Russias Invasion of Ukraine Economic Challenges Embargo Issues and A New Global Economic Order Paul J J Welfens All Chapter
Russias Invasion of Ukraine Economic Challenges Embargo Issues and A New Global Economic Order Paul J J Welfens All Chapter
Russias Invasion of Ukraine Economic Challenges Embargo Issues and A New Global Economic Order Paul J J Welfens All Chapter
Paul J. J. Welfens
Russia’s Invasion of Ukraine
Paul J. J. Welfens
Russia’s Invasion
of Ukraine
Economic Challenges, Embargo Issues, and
a New Global Economic Order
Paul J. J. Welfens
European Institute for International Economic
Relations (EIIW)/Schumpeter School of Business
and Economics
University of Wuppertal
Wuppertal, Germany
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Preface
v
vi PREFACE
Putin may hope that political unrest will emerge in the West and that this
will weaken support for Ukraine in the medium term. However, it is also
understood in the capitals of the EU that the fall of Ukraine is likely to
critically increase Russia’s propensity for military aggression against other
Eastern European countries.
Russia’s invasion of eastern and southern Ukraine brought some initial
Russian success, with invading forces ultimately occupying Mariupol,
Ukraine’s second most important port city, four months after the invasion,
which was launched on February 24, 2022. The military approach that
appeared designed to cut Ukraine off from the Sea of Azov appears to be
partially successful. Russia’s military is far from occupying Ukraine more
broadly; however; the full capture of the Donbas region appears possible.
One key issue concerns the question of whether Western policies could
have helped avoiding Putin’s shift toward a much more aggressive foreign
policy stance after 2005. The extent of Western ignorance and, arguably
dangerous, early policy developments in terms of the West’s relationship
with Russia are rather unsurprising, if one would note, for example, that
official visits of the Russian head of state to London occur only every 129
years. This is, with a hint of cynicism, an allusion to Putin’s state visit to
the UK in 2003. Moreover, Russia has a structural advantage as a large
country—its sheer size makes it almost impossible to attack with any pros-
pect of success (Napoleon and Hitler were among those leaders who had
to learn this lesson the hard way). However, geographic size is also a struc-
tural disadvantage when it comes to the choice of form of government:
developing such a large country as a democracy is conceivable, but the lack
of foreign travel—as a consequence of size—is a disadvantage in the politi-
cal debate for achieving democracy in a country with 144 million
inhabitants.
If you live in the Netherlands, for example, you could have reached
dozens of democracies at a reasonable price after a maximum of a six-hour
flight. If you fly six hours within Russia, you are still in Russia, unless you
have flown north-south. Nevertheless, after 1991, new travel opportuni-
ties emerged for only the top 20 million or so, those who could travel to
Athens, Paris, Berlin, London, or Lisbon; thanks also to the emergence of
low-cost airlines flying from Russia and from EU countries. These almost
15% of the Russian population were able to visit Western countries (but
the time spent in the West was apparently too short to win a large majority
of the Russian population over to Western ideas).
PREFACE ix
destroy the established global economic order; one can note, that several
regional specialists on Ukraine and Russia had pointed out the risk of
Russian military aggression from about 2007 on. The stakes in this con-
flict are naturally high for Ukraine and Russia, but also for Germany and
the EU, respectively, not to mention the US and China.
The following economic analysis focuses on trade and economic rela-
tions between the EU and Russia. The question of possible EU energy
import embargos—with a focus on oil and gas supplies from Russia—con-
cern important sectoral and macroeconomic aspects: with worldwide eco-
nomic effects, which were controversially discussed in the first half of
2022, especially in Germany and the EU as well as in the US. Important
questions about the effects of large refugee flows from Ukraine toward
Eastern and Western Europe are addressed; aspects of integration and
migration, as well as problems of a possible enlargement of the EU to
admit Ukraine as a member, are also in focus. Are Germany and other EU
countries, as well as the UK and the US, providing enough humanitarian,
financial, and military support to Ukraine? A controversial debate, which
also arose in this regard in the first half of 2022, is critically reflected upon
before the final chapter illuminates perspectives for a new world order
after the Russo-Ukrainian war. Questions regarding New Political
Economy perspectives of the world economy are raised herein also with a
view to developments in the next decade(s).
