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Global Implications of Russia’s Invasion of Ukraine

 Russia is pressuring Ukraine because Ukraine is continuing its pro-Western path with solid hopes of strengthening military cooperation with NATO (North Atlantic Treaty Organization) and joining the European Union, so it decided to prevent Ukraine even by force. NATO, an organization based on the North Atlantic Treaty between Western Europe and the United States, was created to oppose the socialist camps of the Soviet Union and Eastern Europe. The Ukrainian War, which began with the Russian invasion, catalyzed the end of globalization and opened the door to de-globalization. Russia's military invasion of Ukraine means that the principles of respect for international law and good faith under mutual contracts, which were the basis of globalization, have collapsed. Therefore, the adverse effects of this war have become an important issue worldwide beyond Europe and Central Asia. Here’s a look at how this shock is shifting the tectonic plates of economics and trade worldwide. 

 

The Global Repudiation of Russia Echoes the Cold War

 From culture to commerce, from sports to travel, most countries avoid Russia in myriad ways. This is a worldwide rejection driven by the urge to show solidarity with besieged Ukrainians and the hope that President Putin will force his troops to withdraw.

 On April 7, 2022, the headquarters of the Security Council, the main body of the United Nations with primary responsibility for maintaining international peace and security, hosted an extraordinary general meeting in New York City, denouncing Russian atrocities. United Nations member states voted to exclude Russia from the UN Human Rights Council at the meeting. The United States led the vote to aim that Russia, which invaded Ukraine and massacred civilians, should not be in the world's top human rights organization. To adopt a resolution to suspend the membership of the Human Rights Council, more than two-thirds of the members who participated in the vote need to vote in favor, and abstention votes are excluded from the tally. A total of 117 delegates voted for the resolution, with 93 votes in favor, 24 against, and 58 abstentions, leaving Russia disqualified from various U.N. organizations such as the Children's Organization (UNICEF), NGOs, and the World Tourism Organization (UNWTO). 

 Meanwhile, China, an increasingly crucial Russian ally, has avoided any criticism of Russia since the invasion began. Brazil's President Jair Bolsonaro, who has close ties to Russia among the ten rotation members, flew to Moscow right before the invasion of Ukraine and has taken a position of neutrality in Russia's aggression. The decision to suspend membership in the United Nations for Russia will take effect until the expiration of the current regime in Russia in 2023, after which membership can be reapplied in the country. It is unprecedented for Russia, a key player in creating the United Nations in 1945 and a permanent member of the Security Council, to be expelled from a significant UN organization.

 Now, the United States is at the center of a special campaign to foil Russia, casting the military conflict in Ukraine into a broader battle between democratic values and autocratic forces. On April 28, 2022, President Biden asked Congress to approve $33 billion (about 42.255 trillion) to provide Ukraine with more artillery, anti-tank weapons, and other hardware and economic and humanitarian aid. "We’re not attacking Russia; we’re helping Ukraine defend itself against Russian aggression," Biden said to the White House. He also added, "The cost of this fight is not cheap, but caving to aggression is going to be more costly if we allow it to happen" The U.S. Congress focused on imposing strong economic sanctions on Russia, restricting the Russian central bank's access to foreign currency reserves and excluding major Russian banks from its SWIFT (The Society for Worldwide International Financial Telecommunication) payment network. The SWIFT payment network was established in 1973 by 239 financial institutions in 15 countries and is an international financial computer network used by more than 11,000 financial institutions. Thus, as Russia was expelled from SWIFT, the ruble fell by 40% and was struck economically. Furthermore, the U.S. administration established a program that would allow Americans to support Ukrainian refugees and temporarily stay in the U.S. under a system known as humanitarian parole. Despite these global sanctions, Russia continues threatening trade in the form of corresponding retaliation.

 

Governments Tighten Grip on Global Food Stocks, Sending Prices Higher

 The war between Russia and Ukraine causes another cost of global inflation. The World Grain Price Index for March 2022 released by the United Nations Food and Agriculture Organization (FAO) reached a record high of 170.1 points, up about 37.3% from March 2021. Russia’s invasion of Ukraine has unleashed a new wave of protectionism as governments, desperate to secure food and other commodities for their citizens amid shortages and rising prices, erect new barriers to stop exports at their borders. Thus, Ukraine, the world's largest exporter of sunflower seed oil, restricted the export of sunflower oil, wheat, oats, and cattle to protect its poor economy. Russia also banned the sale of fertilizers, sugar, and grain to other countries. In addition, the impact of inflation on the world is enormous. For example, Indonesia, which produces more than half of the world's palm oil, has stopped shipping, while Turkey has also stopped exporting butter, beef, lamb, chlorine, corn, and vegetable oil. 

