Conflict could unleash new trade wars

Aunindyo Chakravarty

Senior Economic Analyst

IT has been a year since Vladimir Putin’s army invaded Ukraine. It immediately set off an inflation spiral across the world. Before the war, Ukraine and Russia together supplied about a quarter of the world’s wheat. Ukraine also supplied nearly half the world’s sunflower oil. The war disrupted this and sent food prices sky-high.

The FAO’s (Food and Agricultural Organisation) Food Price Index shot up by nearly 13 per cent immediately after the Russian invasion. It dropped back by July 2022 and by January this year, it had dropped well below where it was before the war began. Energy prices also show a similar trend. Brent crude jumped from a shade under $91 per barrel in January 2022, to nearly $134 per barrel in March. Now, it is flirting with the $80 mark. Natural gas prices nearly doubled after the war began, but the prices have dropped to a quarter from their peak and are almost half of what they were before the war. The same pattern can be seen in most commodities, including key metals. In effect, therefore, the economic consequences of the Russia-Ukraine war have largely disappeared.

But that is only if we look at the economy in the way textbooks teach us to — in terms of demand, supply, trade, markets and prices. In reality, these are just the effects of much deeper economic processes, which have to do with who controls global resources and makes the decisions on how to deploy them. When we talk about that, we have to look at international monopolies, global finance capital, the advanced nation states which back their interests, and the various so-called ‘multilateral’ institutions, like the World Bank and IMF, which act like ‘autonomous’ battering rams to open up doors for western companies and financial institutions. It is here that Russia’s war on Ukraine has had a much deeper impact.

Already, before the war began, American economic and military hegemony was beginning to wane. A part of this reason was the meteoric rise of China as a global power and its growing influence in smaller countries of Asia and Africa. The second reason is Germany’s emergence as a quasi-autonomous power in Europe over the past decade.

In fact, despite the EU backing sanctions on Russia after Putin’s ‘annexation’ of Crimea in 2014, Germany has been opposed to either arming Ukraine or putting NATO boots on the ground to fight Russian separatists in the Donbass region.

Germany had developed deep trade links with Russia ever since the Soviet Union collapsed and was becoming increasingly dependent on Russia for its energy needs. Although this did not lead to any overt diplomatic clashes with the USA, Germany’s warm relations with Putin were a cause for chagrin among successive US administrations.

The USA’s well-established role in overthrowing Ukraine’s pro-Kremlin President Viktor Yanukovych and backing the Maidan protests was aimed as much at Russia as at bringing Germany-led Europe in line. And the spooks in the Biden administration must have rejoiced when Putin invaded Ukraine one year ago. It forced Germany and other European members of NATO to back US interests, even though it was going to inflict huge economic costs on the people of Europe.

The biggest of these is the energy prices that ordinary Germans are paying because gas supplies from Russia have been stopped. The pipelines that carried gas from Russia to Germany were first turned off by Putin in retaliation for the sanctions against Russia. After that, the pipelines were bombed and damaged so that gas could not be transferred to Europe.

Pulitzer Prize-winning journalist Seymour Hersh has reported that the gas pipelines were sabotaged in a covert operation sanctioned by the Biden administration.

Till this revelation, the West had blamed Putin for deliberately damaging the Nordstream pipelines. Hersh's claims, which have been denied by Washington, could become a source of grave embarrassment for the German government as it tries to convince its people that they are paying more for gas for the greater good.

Selling this has become especially difficult as American energy companies, which have replaced Russia as the key suppliers of gas to Germany, have declared record profits. This has led to a wave of anti-Americanism in Germany, where the right and the left have both attacked the government for backing NATO in Ukraine.

While the extreme right-wing party Alternative for Germany (AfD) has openly backed Moscow, Left voices like Oskar Lafontaine have demanded that Germany loosen ties with America. Lafontaine’s book Ami, a derogatory term for Americans, has become a bestseller in Germany. Given Germany’s reluctance to play a leading role in arming Ukraine, the USA has turned to Poland as its pivot for its ‘fight for democracy’ in the region. This is ironic, given that Poland today is ruled by a hard-right group, which has dissolved many of the country’s democratic institutions.

But it is outside Europe that the USA has found the biggest resistance to its role as the global Big Brother. China and India, who account for nearly one-third of the world’s population and are two of the world’s biggest economies have refused to take a stand on the war. Their neutrality is, in effect, a shot in the arm for Putin. This has been further bolstered by China dramatically increasing its exports to Russia, and India undermining the sanctions on Russian oil exports by becoming its biggest buyer.

Not just China and India, but several other key global players have also turned neutral, and have increased their trade with Russia. While Putin’s strong-man tactics have partly backfired on him, it has given the opportunity to many in the developing world to line up against US unilateralism.

The net effect of the Ukraine war has been to weaken the consensus within NATO, give a new lease of life to right wing forces in Europe and puncture three decades of American global hegemony that began with the end of the Cold War.

Things haven't been helped by the USA’s newfound attempt to bring production back home. It could unleash new trade wars that will increase economic rivalries in the crisis-ridden developed capitalist world.

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