Even if, by nature, only a scenario analysis can be carried out on some
important points, it cannot be overlooked that there are serious dangers,
which can be identified: the existing system of a rules-based international
order in conjunction with effective international organizations could go
under. But the “political club” of the BRICS countries—Brazil, Russia,
India, China, and South Africa—is also facing new kinds of tensions. In a
historic departure from the export policy of the Soviet Union, Russia is
using its energy export policy as a political weapon, which may strengthen
Moscow’s position in the short term, but will cast doubt on the country’s
reliability internationally for many years to come. That some EU policy-
makers seem to want to see energy import sanctions imposed against
Russia as a means of weakening Russia’s war financing is, moreover, mainly
wishful thinking when one takes a closer look at global adjustment pro-
cesses. At the same time, it should be noted that Russia is no longer a
constitutional state, as the important principle of proportionality of pun-
ishments no longer applies: anyone who calls Putin’s invasion of Ukraine
a “war” risks being sentenced to several years in prison.
xii PREFACE
In the 1980s, when the socialist system of the Soviet Union and other
socialist countries began to experience a crisis, Russia’s position vis-à-vis
the West had improved in one aspect in foreign trade: namely, in the share
of oil and gas in Western energy imports. Here, Russia was able to benefit
economically from the politically deteriorating relationship between the
EU and US, on one hand, and the primarily Middle Eastern countries in
OPEC (Organization of the Petroleum Exporting Countries).
Under Gorbachev, Russia’s relations with the West improved temporar-
ily. After President Yeltsin took over from President Gorbachev, it took
until 2003 for his successor, Vladimir Putin, to visit the UK. This was the
first visit of a Russian head of state to London since 1874, and it is obvious
that both London and Moscow had made little effort in the matter of state
visits even as early as the period from 1875 till 1917. The Second World
War brought some meetings between British and Russian leaders outside
the UK (i.e., Yalta, Potsdam) and after 1997, there were meetings at a G8
level for a few years—this rapprochement was already frozen again in 2014
when Russia occupied Crimea. This tenuous UK-Russia relationship was
no serious substitute for bilateral relations between a leading Western
country and Russia.
That Putin saw the majority in favor of BREXIT in the June 2016 ref-
erendum in the UK as a personal success—the result of his policy of inter-
ference and destabilization via the role of Russian oligarchs (often with
dual citizenship and a visible inclination to strengthen with donations the
Conservative Party of David Cameron, Theresa May and Boris Johnson as
party chairpersons and heads of government, respectively)—is obvious:
publicly, Putin pointed out with regard to the British political debate that
the democratic result of the BREXIT referendum demanded that a
BREXIT indeed be carried out. Economically speaking, this amounted to
a visible weakening of the UK and to new political conflicts within the UK,
as well as economically to a weakening of the EU.
Russia’s strongest integration into the international system came in
2012, when it became a member of the World Trade Organization (WTO).
However, by 2016 with the election of the populist Donald Trump, the
WTO was already on the US administration’s hit list. In 2020, the WTO
was no longer able to fulfill its mandate as the US had blocked the election
of judges to the WTO’s Appellate Body—undermining its role in the field
of dispute settlement.
With the election of President Joe Biden, a temporary phase of policy
normalization came about in the US and a quasi-recovery of the WTO was
xvi PREFACE
position in terms of trade and capital flows, such as Germany, the UK, the
Netherlands, Belgium, and Switzerland, this would be a structural deteri-
oration and a threat to long-term prosperity. In the longer term, there is
the threat of an increased militarization of international economic
relations.
