Farewell to the Big Mac: Russia’s War Heralds a Dark and Isolated Economic Era | Mondial economy


Jhe major Western brands showed Vladimir Putin how to do it. As the Kremlin army bogged down in Ukraine, Coca-Cola and Starbucks were quick to close their doors to Russian customers.

But the most iconic decision of all came from McDonald’s, which closed its 850 outlets in Russia. The availability of Big Macs in the Soviet Union was seen in 1990 as proof that the old Cold War enemy of the West was turning its back on Communism, but the past fortnight has brought back memories of the bad old days. There were queues outside McDonald’s when it opened in Moscow. Last week, the Russians lined up for one last burger before the withdrawal began.

One of Putin’s predecessors in the Kremlin – Lenin – once said that there were decades when nothing happened and weeks when decades happened, and this is true of the period since Russian troops crossed the Ukrainian border on February 24.

It’s not just that Russia is facing a brutal recession. It is the bursting of the idea of ​​a homogeneous world economy after the cold war. It’s a throwback to the days when defense spending was higher in the west. It’s the possibility that governments will renege on their net-zero carbon promises.

“Putin has created his worst nightmare,” says Mohamed El-Erian, chief economist at Allianz and president of Queens’ College, Cambridge. “He united the West as he had not for a long time; it was the catalyst for large-scale arms deliveries to Ukraine; he changed Germany’s approach to military spending; and it brought the Russian economy to its knees. It’s incredible.”

The freezing of most of Russia’s reserves meant the central bank struggled to support the rouble, which fell by a third in currency markets. Capital controls have been introduced, interest rates have more than doubled and annual inflation is heading towards 20%. The stock market has been closed and financial markets fear that Moscow will fail to repay its sovereign debt later this week.

John Lough, associate member of the Russia and Eurasia program at Chatham House, who in his previous role at NATO in the mid-1990s was the first representative of the alliance to be based in Moscow, says: “Classes averages are going to be hit very hard by the lack of access to vacations abroad, gadgets and good food – things they are used to but will now dry up. Symbolism in politics and international relations is important. What does this signal? This signals “return to the USSR”.

Analysts warn of the biggest annual decline for Russia since the collapse of the Soviet Union, as the exodus of Western capital, technology and know-how draws a 21st century iron curtain around of the Russian economy.

Bank of America predicts a 13% drop in gross domestic product this year — a bigger hit than the pandemic or the 2008 financial crisis caused.

Sanctions from the West have turned Putin’s Russia into a North Korean-style pariah state, but the harsh measures will have consequences for a fragile global economy still recovering from Covid-19.

It may only be the world’s 11th largest economy, with a shrinking population and fewer links to global supply chains than China, but Russia’s status as the world’s largest natural gas exporter and second exporter of crude oil means that it exceeds its weight. .

Russia accounts for just over a quarter of EU oil imports and 40% of gas, a figure reaching 65% in Germany and 100% in some Eastern European states. For the United States, the exposure is not so great: it is the world’s largest oil producer, with a large domestic market, and only 7% of its oil imports come from Russia.

For Germany, gas supplies began in the late 1960s, as a product of former leader Willy Brandt’s Ostpolitik agenda, which wanted closer trade ties between West Germany and the East in order to overcome tensions with the Soviet Union.

The queue to enter a Uniqlo branch in Moscow last week. Photograph: Maxim Shemetov/Reuters

Throughout her 16 years in power, Angela Merkel has remained committed to imports, including the development of the now discontinued Nord Stream 2 gas pipeline. Germany’s energy dependence only increased when the country reduced its nuclear output under coalition agreements between Merkel’s Christian Democratic Union and the Greens.

“That whole legacy of Ostpolitik has been turned upside down,” says Lough. “What we see now is going to be a transformation. The EU’s commitment to drastically reduce energy dependence on Russia is at the heart of it.

It is unlikely, however, to be a smooth process. As the world searches for alternative energy sources, commodities strategists at Bank of America estimate that less than half of Russian exports can be replaced by Iran, OPEC nations and US shale.

