What a Russian financial crisis could mean for the rest of the world

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NPR
Sunday March 27, 2022

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NPR’s Danielle Kurtzleben speaks with economist Adam Posen of the Peterson Institute for International Economics about the far-reaching effects of Russia’s flagging economy.

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DANIELLE KURTZLEBEN, HOST:

As the US and its allies continue to impose tough financial sanctions on Russia, the country appears to be heading towards a financial crisis. As President Biden put it in a speech yesterday, the Russian ruble has been reduced to, quote, “debris.” Western companies have gone out of business. Russian banks are largely cut off from the global financial system. And last week, Biden pushed to exclude Russia from the G-20, the group of 20 leading economies.

We wanted to understand what an unstable Russian economy could mean for the rest of the world, so we called Adam Posen. He recently wrote an article in Foreign Affairs magazine entitled “The End Of Globalization?” to pursue this very question. He is an economist and President of the Peterson Institute for International Economics, a nonpartisan group that studies the world economy. As we talked, I first asked him to characterize the current state of the Russian economy.

ADAM POSEN: Pretty bad, but not terrible. So they had a sudden stop in access to various technological goods, luxury goods and consumer goods. The purchasing power of their home currency is much less – a fraction, as you said, of what it was before. And so they’re starting to feel some real inflation, and they’re also starting to feel some disruptions in their banking system and their access to finance. But it’s not a disaster yet. I mean, it’s not Greece in 2008 yet.

KURTZLEBEN: Let’s turn to some of the countries imposing these sanctions, including the US. It seems that essentially squeezing Russia out of the world economy involves striking a delicate balance. On the one hand, countries imposing sanctions want to inflict pain and get Russia to end its invasion. On the other hand, they risk damaging their own economy and the world economy. Is that more or less correct?

POSEN: That’s more or less correct. Economics is always a win-win situation, and – not always, but I mean, generally in international trade of this magnitude. So if you do something to Russia or China or North Korea or Cuba, you do something back to yourself because you are missing opportunities. They do without markets. They give up what they have to offer. In this case, however, it is quite asymmetrical. Economically, Russia only has its energy exports to offer. And so Germany, Italy and a few other European countries are really dependent on these energy exports. But almost everything else can be replaced. And even that, as we just heard from the G-7 and European Council meetings, European countries will move very far away from Russian energy production as soon as possible.

KURTZLEBEN: Well, I want to talk about some of the practical implications of all of this. Last week, the Organization for Economic Co-operation and Development (OECD) released a report concluding that this war will weaken global economic growth. According to their calculations, growth will be 1.1% lower than if the conflict had not happened. I want to ask you how does it look like in real life? Does it mean even higher prices, greater shortages of certain commodities than many people around the world currently have?

POSEN: I think that’s a number that’s actually misleading for the practical lives of the people you’re talking about. It’s not about global growth in any abstract way. It’s about who is being denied what. So the Russian people are suffering. The Ukrainian people are obviously suffering. Ordinary people in northern and central Europe will have energy shortages and inflation. The US people will have a little more inflation. But in the developing world, especially in North Africa and the Middle East, there are many of these countries, especially Egypt, that are very dependent on Ukraine for wheat, which makes up a large part of their diet, especially for poorer people. And that’s not easy to replace. There are poorer countries in Eastern Europe that are very dependent on Russia and Ukraine for energy but also for selling their own goods, and that will go away. So where this will be felt will vary greatly depending on where you live.

KURTZLEBEN: In your contribution you point out that the sanctions imposed on Russia are further driving the USA and China apart. Tell us why you think that. Why is this happening?

POSEN: Well obviously the US and China have become increasingly suspicious or even hostile to each other, and I mean their governments, not necessarily their peoples. And so the conflict and separation was already building. What I think the Russian invasion of Ukraine and then the sanctions do is they speed up this process because China has to be very careful. They have Russia as their national security ally. They want to weaken the US economically. You want to be a great player. But at the same time, if they support Russia too openly, they will violate US and allied sanctions, and that will really hit their economy. But in the meantime, unless China publicly condemns Russia and joins in sanctions, it will not be seen as enough in the US, and particularly in the US Congress. So I think that unfortunately this is a breaking point where the two sides will continue to separate even if they have already started to do so.

KURTZLEBEN: And here we are approaching one of the larger ideas in your article, which is that globalization itself has already come under some attack, as evidenced by the rise of populist nationalists in several countries. How sustainable is the effect of global economic integration here?

POSEN: Unfortunately, again, I think it’s going to be quite extensive. Now we can separate for good reasons. As I said in my article, there are things that are more important than economic efficiency, like human rights, like national security. But that doesn’t mean one can ignore the economic costs of dividing up the world in this way. And there will be significant costs. Is this the turning point like, sadly, say, the First World War again? God forbid. But is this a tipping point where multinationals and governments will increasingly say I may have to choose sides? I may need to double my investment to make sure I’m in a safe place if I want to export or produce in China or export or produce in the US. And then it cascades. Then you have different business relationships, different technological standards, less competition, less diversity. So this is a big deal. It may be necessary because of ethical and geopolitical divisions, but it is costly.

KURTZLEBEN: That was Adam Posen. He is the President of the Peterson Institute for International Economics. You can read his article “The End Of Globalization?” in Foreign Affairs magazine. Adam, thank you very much.

POSEN: Thanks for having me, Danielle.

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