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A Yemeni worker carries a bag of flour outside a wholesale store in the capital Sanaa, on March 27, 2022. With the country almost completely dependent on imports, aid groups say the situation will only worsen following Russia's invasion of Ukraine, which produces nearly a third of Yemen's wheat supplies. (Photo: Mohammed Huwais/AFP via Getty Images)

Russian Sanctions, Corporate Profits, and the Globalized Economic Pain of the Ukraine War

While the Ukrainians are paying for their democracy with their blood and their lives, our financial system should not allow powerful elites to profit endlessly as working people pay the price.

Russia’s catastrophic attempt to gain re-entry into the league of great powers, after its re-entry into capitalism reduced the country to a raw materials supplier to stronger economies, calls to mind Kalecki’s remark about the fascist promise to humiliated nations after the First World War, that ‘roads to glory lead to war.’ In the violence into which this latest ‘road to glory’ has descended, it is sometimes forgotten that Russia may possess the largest army in Europe (and possibly in the world, depending on how much weight is given to reserve soldiers). But economically it has not recovered from the loss of the peripheral republics of the old Soviet Union, and the ‘shock therapy’ of economic liberalization after the Russian government abandoned socialism. The World Bank estimates that Russia now is merely the 11th largest economy in the world, not only after the United States, China, and Japan, the European behemoths of Italy, France, the United Kingdom, and Germany, but also the ‘emerging markets’ of India and South Korea.

Economic sanctions against Russia are adding to a major redistribution of income from workers and middle-class consumers to profits in international trade.

Russia’s claim to great power status is therefore based on its stock of nuclear weapons, its economic function as a petrol pump for Europe, and an army that is far from sweeping all before it in Ukraine. It is to prevent the use of these weapons (and save on military casualties among their own citizens) that the powers in Europe and North America have preferred to use economic sanctions, in the hope that further impoverishment degrades the national dignity that is being restored with such violence and might evoke mutiny in the Russian elite. The possibility of such a mutiny cannot be accurately assessed by anyone outside the Kremlin. And further impoverishment will be significant but will affect largely the consumption of the wealthier middle classes, who have the most to lose from payment restrictions on imported goods and the joys of foreign travel. Although there are reports of Chinese banks refusing letters of credit to Russian customers out of fears that they may be declined facilities by US banks or face fines of their subsidiaries in the US, Russia retains access to the international payments system of China. And the Indian government is helping to set up a system for the exchange of rouble-rupee payments, although Indian banks will also be wary of possible retaliation by the US. Russian foreign exchange controls require traders to surrender 80% of their foreign earnings for conversion into roubles, and the Russian government has demanded payment for Russian oil in roubles. This is helping to stabilize the rouble exchange rate, after it fell to nearly half of its pre-war value against the US dollar, while international prices of oil and natural gas are benefitting from additional supplies.

However, much of these restrictions on foreign exchange transactions are journalistic hyperbole: The demand for payment in roubles is actually a requirement to deposit dollars in Sberbank or Gazprombank to buy the roubles required to pay for oil. And the obligation placed on traders to surrender dollars means that the Russian foreign exchange market has in effect been brought onto the balance sheet of the Russian central bank, where the central bank decides the rate at which it buys those compulsorily exchanged dollars.

The talk in the commodity markets is of the emergence of a two-tier system in which a fairly high official price is paid for energy and raw materials, but half the price is charged for such products from Russian sources. Similarly, Russian consumers may expect to pay well above the market price outside Russia for their imported goods. In the food-deficient Middle East, food prices are already rising and will rise further, as war affects Ukrainian agriculture. This coincides is the breakdown of cheap off-shore manufacturing, as global supply chains are disrupted: At the beginning of March, Volkswagen temporarily stopped production of electric cars in its factory in Zwickau due to the failure of supplies from Ukraine.

These unprecedented shifts in international markets have moved our business and financial leaders, on whose wisdom and foresight our prosperity is supposed to depend, to declare a new (inflationary) era in world economic affairs. Towards the end of March, as the war entered its fifth week, Larry Fink the Chief Executive of BlackRock, the world’s largest asset manager, wrote to his shareholders at the end of March that ‘The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades… A large-scale reorientation of supply chains will inherently be inflationary.’ (Financial Times 26 March 2022). Fink had in mind the disruption to cross-border supplies due to the war and revulsion against doing business with Russia.

But globalization is more than this, and less. It is more than just ‘global supply chains’ assuring cheap raw materials and components to assembly plants on the fringes of industrial centers. Behind this is a system of worldwide payments, necessary for settling trade and debt obligations in different countries. The Society for Worldwide Interbank Financial Telecommunications, or SWIFT, is a network of 11,000 banks around the world through which most cross-border payments are routed. Although ostensibly a co-operative of member banks, it has agreed to remove select Russian banks from its messaging system, through which cross-border payments are made. However, Sberbank and Gazprombank have so far been spared expulsion from the payments system because German oil and natural gas importers pay for their imports through those banks. Pressure is now building up in Germany and Austria to eliminate such imports. But as long as imports continue, the banks through which they are paid have to be allowed to transfer such payments.

