Ukraine-Russia: like an earthquake

21 March by Michael Roberts

“Ukraine army cuts off main road to Sloviansk” by snamess is marked with CC BY-NC 2.0.

The war in Ukraine is like a powerful earthquake that will have ripple effects throughout the global economy, especially in poor countries”. That’s how IMF chief Kristalina Georgieva described the impact of the war on the world economy. Nobody can be sure of the magnitude of this quake but even on the most optimistic view, it is going to damage significantly the economies and livelihoods of not just the people of Ukraine and Russia, but also the rest of the 7bn people globally. And it is happening just as the world economy was supposedly recovering from the plunge in output, incomes and living standards suffered from the COVID pandemic slump in 2020 – which was the widest and deepest global contraction (if relatively short) in over 100 years.

But let us start with Ukraine itself. Already 3m people have fled the country from the bombs and destruction of their homes and another 6m have been displaced within the country. As with all wars, people’s lives and livelihoods have been lost. Economically, an IMF staff report, completed on March 7, concluded that the country was paralysed. “With millions of Ukrainians fleeing their homes and many cities under bombardment, ordinary economic activity must, to a large extent, be suspended.” Then there is the physical damage. A week ago, the Ukrainian president’s economic adviser put the damage at $100bn already. Half of the country’s exports rely on the port of Mariupol, which is now suffering the most savage siege.

International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
’s tentative projection is for output to fall 10 per cent in 2022 — if the war does not last long. And that is beginning to look optimistic, as the IMF comments, “Downside risks are exceedingly high.” This 10% compares with a decline of the output of 6.6 per cent in 2014, which was followed by a decline of just under 10 per cent in 2015, during the earlier Russia-Ukraine conflict in Eastern Ukraine. However, the IMF warned that “data on wartime real GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
contraction (Iraq, Lebanon, Syria, Yemen) suggests that annual output contraction could eventually be much higher, in the range of 25-35%

Then there is Russia. Putin’s invasion has provoked an unprecedented response in the form of economic and other sanctions against Putin’s friends and supporters and against its banks and institutions, even leading to the seizing of the country’s foreign exchange reserves – and increasing attempts to block or boycott Russian exports (including oil and gas). Preventing the Russian central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

from deploying its international reserves and making it impossible for it to liquidate its assets, is part of an economic war designed to undermine Russia’s economy and the war effort. The French finance minister said that “[w]e are waging total economic and financial war against Russia, Putin, and his government

The Russian economy is not large compared to the G7 economies. In total, the economic forces against Russia amount to an annual GDP of $50trn compared to the puny $4trn from Russia and Belarus.

And when it comes to military firepower, Russia is heavily outspent by the NATO NATO
North Atlantic Treaty Organization
NATO ensures US military protection for the Europeans in case of aggression, but above all it gives the USA supremacy over the Western Bloc. Western European countries agreed to place their armed forces within a defence system under US command, and thus recognize the preponderance of the USA. NATO was founded in 1949 in Washington, but became less prominent after the end of the Cold War. In 2002, it had 19 members: Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the UK, the USA, to which were added Greece and Turkey in 1952, the Federal Republic of Germany in 1955 (replaced by Unified Germany in 1990), Spain in 1982, Hungary, Poland and the Czech Republic in 1999.

So a combination of economic disruption, NATO country sanctions and spiralling inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. is going to drive the Russian economy over a cliff. Forecasts of the output contraction vary. The consensus puts it at about an 8% fall this year.

But the International Institute of Finance (IIF), which looks closely at Russian export and import flows, as well as capital flows, is much more pessimistic and expects a 15% fall – something not experienced in Russia since the collapse of the Soviet Union in the 1990s, taking the Russian economy back to levels of more than 20 years ago.

The use of economic sanctions against a G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). country like Russia is unprecedented. It shows the role that ‘sanctions’ can play as an alternative to military action against governments that do not follow the wishes and dictates of imperialism in the 21st century.

