Finance
comment 1

Economic Disruption Caused by Conflict in Ukraine and Syria

The negative effects of infrastructural damage caused by the recent conflicts in Syria and Ukraine continue to transgress borders, ultimately damaging the global economy.

By Bruno Cervantes

Conflict often yields economic disruption. World War I culled the world’s first attempt at globalization. Similarly, World War II brought never-before-seen destruction to Europe. Just a few decades ago, the collapse of the Iron Curtain (1989) and the dissolution of the Soviet Union (1991) were seen as the end of an era of continuous proxy wars. Nonetheless, the fear of nuclear annihilation has been replaced with that of terrorism, and the violent cycle continues.

A rational economic perspective discourages heavily militarized conflict. Excluding isolated countries such as North Korea and, to a lesser extent, Cuba, the cost of economic sanctions and disruptions in balances of trade should discourage any type of aggression. Unfortunately, conflicts like the Iran-Iraq and Vietnam wars, as well as the United States’ incursion in Afghanistan, demonstrate how ideology and third-party profit can coerce countries into open conflict. Currently, the Syrian civil war and the situation in Ukraine exemplify conflicts that bear significant economic impact in their regions.

 

The Syrian Civil War

The Syrian civil war has devastated Syria and its neighbours. Syrian exports have dried up significantly. According to Deutsche Welle, a German newspaper, Syria’s commodity exports (totaling $2.73 Billion in 2010) have been reduced by 75% after three years of continuous warfare. However, this should be a lesser concern. The country’s loss of human and infrastructure capital is astonishing. As of April, 2013, around 190,000 Syrians have perished since the beginning of the conflict. Moreover, 4.1 million people have been displaced internally and about 3 million have become refugees in neighbouring countries, such as Turkey, Iraq and Lebanon. This loss of population should not be seen as a workforce loss in itself; rather, it is as an intellectual loss. It is reasonable to believe that a significant number of educated Syrians have fled the country. This exodus may hinder reconstruction attempts after the conflict ends. According to UN estimates, it will take Syria 30 years (an entire generation) to recover from the economic devastation brought by this civil war.

The economic impact of the Syrian civil war on the region, and the entire world, is no laughing matter. The sudden influx of refugees will likely affect the neighboring countries’ economies and societies. Currently, Iraq is among the worst hit. Under a state of siege by IS (Islamic State) and crippled by political instability, Republican Iraq is at the risk of becoming a failed state. In the last few years, Turkey, a long-standing pillar of stability, has experienced civil unrest due to the ever increasing autocratic methods of President Recep Tayyip Erdogan. Lebanon is also coming under fire from ISIS which has expanded its operations from Syrian to Lebanese territory. Above these, Syria’s eligibility for the construction of a key pipeline connecting Europe with Saudi and Qatari petroleum augments the conflict’s global reach. Talks of such a pipeline began in 2010, but came to a halt at the start of the conflict.

Globally, the impact of the Syrian civil war has had a multi-tiered effect. Russia has benefited, for it provides the Assad regime with modern weapons. Moreover, Russia continues to provide financial support. Support for Assad, and obstruction of all plans corresponding to the aforementioned pipeline project, translate to the continuation of Russia’s natural gas monopoly. Bear in mind that Russia is Europe’s major gas supplier and such pipeline is likely to make Saudi and Qatari petroleum competitive enough to displace Russia as the main supplier of energy to Europe. Hence, it is in President Putin’s best interest to support Assad at the risk of diminished exports and influence in Europe. Yet, not all is rosy for Putin. Pressure from Russia’s incursion into Ukraine, as well as support of what is considered to be a genocidal regime, has yielded economic sanctions from the EU (European Union) and the US (United States). So far, these sanctions have been symbolic; nonetheless, they may become more constrictive.

On this note, the global weapons market is likely to expand, as American and European manufacturers supply friendlier countries with equipment to stop IS’s onslaught. Currently, Germany and the US (United States) provide modern weapons to Iraq. Other countries, such as Kuwait, may also bolster their defence to prevent an invasion – this time led by Islamists. Iran is also experiencing an increased surge of influence in the region due to its West-endorsed rejection of IS. In response to the conflict, Iran is providing military and economic aid to Iraq to bolster its crippled armies.

