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Empty Mind after Ten Thousand Reasons

Economic consequences of the ‘Ukrainian War’

Kazumasa IWATA


 The Russian invasion of Ukraine opened up the Second Cold War Era. If Russia employs nuclear and chemical weapons, there emerges a risk of the outbreak of World War III. George Soros, a well-known US investor, judged that the World War III has already begun.

 Although Russia’s exit from Ukraine is the most desirable outcome, Russian President Vladimir Putin is deeply convinced that “Ukraine is not real state. Part is Eastern Europe and part is Russia,” according to Director of the Central Intelligence Agency (CIA) Burns. Prolonged battles seem inevitable, and it is not excluded that Ukraine will become “split nation” into east and west at the boundary between Western European civilization and Eastern Greek Orthodox civilization.Energy and food prices are skyrocketing partly due to sanctions against Russia, and stagflation pressure, which is a combination of economic downturn and inflation, is augmenting worldwide.

 According to the Organization for Economic Co-operation and Development (OECD), global growth will decline by 1% and prices will rise by 2.5% in the year following the invasion. In Japan as well, the soaring energy prices combined with the depreciation of the yen are accelerating the deterioration of the terms of trade which adds to the downward pressure on real wages and real consumption per capita. If energy prices continue to rise, the current account deficit will continue for coming several years; the recession will follow and medium-term growth rate will further decline.

 In addition to the effects of “Ukraine War”, the conflict between the United States and China has made it difficult to maintain a safe and resilient supply chain. The US Treasury Secretary, Yellen said that countries sharing the common values are required to build a “New Bretton Woods system” based on a solid supply chain and free trade among themselves.

 Russia has been excluded from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) by financial sanctions. Even more striking was the freeze on Russia’s foreign exchange reserves by the seven major countries (G7). The Bank for International Settlements (BIS), founded in 1930, has now endorsed Russia’s foreign exchange reserve freeze for the first time. As a result, Russia has been frozen nearly 50% of its $630 billion (as of the end of December 2021) foreign exchange reserves.

 However, there are loopholes in both sanctions. The exclusion from SWIFT is centered on Russia’s middle and major banks and it does not cover all the banks. In addition, energy imports from Russia can be paid in rubles through the Gazprom bank. Russia has also made a major shift in its foreign exchange reserves from the dollar to the yuan. Thus, it is possible to escape the foreign exchange reserve freeze measures via the People’s Bank of China.

 The world currency system has changed from the gold dollar standard system (Bretton Woods system I) to the dollar standard system (Bretton Woods System II). There is no other global currency other than the dollar that has a highly liquid government bond market and is equipped with fully open capital transactions.

 Russia is locked out of from the dollar standard system. Among Russia’s regional foreign exchange reserves the gold has the largest share and it may embark on building a currency regime based on commodities (gold).Although limited to the countries closer to Russia, Zoltan Pozsar of Credit Suisse, a major Swiss financial company, sees it as the birth of the “Bretton Woods System III.”


(English translation of Morning Edition of the Nikkei with 2022/5/6)