Opinion – Vinicius Torres Freire: Understand how the war in Ukraine can affect the economy

On February 26, it’s been eight years since Russian agents and concealed soldiers helped Russians from Crimea, then part of Ukraine, to overthrow the region’s government, which would be annexed by Vladimir Putin in March 2014. What happened to the economy world? Nothing.

The tension thermometers didn’t even move: Stock markets, American interest rates, oil prices. What happens now if Russia invades Ukraine? Will this time be different?

It might even be. The Americans promise reprisals that hurt Russian pockets. However, strong economic retaliation should cause collateral damage, perhaps a boomerang effect, affecting allies. Financial turmoil and expensive oil could further hurt the Democratic Party’s performance in the year-end parliamentary election. The medicine can be as bad as the disease.

Joe Biden says he will “impose the most severe sanctions that have ever been imposed” in the event of a break-in. For the moment, leave aside what exactly “invasion” means. What would these serious sanctions be?

Biden suggests he could take the money Putin’s oligarch friends have abroad and make trouble for Russian financial institutions. That could make the new Nord Stream 2 gas pipeline, built to take gas from Russia to Germany across the Baltic Sea, unfeasible.

About 66% of the gas and 29% of the oil that Germany buys outside the European Union comes from Russia. About 44% of the gas imported by the European Union comes from Russia, as well as 25% of the oil. Since the 2014 crisis, the Germans have tried to avoid trouble with the Russians.

In an extreme case, of disruption of the Euro-Russian fuel trade, there would be problems. Europeans would have to look elsewhere for energy, in a world market that would get even tighter and more expensive unless Saudi Arabia betrayed Russia, its informal oil cartel ally, by producing more.

With so much mutual harm, would there be such retaliation?

Russia would catch up. Although far from poor, Russians are not rich (GDP per capita 43% higher than Brazil’s; 88% higher, in purchasing power parity). They live off a large trade balance, on exports, almost half of them from oil and gas.

American newspapers and international policy and security analysts also speculate that Russia could be excluded from an international communications and financial network, the SWIFT (Society for Worldwide Interbank Financial Telecommunications), a kind of cooperative created by banks that provides the service of transferring money between them. Staying out of this system is a big problem in the medium term. How long would Russia be excluded? What if you decide to retaliate by defaulting on the “West”?

The invasion itself can also be an economic problem, depending on what that means.

In April and May 2014, pro-Russian separatists from the Ukrainian provinces of Donetsk and Lugansk declared independence, with very thinly veiled military support from Russia. A civil war started.

Does invasion mean besieging Donetsk and Lugansk? Worse still, go to Kiev? Create an overland corridor between Russia and Crimea? All this must cost a lot of death and money, apart from the risk of fiasco. Or would Russia just intimidate Ukrainians and pro-NATO and “Western” neighbors with gunfire, cyberattacks and other sabotage?

The economic consequences of an invasion and of real, lasting reprisals can be bad goods, of course. The risk of great mutual harm, for “West” and Russia, too. But a “little invasion” can yield a “little sanction”, cheaper. It can be a reason for hope that further misfortune will happen in Ukraine.