Explained: How Russia-Ukraine war is changing global equations

By Anish Kumar | First Published Apr 9, 2022, 8:05 AM IST

Let's understand what has changed in the international, geopolitical, geo-economical and geostrategic relations due to the ongoing conflict.

The ongoing 45-day war between Russia and Ukraine has triggered one of the largest refugee crises in Europe since World War II with over four million Ukrainians leaving the war-hit country. Asianet Newsable set out to understand what has changed in the international, geopolitical, geo-economical and geostrategic relations due to the ongoing conflict.

According to Dr Swasti Rao, Associate Fellow at the Manohar Parikkar-Institute of Defence Studies and Analysis, one of the biggest takeaways of the Russia-Ukraine war was the realisation that how badly the European countries are dependent on Russia for fossil fuels like natural gas, oil and coal.

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The expert on Russia and Europe studies said that a much more standing-on-its-own feet kind of Europe will emerge from the ongoing conflict. However, she was quick to add that this would not come overnight because their dependence (on Moscow) is massive.

Sanctions on Russia

There has been a lot of debate on the sanctions that have been imposed on Russia by so many countries. Russia is actually the most sanctioned country in the world.

Before the February 24 launch of the operation, Russia had perhaps 2000 odd sanctions on it after the Crimean war. But after February 24 operations alone, there have been more than 2500 types of different sanctions were imposed on Russia. So right now the total number of sanctions that Russia is facing is to the tune of about 4000-4500.

But not all these sanctions are as important or not all sanctions could have the same kind of impact. That's because the sanctions are targeted. For example, some sanctions have to do with freezing Russia's financial system, weakening its economic system and devaluing the Ruble. The idea is to basically hit Russia very hard so that they stop funding the war machine. So that is the larger impact.

Vladimir Putin's smart moves

Data shows that sanctions have been unable to deter Moscow. If sanctions will not deter Putin for sure, the best that the United States and its allies can do is they can weaken Russia in the longer term.

According to Dr Swasti, Putin had been kind of readying for getting more sanctions on the country. So what the Russian President did smartly was to build the country's foreign reserve. Just before the war was launched, the foreign reserve was $640 billion -- that is the fourth-largest in the world.

The point of doing this was that in case Russia was cut off from trade and in case the countries put an embargo on oil or gas imports etc that money would help Putin sort of offset the losses.

The other thing that Putin did in the last eight years was that he built a large sovereign wealth fund which is almost 10-12 per cent of the GDP. So the 40 per cent of foreign reserve of the GDP plus 10-12 per cent of sovereign wealth fund acted as a kind of insurance policy to keep the war going, Dr Swasti stated.

SWIFT blow

By cutting off the Russian central bank from SWIFT transactions, the western countries did try to neutralise the effect of $640 billion. Because the point is half of this money is held overseas and if you are cut off from the SWIFT banking there is no way in getting access to that money.

For example, if you are holding a gold reserve, then how would you go to sell that gold. Because even selling that gold would mean that the buyer is going to be threatened with secondary sanctions. So that is how the logic of sanctions works.

Why Putin is undeterred

That, according to Dr Swasti, is because of a singular factor that the European countries are dependent on Russia for gas, oil and coal to the tune of about $5 million to $1 billion every single day. That means that regardless of how the war is being waged, even to date the average trade between Russia and European countries is about $750 million. That is the kind of money that Putin is absolutely sure of. That is the kind of dependence they get so they cannot substitute for overnight.

Europe's way forward on Russia

But having said that just because of this war, the European countries have become extremely aware of their dependence and are trying really hard to diversify as soon as possible.

According to Dr Swasti, that is why the German chancellor and the European Union are heard saying that they would want to reduce their dependence by at least two-thirds by end of the year. And by end of this decade, they are also trying to reduce dependence on Russia drastically and looking at other sources.

For example, Germany, for the first time, struck a deal with Qatar and OPEC countries. Similarly, the EU and the United States had inked a deal with respect to natural gas. The US says that one of the reasons why Russia is still getting away is because of this dependence.

The geopolitical shifts to geostrategic shift to geoeconomics shift -- this is the something that we all are getting to see by way of this war.

New geoeconomics order

Russia was cut off from the SWIFT but the Putin administration has already been developing its own system for the last eight years. Similarly, China has also been developing their own system for such transactions called CIPS.

India recently said that it will continue to buy defence items from Russia as well as oil under the Rupee-Ruble system. What it means is that there is a parallel geoeconomics order coming by way of a parallel payment system.

