Russia-Ukraine war brings about structural changes in global trade

This Friday marks the completion of one year since Russia invaded Ukraine, sending the global economy into a tailspin for a while. The war has led to some structural changes in global trade that can only result in sub-optimal outcomes.
 

First, global trade has got fragmented with the United States and its allies refusing to trade with Russia. Hundreds of companies from Europe and the US have stopped operating in Russia. They have imposed a near freeze on import of oil, gas, and petroleum products from Russia. The carriers and insurers from Europe and the United States have been asked not to transport or insure Russian seaborne oil sold above $60 per barrel. The exports of high tech items to Russia have been banned. Many Russian banks have been excluded from the SWIFT, the global electronic network through which transactions are put through. It is unlikely that these and many other measures taken against Russia will be reversed anytime soon. On the contrary, more stringent measures to cripple the Russian economy are likely.
 

Second, the high price of oil and gas last year in the wake of the Russia-Ukraine war has pushed many countries to look for alternative sources of energy. For a while, coal has come back in favour but that is likely to pass soon. Massive investments are flowing into solar and wind energy sources, which is very good for moving towards net-zero carbon emission goals in a few decades.  
 

Third, massive amounts are now flowing towards making military equipment. Even Germany and Japan have now abandoned their passive stance and decided to invest more in military preparedness. There is no end in sight for the Russia-Ukraine war and demands from Ukraine for more equipment and ammunition to fight Russia. The US and its allies are not in a mood to let down Ukraine and so, their diversion of funds to make more military hardware are only likely to grow. The belligerence of China is also forcing the western countries to invest more in defense expenditure. This trend is unlikely to be reversed soon.
 

Fourth, the US dollar dominates the global financial markets but the sudden freezing of the Russian reserves with central banks in Europe and the US has forced a rethink on the part of some countries, especially China and India, to look for ways to conduct more trade in their domestic currencies and also spread their reserves in different currencies. It is unlikely that the dominance of the US dollar will be challenged in the near future but the way some countries have started thinking of moving away from the dominant currencies is unlikely to change.
 

Fifth, more companies are thinking of locating the production facilities of strategically critical items at home or countries nearby or friendly countries, even if it means higher production costs. They are also diversifying the sources for supply of critical components.
 

Lastly, Russia is unlikely to recover from this war anytime soon. Even the western countries will find it difficult to absorb the costs of helping Ukraine fight Russia and rebuild its civilian infrastructure and host millions of refugees. China, meanwhile, is gaining through participation in regional trading arrangements. The trade and policy makers need to take note of the structural changes and respond suitably.

email: tncrajagopalan@gmail.com