by Akhmet Makhmoudov (Main Stories, Crescent International Vol. 51, No. 2, Sha'ban, 1443)
Even though economics is often assumed to be a precise science where accurate calculations are regularly made and allow for more or less precise predictions, this understanding is simplistic. The world of business and economics is not mere number crunching; it involves transactions implemented by humans whose money spending and consumption habits are often irrational and unpredictable. This approach becomes especially acute during crises.
The economic aspect of NATO’s response to the Russian invasion of Ukraine has also demonstrated that the notion “business is separate from politics” is an illusion. When push came to shove, western state entities did not hide their interventionist economic/business policies to achieve political and geopolitical goals. From fast-food outlets to industrial companies, businesses quickly came to toe the western political line.
Keeping the above realities in mind, unrealistic conclusions created by media hype can be avoided. It may, however, be too early to predict the exact economic repercussions of Russia’s invasion.
NATO’s strategy is clear. It aims to disrupt the economic cycle in Russia, make international trade difficult and create significant logistical hurdles for Moscow to bypass western sanctions. These listed goals are not much different from what western powers have used against Cuba, Venezuela, and Islamic Iran. In all three cases, the targeted states managed to live with sanctions. In Iran’s case, the country even learned to overcome them.
NATO powers are pinning their hopes primarily on significant internal destabilization in Russia. They hope that by isolating Russia and making life difficult for Russian citizens, Vladimir Putin’s government would be either toppled or at least, significantly destabilized. The aim is to degrade Kremlin’s ability to challenge the west.
While many leading Russian economists agree that western sanctions will significantly hurt Russia economically, some of them also forecast that the country will learn to live with them, even if they do not manage to overcome them immediately.
As Russia is quite intertwined with many western businesses and industries, its economic isolation will also have a negative impact on western economies. Most people do not see this perspective because of Russia’s inadequate propaganda mechanisms and NATO’s domination of the information war.
Russia is a massive country with vast resources. True, it is corrupt and mismanaged, but to assume that economic warfare on the largest country in the world will have minimal effects on western economies is simplistic and misleading.
It is important to list some of the ways in which western economies will be affected to get a better understanding of the broader economic warfare between Russia and NATO.
This basic data shows that economic sanctions on Russia will also hurt western economies. The degree may be even higher than assumed, bearing in mind that economics is not a precise science.
Apart from transactional aspects, a key unintended and long-term economic hit that western economies will face will be the undermining of trust in their economic and business commitments and principles. For example, by freezing Russian Central Bank’s assets, along with pressuring private companies to take a political stance, western regimes demonstrate that sacred foundations of capitalism and free-trade are not off limits. The so-called foundational principles of free trade can and will be violated when strategic political interests are involved.
It can be argued that it was shortsighted of the Russian government to expose itself so much to western financial and economic mechanisms, while at the same time aiming to challenge the western global order on a geopolitical level. While this is valid, other economies with fractious political relations with NATO regimes will now think twice before establishing strategic economic ties with the west. Who can guarantee that today’s political allies will not become tomorrow’s foes?
It seems others are already learning from Russia’s bitter experience and divesting from western economic mechanisms. Having outlined in broad terms western economic policies and moves, let us examine possible Russian maneuvers.
These will be analyzed in three phases: short-term response to limiting the colossal negative impact of sanctions, and mid-term policies aimed at making sure that the economic cycle within the country does not regress to a Soviet-style command economy. Finally, the long-term strategy would include making sure that Russia breaks out of its isolation and establishes a somewhat functioning free market system with minimal exposure to western economic mechanisms.
The toughest and probably most problematic phase of Russia’s response to western sanctions will be the initial phase. At the moment, Russia is in reactive mode, focusing on implementing haphazard economic policies. This phase will naturally experience the trial-and-error problems. This will happen not only because Moscow was unprepared for the scale of western sanctions, but in order to create adequate response policies, Russia needs time to observe and analyze the specific impact of sanctions.
At the initial stage, which is only beginning, Russian economic response will most probably focus on state intervention. Its success will depend on how well state economic actors and the private sector cooperate. There are some hints that at least some of the business tycoons are willing to cooperate and aid the economy if the government puts forward reasonable policies.
The major obstacle to phase one will be the level of corruption in Russia. Policies aimed at reducing corruption may prove to be a double-edged sword for the ruling elite. Pursuing corrupt officials, of which there are many, may trigger internal political and economic tensions.
The second phase is likely to focus on facilitating an environment for the Russian private sector to engage in some form of sanction evasion. This phase will depend heavily on Moscow’s geopolitical clout in Central Asia and the Caucasus.
Using the non-tariff mechanisms of the Eurasian Economic Union (EAEU) established in 2000, Moscow will set up shell companies in countries of the former region for import and export purposes. This will automatically trigger geopolitical tensions, as NATO regimes will try to pressure the ruling autocrats in Central Asia and Azerbaijan to reduce Russia’s use of their territories to evade sanctions.
Considering that most of the looted wealth of these autocrats is parked in western capitals, NATO regimes will have significant leverage. However, regimes in Central Asia and Azerbaijan realize that if they turn against Russia, they will arouse Moscow’s fury. Such a development can terminate their rule.
If the Russian government reaches phase two successfully, it will most probably weather the crisis. At this stage of economic warfare with NATO, it will receive some assistance from regimes in post-Soviet regions.
Kleptocratic regimes in Central Asia and the Caucasus will be incentivized to play ball with Russian sanction evasion tactics not only to avoid Moscow’s displeasure, but also to profit from the emerging gray and black markets of bringing in foreign products into Russia.
Phase three of Russia’s economic war with NATO will be directed at attracting investment and doing trade with countries and entities of the developing world. This stage might benefit business organizations of countries like Malaysia, Iran, Turkey, the UAE and South Africa. In an environment where established western business organizations will be eliminated from the Russian business scene, business organizations from developing economies will have a better chance to grow and improve their operations and profits in Russia.
It should be noted that the NATO-Russia economic war will likely last for a decade or more.
Even if Vladimir Putin is ousted as president, NATO powers will not simply forget everything and move on. A broader strategy of making sure that Russia never reaches the ability to challenge NATO in the way it is doing right now in Ukraine will most likely remain in place for many years. Even if Putin leaves, it is most likely that his successor and those around him will be equally anti-western.
In the Russia-NATO economic battle, developing economies which make smart investments in Russia and Central Asia are likely to reap the biggest benefits.
It should be noted that sanctions against Russia do not have United Nations approval. These are imposed unilaterally by individual nation states. Thus, there is significant room for maneuver by developing countries, Russia and western companies aiming to make profit. The economic battlefield will, therefore, remain fluid and quite unpredictable.