The reshaping of the world as Ukraine war rages on

Ukrainian servicemen prepare a position for a self-propelled artillery system not far from Kyiv on March 6, 2022. PHOTO: EPA-EFE

BEIJING (CAIXIN GLOBAL) - Political traditions and policy principles upheld for decades were overturned in just a few days as Russian bombs flattened cities in Ukraine, leaving the world to wonder: Where all this will take us?

Since Russian President Vladimir Putin launched his "special military operation" to "demilitarise" Ukraine on Feb 24, Russian troops have advanced into Ukraine territories in several directions in a full-scale invasion in the country's neighbour.

The war in Ukraine is the biggest conflict in Europe since World War II, setting off profound changes to a world order that has been in place since the end of the Cold War, analysts said.

The invasion ignited economic warfare between Russia and the West as major economies including the United States, the EU, the UK and Canada imposed sweeping sanctions aimed at crippling the Russian economy, targeting banks, oil refineries, and military exports.

Battles are also unfolding on social media in an information war capturing attention around the world. Led by social media-savvy President Volodymyr Zelenskyy, Ukraine is winning a fight for hearts and minds that has fuelled global protests against the Russian invasion. Overwhelming grassroots support for Ukraine is driving governments to justify their Russia policies.

The war may drag the world into another Cold War showdown with Europe further leaning toward the US, some experts said. But others said Russia will completely lose the ability to maintain its status as a great power to challenge the West and will be increasingly marginalised after the war.

As the fighting rages on, no one can draw a conclusion on how the Russia-Ukraine confrontation will reshape the world, but Europe is likely to face a tougher, more unpredictable and more isolated Russia. Stiff resistance from Ukraine has so far stopped Russian forces from controlling major cities except Kherson, a key southern Ukraine port city that Russia captured last week.

Russia has been stepping up assaults on cities including Kharkiv, Mariupol and the capital Kyiv. Russian troops are pushing westward toward Odesa, Ukraine's biggest port city and home to a large naval base, in a move to capture Ukraine's entire Black Sea coast. As the war marches on, intense shelling and ground battles are making it increasingly destructive and deadly.

The United Nations human rights office said Friday it confirmed 331 deaths and 675 injuries among civilians in Ukraine and suggested that the true toll was probably much higher. More than 1 million people have fled Ukraine. Russia acknowledged March 2 that 498 of its soldiers were killed in the conflict and 1,597 more injured, the biggest total of military casualties released by the country in recent years. Ukraine said Russia's losses ran into the thousands of dead.

European countries including Germany in a few days have overhauled some long-held political traditions amid turbulent public opinions, shifting away from stances before the war at a pace and in coordination rarely seen.

Financial nuclear war

The fighting in Ukraine has raised fears of a potential nuclear conflict, especially after Putin last week ordered his nuclear forces to be put on higher alert. Although Russian officials including Foreign Minister Sergei Lavrov have increasingly cited nuclear threats in public statements, experts said a nuclear war is unlikely.

Adm. Charles Richard, chief of the US Strategic Command, told a House Armed Services subpanel March 2 that there were no changes to the US nuclear posture following the Russian threats. But a nuclear war in the financial sphere has already begun.

Hours after Putin announced the invasion, the US, Britain and the EU rolled out sanctions on Russia that include restrictions on the sale of Russian debt and a freeze on assets of Russian oligarchs and banks.

On Feb 25, the EU expanded the sanctions list of Russian banks to cover 70 per cent of the country's banking market. On Feb 26, the US, Canada, Britain, France, Germany, Italy and the European Commission imposed new restrictive measures on Russia's central bank to prevent it from using foreign reserves to undermine sanctions. In a further move March 2, Western governments kicked certain Russian banks out of the global messaging system known as SWIFT that enables cross-border banking transactions, a move that some described as a "financial nuclear bomb."

European officials said measures targeting Russia's central bank would freeze about half of the bank's US$630 billion (S$860 billion) of international reserves, hampering its ability to use them to prop up the ruble. This may further trigger a large-scale bank run in Russia, damage the ability and willingness of companies and banks to repay foreign debts, and cause further collapse of the ruble while spurring inflation, shaking Russia's entire macroeconomic order and even its political foundation.

The impacts of the sanctions were immediate. Anxious residents in Moscow and other Russian cities started lining up to withdraw cash, and the ruble plunged as much as 30 per cent against the dollar Feb 28 to a record low. In subway stations, people scrambled to find cash for tickets as Apple Pay and Google Pay ended service for sanctioned Russian banks.

Apart from Russian financial institutions, the US and the EU also tightly restricted Russian companies from raising funds. Sanctions were imposed on enterprises including state-owned gas giant Gazprom and its oil business arm Gazprom Neft, Russia's largest shipping company Sovcomflot, Russian Railways, leading communications operator Rostelecom, and diamond mining company Alrosa.