Explaining the significance, Dr Swasti said, "We live in a very globalised and inter-connected world and one of the major realisations of the today's world is that our supply chains are so deeply embedded that any country that kind of gets cut off from the supply chain runs the risk of real economic isolations."

"The point is that this kind of sanctioning of SWIFT, it is also kind of accelerated a parallel payment system and that is also something that is going to have its impact in the future. Right now, there are so many countries who have not joined these parallel transaction systems but slowly and steadily there are a lot of countries in the world that are trying to de-dollarise because they are so dependent for their trade on China," the expert said.

Rising Brent prices

The other major global impact that the world has seen due to the Russia-Ukraine war is the soaring prices of Brent crude oil.

Before the war started in December 2021, the Brent was being traded at about $70 per barrel and right now it has crossed $150 a barrel and it is actually expected to go up further.

And this is affecting every single nation in the world.

India does not buy much oil from Russia. It buys less than 2 per cent or even less than one per cent. India's major oil imports come from OPEC countries. So should India be bothered? While New Delhi is not bothered about dependence on Russia, the global prices definitely impact the country.

If major oil-exporting nations such as Russia are sanctioned, speculative prices and markets actually come into play and the prices start to soar. There is a global frenzy to control the prices and that kind brings the other geoeconomics dynamics.

The US strategy

The US has the biggest strategic oil reserve. But they are not very forthcoming with regard to using it unless they are really pressed hard. The US does not want to touch its own strategic reserves. Instead, it starts to put pressure on its allies, the Gulf Cooperation Council countries, and the OPEC nations to pump more oil so that the global prices can be controlled.

The Middle-East snub

Now, an interesting picture is emerging here as well. "We know that the US and Saudi Arabia are allies, but recently, especially after the Syrian war, the role of the US as a security provider has actually shrunk not just in the Middle East but also in Afghanistan and the world over," says Dr Swasti.

"Saudi Arabia and the US relations are not really very good right now, especially under the Biden administration. We have seen how the Saudi crown prince does not really take his (Biden's) call," the expert further said.

Saudi Arabia has refused pleas by the United States to pump more oil. They seem to be saying, 'We are not your sidekick. We do not get into this war with you. We did not impose any sanction and we have nothing to do. So why are you forcing us to pump more oil because that really affects our own geoeconomics and geostrategic interests?'

American countermeasures

The Middle-East snub has made the United States make some interesting developments.

"The Biden administration has actually started reconsidering the Iran nuclear deal, which is technically known as JCPOA. There is a lot of talk the about Iran nuclear deal which was really put on the backburner for a long time. It has come back into the picture. If this particular deal comes through, Iranian oil would return into focus too," Dr Swast said.

The other thing that the US is doing is that it has started talking to Venezuela, which was under sanctions from the Donald Trump era itself. A few weeks ago, a US delegation actually went to Venezuela -- oil was one of the agendas.

Venezuela has one of the biggest oil reserves, but the problem is they do not have as much infrastructure to pump it right away. So the US is looking to align with all these erstwhile enemies so that the global price of oil is controlled.

This assumes significance considering that very soon there would be a mid-term election in the US and obviously the Democrats do not want the Republicans to have an edge with regard to how inflation and oil prices are going up. These are important things that how the war in the far-flung areas in eastern Europe is actually affecting the rest of the world in such a fundamental way.

When Russia was put under so many embargoes by the West and sanctions by the US, Japan UK etc, Moscow started to diversify. Russia has a deeper relationship with China when it comes to things like oil and natural gas etc. They already struck a deal in 2019 and in 2022 during the Beijing Olympics. Putin had gone to China and struck a deal there. But the point is that it would take at least 3 years to materialise.

Russia-China-India

At the moment, they have a pipeline from Siberia but the amount of natural gas that Russia needs to sell to China to offset the impact of the western sanctions would need some time. So three years is a long time.

Russia needs customers right now. So it turned to India and Russia has offered its oil at a discounted price. Now India, of course, has gone ahead and said that time is right to build a strategic reserve. According to Dr Swasti, by end of this year, India would perhaps buy oil to the tune of $15-20 million.

India has been keeping its strategic interest first and doing the right thing by pursuing a relatively non-aligned foreign policy. New Delhi is keeping its national interest first.

Image: A destroyed tank of the Russian army is seen about 40 km west of Kyiv. Photograph: Sergei Chuzavkov/SOPA Images/LightRocket via Getty Images

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