The economics of the Ukrainian war

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The war could last longer than expected. Wars are easier to start than to end. [Courtesy]

Ukraine refused to make the headlines. After two weeks, the capital kyiv is still in Ukrainian hands and the pincer movement has not brought the country under control.

Remember Shaka, the Zulu military strategist? Some say Kyiv’s cathedrals might be the only thing preventing the city from being overrun by Russian forces.

You cannot destroy the origin of the Orthodox Church, which is deeply rooted in Russian and Ukrainian minds.

The war could last longer than expected. 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 Ukrainian resistance could prolong the conflict. Some suggest that war profiteers would like such a scenario.

One of the concerns is that other countries would be drawn into the conflict. There is already a rumor that Belarus could join us. It’s another question when the 2.5 million Ukrainian refugees will return and start their lives anew.

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

Not wanting to confront Russia on the battlefront, the West (read the United States and its allies) resorted to economic sanctions.

Ukrainian National Guard soldiers take position in the center of kyiv, Ukraine, February 25, 2022. [Reuters/Gleb Garanich]

They range from banning Russian banks from the SWIFT financial messaging system to shutting down companies with ties to Moscow.

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

I assume that many western companies in Russia will be nationalized.

This prospect left my head spinning. When the Cold War ended, Western companies waited in the wings to enter 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 into new frontiers and make money as we watched, fascinated by the fall of the Berlin wall.

Looking at Western companies leaving Russia, it is obvious that they have made a lot of money.

The question is: why haven’t we invested in the former Soviet republics like the West?

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

Think about 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 bother Russia (read Putin)? They would have continued to do business in silence if the current crisis had not occurred. They are likely to send their profits home.

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

Russia seems to understand that the hunter and the hunted are exhausted.

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

While the closure of businesses will mean the loss of investment and jobs for Russians, Westerners and Easterners (like the Japanese) will also lose their profits.

Russia is a mature market with 144 million citizens. Companies could return after the end of the Ukraine conflict, but shareholders will feel the effects in the meantime.

Politicians could also burn their fingers as voters lose their jobs to divestment in Russia.

The sector to watch closely is that of energy.

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

Would Russia shut off gas to protest sanctions? Could it be another response to the sanctions? Russia can only watch gas and oil prices soar, disrupting Western economies.

The United States is far away and can exploit its shale gas or import oil from South America or Canada. Europe, however, is more indebted to Russia for its oil and gas. Why doesn’t Russia care about its energy markets? Could China and perhaps India be alternative markets?

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

Who will blink first? Could sanctions make Russia bolder and more self-sufficient? Remember South Africa during the apartheid era. Sanctions are also difficult to monitor.

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

Some have argued convincingly that we should have started exporting our oil now. We would have received a windfall from the rise in oil prices.

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