The Western allies also took steps to limit Russia's access to key technology in areas including semiconductors, telecommunications, aviation and maritime technologies. Airspace bans and sanctions on Russia-funded media were also launched. The sanctions rolled out much faster and more broadly than Russia expected, said Rachel Ziemba, an adjunct senior fellow and sanctions expert at the Centre for a New American Security, a think tank.

Although Russia was prepared after dealing with US sanctions for many years, the quick escalation of restrictions from the US and Europe still destabilised Russia's economy, Ziemba said. Russia may not have expected such a coordinated response from the West, according to Michael S. Bernstam, a researcher at Stanford University's Hoover Institution.

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Before the invasion, the US and Europe differed on potential sanctions such as the SWIFT ban, giving Russia the sense of a split within the transatlantic alliance, Bernstam said. To counter the impacts of the sanctions, Russian authorities have adopted drastic measures to stabilise markets and prevent capital flight, including hiking benchmark interest rates and halting stock trading.

As of March 2, the Dow Jones Russia GDR index, which tracks the performance of 23 Russian stocks listed in London, fell 98% in two weeks, wiping out US$572 billion of market value, according to Bloomberg data.

Russia is likely to be the biggest economic loser in the war behind Ukraine, said Jason Furman, a senior fellow at the Peterson Institute for International Economics. The long-term impacts of the sanctions will not only undermine Russia's economy but will also largely sever its economic ties with other countries, Furman said.

The allies have so far stopped short of sanctioning Russian banks handling energy payments, leaving room for the country to obtain foreign revenue from energy transactions. It reflects Europe's concerns over its heavy reliance on Russian energy, which accounts for 40% of Europe's gas consumption and 26% of oil supplies.

"I don't think Western countries are willing to take the pain of cutting off Russia's energy trade altogether," Ziemba said.

"Under today's economic globalisation, even unilateral sanctions will take into account bilateral trade and be refrained from because it is very likely to hurt oneself unintentionally," a policy banker said.

Sanctions that might topple the Russian economy would be a "very dangerous weapon," Bernstam warned, as such measures in the long run could damage Russia's economy and affect political stability. "The next step after initiating sanctions should be to manage them," Bernstam said. The West needs to cautiously manage the pace and strength of sanctions to avoid humanitarian disasters caused by the complete collapse of the Russian economy and to keep Russia from engaging in military conflict with NATO, he said.

A shifting world

Large scale demonstrations against the war swept streets from Berlin to Bangkok. Driven by turbulent public opinion, European governments swiftly made major policy shifts to coordinate on a slew of issues from sanctions against Russia to military assistance for Ukraine and sheltering refugees. Such moves have been rare since World War II.

The European Parliament passed an unprecedented resolution March 1 calling for efforts to grant Ukraine EU candidacy. Although the resolution was not decisive for Ukraine's accession to the EU and a formal process would still take years, the measure sent a strong political signal.

European countries including France and Germany also reversed a historic policy of never sending weapons to conflict zones. As of March 1, at least 20 European countries said they would send anti-tank weapons, anti-aircraft missiles, guns and ammunition, and other lethal and defensive weapons to Ukraine.

In a significant shift, Germany ramped up defence spending following the Ukraine crisis. Chancellor Olaf Scholz said Feb. 28 his government would set up a special fund of 100 billion euros to upgrade its armed forces and that Germany in the future will adhere to the NATO goal of spending 2% of GDP on defence. The country has kept its military spending below 1.4% of GDP since 2014.

In an unprecedented move, traditionally neutral Switzerland agreed Feb. 28 to enforce EU sanctions against Russian companies and individuals including Putin. Switzerland's move is crucial for making Russia feel the pain of sanctions as its oligarchs have long relied on Switzerland's massive private banking system, experts said.

As the situation in Ukraine deteriorated, neutral countries such as Sweden and Finland, which were lingering on the periphery of NATO, launched formal domestic debates about their own accession to NATO. Georgia and Moldova, neighbouring Ukraine, submitted formal applications to join the EU on March 3 and 4.

But such moves may further fuel Russia's geopolitical security concerns, analysts said. European leaders including French President Emmanuel Macron have been making efforts to mitigate tensions between Russia and Ukraine and advance diplomatic solutions for the conflict.

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"The current crisis will only strengthen our resolve," Laurent Bili, the French ambassador to China, said in a written interview with Caixin. "Finding solutions is the art of diplomacy, and choosing war only adds to the problem." Officials from Russia and Ukraine have met for two rounds of talks in Belarus with a third round to be held soon.

A prolonged war will hurt not only Ukraine and Russia but all of Europe. Global credit rating giant Moody's predicted that a protracted conflict, mounting sanctions and tight energy supplies will drag the euro zone economy into recession between the summer of 2022 and early 2023 and will lead to stagflation.

Shen Liantao, a senior researcher at the Asia Global Institute at the University of Hong Kong, said being emotional offers no help to current international order. An exchange of sanctions will lead to a dead end rather than a truce, Shen said.

"After the 'weaponisation' of finance, there is no way out, and there are no winners," he said.

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