The Ukraine war is entering into its next phase, where after initial setbacks Russia seems to have gained an upper hand. They have managed to capture and retain most eastern and some southern part of Ukraine. Ukraine forces are fighting with the active help of NATO but they seems to be of lesser match to Russians. Important point is that Russia has not attacked any NATO countries yet, for this active support although there are allegations and warnings from time to time.
Voices from Russia are continuously blaming “Western Oligarchs” for this war and resulting hardship. The two regions which are facing severe problems because of this war are Japan and Europe. In both and especially in Germany the factories have curtailed the productions because of reduced demand due to supply chain problems. In Europe this is also due to shortage of supply of energy. Russia has been continuously reducing the gas supply to Germany and other western countries through its Nordstorm 1 pipeline. It is also expected that they may shut this supply in mid July for maintenance and may not restart the same again. If this happens then it will be a sort of death blow to German and other European industries and severe stress on their financial situation. Germany has for the first time recorded a trade deficit since early 1990s and other European countries are even worse than Germany. The situation is so grim that even most leftist party in Germany is calling for the government to lift sanctions on Russia to save industries! If this war and sanctions continue, Euro, as currency will continue to face severe pressure. It is already at close to parity with USD as of now. The financial sector and especially European Banks will consequently face serious repercussions. The estimated time line for this is next 4-6 months.
The rise in energy prices have also started pinching European citizens. The monthly energy bills have already shot up by 2 to 3 times. They may go even much higher if the situation continues. This may force respective European countries’ governments to take a position which would be different from the NATO. As it can be seen now, US is making Europe fight with Russia and pay the cost of war too. If this feeling becomes common than some European countries may seek compromise with Russia and Western unity will break.
In recent weeks we have seen commodity including oil prices correcting. This may give some reprieve to the inflationary pressure. This seems like an interesting slide as everyone including Fed and other central banks few days ago were warning of impeding inflation risks and hence were increasing interest rates at a pace not seen in last so many years. If this fall in commodity prices continue and with that even oil prices fall steeply, then Russia which is getting all the funding of the war from high oil prices will start facing crunch. This even may force Russia to ease its restrictions on sale of gas to European countries. We will have to see how this unfolds.
One reason for recent fall in oil prices is the possible cap western countries are proposing to make on Russian oil. They are discussing at an advance stage to put a cap on the oil which Russia exports, to a level which prohibits Russia from earning superlative profits which helps to finance Ukraine war. These restrictions, if and when brought in, will limit Russia’a ability to transport and insure Russian oil exports. As most of the major insurance and transport providers are either Americans or Europeans, the restrictions can easily be monitored and such companies can be fined or barred if they do not follow these measures. While on paper these look okay but implementation of these measures will definitely lead to unintended consequences. We have always seen that artificial ban on essentials lead to self created shortages and black markets. This measure alone can lead to oil prices shooting up to a level never seen before. West has really been fumbling to respond to the challenges put forward by Putin so far.
In this situation, there is another x-factor and it is the weather. If Europe has very hot summer and equally chilly winter then it will quickly succumb to the situation and Russia will benefit the most. Whereas mild summer and winter may help Europe to navigate this period with less gas requirements and hence the conflict can prolong.
China still has been quiet although its zero covid policy is becoming more and more intriguing. As for India, going so far has been good, but, it will have critical impact on its forex front as forex reserves have been depleting steadily since last 5/6 months. The prolong war can have significant risks on India’s currency which has been relatively steady as compared to other major global and peer currencies.
Another example of western double standards are seen again in the farmer’s agitations which are going on in different parts of Netherlands. These have been going on for some time and are becoming serious. Yet, there is hardly any media coverage. The Dutch government is dealing with these agitators with a firm hand, same way as was seen when the truckers went on strike in Canada. Western governments are never criticised seriously or there is no closer media scrutiny as it is done when an emerging country faces such issues. India too had its farmer’s strike which were generously covered by western media and government was put under severe scrutiny and pressure from NGOs, western media and even so called liberal western governments. The government in India was forced reverse these reforms affecting billions of its citizens. Both Canada and Netherland governments have not only crushed these agitations but also harassed arrested and even shot at these agitators. But, for strange reasons they have not been questioned or scrutinised. So, when the food on one’s table is at the risk, the liberal principles go out of the windows. Such principles and sermons are only reserved for the lesser mortals of emerging countries governments.
Now to end, we all need to learn and appreciate history. Our fore fathers have always taught us that present and future are dictated by past. Our current generations have been too engrossed in the present and hence tend to loose the focus on past history and struggle to forecast future. Putin has spoken about “Peter the Great”. This clearly give ideas of what Russians are thinking and what their next steps could be. 75 years back, whole of Europe had a history of thousands of years of wars. The EU and NATO were created to evolve peace in Europe. Now, if Russians want to achieve “Peter the Great” moment, can European peace sustain?
-Sandip Parekh
