Putin set to score a military win in Ukraine, but geo-economics may eventually lead to his ouster from power

I never tire of recalling what Joseph Schumpeter, one of the greatest economists and scholars in the world, wrote in his monumental tome: The nearer we are to an epoch the less we understand. Our own we understand the least.

It is too early to make an assessment of Russia’s Ukraine war and its implications on the country’s polity and economy. But already some clues are visible.

At this point of time, what is looking certain in the midst of all other imponderables is that Russia will win the military campaign eventually. But, like in the aftermath of the great war in Mahabharata, will Russia itself survive in its present form? That outcome will decide a lot for the future.

This begets the question whether in the twenty-first century it is old-fashioned geo-politics and power play which are the final reckoner or geo-economics will finally overtake it.

The raft of sanctions, which are the weapons of geo-economics of present day, are already biting on Russia and its elites and those who are the ultimate deciders.

The cumulative impact of the sanctions seems to be having a three-fold implosion. First, these sanctions and restrictions are fundamentally destabilising Russia’s macro-economic balance and pushing the economy to the edge of a precipice.

Secondly, personal sanctions on individuals are hitting them personally and their ability to conduct normal business and transactions. This will have eroded their loyalties and steadfastness to Russian president Putin who has so far been bankrolled by these hugely rich oligarchs.

Thirdly, in view of the sanctions and out of disgust at the brutality of Putin’s totally uncalled for war against a far smaller country, big multinational corporations are suddenly withdrawing from Russia. This will have immediate consequences on employment and income creation. Thus, the withdrawal of corporations will have socio-economic impact.

But for now, it is the immediate consequences of the financial sanctions and the fear of a financial crisis which is most pressing.

Some $600 billion of war chest, built by the Russian central bank over years, lies mostly confiscated in the western financial centres as a first measure of the sanctions. Russian banks are out of their international clearing network. Exports of Russia’s mainstay of earning, namely, oil and gas, have been put on hold.

Sanctions are crippling the Russian central bank and its ability to what it is supposed to do. The currency is depreciating every day and it has raised the basic policy rate to unsustainably high levels to stem the slide.

That has not stopped the rouble’s downward drift. Huge volume of funds remain locked up and frozen, not available when these are needed most by its beleaguered banks to keep the internal banking system working.

Banks without funds is like patients snapped of their essential lifeline. As a consequence, they are also not able to serve their primary roles. Long lines are reported in front of bank offices and people are not able to withdraw their own money. This is the surest way to ruin trust in the banks and financial architecture.

Some of the Russian banks’ subsidiaries outside the country have already collapsed. Now a similar development should be expected within the country as well. Bank failures could lead to fear of financial freeze and a total collapse of the system.

The sanctions on institutions and economic entities apart, United States has announced a decision to place sanctions on Russian president Vladimir Putin and his foreign minister, Dmitry Lavrov. European Union and UK also have decided to follow suit.

Sanctioning a head of state and the foreign minister is a public slap on them and it also means a kind of snapping of diplomatic relations in relations with the head of the government. This will be infamy before the Russian people as well.

Both these leaders would be hit personally since they reportedly have huge amount of wealth much of which is invested globally. Admittedly, it would be tremendously difficult to track their ill-gotten wealth and freeze these assets. However, sanctioning them means the search would start for locating their wealth and then confiscating these.

Along with government heads, the immensely rich Russian oligarchs are already facing the same prospects of losing their amassed wealth around the world. A principal location of these investments has been Britain since the last ten years.

Many of London’s most pricey real estate has been bought over by Russian oligarchs and their children are staying in these properties. They are now facing uncertainty and threats in the wake of Russia’s war against Ukraine.

Not surprisingly, some Russian elites have started making noises and reportedly putting pressure on the Russian State to come seriously to the negotiating table with Ukrainian as the economic sanctions have started biting.

The splits are already showing. The Moscow stock exchange has not been reopened this week for fear of a blood bath on the exchange which can cause an imminent financial crash. The central bank is imposing capital controls on transfer of funds out of the country.

Russia can possibly get some help from China. After all, China has the world’s largest pot of savings — over $3 trillion. China could bail it out with ease. But will it really do that?

Given the current mood of the USA and its western European allies, will China’s dealing with Russia also attract sanctions? Two of them together could sustain for a while. However, in their dogged pursuit of punishment for Russia, the western bloc together can punish China as well.

Despite its size and girth, China is vulnerable to threats from USA and European Union. Even today, China is dependent on its exports and critical imports on them. Exports and imports together account for the bulk of its GDP. Hence the threat of effective sanctions could also intimidate China, despite its heft.

A financial collapse, coupled with shooting inflation, sudden unemployment and large-scale impoverishment are what autocrats would fear. A combination of these economic issues could well unsettle an autocratic regime. What is needed is steadfastness in pursuit of these sanctions.

There is no doubt that even after a successful military win, Putin might have to go unceremoniously and Russia can come unstuck. That will show that geo-economics in the present world could be far more powerful than weapons of mass destruction.

Ukraine’s ultimate salvation lies in Russia itself and its people. It may be saved if the Russian people rise in the face of the consequences of an unjust and avoidable war.

(IPA Service)

Views are personal