 The measures are often well-intended. However, trade experts warn that the current wave of protectionism will only compound the problems governments are trying to mitigate. According to the April Consumer Price Trend released by the National Statistical Office on May 3, 2022, the consumer price index rose 4.8 percent from last year, the highest increase since October 2008 (4.8 percent). In addition, oil prices have risen, and the import price index of agricultural and livestock products has risen more than 30% for the third month. Spain's inflation rate in March was 9.8%, the highest in about 37 years since May 1985, and wheat prices rose more than 20% in the UK. Export restrictions make grains, oil, meat, and fertilizer expensive and even harder to obtain at record prices.

 Furthermore, this puts a much more significant burden on the world's poor, who are paying a much larger share of their income for food, and increases the risk of social unrest. In particular, the war will further weaken the food situation in developing countries in Africa and the Middle East, heavily dependent on grain imports, such as Egypt and Lebanon. Since the beginning of the year, governments have imposed a total of 47 export curbs on food and fertilizers — with 43 of those put in place since the invasion of Ukraine in late February, according to tracking by Simon Evenett, a professor of international trade and economic development at the University of St. Gallen.

 

How Russia’s War in Ukraine Is Choking the World’s Supply of Natural Resources 

 Russia is a raw material powerhouse that produces and exports vast amounts of natural gas that countries worldwide use to make cars, transport people and goods, and turn on lights. However, Putin signed the presidential decree on March 30, 2022, saying that if the so-called "Unfriendly Counties" do not pay in the Russian currency, the ruble, Russia will stop supplying natural gas. Russia's unfriendly countries include the U.S. and European Union members who help Ukraine and South Korea, Britain, Japan, Canada, Norway, Singapore, Switzerland, and Ukraine. Countries designated by Russia as unfriendly countries must be approved by the Russian Government Committee when making transactions, and debt repayment must be made in Russian rubles. Since the contract stipulates those goods transactions and payments such as natural gas and crude oil are paid in euros and dollars, this Russian notification is a one-sided measure to defend the ruble exchange rate that has fallen due to Western sanctions and reduce dependence on the euro. Therefore, on April 26, 2022, Russia suspended the first gas supply to Poland and Bulgaria, which refused to pay for the ruble. On the other hand, Hungary, which has accepted the demand for the payment of the ruble, continues to supply gas. 

 The United States, the United Kingdom, and Canada have banned Russian crude oil imports, and many companies are imposing their sanctions on Russia for fear of damaging its reputation in part. But according to Russia's destination for commodity exports, Russia earns more than $1 billion a day in oil and gas exports, most of which go to Europe. Europe, geographically and economically close to Russia and Ukraine, is also difficult to rule out the possibility of stagflation, which is a rise in prices amid the economic downturn. Germany recorded an inflation rate of 7.3% in March 2022, the highest since reunification in early 1990. Rising natural gas prices raise household energy costs such as electricity bills and cause enormous damage to consumers and businesses by increasing the cost of producing goods. To counter this, some countries, such as Germany and Italy, are considering extending the use of coal power plants, which focus on energy acquisition rather than carbon neutrality and may hinder green goals in the short term. As Russia's natural gas supply and demand became unstable, power generators scrambled to compete for coal, and as competition intensified, coal prices soared to record levels. Meanwhile, Hungary, one of Russia's energy-dependent countries, said it was challenging to find an alternative to Russian energy and suggested that it was open to paying in rubles for gas supply.

 

How Should We Respond to the New Crisis?

 According to ‘Reuters’ on 2 May 2022, EU Commissioner for Energy Kadri Simson said at a press conference after the EU Energy Ministers' Meeting in Brussels, Belgium, "Paying rubles through Russian-managed currency and second dedicated accounts in Gazprombank is a violation of sanctions." Therefore, the European Commission warned that Russia could violate EU sanctions if it responds to the request for payment of the ruble proposed by foreign companies. In addition, the European Union announced energy measures to reduce its dependence on Russia by 80 percent by the end of this year. This includes replacing 112 billion cubic meters of the 155 billion cubic meters of natural gas imported from Russia with other energy and using liquefied natural gas (LNG), hydroelectric power, and wind power. 

