invasion of Ukraine has mostly - as expected - affected the country and its citizens. Many were forced to flee the country and seek asylum in neighboring countries such as Poland, Romania, and Moldova. However, many Ukrainians were forced to stay, and fight for their country. Ever since the invasion, Ukraine’s economy has contracted. According to the International Monetary Fund, “the loss of life, damage to critical infrastructure, trade disruption and an outflow of refugees would lead to gross domestic product falling by a minimum of 10% in 2021”. However, many countries have stepped up and helped Ukraine in these difficult times. Countries have donated weapons, funds, and have delivered humanitarian and non-lethal aid. While many countries have helped Ukraine, they have also simultaneously worked against Russia. Through economic sanctions, they hope to weaken the country and its president, Vladimir Putin. But many challenges have arisen as economic sanctions against Russia persist.
Many Ukrainians have fled the country to a safer place. While most women and children are able to successfully escape the war and seek refuge in neighboring countries such as Poland, men are forced to stay in Ukraine to fight and protect their country. However, this conflict has greatly affected Ukraine, who found itself cut off from the world by war. Trade has been disrupted throughout the country, and according to the UN, hundreds of thousands of people inside Ukraine have been cut off from life-saving aid such as humanitarian aid due to the military encirclement of cities. Vulnerable populations in Ukraine such as elderly citizens, or the economically disadvantaged are most likely to become refugees and will have the greatest difficulty coping with rising food and fuel costs. Relief efforts are underway around the world to ensure that people's basic needs for food, shelter and psychological safety are met in the conflict zone and beyond.
Trade-wise, the conflict has disrupted the global supply chain of diverse goods, and affected international trade as a whole. Ukraine is a massive producer and exporter of seed oil, corn, wheat, and iron ore. However, since the beginning of this war, the country’s production has declined as people have fled the country and men were forced to give up their occupations to join the army and help fight against the Russians. Similarly, the concentration of wheat, fertilizer, and related production in Russia will strain food supplies globally. Securing the continuous supply of food to the countries most tied up to exports from these regions is becoming an issue. Stocks - about half of the corn Ukraine was expected to export for the season - are increasingly difficult to get to buyers, providing a glimpse of the disruption caused by the war in Russia, which accounts for roughly $120 billion global grain trade. Already disrupted by supply chain blockages, surging freight rates and weather events, markets are expecting further turmoil as shipments from Ukraine and Russia - which together account for about a quarter of the global grain trade - become more complicated and raise the specter of food shortages.
Ports, railroads, and roads throughout Ukraine have either been closed, or taken over by the Russian army. No foreigners have really been able to get in the country ever since the start of the war due to fear. Thus, the Ukrainians that remain in the country have found themselves unable to access foreign goods and services that the country once imported. The lack of production, manufacturing, and transportation in Ukraine due to the war has also disrupted the global supply chain, as previously mentioned, which has had and will keep having a negative impact on the world’s economy and other countries that relied on Ukrainians and Russians export of agricultural goods, which consisted of a wide variety of goods. Citizens that remain in Ukraine have done so to fight for their country against the Russian army, as a result, there are fewer people than ever that work to produce and provide goods not only for Ukrainian citizens, but also for foreign citizens who relied on such goods.
As the effects of war can be felt everywhere, other countries such as the United States and NATO cannot get involved in the conflict due to the concern that it will become a war between Russia and the West. Since Ukraine is not a member of NATO, the alliance is not obligated to defend the country. Similarly, as the United States is an ally of NATO, the country cannot get involved in the conflict, unless Russia invades a NATO country, which is not so likely to happen as this could result in World War III. However, both NATO and the United States are determined to do all that is in their power to support Ukraine.
Their inability to get physically involved in this conflict is due to the fact that Ukraine is not a member of both the European Union and NATO. Ukrainian President, Volodymyr Zelenskiy, whose country is facing a massive unprovoked invasion from neighboring Russia, has called on the European Union to grant Ukraine EU membership under a special procedure as soon as possible. However, it is not as easy as it sounds, the process to gain EU membership is very long and many EU countries are against an expansion of the European Union. Similarly, Ukraine is unable to join NATO just yet, but the organization is committed to helping the country and its citizens in these difficult times.
As a response to the war, many countries have set up a number of economic sanctions in the aim to weaken Russia. But as these sanctions take place, a big question arises: who do these sanctions actually hurt? Economic sanctions on Russia have a goal to affect the economy of the country. SWIFT - the Society for Worldwide Interbank Financial Telecommunication, is a Belgian cooperative society providing services related to the execution of financial transactions and payments between banks worldwide - has banned Russia. As a consequence, Russian banks are no longer able to use the financial interface to transfer money. But financial sanctions, not banishment from SWIFT, are the key economic punishments being imposed on Russia. Economic sanctions on Russia such as a ban on exports, blocking of Russian assets, sanctions against individuals, ban of oil and gas imports from Russia. Additionally, all Russian banks have had their assets frozen. But who are these sanctions truly affecting? The government? Or the people?