Topically, economic historian Nicholas Mulder had just published a book entitled, The Economic Weapon: the rise of sanctions as a tool of modern war. Mulder points out that economic sanctions started to be used by imperialist powers when the League of Nations was set up after the First World War. The leading powers in the League “believed they had equipped the organization with a new and powerful kind of coercive instrument for the modern world.” The then US president Woodrow Wilson described economic sanctions as “something more tremendous than war” that could bring “a nation to its senses just as suffocation removes from the individual all inclinations to fight.” There would be no need for force. “It is a terrible remedy. It does not cost a life outside of the nation boycotted, but it brings a pressure upon that nation which, in my judgment, no modern nation could resist.” In that sense, sanctions remind me of medieval sieges, where cities were starved into submission, without military action. Economic sanctions were a new 20th-century weapon along with chemical weapons and nuclear bombs.

Mulder argues that economic sanctions were used first by European imperialists against peoples who lived outside the ‘civilized world’. Then the US rise to global power in the 20th century saw both negative sanctions (oil embargoes) and positive sanctions (Lend-Lease). “America’s sanctions have been shaped by three factors: its unique military dominance, the ideological inflexion of Cold War politics, and the role of US financial markets in the world economy.”

John Maynard Keynes saw ‘positive’ sanctions as beneficial, ie through aid and subsidy to the good guys, while applying bans, blockades and punishments to the bad guys. And he reckoned the financial system sanction was the most powerful – and that is now being put into practice against Russia. Of course, the larger and more powerful a country, and the weaker and less firmly it is applied by an alliance of countries, the less its impact will be.

But what about the global impact of the conflict? Although Russia and Ukraine are relatively small in output terms, they are large producers and exporters of key food items, minerals and energy. Ukraine and Russia together account for more than a quarter of the global trade in wheat and a fifth of corn sales. The longer Russian forces remain in Ukraine, the longer tractors and combine to harvest the nation’s crops stay idle, it threatens food security far beyond the region, the IMF has warned.

For example, Egypt imports 80 per cent of its wheat from Russia and Ukraine. With many countries in Africa and the Middle East being similarly exposed, Europe could soon have another migration crisis on its hands, on top of millions of Ukrainian refugees. Then there is Ukraine’s role in supplying many of the rare gases needed in industrial processes — such as neon, krypton and xenon — including already beleaguered semiconductor production.

Energy is the main spillover channel for Europe as Russia is a critical source of natural gas imports.

This is going to hit output across Europe.

The IMF reckoned that “the prolongation of Russia’s aggression towards Ukraine, in addition to the humanitarian and economic losses, will also lead to significant spillover effects throughout the world: deterioration of food security, surging of energy and commodity process, rising inflationary pressures, disruption of supply chains, increasing social spending for refugees, and increasing poverty. The global economic damage of this war will be devastating.”

In its report, the OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
also presented a dismal picture if the war continues for much longer: “global growth could be reduced by over 1 percentage point, and global inflation raised by close to 2½ percentage points in the first full year after the start of the conflict. These estimates are based on the assumption that the commodity and financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. shocks seen in the first two weeks of the conflict persist for at least one year, and include a deep recession in Russia, with output declining by over 10% and inflation rising by close to 15 percentage points.”

And if energy imports from Russia fall by 20%, either through sanctions or counter-sanctions, it would reduce gross output in the European economies by over 1 percentage point, with significant differences across countries.

Management consultants McKinsey also predicted nasty outcomes for Europe’s economies, in particular. In McKinsey’s hoped-for scenario, where the end of hostilities is in sight by the second half of 2022 and sanctions do not extend into the energy sector (so that energy exports from Russia to Europe keep flowing), McKinsey reckons that GDP growth in the eurozone and Germany would stagnate in 2022, but then recover to 2.1 per cent in 2023 and 4.8 per cent in 2024. That’s bad enough, but if there is a protracted conflict that intensifies the refugee crisis in Central Europe and where Western countries and Russia further extend sanctions, leading to the shutdown of oil and gas exports from Russia to Europe; then the eurozone would tip into recession in 2022 and 2023, led by Germany.