 The new energy measures are expected to accelerate the transition of Europe's primary energy source to eco-friendly and renewable energy. Eco-friendly and renewable energy has become a direct connection to Europe's survival beyond responding to climate change. "The Western response to the crisis could promote decentralization of the global energy system and reshape energy geopolitics," Adair Turner, chairman of the British Think Tank Energy Transition Committee, said in an interview with the “Financial Times.” The Italian government has relied on Russia for more than 40% of its total gas consumption. It has set complete independence from Russian natural gas by the second half of 2024.

 In an interview with the daily ‘La Republica,’ published on May 3, 2022, Italy's cabinet minister for ecological transformation, Roberto Chingolani, said, "We must stand on our own feet by the second half of 2024. We can do it without importing Russian natural gas," he said, adding that he is determined to diversify into Algeria, Angola, Congo, and Qatar. Korea responded to this situation by participating in a ‘joint statement on the Republic of Korea’s Partnership on Export Controls for Russia’ on March 7, 2022. In the joint statement, South Korea's Trade, Industry, and Energy Minister Moon Seung-wook and U.S. Commerce Minister Gina Raymondo announced that South Korea would officially join the international ranks against Russia's invasion of Ukraine by implementing strict export controls. In particular, the U.S. expressed its willingness to cooperate with South Korea, Japan, Qatar, and other countries to help the European alliance threatened by Russia. The international community must consider future responses and directions in such a catastrophic situation.

 

Korea's Economic Situation with High Foreign Dependence

 As the international community is closely connected, it is necessary to analyze Korea's economic situation. Concerns are growing over the damage Korean companies will suffer as the U.S. and Russia’s two major powers are likely to enter military action in Ukraine. In addition, rising purchasing prices of raw materials and other overseas products exacerbate inflation and affect consumer spending and investment, a significant factor that slowed Korea's growth rate to 0.7 percent in the first quarter of 2022 from 1.2 percent in the fourth quarter of 2021. Regarding services, housing utilities such as electricity costs rose 13.7% in April from a year ago, the highest increase since 2008. Airfares soared 18.6 percent every month to a record high, and housing costs, including rent and hotel accommodation, rose 0.5 percent from a year earlier, the highest since 2005. According to the Korea International Trade Association, more than 40 Korean companies, including Hyundai Motor, Kia, Samsung Electronics, LG Electronics, POSCO, Amor Pacific, and Orion, have entered Russia. Economic sanctions against Russia will paralyze the supply and sales chains at the same time, negatively hitting production at local companies. In addition, if Russia's financial sanctions are applied to Korea, it will not be possible to pay in dollars, and Korea will have to receive payments in Russian rubles. If the ruble falls sharply, the won value will be significantly reduced. 

 In addition, Korea's vaccine and clinical-related projects, which were closely promoted along with Russia and Ukraine, are also directly affected. In 2021, two consortiums in Korea (Huons Global, Korea Korus) signed a contract for consignment production (CMO) of Russia's COVID-19 vaccine (Sputnik V, Sputnik Light). Huons Global was in the stage of producing vaccine prototypes. Still, Russia designated Korea as an unfriendly country. Then Huons Global decided to suspend the consignment production project on March 10, 2022, due to concerns over the project's sustainability under various international sanctions. The Korean Korus consortium plans to continue its business, including shipping commercial production to a final destination other than Russia. However, it predicted that it would be difficult to carry out the long-term project due to the suspension of WHO and European Medicine Agency (EMA) evaluation and international boycott. As the Korean economy has an economic structure with a very high dependence on foreign trade and energy, a significant impact is expected if the situation is prolonged. Therefore, the international community will have to analyze the global economy in the general area and respond with all-out efforts to minimize the adverse effects of this situation.

 

 Russian President Vladimir Putin shows no sign of willingness to compromise with the Ukrainian government and end the war. In Ukraine, no one knows precisely what that toll is, except that many people have been killed. These two countries are not the only ones standing at the inflection point. ‘Bank of America,’ a U.S. investment bank, released a report comparing the world to be unfolded in the 2010s and 2020s under ‘The Big Change.’ The report predicted that the keywords of deflation, democracy, and globalization that dominated the 2010s would be replaced by inflation, dictatorship, and nationalism in the 2020s. The longer the conflict lasts, the greater the global aftershocks will be. Korea is never free from its influence. What should we prepare?

최승빈  carpediem_oon@inha.edu

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