Russia annexed the Crimea. The U.S. and the European Union are developing sanctions, including the freezing of funds and prohibition on entry. We can say that this attempt to punish Vladimir Putin for what he expanded the territory of Russia. Now the market is increasingly heard Express concern about the beginning of a new cold war, the long period of strained relations between the East and the West, writes the American edition of MarketWatch.
The United States seems to have no doubt in the near destabilization of the world oil market. For this reason, according to them, and decided to test the “distribution system”. But America uses the backup reserves of “black gold” not according to the intended purpose.
The Kerch Strait as the “road of life”: it will link the Peninsula to the “mainland Russia” auto-, railway – and energomaterialy. Recommendations from the White house: in order to sell “short”, to speculate and purposefully bearish market.It is expected that the upcoming action will hit economies and markets. In fact, it is not so. The last cold war, which lasted from 1946 to 1989, coincided with a prolonged period of economic recovery.
And yet a new cold war could fundamentally change the world economic order. The result of the confrontation will be six inevitable consequences, including the impact on the European economy, increased defense spending and strengthened support to developing countries.
You can say that in the first place Crimea is part of Ukraine and you can argue freely whether the vote of the people of the region over reunification with Russia or scared of their powerful neighbor. However, there is no doubt that the period of peaceful coexistence between East and West, which lasted more than two decades and began with the fall of the Berlin wall, came to an end. The tension will increase and the threat of conflict will prevail over the global economy.
In essence, the confrontation will be disastrous for development. While wars destroy the economy, enmity, at least not destroying it. Significantly, in the 1950s and 1960s there was a steady rise, and the wage growth was higher than since the collapse of the Soviet Union. In the American market in the midst of the cold war, from 1949 to 1955, was dominated by the bulls. It is the third duration period in U.S. history.
All that can happen is a change in the mechanisms of the world economy. Below are six consequences.
As the European economy deteriorates
Russia cannot serve as an example of the economic miracle, it is extremely heavily dependent on natural resources. However, the Russian Federation is the eighth largest economy in the world, located on the right shoulder of Europe. The volume of trade between the EU and Russia has grown over 10 years from 90 billion euros to 335 billion euros. It helped European companies at a time when the domestic market experienced a decline. For export to Russia accounts for 0.6 percent of gross domestic product. It’s not a big percentage, but still important. If sanctions will be imposed and there will be barriers that affected trade relations, and with it the European economy.
Will increase energy prices
Europe is heavily dependent on oil and gas imported from Russia. About 40% of the gas consumed in Germany comes from Russia, in Austria the figure is 50%. Sanctions will have no value if they do not affect the energy, and Russia hardly exports anything else. Even if you do not impose a direct ban, the rest of the world, apparently, tries to reduce its dependence on Russia. If the supply will decrease, prices will automatically jump is one of the postulates of economic science. Geopolitical instability in the middle East in the 1970s became the reason for the oil shock. Forty years later, the conflict between the West and East can produce something similar, with similar consequences.
The weakening of the Russian economy
The Russian leadership has done nothing to improve the economic situation, relying only on natural resources controlled by friendly businessmen to keep the country afloat. The growth rate has declined and is projected to be 1.5% this year – clearly not enough for a developing market. Sanctions and ban on entry will only exacerbate the situation. How many foreign companies want to invest in Russian projects in the coming years? Not only is this bad for the global economy: emerging markets like Russia is supposed to become the flagship of global growth, but it will create more tension. Poor countries are unstable, which can lead to new problems in the future.
The increase in military spending.
Since the end of the cold war all Western countries have continuously reduced defense spending. Take for example the UK. When the Berlin wall fell, Britain spent 4% of GDP on the military. Now they make up less than 3%. This may seem a minor difference, but one percentage point of GDP is a lot of money. If you need to contain Russia, the costs will inevitably be increased. This will be good news for the defense industry and high-tech development: military spending contributed to economic growth during the cold war. The problem is that this is happening at a time when budget deficits are already high and the government cannot afford the additional costs.
Strengthening of quantitative easing
In a tense, divided world, the funds do not come so easily as it happens in conditions of peaceful international environment. But without foreign capital inflows, governments of countries such as USA, UK and now Japan, are unable to Finance themselves. Rectify the situation? To instruct the Central Bank to print money and buy bonds. This is the only way to stay afloat.
Strategically important economy will be supported.
In Greece extremely left-wing party SYRIZA leads in the polls, and she can win the next election. After the cold war, Western strategists stopped worrying about the fact that in countries such as Greece, can come to power left. But now? Russia has always regarded this country as a good ally, mainly for its ports on the Mediterranean sea. If geopolitical confrontation has once again returned to the stage, no one is going to let Greece fail – this is too important. The same applies to Turkey, which controls access to the Black sea. But Egypt, with its Suez canal. Any country’s geostrategic importance will receive financial assistance, as it was in the 1960s and 1970s.