Ukraine and the Global Economic War

Image: Engin Akyurt


The current war may reconfigure a new economic order to come

The war in Ukraine and the actions of the United States, the European Union and the United Kingdom mean the end of the dollar as a world reserve currency? Even with the peace talks recently held in Türkiye or with the proposed 15-point peace plan, such as the Financial Times had reported previously, the consequences for the dollar still persist. For the first time, Russia, a major nuclear and economic power, was treated as a vassal state, with the United States, European Union and United Kingdom confiscating its $300 billion foreign exchange reserves. What about other countries that also keep their foreign exchange reserves largely in dollars or euros?

The threat to dollar hegemony is only part of the consequences. Complex supply chains, built on the premise of a stable trading regime in line with World Trade Organization principles, also threaten to crumble. The United States is discovering that Russia is not simply a petrostate as they thought, but that it also provides many of the critical materials that the US they need for various industries as well as their armed forces, in addition to the fact that Russia is also an important supplier of wheat and fertilizers.

The seizure of Russia's funds means that faith in the United States as a world banker and in the dollar as a global reserve currency is in question. Why should countries keep any trade surplus and deposit it abroad if that surplus can be seized at will through Western-imposed sanctions? The promise of a dollar as the world's reserve currency was that all dollar surpluses would be safe. With the seizure of $9,5 billion from the Afghan central bank, and redistribution of 7 billion, the United States has shown that it considers another country's dollar reserves held by the US central bank to be its own money.

It can even be an economic asset on the books for a country by holding its foreign exchange reserves at the US central bank. But it is effectively a political liability, as the US government can confiscate this asset as it wishes. The United States has previously demonstrated its ability to impose sanctions against countries such as Iraque, Libia e Venezuela and to confiscate their assets, which resulted in far-reaching negative impacts for these countries. The confiscation of Russia's foreign exchange reserves by a handful of western countries - Colonizing states and former colonies – shows that the so-called rules-based order is now based on the dollar as a weapon of war and the West's control of the global financial system.

Economists – Prabhat Patnaik e michael hudson – and financial experts like Zoltan Pozsar's Credit Suisse are now envisioning a new regime in which another currency or some other variant system will emerge as the new world reserve currency. According to Pozsar, “When this crisis (and the war) ends, the US dollar should be much weaker and, at the other extreme, the renminbi much stronger, backed by a basket of commodities".

What led to these predictions? After World War II, the agreement de Bretton Woods made the dollar the world's reserve currency. It replaced the British pound and was pegged to gold with a value of conversion from 35 dollars to an ounce of gold. In 1971, then-President Richard Nixon ended the system Bretton Woods e removed the “convertibility of US dollars into gold”, which meant that the dollar was now backed only by the US government (or the US Treasury). The dollar, as a reserve currency, had three things going for it in the postwar years: it was backed by the United States, which was the world's largest industrial producer; the United States was the pre-eminent military power even if challenged by the Soviet Union; and was backed for oil from West Asia, the largest commodity marketed, with its price fixed in dollars.

The naming of oil from West Asia, particularly from Saudi Arabia, was critical to the United States and was determined by its military power. O coup in Iran against then Prime Minister Mohammad Mosaddegh on 1953, the blight of 1958 in Iraq, and many other political events in West Asia can be understood more easily if the world understands the importance of oil to the United States.

This was the basis of Carter Doctrine, extending the Monroe Doctrine equivalent to the Persian Gulf region – and reflected the United States' interest in the region and its intolerance of interference by any foreign power there. US foreign policy in West Asia has been captured by anti-war protest bumper stickers and posters for decades, with variations on the phrase, "Our oil is under their sand." The United States' control over West Asian oil, combined with its industrial and military power, ensured that the dollar remained the world's reserve currency.

