Russia annexed Crimea. The United States and the European Union are developing sanctions, including freezing accounts and a ban on entry. We can say that these are attempts to punish Vladimir Putin for expanding the territory of Russia. Now the market is increasingly voiced fear of the beginning of a new Cold War, a long period of tensions between East and West, writes the American publication MarketWatch.
The United States does not seem to doubt the near destabilization of the global oil market. It is for this reason, according to their data, that it was decided to test the “distribution system”. But America does not use the reserves of “black gold” for its intended purpose.
The Kerch Strait as the “road of life”: it will connect the peninsula with the “mainland Russia” auto, railway and energy arteries. Recommendations from the White House: in Russia you can only sell short, speculate and purposefully play to lower the market. It is assumed that the upcoming measures will hit economies and markets. Actually this is not true. The last Cold War, which lasted from 1946 to 1989, coincided with a long period of economic recovery.
Still, a new Cold War could fundamentally change the global economic order. The confrontation will result in six inevitable consequences, including a blow to the European economy, increased defense spending and increased support for developing countries.
You can claim that Crimea is primarily part of Ukraine, and you can also argue whether the region’s inhabitants voted freely for reunification with Russia or were scared by a 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, has come to an end. Tensions will increase, and the threat of conflict will dominate the global economy.
In essence, the confrontation will not be catastrophic for development. While wars destroy the economy, enmity at least does not destroy it. It is authentically that in the 1950s and 1960s. a steady rise was observed, and wage growth was higher than since the collapse of the USSR. In the American market at the height of the Cold War, from 1949 to 1955, the bulls dominated. This is the third longest period in US history.
All that can happen is a change in the mechanisms of the world economy. Below are six implications.
The state of the European economy will worsen
Russia cannot serve as an example of an economic miracle; it is extremely 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 the Russian Federation has grown over 10 years from 90 billion euros to 335 billion euros. This helped European companies at a time when the domestic market was in recession. Export to Russia accounts for 0.6% of gross domestic product. This is not a big share, but still important. If sanctions are imposed and barriers arise, trade relations will suffer, and with it the European economy.
Energy prices will rise
Europe is heavily dependent on oil and gas supplied from Russia. About 40% of the gas consumed in Germany comes from Russia, in Austria the figure is 50%. Sanctions will not matter if they do not affect energy, and Russia is unlikely to export anything else. Even if a direct ban is not imposed, the rest of the world is likely to try to reduce its dependence on Russia. If supplies decline, prices will automatically jump – this is one of the tenets of economic science. Geopolitical instability in the Middle East in the 1970s. caused oil shock. Forty years later, the conflict between the West and the East can give rise to something similar, with similar consequences.
Weakening Russian economy
The Russian leadership has done nothing to improve the economic situation, relying only on natural resources controlled by its friendly businessmen to keep the country afloat. The growth rate has already decreased and is projected to be 1.5% this year – clearly not enough for the emerging market. Sanctions and a ban on entry will only aggravate the situation. How many foreign companies will want to invest in Russian projects in the coming years? Not only is this bad for the global economy: emerging markets like Russia are supposed to become the flagship of global growth, but this will create even more tension. Poor states are unstable, and this is fraught with new problems in the future.
Increased military spending.
Since the end of the Cold War, all Western countries have continuously reduced defense spending. Take Great Britain for example. When the Berlin Wall fell, Britain spent 4% of GDP on military needs. Now they make up less than 3%. This may seem like a slight difference, but one percentage point of GDP is a lot of money. If Russia needs to be contained, spending will inevitably be increased. This will be good news for the defense industry and the development of high technology: military spending contributed to the boom during the Cold War. The problem is that this happens at a time when the budget deficit is already large, and governments cannot afford the extra costs.
Strengthen quantitative easing
In a tense, divided world, funds do not flow as easily as they do in a peaceful international environment. But without the influx of foreign capital, the governments of countries such as the USA, Great Britain, and now Japan, cannot finance themselves. Correction of the situation? Assign the central bank to print money and buy bonds. This is the only way to stay afloat.
Strategically important economies will receive support.
In Greece, the far-left party SYRIZA leads the polls and can win the next election. After the Cold War, Western strategists no longer worried that leftists might come to power in countries like Greece. But now? Russia has always regarded this country as a good ally, mainly because of its ports in the Mediterranean. If the geopolitical confrontation returns to the scene again, no one is going to let Greece go bankrupt – this is too important. The same applies to Turkey, which controls access to the Black Sea. And Egypt with its Suez Canal. Any country of geostrategic importance will receive financial assistance, as was the case in the 1960s and 1970s.