The study builds upon earlier analyses of economic system transforma-
tion in Russia, Poland, Hungary and other Eastern European countries—
including a project that was carried out during the Gorbachev era, whereby
the project team also included researchers from St. Petersburg (Leontief
Institute) and Kharkiv University. In view of the Russo-Ukrainian war, the
system transformation has only been partially successful, and the question
of how to secure prosperity, international economic cooperation, and
peace in Europe in the long term is an ongoing challenge. The German
and Eurozone economies face significant structural adjustments after
2022/2023, and the global economy faces increased inflationary pres-
sures, tendencies toward de-globalization and slower economic growth,
and deteriorating cooperation in international climate policy. The corona
crisis in Europe and the global economy has not yet really been overcome,
as the Russo-Ukrainian conflict has led to significant price shocks in many
regions of the world economy and is likely to continue to weigh on finan-
cial markets for several years; increased risk in industrialized countries will
be reflected in increased fluctuations on the stock markets, among others
effects.
The post-war reconstruction of Ukraine will be a particular challenge
for Western countries. EU integration is likely to intensify, but at the same
time, it will become more complicated as economic heterogeneity in the
EU will increase with the probable acceleration of EU enlargement round
to include some Western Balkan countries. This will make it more difficult
to find a political consensus. This would also hold in the case of an enlarge-
ment of the EU to admit Ukraine as a member; a hasty and ill-conceived
EU enlargement in the east is likely to lead to the next BREXIT case. Thus
far, the EU has not drawn the real and necessary conclusions from the
BREXIT debacle.
It will remain a difficult task for the EU to secure good relations with
Russia and China and to restore security across Europe. The economic
debates and the main aspects highlighted here are manifold, the effects of
the Russo-Ukrainian war are global and fundamentally affect the dynamics
of globalization. In the medium term, we can expect at least a temporary
de-globalization of the economy and the influence of international
xxiv PREFACE
Co. Publishers) was cited very rarely in the following three years—
although, one should note that one such citation was by a US military
analyst in her publication. Unfortunately, the latter author, misunder-
standing Eltchaninoff’s analysis, concluded that Russian further military
aggression against Ukraine was not to be expected. One can only wonder
to what extent the study by Eltchaninoff was taken up in time—or at all—
by Western intelligence services and politicians. Incidentally, the media
coverage of Ukraine and related issues is sometimes strangely erroneous
(even the World Bank published a press release on April 10, 2022, that, for
example, reported the sum of guest worker remittances from Russia to
Kyrgyzstan and Tajikistan to be twice as high as they actually were). The
fact that on certain news broadcasts on German television in March 2022,
reporters also repeatedly confused millions and billions of Euro in terms
of EU military aid is, by the way, worrying in terms of the quality of jour-
nalism on a very important topic; it is also downright dangerous with
regard to a potential escalation in terms of an EU-Russia conflict.
In the end, the big question facing policymakers is how to bring about
a new, stable and humanitarian world order with good prospects for
achieving climate neutrality—not by permanently excluding Russia from
the global community, but by integrating the country better only after
comprehensive political reforms.
Looking at the four economic fields of an aging society, ICT expansion
(ICT stands for information and communication technology), economic
inequality and globalization (trade and direct investment), and relating
them to the Russo-Ukrainian war, important perspectives emerge for
Russia, China, the EU (plus the UK), and Ukraine as well as Japan and
China. Depending on the outcome of the Russo-Ukrainian conflict, two
alternative scenarios emerge here—an increase in nominal interest rates in
the medium term and real interest rates in the long term. The Russo-
Ukrainian war causes an international slowdown in economic develop-
ment, which for China brings a dampening effect in real growth and a
lower inflation rate than in the US and the Eurozone plus UK.
In the UK, the Johnson government will push for the UK’s agreement
with the EU over Northern Ireland (the Northern Ireland Protocol) to be
effectively terminated in the slipstream of the Russo-Ukrainian war.
