The impact of the Ukrainian war on the global economy
THE CRISIS is escalating extremely quickly. The Western Front, which we thought was splintered due to relations with Russia, united. Putin and his administration are facing severe sanctions.The most critical move to date has been the withdrawal of major global energy companies from Russia.
US and European countries previously imposed sanctions on Russia due to both the Georgian war and the annexation of Crimea. But these sanctions never included energy companies.
Now the situation is different. BP has terminated its partnership with the Russian oil company Rosneft. Shell has divested its interests in natural gas extraction and processing on Sakhalin Island in Russia and its stake in the Salym and Gyudan energy ventures. Then, Norwegian oil and gas company Equinox and American ExxonMobil withdrew. Italian ENI has also put up for sale its 50% stake in the Blue Stream pipeline form Russia to Turkey.
The exit of energy companies form Russia will have two negative effects on the Putin administration. The first is diplomatic influence. Putin was able to use partnerships with giant companies based in the US and Europe as “bargaining chips” in his negotiations with the West. Now that’s gone.
The second is the issues Russia may soon face in extracting and selling its underground assets. Russia is a “regional economic power” whose strength is based on oil and natural gas exports, rather than a “global economic power” like the US or China. Russia had technology support from Western-based global companies with which it partnered to extract oil and natural gas. The sanctions will create serious problems for Russia in terms both the extraction and processing of natural gas and oil, as well as the renewal and repair of old and deteriorated Russian machinery and facilities.
Considering the dependence of the Russian economy on oil and natural gas exports, it would not be wrong to assume that this will have a heavy impact on the Russian public in the short term. The Wealth Fund, which Putin entrusted Russian finances to when entering the war, will end in the near future both as a result of financial sanctions imposed by the West and the necessary expenditures both of war and of every day life.
Obviously, the West believes that the trouble Russia will face as a result of the sanctions may pave the way for the Putin administration to be questioned before the public.
CHINA’S ROLE IS CRITICAL
Will the west be able to hold Russia to account? Here, China’s role will be critical.
China’s initial reactions to the Ukraine war reveal that they did not like Putin’s fullscale invasion. The Chinese economy is fully integrated with the global economy, though its governance system is different than that of the West. Disruptions in the global supply chain, which are being prolonged by the Ukraine war, seem to have negative consequences for the Chinese economy in the short term. In fact, with this calculation, China demonstrated its stance by abstaining from the vote held in the UN security council on the condemnation of Russia.
Likewise, the Chinese government’s offer to mediate between Ukraine and Russia is another concrete development that reveals the Beijing administration’s “end this war and let’s get to work” attitude.
However, if the war is prolonged, it is obvious that Russia, which will be under heavy sanctions from the West, will become a “cheap market” for China. It is highly likely that China will try to fill the Russian economy, emptied of Western companies, and buy them up quickly. What will be the West’s reaction to the absorbing of the Russian economy into the giant Chinese economy? This seems to be one of the most pressing questions for the long run.
AN OPPORTUNITY FOR TURKEY?
From the perspective of Turkey, the first thing that appears is that the economic crisis seems to shield the country from being forced to impose sanctions on Russia - for now. President Erdogan’s statement that “we will neither give up on Ukraine nor Russia” - again, for now - has been met with understanding by the West. However, the longer the war goes, the more pressure there may be on Turkey to join the sanctions regime.
The Russian invasion of Ukraine seems to have increased Turkey’s importance in NATO. For Ankara, this situation may also open a new opportunity for getting full membership in the EU.
The biggest obstacle to this opportunity is the anti-Western rhetoric of the AKP, given its domestic policy motives. The volatility of the President may be welcomed by the domestic public - especially AK Party voters - but when it comes to foreign policy, it’s difficult to ignore the volatility and changing discourses of the government, as well as the deterioration of relations between the US, Europe, and Turkey’s current government.
ISRAELI PRESIDENT'S VISIT IS KEY
In terms of the global energy game, the Ukraine crisis may create new opportunities for Turkey. It shouldn’t surprise anyone to see Israel and Turkey begin negotiations on energy in the Eastern Mediterranean following Israeli President Herzog’s visit to Ankara next week.
In the vacuum left by Russia, it’s not difficult to predict that the West - in particular the US - will do everything necessary to meet Europe’s energy needs. It’s possible that Turkey becomes the country where the energy corridor intersects. In this content, it should not surprise anyone if moves are soon made to solve the Cyprus problem.