Economic prosperity is under threat in Eastern Europe. The rise of strategic competition between Russia and Western democracies over Ukraine is highlighting the inextricable link between geo political actions and the region’s economy. The lingering threat of war is affecting the region’s stability and financial markets. This is a mark of geo-economics at play. These events are not only important from a security perspective, but also for continued economic integration in these regions.
Broadly defined, geo-economics refers to how geopolitics influences economic development and how major economic transformations influence geopolitics. While strategic conflict and regional power games are not new, they are once again a modern-day reality. As we move from a unipolar to a more multipolar world economic security is becoming a vital component to a country’s ability to project power in the 21st century. This is largely due to the expansion of regional trade deals and the integration of global financial markets.
Today we see a number of advanced countries embroiled in geo political disputes, particularly in regions where the absence of a hegemon has left space for ideological divisions to emerge. Such regions include, East Asia between China and Japan; and more recently in Eastern Europe between Russia and the EU with Ukraine at the core. Crimea’s annexing to Russia has the potential to further damage not only Russia`s economic situation, but also impact the global economy.
Since pro-Russian forces entered the southern territory of Crimea, the West has begun to wage an economic and diplomatic war against the Kremlin. The March 16 referendum in Crimea only added fuel to the fire. In order to put pressure on Russia in retaliation for destabilizing Ukraine the West has responded by temporarily removing Russia from the G8, and introducing a range of “sectoral sanctions” to pinpoint specific companies and officials in Russia’s largest industries[i].
For instance, at the end of April the US Senate introduced a bill calling for sanctions targeting Russia’s biggest banks, Sberbank and VTB, the state energy companies Gazprom and Novatek, and the arms dealer Rosoboronexport[ii]. At the same time the European Union (EU) imposed travel bans and asset freezes on 15 high profile Russians including Russia’s deputy prime minister Dmitry Nikolayevich Kozak[iii].
The implementation of economic weapons has further escalated the geo political stand-off. This has the potential to cause an economic fallout for Russia and the EU, given that the two are integrally tied by investment and trade.
Russia is the EU`s third biggest trade partner. It makes up 7 percent of the EU`s imports and 12 percent of exports[iv]. Russia’s biggest trade and investment partner is the EU, with trade worth an estimated $330 billion in 2012[v]. This of course includes Russian oil and gas exports to the EU, which are now at risk. Moscow is considering suspending its supply of energy to the EU, and EU leaders are considering reducing dependency on Russia`s oil and gas supplies. This would hurt Russia, which is heavily reliant on it energy sector, and it would also have serious consequences for Western companies invested there, such as ExxonMobil, Shell, Total, Statoil, BP[vi].
We have already seen this mounting tension unsettle Russia’s share price index, which has fallen 7 percent[vii]. Its central bank has raised interest rates and has been forced to spend around $12 billion[viii]in reserves to support the Russian Rouble, which took an initial knock and could fall further. Analysts warn that these outcomes and measures have placed the economy at risk of recession. Ratings agencies have downgraded Russia’s credit rating from stable to negative[ix]and Russia’s deputy Economic Minister, Andrei Klepach, has warned that Russia faces a period of stagnant growth[x].
While the Ukraine`s already stagnating economy felt the initial effects of this dispute, this attention has now turned to the deterioration of Russia’s commercial ties with the West and the likely long-term costs to Russia’s own economy. If tensions continue to intensify between Russia and the West, this will undoubtedly damage foreign investment in the region and cause an economic slowdown. In addition, international sanctions on Russia may undermine not only its economy, but also its political and social stability[xi].
This is only one instance of many geo economic struggles that can be found around the world. One of the most worrisome is being played out in East Asia with the Senkaku/Diaoyu islands at the centre. These islands are thought to be rich in oil and natural gas resources. Crucially, economic relations between Asia`s financial powerhouses have soured in recent years, particularly since Japan`s Government nationalised the islands in 2012[xii].
China moved to temporarily ban the export of rare earth metals[xiii]to Japan, which are needed for its massive electronic goods industry. Chinese consumers continue to boycott Japanese products, and Chinese factories, today, favour South Korean suppliers[xiv], resulting in lower demand for Japanese products. This includes the sales of Japanese cars in China which have dropped, hurting Japan`s automotive industry – the world’s 3rd largest. Accordingly, Japanese manufacturers have been forced to rethink their investment strategies in China.