However, according to Speaker Nancy Pelosi, the US will reject such a
move—there can be no US-UK free trade agreement, she said, if the UK
would, in doing so, also effectively undermine the Good Friday Agreement,
which brought peace to Northern Ireland (and in which the US played a
xxvi PREFACE
3 The
West and Russia: Frozen Relations Between
the UK and Russia for Decades 69
4 Energy Perspectives 77
5 A
Russian Energy Import Boycott by Germany
or the EU as a Policy Option? 95
7 Asia
and the Global Effects of an EU Energy Import
Boycott of Russia115
xxix
xxx Contents
8 EU-China-Russia:
Macroeconomic Aspects and
Multinational Enterprises125
9 Ukrainian
Refugees and Ukrainian Guest Workers in EU
Countries and Their Effects on Ukraine and the EU155
10 Key
Ukraine-related Emigration Aspects and EU
Enlargement Risks with Ukraine167
11 International
Aid Pledges to Ukraine: Coverage, Effects,
and Potential Challenges181
12 Scenario Perspectives207
14 Free
Trade, Freedom, the Rule of Law, and Democracy
Belong Together271
Annex A: German-Russian Economic Relations in 2021
(Federal Statistical Office of Germany, 24/2/2022)291
Annex C: Ukraine’s Neo-Nazi Problem—Cohen (2018),
Published on REUTERS on March 19th, 2018297
Annex D: EU Sanctions Against Russia (from EU Ukraine
Support Website, March 2022)299
Contents xxxi
Annex E: OECD Interim Economic Outlook, March 2022
(Economic Model Analysis of the Russo-Ukrainian War/Main
Assumptions and Selected Results)301
Annex F: Joint Statement by the Leaders of International
Financial Organizations with Programs for Ukraine and
Neighboring Countries (World Bank, 2022a)305
Annex G: Intra-EU Solidarity Requirements of Member
Countries under the EU Gas Supply Emergency Directive
(Excerpts: 2017)309
Annex I: On Important Sectors with High Electricity Intensity
of Production (Expert Opinion for the German Federal
Ministry of Economic Affairs and Energy, 2015)321
Annex J: Sanctions Against Russia (According to Spisak
[2020], Tony Blair Institute)327
Annex K: Extract from the Emergency Plan for Gas for the
Federal Republic of Germany (2019); (Transl: PJJW)331
Annex L: Indirect Job Effects of Major Sectors in Germany
(per 100 Direct Job Effects in the Respective Sector; Based on
Input Output Analysis)335
Annex M: Conceptual Framework—Key Quantities in the
Bachmann et al. (2022) Model337
Annex N: On International Citations of the Eltchaninoff Book
on Putin (English Edition: Inside the Mind of Putin)339
Annex O: IMF World Economic Outlook Projections, April
2022343
xxxii Contents
Annex P: Traditional Gas Market Perspective in the EU and
New Approach347
Annex Q: EU Trade Relations with Ukraine. Facts, Figures,
and Latest Developments (European Commission, 2020b)351
Annex R: House of Commons Foreign Affairs Committee
(2017)355
Annex S: Simplified Regression Analysis for the Russian Real
Gross Domestic Product, 2005–2021357
Annex T: Analytical Approach for the Economic Effects of a
Gas Cut-off in Germany in the Second Half of 2022,
According to Lan et al. (2022, p. 25)365
Index369
About the Author
xxxiii
List of Figures
Fig. 1.1 Map of Eastern Europe showing Ukraine, Russia, the Exclave of
Kaliningrad, the Baltic States, Poland, Belarus, and other
countries. Source: Own representation; created using
Datawrapperhttps://www.datawrapper.de19
Fig. 1.2 Google trend analysis for Germany: “war Russia”, “inflation”,
“recession”, and “gasoline price”. Note: Weekly data are in
whole numbers; lowest value “<1”. Source: Own presentation;
data from Google Trends (https://www.google.com/trends) 31
Fig. 1.3 Google trend analysis for the US: “war Russia”, “inflation”,
“recession”, and “gasoline price” Note: Weekly data are in whole
numbers; lowest value “<1”. Source: Own presentation; data
from Google Trends (https://www.google.com/trends) 32
Fig. 1.4 Changes in crude oil prices on a daily basis, from January 1,
2021, to March 21, 2022. Source: Own presentation and
calculations; data from Federal Reserve Economic Data (as of
2022)34
Fig. 1.5 Business cycles from 1970 to 2020 in the US, Germany, France,
Italy, the UK, and Japan—percentage of annual rate of change
in real GDP. Source: EIIW presentation; data from the World
Bank (World Development Indicators, as of 2022) 35
Fig. 1.6 Selected share price developments, 2019–22 (daily values):
Germany, the US, Eurozone, the UK, Japan, China. Note: This
chart shows the performance of the world’s major stock indices