The US Federal Reserve also offers currency swap facilities to selected other central banks, in Europe, but also in Japan, Mexico, Brazil, and South Korea, allowing those central banks to draw dollars that are necessary as backing for many international transactions. The central banks outside the US, benefitting from these facilities, will of course be careful not to jeopardize their access to currency swap facilities by allowing commercial banks to make payments that bypass US sanctions. This is in addition to the freezing, shortly after the invasion of Ukraine, of up to 40% of Russian reserves held in markets outside Russia.

It is possible to argue that this international payments system is really at the heart of what is called globalization because it is the system that allows money and capital to flow between countries. In the heady years following the dissolution of the Soviet Union, when Francis Fukuyama celebrated the end of history, this international integration of finance underpinned the globalization announced by Anthony Giddens and Zygmunt Bauman. But the lived experience of globalization was always less than this. Russia and China did eventually join the World Trade Organisation and the International Monetary Fund. But the development of free trade and international payments systems was largely regional, most notably in Europe with the establishment of the European Union and its Single European Market, and in North America with its North Atlantic Free Trade Agreement (superseded in 2020 by the US Mexico Canada Agreement), with other regional agreements in the cone of South America, in West Africa, Southern Africa, and South-East Asia. Most of the world’s population, in India, China, and the poorer countries of the world, make no use of international payments and live in countries where cross-border trade and its associated payments are strictly controlled. In those countries, only a wealthy minority with financial assets in off-shore territories, such as Mauritius and tax havens in the Caribbean, can move their deposits freely around the world. And even in countries where such payments are unrestricted, that freedom is only within the territories of associated countries. ‘Globalization’ always promised more than it delivered.

This system of regional trade and payments areas was already fragmenting before the War in Ukraine. The most spectacular case has been the departure of Great Britain from the European Union, ‘going global’ to set up barriers to international trade and payments. But perhaps the biggest push towards that fragmentation has been the use of economic sanctions by the United States as an alternative to military persuasion, which is perhaps Donald Trump’s most significant innovation in statecraft. Sanctions require only an Executive Order signed by the President of the United States. But US banks also have a central position in the international financial system. US commercial banks provide dollar-based foreign exchange swaps (between commercial banks, backed also by central banks’ currency swaps with the Federal Reserve) as security for credit transactions in other currencies. This means that banks in other countries cannot bypass US sanctions without losing the foreign exchange swap facilities with US banks that foreign banks need to conduct their business. This banking and financial power will now ensure that most banks around the world fall into line with US sanctions.

Over time, the economic sanctions imposed in support of Ukraine will have important economic consequences. The cost of living in virtually all countries of the world will rise, on top of the price inflation that was already taking off even before the war started. This will be blamed on the war, and declared by all right-thinking people to be part of the sacrifice that is necessary to defend democracy and peace against autocracy and war. But, short of rationing, natural catastrophe (such as Covid), and war, there is very little that makes people change their patterns of day-to-day expenditure, even if they may now season their expenditure with complaints about the prices now being paid for their customary shopping. This will allow the government of Russia and its friends to declare that the economic impact of sanctions has been contained and they are not really working.

However, there is something else that is happening that is no less real than inflation, even if it is less obvious than the rise in inflation. When international markets and payments systems fragment, it is the arbitrageur who makes money, at the cost of producers and consumers. Consider the market for luxury imported goods in Russia, such as German cars or French wines. These will not cease to be available in Russia. But they are already becoming much more expensive, both because of the depreciation of the Russian rouble against the Euro, and because of the more roundabout methods now necessary to secure shipments of these goods and pay German and French exporters for them. In the oil market, traders will seek out Russian oil that they can buy at a much lower price, in devalued roubles perhaps because of sanctions, but refined products like petrol will be supplied at a price above the much higher price for non-Russian oil.

In short, economic sanctions against Russia are adding to a major redistribution of income from workers and middle-class consumers to profits in international trade. It reinforces the boost to profits in the armaments industries as governments around the world expand their military capabilities and supplies to the combatants in Ukraine. This shift in distribution comes at a time when, in the recovery from Covid, business corporations are raising their prices to recover revenue lost due to measures taken by governments to suppress Covid, and to repay the debts run up by those corporations during the pandemic. Profiteering from military and economic warfare needs to be exposed and challenged. Given the existing institutions of international capitalism, it is difficult to suppress such profiteering. But it can be taxed, as such profits were in Britain and the United States during the Second World War, to pay the costs of aid to Ukraine, refugee relief and the reconstruction of health services, and to protect the living standards of the less well off. Our captains of business and generals of finance should welcome the opportunity to contribute to the defense of liberal values. The Ukrainians are paying for their democracy with their blood and their lives; working people and their families around the world should not also have to pay for the profits that are made out of that struggle.


Jan-Anita

Jan Toporowski

Jan Toporowski is Professor of Economics and Finance at SOAS, University of London, Visiting Professor of Economics at the University of Bergamo, Italy, and Professor of Economics and Finance at the International University College, Turin, Italy.

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