Recent history makes us think of Russia as a global superpower, which it is not. The Russian economy has no global muscle, and Moscow needs to work with others to secure its future.
In terms of GDP, the Russian economy is about the size of Brazil’s. The GDPs of Texas, California and New York are each larger than Russia’s, as are those of Italy and South Korea, among others.
Russia’s power lies in energy based on natural resources, a commodity much needed by the neighboring European Union.
The entire European production apparatus is tied to Russian energy. The conflict in Ukraine makes energy more expensive, weakening the EU and benefiting Russia. Russia’s current account surplus more than doubled during the January-February 2022 period compared with a year earlier.
The more sanctions that Europe imposes on Russia, the more expensive oil and gas become for the EU.
The recent fuel price hikes in European countries, including many members of NATO, tell of the pain — except for the United States, however, which went in the opposite direction, buying more Russian oil earlier this year.
And further, this does not take into consideration the impact of the devalued Russian rouble and contested ownership of the assets Western companies have left in Russia.
First, the devaluation enables Moscow to buy, at cheap prices, Russian companies held by American and European persons and entities.
Second, if Moscow moves forward with threatened legislation, the assets owned by companies that left Russia in response to the “special military operation” in Ukraine will soon be in Russian hands. In the airline industry alone, an estimated $10 billion worth of aircraft owned by Western leasing companies are trapped in Russia.
Whether Russia, without the expertise, can run Western companies, remains to be seen. It is unclear if full know-how is even relevant in most cases. After all, operating restaurant chains, luxury stores and airlines is not some indecipherable mystery.
McDonald’s will be an interesting case to watch. With about 850 stores in Russia, the fast-food chain announced on March 8 that it was ceasing operations in the country.
On March 12, a Russian state-owned corporation filed a trademark application, using a twisted yellow golden arches logo. It is said the golden arches will be rotated at all the stores McDonald’s left behind and they will be rebranded as Uncle Vanya’s.
Meanwhile, one of the most serious issues for the West is that sanctions have succeeded in driving Russian banks out of the institutions they control, such as the SWIFT banking transaction system — the Society for Worldwide Interbank Financial Telecommunication.
In institutional terms, it is more important to be the owner of the rules of the game than a player. The king makes the rules. The SWIFT system no longer operates in Russia, leaving only a few options for Russian entities and individuals to make cross-border transactions. Cryptocurrencies or the Cross-Border Interbank Payment System from China are the only options now at hand for Moscow.
With all the sanctions it has produced, the US government wants to believe that Russia’s President Vladimir Putin is pulling his hair out in anger, that he wants to go to the party in Brussels, and that he will have to go to Paris to buy a dress because there are none left in Moscow.
Furthermore, with the economic sanctions, the members of NATO have undermined their credibility and trust.
With the freezing of Russian reserves, all the countries of the world now have a reason to distrust Europe or the US as the guardians of their reserves. Confidence in the financial system has taken a blow to the jaw — and that jaw is going to need reconstruction.
This unfolding scenario generates more doubts than certainties about the US dollar as a reserve currency, confidence in US institutions, and the value of being a US ally.
Luis Garcia is an economist from Purdue University, Indiana, with a master’s degree in philosophy from American University in Washington DC and an MBA from Los Andes University in Bogota.