Although India may have to deal with strategic and economic consequences of the Ukraine standoff, New Delhi will have little influence over developments in Europe. Being a close strategic partner of Russia, the United States and the European Union, it can only hope for a “peaceful resolution of the situation through sustained diplomatic efforts” — as the External Affairs Ministry spokesperson stated recently.
At a time when the US and Europe had started focusing on an assertive China, suddenly Russia has again become their main strategic challenge. As western foreign policy focus and resources are going to be deployed on the European security situation, this may take away some of their attention away from Asia and the Indo-Pacific narrative. This may also further deepen Russia-China strategic ties.
Although it has been mainly portrayed as a Russia-Ukraine crisis, Moscow’s ambitions are much bigger. Russia is trying to alter the post-Cold War security architecture in Europe, which has been dominated by the US and NATO. It wants long-term legal guarantees “which would exclude NATO’s further advancement to the east and deployment of weapons on Russia’s western borders”. So, it is seeking not just a ban on Ukraine entering NATO, but also a roll back of troop deployment in Eastern Europe.
US President Joe Biden and many European leaders have repeatedly warned that in case of military intervention in Ukraine, Russia would face massive economic consequences. Though the nature of economic measures will depend on the seriousness of the situation, policy makers and companies in all major economies have started preparing for possible disruptions.
Responding to Russian actions in Crimea and Eastern Ukraine in 2014, the EU and the US imposed sanctions against Russia, which have been reviewed and renewed periodically.
The EU has imposed asset freeze and travel ban on 185 people and 48 entities so far. Other measures include ban on arms trade; export ban for dual-use goods; restricted access to certain sensitive technologies as well as limited access to EU primary and secondary capital markets by Russian banks and companies. Similarly, the US has imposed Ukraine-related sanctions on about 735 persons. Sectoral sanctions also apply to Russia’s financial, defence, and energy sectors.
In response, Moscow has its own list of representatives of EU member states and institutions who are prohibited from entering Russia. It has also imposed a ban on food imports from the EU and the US.
Despite the 2014 Ukrainian crisis, the EU and Russian economies are still significantly engaged with each other. With about $190 billion goods and $30 billion services trade, the EU was Russia’s biggest trading partner in 2020. The EU imports about 40 percent its gas and 25 percent oil from Russia. Out of $105 billion imports from Russia, about 70 percent EU imports were fuel and mining products, mainly petroleum. Similarly, with about $350 billion FDI stock, the EU was also the biggest investor in Russia in 2019. Russian companies have also invested about $150 billion in the EU. The US’ economic ties with Russia are much smaller.
As Russia is a major energy producer and exporter, a war in Ukraine can have a serious impact on oil and gas markets. It could happen either because of Moscow’s use of gas exports as a tool for leverage, or because of economic sanctions imposed on Russia. Oil prices have already hit a seven-year high. If the situation deteriorates, the Nord Stream 2 gas pipeline from Russia to Germany may not fructify.
Traditionally, EU-Russia energy interdependency has worked. But to retaliate against any serious economic sanctions, Russia can give a brief energy shock to Europe. The Economist estimates that a complete cut-off of piped gas to Europe will cost Gazprom between $203 million and $228 million a day of lost revenues. A three-month disruption would cost $20 billion to Russia. Since Moscow is sitting on over $600 billion of foreign exchange reserves, a limited period cut-off cannot be ruled out. The US and EU are already working together to source alternative supplies of gas.
There are also discussions of using the economic ‘nuclear option’ of disconnecting Russia from the global banking system by cutting it off from the SWIFT. This could seriously disrupt energy and metal markets as well as operations of foreign firms in Russia.
The Iranian economy faced serious consequences when it was disconnected from the SWIFT in 2012. Concerning Russia, a SWIFT cut-off was proposed by the UK in 2014. The Russian authorities then called it tantamount to “a declaration of war”.
The European Central Bank has already warned banks with Russian exposure to be prepared for sanctions. Banks having significant exposure in Russia include Citigroup, France's Société Générale, Austria's Raiffeisen and Italy's UniCredit. In the energy sector, British Petroleum, Shell, Exxon, and ONGC are seriously engaged in Russia.
Overall, the emerging security situation in Europe may negatively affect India’s energy import bill, complicate strategic choices, and create difficulties in arms imports from Russia.
Gulshan Sachdeva is Professor at the School of International Studies & Coordinator, Jean Monnet Centre of Excellence, Jawaharlal Nehru University.
Views are personal and do not represent the stand of this publication.
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