And just as there was long-term ‘scarring’ of capitalist economies from the Great Recession of 2008-and the COVID pandemic slump of 2020, the Ukraine-Russia conflict is adding more damage. ‘Globalisation’ (the extension of world trade and capital flows) was an important counter-tendency for imperialist economies to falling profitability of productive capital domestically in the last two decades of the 20th century. But globalisation, the expansion of untrammelled imperialist capital flows and trade, stuttered in the 21st century, and under the impact of the Great Recession, went into reverse. World profitability fell to near all-time lows. This is the underlying cause of intensifying economic crises and geopolitical conflicts in the last two decades.

And now that this apparently ‘regional’ war has been revived into a world issue, it could fundamentally alter the global economic and geopolitical order as energy trade shifts, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings. After the Trump period US protectionist tariffs against China, Mexico and Europe, now there is this increased geopolitical tension, which further raises risks of economic fragmentation, especially for trade and technology.

Then there is debt. The Covid-19 pandemic coincided with a further rapid increase in corporate indebtedness. Corporate debt had already been increasing globally since 2007, but the pandemic crisis has led to a further sharp increase. US corporate indebtedness rose by 12.5% between 2018 and 2020, much more than the increase in the entire decade leading up to Covid-19. The graph below shows debt as % of GDP.

Now falling growth in output, even recession, weaker investment and lower corporate profitability, alongside rising inflation, threaten to deliver widespread bankruptcies among corporate ‘zombies’ and ‘fallen angels. This makes the plans of central banks to hike interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
to control accelerating inflation difficult at least, and impossible at most. One recent empirical analysis reckons that “when the level of corporate debt is sufficiently high, a contractionary monetary policy even increases inflation”, reminiscent of the stagflation episode in the 1970s after the oil ‘shocks’ then. The paper concludes that “our work suggests that monetary policy will not be effective in reducing inflation gently towards a soft landing. This means that central banks ultimately have to choose between generating a recession, with significant bankruptcies, or accepting continuing stagflation.”

‘Liberal’ economist Wolf, is deeply worried. “A new world is being born. The hope for peaceful relations is fading…. No one knows what will happen. But we do know this looks to be a disaster….... The combination of war, supply shocks and high inflation is destabilising, as the world learned in the 1970s. Financial instability now seems very likely, too. A prolonged bout of stagflation seems certain, with large potential effects on financial markets.” In the long term, the emergence of two blocs with deep splits between them is likely, as is an accelerating reversal of globalisation and sacrifice of business interests to geopolitics. Even nuclear war is, alas, conceivable.”

Wolf claims that this war is a battle between the forces of ‘democracy’ (as represented by NATO) and the forces of ‘autocracy’ (as represented by Russia and China). This is nonsense – where does NATO ally Saudi Arabia, or the military dictatorship in Egypt, or the autocracy of NATO member Turkey, fit into this categorisation? Instead, the Russia-Ukraine conflict has exposed the increasing contradictions in the world capitalist economy between the imperialist powers on the one hand and those countries which try to resist the policies and will of imperialism.

IMF chief Georgieva pronounced that “We live in a more shock-prone world.” Yes, the shocks have been coming thick and fast in the 21st century. Georgieva continued: “And we need the strength of the collective to deal with shocks to come.” Indeed! But it is not the collective will of the capitalist powers that can deal with these shocks: they have failed over climate change; over preventing and stopping the COVID pandemic; and over ending poverty and keeping world peace. Instead, all will depend on the collective will of organised working people.

Michael Roberts

has worked in the City of London for over 30 years as an economist. He is author of several books on the world economy: The Great Recession, The Long Depression and World in Crisis. He blogs at

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