A difficult year with worse to follow

There is a lot at stake for Russia in the ongoing Ukraine war, and it could cause a great deal of pain for the world

When a difficult year draws to a close, one hopes for a better morrow. Such hopes seem fanciful this time around. The year 2023 is likely to be far more challenging than the one that is about to end.

The huge disruption this year is the yet unresolved conflict in Ukraine. The conflict has derailed global growth. It has caused inflation in the advanced economies to rise to levels not seen in decades. And it has provided fresh impetus to the process of de-globalisation that has been under way in recent years.

What happens to the global economy in 2023 depends pretty much on the future course of the war in Ukraine. All forecasts about the duration and outcome of the war have thus far been proved wrong. In February, experts predicted that the war would be over in weeks, if not days, given Russia’s overwhelming military superiority over Ukraine.

That did not happen. Russia’s “special military operation” began with an assault on the Ukrainian capital, Kyiv, in the hope that the Zelensky government would capitulate quickly. The assault was beaten back and Russian forces were forced to retreat.

Nato backed Ukraine with billions of dollars in military and financial aid. The West imposed crippling sanctions on Russia. The pundits of the Western world said Russia’s inefficient military would suffer a humiliating defeat. The Russian economy would collapse under the weight of sanctions.

President Vladimir Putin would be swept aside by a massive tide of discontent in Russia.

The pundits were proved wrong again. After the initial setbacks, the Russian military pulled back and focused on the liberation of four provinces in the Donbas region. The provinces were subsequently annexed to Russia. Mr Putin remains in power. The Russian economy has withstood the sanctions much better than the Nato countries barring the US.

If the world’s leading intelligence agencies, strategic affairs analysts and journalists on the ground could have been so wrong about the conflict thus far, you have to wonder whether experts have anything to offer at all.

The Ukraine conflict has taken a huge toll on the world economy. The International Monetary Fund (IMF) has estimated global growth in 2022 at 3.2 per cent, down from 6 per cent in 2021. For 2023, it estimates global growth at 2.7 per cent. This would be the slowest growth since 2001, leaving aside the global financial crisis and the Covid-19 pandemic.

India cannot escape the fallout of the gathering storm. Analysts are revising the growth forecast for India for FY 2022-23 upwards and that for FY 202324 downwards. India was on track to achieve gross domestic product growth of over 8 per cent in 202223 before the Ukraine conflict erupted. Now, it is likely to end up with growth of 6.5-7 per cent. Growth in FY 2023-24 is likely to be in the range of 5-6 per cent or even lower. Relatively low growth in FY 202324 will pose a serious headache for the finance minister as she readies the Budget for the coming year.

The IMF’S forecasts, made in October 2022, assumed the conflict in Ukraine would not escalate. As we approach a new year, the conflict has already escalated with worse in the offing.

Following Russia’s withdrawal from Ukraine’s southern city of Kherson, Western think-tanks have been painting a rosy picture of the prospects for Ukraine. Ukraine, they contend, can very well go on the offensive, reclaim the provinces annexed by Russia and even capture the Crimean peninsula that is of strategic importance to Russia.

Independent analysts, many of whom have a military or intelligence background in the West, have been quick to dismiss these hopes as delusory. The evidence, they say, is that Russia is poised for a massive offensive involving half a million troops. Russian missile and drone attacks have shut down over 50 per cent of Ukraine’s power capacity. Having failed to get Ukraine to the negotiating table, Mr Putin will not rest now until his objectives of de-nazification and demilitarisation of Ukraine are met.

The real threat is that Nato will find it hard to stomach a decisive win for Russia. It may be tempted to intervene directly. That will take the conflict to a different level altogether. A third possibility, flagged by the US Director of National Intelligence, is that the current war of attrition will continue through 2023 with no decisive outcome.

An escalation or even a prolonged continuation of the conflict will be terrible news for an already battered world economy. The high price of gas is hurting Europe badly. Now, it appears oil prices too could shoot up after having fallen to $85 a barrel. Starting this week, the EU and the G7 have imposed a price cap of $60 on Russian crude oil exports. Shipping and insurance firms in these countries are barred from carrying Russian crude sold at a price above the price cap.

Russia has declared that it will not supply to countries that adhere to the price cap. If Russia’s supply of oil to the market falls, oil prices will rise. That will be yet another blow to the world economy. There could also be secondary sanctions against countries that do not observe the price cap.

There is far more at stake in the Ukraine conflict than the disagreements between the West and Russia over the status of Ukraine. The world’s second mightiest military power, Russia, and the second biggest economy, China, are seeking to rewrite the rules of an international order that is intended to sustain the hegemony of the West.

Both Russia and China would like to decouple as far as possible from the West and engage in a bigger way with the rest of the world. There is talk of non-dollar trade, an alternative to the dollar as a reserve currency and an alternative payments system. Russia now sees itself as engaged in an existential struggle with the West.

A new world order is struggling to be born. Not to sound morose towards the end of the year but it would be naïve to understate the pain that this struggle will mean for the world.