The interconnectivity of the
global economy could mean sanctions against Russia have a
ripple effect worldwide.
A defiant President Barack
Obama today refused to accept the legitimacy of the Crimea referendum
to join Russia and announced the beginning of targeted economic
sanctions, designed to pressure Moscow into reconsidering its actions
toward the Ukraine.
It appears that the
referendum will succeed with a whopping 97% majority voting in support of the
ballot measure – a figure that doesn’t at all align with the ethnic and
political map of the region. Russians are the largest ethnic majority on the
peninsula, but comprise
only 60% of the population. It’s very unlikely that the vote was legitimate, or
The Obama administration has
responded by freezing the assets of key Putin aids and
Crimean officials that are associated with separatism. The European Union also approved
its own sanctions today in coordination with the U.S. The U.S. has threatened
additional sanctions should the Russian government annex Crimea.
The impact of any sanctions
won’t be immediate, but anonymous U.S. officials told
members of the press that the actions were designed to hit “close to home” for Russian President Vladimir Putin. The effect of Russia’s intervention in
Ukraine has already impacted its economy; the stock market and ruble currency
since the crisis began.
It’s a small world
However, Russia is much more
a part of the world economy than the Soviet Union was. The turmoil caused by
Russian’s intervention has affected more than its domestic fortunes – it’s also
shaken global equities markets in Europe and the U.S., noted Northeastern
University global management and innovation professor Daniel J. McCarthy.
The price of gold has
increased, and that curiously benefits Russia, which has been increasing its
holdings dramatically in recent years, McCarthy said. But that doesn’t mean that
Russia would be insulated from a chill in global trade. Any attempt to
retaliate against Europe by flexing its muscle as a large exporter of natural
gas would also hurt it.
“Such actions would also
further erode its credibility and add to distrust of Russia as a reliable
supplier. Common sense would say Russia is unlikely to bring that on itself,
BUT they have done it in the past including in 2009,” McCarthy explained, “Even
though it would hurt the Russian economy, Putin would likely react with such
retaliation if European countries were to join with the U.S. in embargos or
attempts to expel Russia from the G8.” The economic ripples would be
Russia supplies around 30% of
Europe’s natural gas and 20% of other important fossil fuels. A disruption in
trade could affect the price of products in Europe and throughout the world,
McCarthy said. Further, any Russian military action in Ukraine – the world’s 2nd
largest grain exporter – would upset world markets, which Russia now belongs to.
Russia could retaliate
against global corporations and U.S. interests within its borders, which would ultimately
harm businesses worldwide.
“One of the mismatches of the
Ukraine conflict that makes it both dangerous and new is that Russia is
conducting a 19th century foreign policy in a globalized world where actors are
tied together economically as they have never been before,” said Edward
Goldberg, a faulty member at NYU’s Center for Global Affairs and Baruch College
Goldberg explored Russia’s
interdependency with Europe further:
· “The EU is by far Russia's largest customer for
energy. Russia supplies 31 percent of EU gas imports, 27 percent of crude oil
imports, 24 percent of EU coal imports, 30 percent of total EU uranium imports,
and is the EU's third-largest supplier of electricity.”
· This represents 88 percent of Russia's oil exports, 70
percent of its gas exports, and 50 percent of its coal exports.
· But equally important 40 percent of the Russian budget
derives from the export of raw materials to the EU.
· Much of the natural gas from Russia to Europe passes
through a maze of pipelines in the Ukraine. In principle Russia could
threatened to cut off gas to Europe but in our interconnected world this would
hurt Russia, the supplier as much as it would hurt Europe the customer.
Any military action in the
Ukraine could also damage Russia’s ability to export its gas – many of its
pipelines pass through Ukraine. A disruption in liquidized natural gas exports
could also shape policy in the United States to export more LNG onto the world
market. The U.S. is one of the world’s largest natural gas producers, but domestic pressure from the U.S. chemical industry not to export so that keep
prices remain low would complicate matters, Golberg said.
What's more, the cost of infrastructure and changes in prices in
the coming years could make increasing U.S. exports impractical, but it could
be a powerful lever to pull in an economic conflict with Russia.
“If America begins to export LNG in
substantial quantities it will have a direct economic impact on Russia. As an
example, last year when on account of lack of US sales more mid-eastern LNG
went to Europe, Gazprom, the Russian gas monopoly, was forced to renegotiate its contract down in Europe,” Golberg said.
Ultimately, the situation in
Ukraine may be less about economics than Vladimir Putin’s political ambition
and securing a 4th term as president, McCarthy said.
“He obviously believes that
Russians like strong leaders and makes every attempt to look like a very strong
leader: witness his proud buff appearance, his judo bouts, playing hockey,
flying in fighter jets, and other such shows of bravado. The situation in
Ukraine provides him an opportunity to show himself as that strong leader in
the tradition of Peter the Great. It is his opportunity to exhibit his personal
power and his country’s power to the world, possibly at the cost of Ukrainian
This post was originally published on Smartplanet.com