Western sanctions hit world economy

Editor’s Note: The Center for BRICS and Global Governance (CBGG), a Beijing-based nongovernmental think tank, organized a seminar on the global impact of Western sanctions against Russia and the international monetary system reform on Saturday. Following are excerpts from the speeches presented by three experts:

Sanctions should make world sit up

The financial sanctions against Russia could trigger a global credit crisis. Economic and financial globalization and the international monetary system are based on countries’ credit ratings. If this foundation suffers a blow once again like the one suffered by the Bretton Woods system in the past, the international monetary system could face a deep crisis.

The severe sanctions against Russia include many against individuals, which among other things have invalidated their credit cards. Also, Western powers have frozen Russia’s $300 billion foreign exchange reserves.

Indeed, the sanctions’ impacts are being felt beyond Russia, with India asking that, if even the foreign exchange reserves of a country are unsafe, what will be the future of the international monetary system.

Apart from the possibility of more and more regional and international trade being conducted in local currencies, the efficiency of the global financial system will decline. The dividends produced by globalization, too, will shrink.

The financial sanctions against Russia are already shaking the existing international monetary and financial systems. That indicates a global credit crisis could break out and its impacts would be felt by all countries.

If developed countries take advantage of their strengths, break their promises at will, and shake the foundation of the global credit system, they may end up triggering a global financial storm. And in a globalized world, where all countries share not only the spoils but also the risks, the initiators will also be impacted by the storm.

Therefore, all countries need to move cautiously and think twice before doing something that could weaken the global financial system’s foundation. Otherwise,

all countries, including developed ones, will suffer.

Liu Shangxi, president of the Chinese Academy of Fiscal Sciences and an academic member of CBGG

China must prepare for spillover risks

The rising energy and food prices owing to the Russia-Ukraine conflict have increased inflation worldwide. Some Western scholars are saying that, like in the 1970s, some countries are now facing stagflation due to the rising energy prices, exposing the structural problems of global production.

Now, political security has become an important consideration for countries to participate in, or contribute to, the global economy. In particular, the compulsion to choose sides is undermining international relations, and the economy and payment systems.

As for China, the drastic global changes are affecting the country’s economic and financial security, Belt and Road projects and the internationalization of the renminbi.

In general, the Ukraine crisis has created three major challenges for China. First, external demand has dropped sharply and the role of trade in driving China’s economy is set to weaken. Plus, the changes in developed countries’ monetary policy, which will reduce liquidity, could cause a decline in those countries’ investment and consumption needs. In fact, many Chinese import and export companies, especially some small and medium-sized ones, are already facing serious challenges.

Second, the risk of investing in Belt and Road projects is rising due to the increasingly complicated nature of geopolitics. The Russia-Ukraine conflict has extended the differences between the West and Russia to the economic and financial

fields, and forced some Belt and Road countries and enterprises to choose sides, dealing a blow to globalization and the Belt and Road Initiative.

For example, both Russia and Ukraine are important partners in the Belt and Road Initiative, but the conflict has made it impossible for some previously agreed investment and other projects to continue. This could impact the economic development of both Ukraine and Russia and halt their contributions to the Belt and Road Initiative and globalization.

In addition, China may also feel the pains of indirect or secondary sanctions. As a result, some countries which are politically close to the West might move closer to it, interrupting the cooperation projects with China.

Third, there is an increasing risk of huge capital outflows from China. The Ukraine crisis has made it even more difficult for China to stabilize balance of payments and the renminbi exchange rate.

The first collective outflow of capital from emerging market economies in more than 20 years followed the US Federal Reserve’s interest rate hike in March.

As such, China should view its financial security from a political perspective and properly handle its relations with major powers. The risks to the global financial market nowadays mainly come from international relations, because Western powers have been wielding finance as a political tool to browbeat developing countries. The financial game between Russia and the US is no longer a market issue based on cost and benefit of investments or business interests. It has become a major political game. And this political game will continue for a long time.

BRICS Plus countries must boost cooperation

Facing Western sanctions, Moscow first asked “unfriendly” economies to settle the payments for Russian natural gas supplies in rubles. After that, Russian President Vladimir Putin signed a law banning the placement and circulation of depository receipts for shares of Russian issuers of foreign stock exchanges.

These “counter-sanctions” by Russia are affecting European countries as they are highly dependent on Russian oil and gas. The ruble payment system could help stabilize the Russian currency’s exchange rate, prevent large-scale placement of rubles in foreign exchange and stock markets, weaken the effects of the Western sanctions and help diversify the global monetary system.

Although this won’t change the dominant status of the US dollar and the euro as international currencies, it will weaken the hegemony of the greenback, for it would prompt people to think about the risks associated with the US dollar and other currency assets.

Facing new changes in the international financial system, BRICS-Plus countries (Brazil, Russia, India, China and South Africa plus Indonesia, Turkey, Mexico, Malaysia and Iran) should work together to work out an effective way of settling cross-border payments.

They also need to strengthen cooperation with other economies. And since countries are likely to focus more on national security, domestic circulation and regional cooperation, the original multilateral order could change to a certain extent.