from January 4, 2019, to March 29, 2022 (January 4,
2019=100). Source: Own calculations; data from investing.com,
onvista.de39
xxxv
xxxvi List of Figures
Table 1.1 Selected data for the world economy and key countries/
country groups from the IMF July 2022 World Economic
Outlook Update, including size of revisions between July and
April WEO, for output, inflation, and trade 17
Table 1.2 Share of fossil energy imports from Russia in domestic energy
consumption of selected countries, 2019 38
Table 2.1 Top 15 leading countries in natural gas reserves as of end
of 2020 49
Table 2.2 Top 15 natural gas exporters (in volume), estimated 2017 50
Table 2.3 Country ranking of bilateral aid commitment to Ukraine in
percentage of donor country GDP, February 24, 2022—
March 27, 2022 61
Table 4.1 Russia’s share in national non-EU Imports of EU member
dtate, H1 2021; share (%) of trade by value, sorted by gas
share and alphabetically 80
Table 6.1 Expected loss of real income in the event of a German energy
import boycott against Russia (DE=Germany) 109
Table 8.1 Total net outward FDI stocks of selected OECD economies
with Russia as a partner country in 2020 145
Table 8.2 Total net inward FDI stocks of selected OECD economies
with Russia as a partner country in 2020 146
Table 9.1 Refugee movements from Ukraine, as of March 30, 2022
(total influx from Ukraine in neighboring countries) 156
Table 10.1 Technical EU pillars: clusters of negotiating chapters for EU
enlargement (European Commission, 2020) 175
xxxix
xl List of Tables
Crimea with Russia, could become a target of the Ukrainian armed forces
since Ukraine has obtained some new medium-range weapons from
Western countries with which it could target the bridge from a great dis-
tance. However, if Ukraine would destroy this new bridge, it could be
seen as an escalation of the war and one may presume that the US would
not easily accept such an attack by the Ukrainian military. As regards the
consequences of the Russian annexation of Crimea, and the Russian gov-
ernment’s support for political and military unrest in the Donbas region,
there has been an in part low-key radicalization of Russia’s policy stance
over time—however, Vladimir Putin’s public questioning of the legitimacy
of an independent Ukrainian state has apparently been the political start-
ing point of Russia’s preparation of the further invasion of Ukraine in
2022—and the international responses to that act of military aggression—
which are the focal point of this book.
Overall, there is a kind of economic war being waged between the West
plus Japan, the Republic of Korea as well as Australia and others on one
side, and Russia on the other. The Russo-Ukrainian war itself has signifi-
cant repercussions for Ukraine, which is under attack, but also for Russia.
Russia’s position as a major international exporter of oil, gas, wheat, and
fertilizer, and Ukraine’s similar role especially in terms of wheat, creates
global economic effects through rising price expectations for commodities
and grain, while the large number of political adversaries of Russia among
industrialized countries indirectly internationalizes the conflict’s impact.
In Russia itself, there is probably a relatively small opposition to the war,
especially among young people and intellectuals. However, President
Vladimir Putin is cracking down—as he has done before—on protesters
and critics. The sanctions imposed by the West make economic life more
difficult for people in Russia every day. Yet in the past 40 years, Russia has
also already endured a real income decline of over 10% (during the trans-
formation crisis at the end of the Soviet Union).
For Russia, at least in the short term, the decline in energy export rev-
enues is relatively manageable as market prices for oil and gas have risen in
2022: lower export volumes to Europe are accompanied by significantly
higher energy prices. Meanwhile, the fierce military clashes in Ukraine
continue. Russia’s invasion of Ukraine is a shocking experience for the
people of that country and brings with it an enormous amount of suffer-
ing and destruction; it also brings significant declines in exports and pro-
duction. The International Monetary Fund (IMF, 2022b) estimates the
decline in Ukraine’s real gross domestic product (GDP) in 2022 at −35%.
1 BEGINNINGS OF THE RUSSO-UKRAINIAN WAR 5
Ja hiirenkorvall' — ja hiirenkorvall'
On koivut, on koivut!
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