06.06.2022 Author: James ONeill

The War in Ukraine is Having Major Consequences for the World Economic System


The war in Ukraine is grinding to its inexorable conclusion with a Ukrainian defeat only a matter of time. Yet this truth has not penetrated the mind of Ukraine’s president who recently issued the absurd demand that the Ukrainians would talk peace, but only after the Russians had withdrawn from the Donbass and from Crimea. It is obviously impossible to hold rational talks with this man while he persists in making impossible demands.

It appears that even the Americans have recognised the futility of the war. Despite all the belly who about the $40 billion recently voted on by the United States Congress, it transpires only a small fraction of that sum will actually be provided to the Ukraine. The bulk of the money will be used to re-equip the Americans to replace the weapons that has already been supplied.

The fate of those supplies, which are rapidly destroyed or captured by the Russians, are another reason for the Americans to be cautious about providing in this supply of weaponry. The message is however, not penetrating Ukrainian consciousness about the realities they face. We are now hearing claims that August there will be a major counter offensive which will reverse all the losses of the past four months.

The Ukrainians have completely failed to provide a shred of evidence as to where these forces are coming from. When challenged they proffer the explanation that this mysterious army is currently being trained in Germany. This claim was obviously a surprise to the Germans who have singularly failed to provide a shred of evidence to support the claims. The only really unknown question remaining about this war is how far will the Russian advance go? The complete re-capture of the Donbass is certain, as is the capture of an area of Ukraine extending along the coast. If completed, this will remove all Ukrainian access to the sea, with obvious implications as to its ability to ship its grain to foreign ports.

Amidst all the hysteria and false claims being made there was at least one glimmer of realism in Ukraine. They fired a Minister who had been responsible for repeatedly asserting the false claim that the Russian soldiers had been systematically raping Ukrainian women. There was never any evidence to support this outrageous claim and the firing of the main perpetrator of those lies reveals at least one small glimmer of realism in the Ukrainian account of the war.

The chain of events unfolding in the Ukraine represents a huge blow to the Americans. As recently as two weeks ago the United States secretary of defence was uttering absurd claims about an imminent Russian defeat in the war. The Russian economy was apparently, according to American and European claims, on the brink of collapse. That has not happened. If any economy is in dire peril of collapse, it is that of Europe’s. The absurd claims about removing Russian oil from their imports is having to face the groom truth that there is no alternative supply to make up the shortfall that would be created, and that the Europeans face the better reality of a very cold winter without the means to warm them -selves.

A fundamental part of the European problem is that they seem to have completely lost the ability to think independently. They keep making decisions that are designed to please the Americans, but which totally disregard the fundamental obligation to protect the well-being of their own citizens. The gestures towards freezing the Russian energy supplies is a classic example of shooting themselves in the foot. It is unsurprising in this context that a number of countries in the European Union are making separate deals with the Russians to ensure that their own people do not freeze this coming winter.

Any remaining Russian sympathy for their position was effectively destroyed when the Europeans seized an estimated $300 billion of Russia’s foreign exchange earnings, on the top of a similar amount frozen by the Americans. This is an astonishing act to perpetrate, actually without any legal foundation at all. The results of this act of economic vandalism will be multiple.

First, it has persuaded the Russians to demand that payment for their goods be made in roubles. This caused an initial shock, and a refusal by some of the European Union, notably Poland, to refuse to abide by the new conditions. The Polish people will be the ones to suffer.

Secondly, and perhaps more significantly in the longer term, the theft of Russian foreign earnings has sent an unequivocal message to the rest of the world. They could be next. The net effect of this move is to hasten the day when the rest of the world, outside the smug European coterie, decides that they no longer need to use the dollar, pound or euro for their international transactions.

The implications of this move are profound. Effective United States control of the worlds monitory system rests on the willingness of nations to use the United States dollar for their international transactions. Remove that from the financial edifice and a major part of the ability of the United States to bully the world is removed. The implications are profound. The Saudis, who account for a significant proportion of world oil sales, have been negotiating with China to accept payment for their oil in non-dollar terms.

Russia and China have for some time now been working on creating an alternative system of world payments for goods received from one to the other. A number of other countries, especially in the so called third world, have shown a willingness to join the new system. The Europeans and the Americans have only themselves to blame.

One cannot abuse a system that was set up for their own convenience, and let’s face it, the exercise of enormous power, without their being consequences. Those consequences are now appearing and the old system will never be maintained or returned to.

The Chinese have seen what the Europeans and the Americans did to the Russian foreign exchange holdings. They realise that they could be next and have already begun serious moves to reduce their foreign holdings held in dollars. This will also have the effect of reducing the attractiveness of United States door with a The Chinese have seen what Europeans and the Americans did to the Russian foreign exchange holdings. They realise that they could be next and have already begun serious moves to reduce their foreign holdings held in dollars. This will also have the effect of reducing the attractiveness of the United States dollar with a consequential further reduction in its value and international attractiveness.

It is unlikely that the Europeans and the Americans realised the longer-term consequences to their own financial position when they embarked on their anti-Russian moves earlier this year. They will now have plenty of time to reflect on the consequences of their economic arrogance. Sympathy from most of the world will be noticeably lacking. They have only themselves to blame.

James O’Neill, an Australian-based former Barrister at Law, exclusively for the online magazine “New Eastern Outlook”.

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