Global crises in energy markets take the form of disrupting the international economy, as well as triggering lasting change. The long postwar boom came to a head when OPEC cartel action led to a quadrupling of crude oil prices by the end of 1973. There were echoes of that last week, when Brent crude rose above $130 a barrel, on course for its all-time high. of $147 per barrel, reached in 2008.

El-Erian says there was a risk of stagflation – a combination of rapidly rising prices and weak growth – in the global economy even before the Russian invasion. “Now stagflation has become the benchmark and a global recession has become the risk scenario,” he adds.

Russia is no stranger to economic crises. The “shock treatment” administered by the International Monetary Fund and other multilateral agencies after the demise of the Soviet Union was brutal. Production fell steadily until the mid-1990s, unemployment peaked at nearly 14%, and rising alcoholism and suicides led to a sharp drop in male life expectancy. A default in 1998 sent ripples through global financial markets, leading to the collapse of US hedge fund Long Term Capital Management.

The economy has gone through three phases since the collapse of communism, according to Holger Schmieding, chief economist at Berenberg Bank. An initial period of rapid but often disorderly change gave way to progress from the late 1990s. Following other post-socialist countries, Russia began to establish closer ties with the European and global economy broadly, helped by a surge in oil prices. In a third phase, global isolation has set in since the annexation of Crimea in 2014, pushing Moscow to focus on self-reliance and a “fortress Russia” economic policy to guard against Western sanctions.

The only problem, economists say, is that the path to autarky is rarely a recipe for lasting success.

“Step by step, it’s starting to look like some of the characteristics of the late Brezhnev-era Soviet Union — an underperforming petro-economy with an oversized military sector,” Schmieding says.

A young woman drinking coffee at a table with the familiar green Starbucks corporate lettering behind her, except the lettering is in Cyrillic rather than the Roman alphabet
A new branch of Starbucks in the town of Khimki, outside Moscow, in 2007. Photograph: Alexander Natruskin/Reuters

Away from oil, Russia is vital for rare earth minerals and agricultural products such as wheat, corn and sunflower oil. Together, Russia and Ukraine account for a quarter of world wheat exports; prices have jumped more than 50% as the world’s breadbasket grapples with war.

Some developing countries will find that they are paying the price. Russia supplies Egypt, which has a population of over 100 million, with 85% of its wheat imports, while 90% of Lebanon’s imports of wheat and cooking oil come from Ukraine and Russia.

For the UK, soaring oil prices are already hitting motorists hard, pushing pump prices for unleaded petrol and diesel to record highs last week.

Although the UK gets as little as 5% of its gas and 10% of its oil from Russia – meaning a phase-out of supplies is unlikely to lead to shortages – soaring oil prices gas in wholesale markets will increase the cost of living squeeze. Chancellor Rishi Sunak is under pressure to step up support for households in his March 23 spring statement.

High inflation is set to lead to the biggest annual fall in living standards since at least the 1970s – costing the average household at least £1,000 a year – as wages fail to keep pace with prices.

Gerard Lyons, chief economic strategist at wealth management firm Netwealth, said: “I don’t think a recession can be ruled out for the UK, although it’s not the most likely scenario.”

Squeezing Putin’s financial power could encourage Russia to forge closer ties with China. With the payment system and the power of intervention of central banks in the foreign exchange markets, harassed by sanctions, turning to the Chinese yuan and the payment networks supervised by Beijing could prove attractive.

However, experts believe that there could be reluctance in both countries for a Sino-Russian pact. Pipelines and other infrastructure for large-scale oil and gas exports to the east are not in place, while there could be repercussions for Beijing if it helps Russia evade extensive Western sanctions and contact information.

“They will be pushed closer to China, but it is very uncomfortable for Russia without the balance relationship with the West and access to Western finance and technology. This highlights the weakness of the Russian system,” says Lough.

“My view is that this will fatally undermine his position. He brought a form of destruction on Russia because the economic impact is going to be so great. There is simply no justification for this. This is an extraordinary miscalculation.

And one with repercussions far beyond Russia.

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