Even the EU has begun to come under strain. Multitudes of refugees are entering Spain, Portugal, and Italy to escape from violence in Africa and the Middle East. Efforts to deal with an ever-increasing humanitarian crisis are likely to take a heavy toll on a number of Europe’s economically depleted countries. Moreover, thanks to the Syrian civil war, the rise of IS is likely to endanger European collective security. There is an increasing number of European and American citizens, particularly young adults, enlisting to fight in the name of a global Jihad. Security expenditure may rise to counter this threat, but it is unlikely that the already battered Eurozone will eagerly put money into security after calls for years of austerity. While the US holds diminished energy interests in the region (thanks to the discovery of Shale gas reserves on American soil), it is unlikely that it will keep its arms crossed. The rise of IS may render fruitless all the years of American involvement in Iraq and Afghanistan.

 

The Conflict in Ukraine

It came as a surprise earlier this year when 30,000 Russian troops, aided by a similar number of protesters, successfully invaded and took over the Ukrainian-controlled Crimean peninsula. Soon after, the self- proclaimed republic of Donetsk began its secession efforts from Ukraine, supported (politically, militarily and economically) by President Putin. This was considered to be a response to the overthrowing of Pro-Russian President Viktor Yanukovych, following five days of protest against a controversial trade agreement with Russia and the cancellation of a treaty with the EU. As his justification for the invasion and subsequent annexation of Crimea, President Putin claimed that the revolution that toppled Ukrainian leadership endangered the lives of the Russian majorities. Additional to the obvious economic damage caused by possible confrontation between the two former Soviet Republics, the conflict’s geographical proximity to the EU has amplified its global impact.

Clearly, the main economic protagonist is Ukraine. The country has lost close to three million inhabitants, several fields of gas and oil, and substantial revenue from tourism. Ongoing conflict against Pro-Russian rebels in Donetsk has affected the economic outlook further, for the area’s economy depends highly on heavy industry. Additionally, hostility with Russia yields even more damage, for Russia is Ukraine’s second largest trade partner after the EU.

Ukraine’s picture is not absolutely bleak. The EU and the IMF (International Monetary Fund) pledged to assist Ukraine with aid exceeding USD $20 billion. Moreover, Ukraine is expected to hasten its bid for integration into the EU, conditional on undertaking several market reforms. By doing so, Ukraine will gain access to generous amounts of credit, the EU’s financial breadth and depth, free trade with most of Europe, and the promise of collective security against foreign threats.

Nonetheless, the main economic standoff remains between the West and Russia. In response to its aggression against Ukraine, the EU and US targeted Russia with several, albeit symbolic, sanctions. These are symbolic because they are unlikely to cripple the Russian economy – most of them target luxury goods and individual consumers. These sanctions may soon escalate for two reasons: Russia’s consistently aggressive foreign policy with regards to Ukraine and President Putin’s ban of all food imports from the EU. According to Forbes, this ban has generated an estimated combined loss of USD $12 billion dollars in exports for a number of countries, including Poland (apples), France (cheese) and the Baltic States (milk). We must also bear in mind that the EU depends highly on Russian Gas to provide energy to several member states. The risk of getting cut off works as a counter-weight against further, possibly more serious, sanctions.

Forbes’s report states that increasing prices are affecting Russian consumers. However, little public discontent has arisen with regards to these sanctions. President Putin’s popularity is still considerably high, with an approval rating of approximately 83%, according to the latest poll conducted by Gallup. Most Russians see Putin as a figure of stability. Moreover, they approve of his strong foreign policy. President Putin claims that Russia’s move will yield greater competitiveness of the country’s agricultural goods. Regardless, further escalation of this economic war could quickly turn sour for Russia. Last time this happened, the Soviet Union invaded Afghanistan, which resulted in the Soviet economy’s successful crippling. As a former KGB officer, President Putin may not enjoy witnessing the collapse of his leadership, akin to Mr. Gorbachev’s regime. Moreover, Russia’s involvement in a conventional encounter may persuade Islamic extremists in Chechnya to press their claims even further.

 

Conclusion

As we may observe in generality, international conflict is a disruptive force for the global economy. War yields negative shocks in capital markets. It destroys infrastructure, weakens the workforce, and affects the quality of life of all of its participants. Yet, we must consider that war is not absolutely destructive, for there are always sectors that benefit from armed conflict. Seen through changes in the weapons market and economic actors inside or outside the areas of conflict, wars may in fact act as positive catalysts with respect to increases in production. This we have seen in the case of Syria and its impact on the global arms market, or, in the case of the conflict in Ukraine, the arguable benefits to Russian agricultural producers brought about by the ban on food imports.

 

Facebook Comments

Leave a Reply

Your email address will not be published. Required fields are marked *