Global

The Cost of Caring in a Global Economy

WRITTEN BY LUKA BORICH


How does one plunge their economy into severe recession, undo decades of efforts to build an economy, commit untold war crimes and attempt to redraw the Iron Curtain from which they have barely emerged from? Putin is how. History – if not the Hague – will judge Putin as the driving force behind one of the most public invasions in recent times. The immediate impact on the world has been significant, and only projects to get worse. New Zealand is no exemption to this. But what has this taught us about a global economy?

A word on Ukraine: It goes without saying that the Ukrainian resistance and counter-offensive has been nothing short of remarkable. Russia outnumbers Ukraine’s military five to one, yet the Ukrainians are digging in. Russia has taken territory, but Ukrainian combat soldiers and civilians have made them work for every inch. They are far braver than I. President Zelenskyy is a leader of leaders. Slava Ukraini.  

The invasion began on the 24th of February. Five weeks in, and the totality of sanctions from other nations are becoming entrenched. SWIFT, Russian oil and steel are among the headliners. Companies including Apple, Nike, McDonalds, Samsung have all closed stores. KPMG, American Express, PwC have all withdrawn to some extent. 

This leads us to the first big lesson from the Putinvasion: global demand doesn’t come without global supply. The reality of international dealing - the art of importing and exporting – means Russian demand follows Russian supply. If we stop accepting their oil and steel, they will stop accepting our dairy and seafood. Sanction us, we sanction you back.

For the year ending June 2021, our exports to Russia approximated $293 million. On one level, that is overwhelming. But numbers deceive us without context. Russia is (I guess ‘was’ is more appropriate now) our 27th largest trading partner and accounts for 0.5% of our global exports. Relatively speaking, this is neither negligible nor overly significant. The dairy industry makes up the majority of our exports to Russia, specifically butter. But outside of ‘Big Butter’, the Ministry of Foreign Affairs and Trade do not project a groundswell of impact in this regard.

In all likelihood, the palpable impact of sanctions on Russia will be indirect. Ukraine and Russia are among the largest exporters of wheat globally. Neither are in a position to export at this juncture, and thus the cost of key raw materials may put pressure on inflation. Russia is hardly inclined to export other key minerals such as aluminium and palladium, the latter of which Russia supplies 43% of the global supply. This has already led to a rise in shipping costs and smelters have closed due to the cost of power.

Uncertainty of foreign exchange markets has led to a collective loss of confidence in the stability of some currencies (cough ruble cough). The subsequent retreat to safer currencies such as the US Dollar and commodities such as gold will likely cause depreciation in the NZD, which will improve export competitiveness at the cost of inflated imported goods.

Some may argue that the spike in energy prices is karma to a global economy that over relies on (Russian) oil. And I agree that the world should be greener. Hiding in the shadows however is maybe the most important takeaway from Russia invading Ukraine: our ‘global’ economy is not as global as we pretend it to be.

One example is the reliance on Russian oil when alternatives exist, such as in African nations. Geography works against us here; countries cannot provide what they do not have, and thus to an extent where we get our resources is not always up to us. Moreover, importing many commodities from one country may bring economic efficiency.

I wonder what that efficiency means to those in Kharkiv or Mariupol or Kyiv right now. Countries have been reasonably active in sanctioning Russia, but the power Russia possesses is somewhat a product of the environment in which the world operates. Not all governments are democratic and not all share a similar adherence to principles of human decency, yet we deal with them anyway. In this context, it is hard to be surprised at what Putin has been willing to do. 

Don’t get me wrong: sanctions work. They can compel governments to do – or not do – things that they otherwise would but for the threat of sanctions. Economic pressure is a ‘soft’ power insofar as it doesn’t involve violence, but it absolutely has an impact. 

Ultimately, sanctions will always be found between demand and supply in the dictionary. Maybe that’s poetic. Sanctions run afoul to free trade after all. What has been and is to come are the consequences of operating in a global economy. To us in New Zealand, that is the charge of doing business with an oligarchy. To those in Ukraine, it’s the cost of caring. And it’s totally worth it.