The fall of the United States as a world industrial power went hand in hand with the rise of China. A measure of China's industrial rise can be seen from a simple comparison provided by the Lowy Institute, using International Monetary Fund data on global trade. In 2001, more than 80% of countries had the United States as their main trading partner compared to China. By 2018, that number had dropped to just over 30% – 128 of the 190 countries “[traded] more with China than with the United States”. This dramatic change has happened in less than 20 years. The reason for it is industrial production: China overtook the United States in 2010 to become the world's largest industrial producer. (India is the fifth largest industrial producer, but contributes only 3,1% of world manufacturing output, versus 28,7% for China and 16,8% for the United States.) It is not surprising that world trade patterns follow industrial production.

Two recent developments are important in this context. China and the Eurasian Economic Union, made up of Russia, Kazakhstan, Kyrgyzstan, Belarus and Armenia, appear to be moving towards a new monetary and international system. India and Russia also seem to be working on a exchange rupee-rubles based on India's need to import Russian weapons, fertilizers and oil. India already had created previously a similar system for buying Iranian oil in rupees. This could also spur increased exports from India to Russia. Saudi Arabia recently indicated that it could also designate its oil sales to china in yuan and not in dollars. If that happens, it would be the first time since 1974 that Saudi Arabia would sell any oil in a currency other than the dollar. This would give the yuan an immediate boost, as more than 25% of all Saudi Arabia's oil is sold to China.

The United States dominates the services, intellectual property (IP) and information technology (IT) markets. But markets for physical goods, unlike services such as IP and IT, are based on a complex sourcing model and therefore have complex global supply chains. If Western economic warfare means pulling Russia's supplies out of the global market, many supply chains are at risk of unraveling. I already wrote about energy war and how the European Union depends on the gas pumped by Russia to Europe. but many others commodities are critical for those who sanction Russia and for those who may now find it difficult to trade with Russia because of Western sanctions.

Incredibly, one of the key elements in the supply chain for manufacturing chips depends on Russia. Russia is a important supplier of sapphire substrates (using artificial sapphires) used in the manufacture of chips semiconductors. The other critical item for manufacturers of chips is neon, whose two main suppliers are located in the southern Ukrainian cities of Mariupol and Odessa. Together they producebetween 45% and 54%” of global neon supply.

Yes, I highlighted earlier the danger that the Ukraine-Russia conflict poses to the European Union's plans on climate change, which could also jeopardize its plan to make gas a bridge fuel. The use of batteries as a key storage element in the renewable energy route also has a substantial weakness vis-à-vis Russia. Nickel is critical for electric batteries, and Russia is the third largest nickel supplier in the world. With the United States and the European Union imposing sanctions on Russia, China, already emerging as the world's largest supplier of batteries, could gain an even more dominant position in the global battery market.

The other supply chain issues that could arise as a result of the Russia-Ukraine war involve palladium, platinum, titanium and rare earth elements. All of these minerals are needed by advanced industries and are likely to be hit by supply chain bottlenecks around the world. They are also on the list of 50 strategic minerals that the United States need as they are critical to their security.

A retrospective look at how global supply chains were blocked during COVID-19 should give the world an idea of ​​what the next crisis could look like and why it could be so much worse than what was witnessed during the pandemic. Sanctions are easy to impose, much harder to lift. And even after sanctions are lifted, the supply chain will not unify smoothly as it did before. Remember, these global supply chains have been set up gradually over decades. Undoing them using the sanctions wrecking ball is easy; redoing them is much more difficult.

The world's food supply will be hit even harder. Russia, Ukraine and Belarus produce a significant amount of fertilizers needed by farmers around the world. Russia and Ukraine are among the biggest exporters of wheat. If Russian wheat is sanctioned and Ukraine's harvest is hit due to the war, it will not be easy for the world to prevent severe food shortages.

There is no doubt that the world is on the brink of major economic change. This tipping point will lead to the complete destruction of the Russian economy, even if Russia achieves a quick peace with Ukraine and there is no NATO-Russia war. Or he will reconfigure a new economic order to come: a world order with cooperative solutions instead of military and economic wars.

*Prabir Purkayastha is a journalist. portal editor NewsClick.

Originally published on NewsClick Portal.

Translation: Fernando Lima das Neves.


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