Ultimately Japan’s export dependence on China proved costly. At the height of the tensions in 2013 Bloomberg reported that Japan’s industrial productivity sank 1.7 percent[xv]. This geo political row has harmed economic integration and development in the region, particularly given that China and Japan are the second and third largest economies in the world. If the power struggle over Ukraine continues to spiral out of control, the region many face similar negative economic outcomes, which could set development back decades.
Events in Ukraine and the East China Sea illustrate how the use of economic weapons in geopolitical stand-offs devastate economic relations and economic development in their respective regions. Geo political events are traditionally seen from a security perspective, but it is also important to consider how they can prevent continued economic growth and integration. As multilateral trade regimes are springing up across the globe, inextricably linking economic and political forces, security concerns only undermine mutually beneficial relationships for free trade and foreign investment.
Opinions expressed here are strictly personal and do not necessarily reflect the views of the World Economic Forum.
Photo credit: shannonside.ie
[i]Talley, I, In Next Russia Sanctions, West Plans to Use Scalpel, Not Hammer, May 8 2014, http://blogs.wsj.com/economics/2014/05/08/in-next-russia-sanctions-west-plans-to-use-scalpel-not-hammer/
[ii]Rankin, J, As tensions in Ukraine mount, could tougher sanctions against Russia work?, May 4, 2014, http://www.theguardian.com/world/2014/may/04/tensions-ukraine-mount-sanctions-russia-work
[iii]The Guardian, Ukraine: EU imposes new sanctions on Russia, April 29, 2014, http://www.theguardian.com/world/2014/apr/29/ukraine-eu-imposes-new-sanctions-on-russia-live-updates
[iv]RT, Russia to redirect trade elsewhere in case of EU-US sanctions, March 19, 2014, http://rt.com/business/russia-eu-us-sanctions-742/
[v]RT, Russia to redirect trade elsewhere in case of EU-US sanctions, March 19, 2014, http://rt.com/business/russia-eu-us-sanctions-742/
[vi]Brower, D, How to Lose an Energy War With Putin, Politico Magazine, http://www.politico.com/magazine/story/2014/03/vladimir-putin-energy-war-104891.html#.U2kQqPmSzy5
[vii]Popina, E, Putin Sparking Worst Stock Rout Since Moscow Crackdown, Bloomberg, Mar 7, 2014, http://www.bloomberg.com/news/2014-03-06/putin-sparking-worst-stock-rout-since-moscow-crackdown.html
[viii]Kelly, L, Kobzeva, O, Russian markets take fright on Putin threat to Ukraine, Reuters, Mar 3, 2014, http://www.reuters.com/article/2014/03/03/us-russia-markets-idUSBREA220A520140303
[xi]Reuters, Ukraine financial fall-out exposes Russia’s economic weakness, March 3, 2014, http://www.reuters.com/article/2014/03/03/us-urkaine-crisis-russia-economy-analysi-idUSBREA221D020140303
[xii]Financial Times, Japan risks China’s wrath over Senkaku, September 10, 2012, http://www.ft.com/intl/cms/s/0/babbfa2a-fb2b-11e1-87ae-00144feabdc0.html#axzz30xIUwBzF
[xiii] King, A, Armstrong, S, Did China really ban rare earth metals exports to Japan?, East Asia Forum, 18 August 2013, http://www.eastasiaforum.org/2013/08/18/did-china-really-ban-rare-earth-metals-exports-to-japan/
[xiv]Bloomberg, China-Japan Dispute Takes Rising Toll on Top Asian Economies, Jan 9, 2013, http://www.bloomberg.com/news/2013-01-08/china-japan-dispute-takes-rising-toll-of-asia-s-top-economies.html
[xv]Bloomberg, China-Japan Dispute Takes Rising Toll on Top Asian Economies, Jan 9, 2013, http://www.bloomberg.com/news/2013-01-08/china-japan-dispute-takes-rising-toll-of-asia-s-top-economies.html