How Russia’s War Would Hit the Economy



Renuka Rayasam | Politico

FRONT LINES, MEET BOTTOM LINE — The tensions between Russia and Ukraine heightened this weekend, with reports of U.S. intelligence analysts predicting as many as 50,000 civilian deaths, and thousands more military deaths, in the event of a full invasion as U.S. troops moved into Eastern Europe to reassure allies.

Beyond the military moves, a global trade conflict could be brewing.

President Joe Biden and Germany’s new Chancellor Olaf Scholz said today that the U.S. and its allies were ready to present a united front of severe sanctions against Russia if President Vladimir Putin were to invade Ukraine. Scholz has been trying to counter the perception that Germany is not willing to stand up to Russia.

But he remained silent about the future of Nord Stream 2, a gas pipeline connecting Russia to Germany, even as Biden said, during their joint press conference, “We will bring an end to it” should Russia invade Ukraine.

“We will act together,” Scholz said today during the joint press conference with Biden. “We will not be taking different steps. And they will be very, very hard to Russia.”

About 40 percent of Europe’s gas imports come from Russia, and West Germany used “pipeline diplomacy” during the Cold War to bring the two countries together.

Russian retaliation to sanctions would hit Europe a lot harder than the U.S., trade reporter Doug Palmer told Nightly during a Slack chat today. U.S. companies had investments totaling about $12.5 billion with Russia in 2020 — compared with $123.9 billion in China and $3.5 trillion in all countries in Europe. This conversation has been edited.

Why is Europe far more worried about a trade war with Russia?

The EU depends on Russia for a lot of its energy supplies. So the concern is Russian President Vladimir Putin might respond to sanctions by cutting off natural gas shipments through Ukraine. That could cause a lot of pain if it happened during the winter months, and U.S. officials also say they are confident that the new Nord Stream 2 pipeline carrying gas from Russia won’t become operational if Putin further invades Ukraine. The EU and Russia also have much more non-energy trade than the U.S. and Russia.

Would there be any U.S. sectors or companies that would bear the brunt of retaliatory sanctions from Russia?

Technology companies could be hurt, because one sanction the administration is considering is export controls. That is expected to bar both U.S. companies and foreign companies from selling items to Russia that contain certain sensitive technologies like semiconductors. That would affect U.S. sales to Russia and to foreign companies that use the components in products they sell to Russia. The diverse membership of the U.S.-Russia Business Council shows many well-known U.S. companies who could be affected by new sanctions, including on the financial front. Those include Abbott, Boeing, Cargill, Pfizer, Google, ExxonMobil, Procter & Gamble, among others.

The U.S., Europe and G7 countries imposed sanctions on Russia in 2014 in the aftermath of the Crimean invasion. What has been the long-term impact of those?

One study estimated that those sanctions have cost Russian corporations almost $100 billion since 2014. But they clearly weren’t painful enough to persuade Putin to reverse his actions in Ukraine. U.S. officials are trying to send the signal that a new tranche of sanctions would be much more severe and do much more damage to Russia’s economy, both in the short and the long-term. But the big question is whether Putin believes the U.S. and EU sanctions will pack that big a punch.

What about broader global markets if war breaks out?

Russia accounted for only about 1.9 percent of world imports and exports in 2020, according to the World Trade Organization. That puts it between Switzerland and Taiwan.

Still, an invasion would be an event of global significance and could affect international relations in a number of ways, including by potentially pushing China and Russia closer together and encouraging both countries to rely less on the West. U.S. export controls and financial sanctions could also strain relations with countries, such as China, that continue to trade with Russia. It also would likely accelerate trends in Europe to diversify energy supplies and force companies that currently do business in Russia to make difficult decisions about their future plans.

It could disrupt global energy markets if Russia were to cut off gas shipments and the EU suddenly had to find alternative supplies. U.S. officials have said they are making contingency plans if that happens.

Renuka Rayasam covers Texas politics, policy and health care for POLITICO. Her reporting career has taken her from Austin, Texas to Berlin, Germany with a stop in Washington, D.C., along the way. Rayasam joined POLITICO Pro after seven years freelancing for various publications including The New Yorker, The Wall Street Journal, Foreign Policy, The Atlantic and Quartz.

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