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Home / Opinion / Columns /  Geoeconomics: The war beyond the battleground of Ukraine

In The Age of Unpeace, Mark Leonard writes: “The connections between people and countries are becoming weapons." This has clearly been visible in what has happened after Russia attacked Ukraine, with things happening beyond the battlefield. Russian President Vladimir Putin recently said that his government would only accept payments in roubles for delivering natural gas to unfriendly countries. As Leonard writes: “Some countries are more central to the system than others. They can cut rival nations off and use their control of hubs to assert their power." As per the International Energy Agency, nearly three-fourths of Russian gas is exported to countries in Europe.

This is geoeconomics at work. Robert D. Blackwell and Jennifer M. Harris define the term in War by Other Means as: “The use of economic instruments to promote and defend national interests." Of course, the countries backing Ukraine are also using geoeconomics to hurt Russia. The access of many Russian banks to the Society for Worldwide Interbank Financial Telecommunication (Swift) network has been cut off. As Blackwell and Harris write: “The fact that SWIFT is domiciled in Belgium—as opposed to a country less sympathetic to U.S. and European geopolitical interests—made it considerably easier to leverage this network." So, why is Swift so important? Globally, over 11,000 financial institutions use the system. While it doesn’t move money around the world, it provides messages on how to receive and make payments, making them faster and secure. Banning a country’s financial institutions from using Swift makes it very difficult for it to carry out international trade (that is, make payments for imports and get them for exports).

There exist Swift workarounds, but they don’t work at the same scale that it does. Also, figuring out other payment mechanisms takes times, thus delaying the country’s ability to earn money in the meanwhile. Ultimately, any country needs money to fight a war.

Like the US control over Swift, the UK is a dominant player in the business of shipping insurance. A news report in The Guardian says that Lloyds of London, an insurance and reinsurance market located in London, is working with the British government to implement sanctions that may include “cancelling Russian firms’ insurance cover."

So, what does all this mean? For European countries to pay for Russian gas in roubles, they need to earn those roubles. And that is only possible if they trade with Russia and agree to get paid for what they export in roubles. Only then can this currency be used to pay for Russian gas. As of now, European countries have refused to pay Russia in roubles because that would mean trading with Russia, whereas Russia has said that gas billed in roubles is just days away.

Note that Swift-access deprivation has made it difficult for Russia to carry out international trade. Countries that want to trade with Russia need alternate payment mechanisms. Take the case of India. There was initial talk about rupee-rouble trade. Now a Business Standard report says that bilateral trade might be conducted only in rupees, given the rouble’s volatility. Countries looking to trade with Russia will also have to figure out how to move and insure the goods they are paying for. All this takes time and time is of the essence during a war.

Further, nearly half of Russia’s foreign exchange reserves have been frozen. Also, many Western corporations, in order to be seen doing the right thing, have closed their operations in Russia.

We can expect multiple repercussions of the geoeconomics at play currently. As Blackwell and Harris write: “Each time the United States uses these sanctions, [it] may be hastening other countries’ search for alternatives to the dollar, which in turn would undercut the future effectiveness of sanctions." News reports suggest that Saudi Arabia is planning to price a part of its oil sales to China in yuan instead of the American dollar.

There is increased talk of countries needing to be more self-sufficient and depend less on imports and the global financial system. This overlooks the fact that sanctions on Russia kicked in only once it attacked another country. Very few countries would have such plans.

People might counter this by saying that similar sanctions have been implemented in the past on countries like Iran and Venezuela, making self-sufficiency important. And they are right. Nonetheless, a major reason Russia went to war knowing fully well that it would face sanctions lies in the fact that it has access to natural gas, oil and coal reserves, stuff that Europe needs. Hence, whatever power Russia has emerges from the fact that it is globally integrated.

Most thinking on economic issues done by those in positions of decision-making would qualify as first-order thinking. Given this, the national goal of self-sufficiency is likely to become even more popular in time to come.

But it will come with its share of costs, including higher prices. Also, the main message of self-sufficiency will be one of export promotion and import reduction, even though exports and imports are two sides of the same coin—which is global trade. At an aggregate level, you can’t promote one at the cost of the other.

But then, logic doesn’t stand a chance against the rhetoric of nationalism that self-sufficiency comes with.

Vivek Kaul is the author of ‘Bad Money’.

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