As horrible as it is, economic sanctions against Russia are actually impacting Russian citizens who have seen their assets abroad frozen, and who also cannot access goods and services that they once did. The lower class in Russia is the one suffering the cost of these sanctions, but as time passes, Russia as a whole will feel the effects of these sanctions, as many foreign companies have pulled out of the country in response to its invasion of Ukraine. Sanctions would prohibit Russian energy exports, which would traumatize the European economy, which is heavily dependent on Russia, and would worsen the surge in energy prices. As companies have pulled out of the country, Russia’s GDP is expected to heavily shrink as an outcome. Russia's central bank has been struggling to stabilize the value of the ruble and prevent a sharp rise in interest rates without access to about half of its foreign exchange reserves. The Russian stock market was also closed for weeks, suspending shares of domestic companies that could plunge as soon as trading resumed.
The sanctions also have an impact on the European and global economy, which is heavily dependent on Russia for oil, gas, and different goods. The country is also a big importer of luxury goods, so countries such as France and Italy will see their export of luxury goods decline in the next year (and more). This will greatly impact the economy of these countries as such exports contribute to a big portion of their gross domestic product. Businesses have also been hurt, they have lost a lot of their revenues as they pulled out of Russia. However, if they had stayed in the country, with the increasing number of economic sanctions, they would have suffered the long lasting effects of these sanctions on their businesses, which would have also impacted other countries that are also home to such companies.
Oil prices have gone up throughout the world. The United States, France, or the United Kingdom are all three big importers of Russian gas and oil. The “Russian oil ban” as it is called has created a lot of discontent in many European countries, whose citizens have to suffer the cost of an increase in oil and gas prices. Europe exports 45% of gas from Russia, and has pledged to reduce its purchases of Russian gas by two-thirds before the end of the year. However, an alternative must be found in the aim to reduce the price of oil and gas in European countries. Europe has become too dependent on Russia for gas, but until an alternative is found, citizens will have to deal with the increase of gas and oil prices in their respective countries.
Overall, the economy of Europe has been slowing down as a result of Russia's invasion of Ukraine. Not only was the supply chain disrupted by this invasion, but citizens in both countries are completely left alone. No one can really get into Ukraine, as a result, the country struggles to import goods that its citizens once consumed on a daily basis. They are left with local producers and manufacturers. Similarly, countries who used to trade with Ukraine can no longer do so. Wheat and grains are agricultural goods that the country used to export, however, as a port has been destroyed, the country has been cut off from the world, unable to export its goods to countries who relied on them. But similarly, many companies have backed out of Russia, leaving citizens unable to access certain goods and services.
As Russia keeps invading Ukraine and does not seem to be willing to put an end to this conflict that has already cost the lives of many, I wonder whose economy will be the most impacted: Russia’s economy, or Europe’s economy? Both are really powerful, but the sanctions that countries in the European Union and NATO have set up against Russia have also affected more than just Russia. Although Russia’s GDP is expected to shrink this year as a result of this invasion, I wonder how much longer can the country go without the help and support of other countries, or even companies that were once in the country. Left completely alone, Russia is left with its own resources, and is fully aware that its citizens are suffering from this conflict. It makes me wonder how much longer will they be able to fund this war, and allow for its citizens, especially the lower class, to be impacted by it.
Although much has been done by the international community in response to this conflict, Ukraine is still being invaded by Russia, and many face the consequences of this conflict every day. It is extremely hard for other countries and NATO to physically be involved in this conflict as it could lead to world war III. Many fear Russia, a powerful nation that has access to numerous nuclear weapons. While it is understandable that the international community is unable to get too involved in this conflict, and with the long process that is for Ukraine to be able to join NATO and the EU, the international community is left with the options to use sanctions against Ukraine, or to donate to Ukraine, military aid, humanitarian aid, weapons, and funds. As the situation does not seem to be getting any better, the international community should do everything that is in their power to limit the influence of Russia on Ukraine, in the hope that one day, Russia will back out.
To conclude, this conflict has taken a turn that no one really expected. While many were aware of Russia’s threats, it was still a big shock when Russia actually invaded Ukraine. As the international community is doing everything that they can to help Ukraine in these difficult times. Many countries have welcomed refugees, sent humanitarian and military aid, as well as many other resources, Ukraine and its citizens that have remained in the country still greatly suffer from this war. Russia’s citizens have also been greatly affected as the economic sanctions are directly affecting them. The economy of Russia, Ukraine, and Europe is shrinking. Unless Russia backs out of Ukraine, the consequences of this conflict will be long lasting and an entire economy will have to be rebuilt, which will take time. In the meantime, we can hope that Ukraine will be able to join the EU and NATO, in the aim to get more support and help from other countries, as Ukraine puts up a big fight against the superpower, Russia.
