“The attempts to isolate have not worked even with small countries such as Cuba or North Korea. Compared to them, Russia is an immeasurably larger player in the global economy, with a potentially self-sufficient territory and raw material base”–says György Ilyash, researcher of the Hungarian Institute for Foreign Affairs and Trade. Interview on the economic war against Russia and its consequences.
The EU sanctions have already been felt radically in Russian financial markets, and regional currencies in Central and Eastern Europe are not performing well either. What could be the initial impact of the sanction packages on the region’s economy in general? What might the effects be for Hungary?
First, it is worth noting that, in theory, economic sanctions and the communication related to them usually indicate that they are a well-considered public policy decision based on a cost-benefit analysis. However, the reality is more complex, and we have seen in the past that these decisions often have significant negative externalities. A notable recent example was when the Trump administration’s sanctions against the Russian Oleg Deripaska shook the global aluminum market so much that they had to be quickly withdrawn. The current sanctions against Russia are unprecedented. Sanctions of similar severity have been imposed only on small economies that are marginal to the global economy. Thus, it is no wonder that figures such as the German Federal Minister of Finance Christian Lindner (FDP) and the American Chair of the Federal Reserve Jerome Powell acknowledged that the sanctions’ impacts on individual countries and the global economy are unpredictable and unquantifiable. The one sure thing is that they will also negatively affect the imposing countries, and everyone will have to pay the sanctions’ costs. Hungary benefits from the open global markets as an open and export-led economy. Therefore, the country will be pressured by two sides. Firstly, sanctions will result in the emergence of fault lines, logistical barriers, and other constraints in the world economy. This will put our export-led economy under pressure. Secondly, the adverse global economic trends will also spill over into the Hungarian economic activity. In the last two years, many lasting negative developments emerged in the global economy, such as international debt growth, inflation, increases in global food prices, the new commodity supercycle, and the primarily European energy crisis. The new ongoing sanctions will reinforce these trends, negatively impacting the population’s living standards, eventually leading to political consequences. This is true not only for Hungary but more or less also for the whole region. Furthermore, the economies of Central Eastern Europe are strongly linked to the German economy, which further increases their exposure to global economic dynamics.
What economic policy changes might these effects trigger in the CEE region and Hungary?
For open and export-led economies, global negative economic effects are difficult to mitigate, especially if they are lasting. Whatever measures are put in place, they can only temporarily protect regional economies from global impacts. Part of the long-term strategy can be either entering new markets or quickly utilizing the new opportunities created by the current sanctions, such as filling the small gaps in the fragmented global logistics. The current geopolitical situation will inevitably be followed by decisions to increase defense budgets, complicating the picture. It was just the first announcement that Germany approved an additional €100 billion spending for defense purposes. Obviously, the financial resources to the defense budget will have to be reallocated from somewhere else. Because of the aforementioned negative global economic trends, deteriorating living standards, and political consequences, states worldwide will be forced to temporarily cut spending on the green economy, energy transition, and similar programs.
The war has come in an already high inflationary environment, and the conflict is adding further upward pressure to the already high prices of energy commodities, agricultural products (wheat, maize) and inputs (fertilizers), and raw materials (aluminum, copper, rare metals). Uncertainties about Russian purchases of raw materials (copper, aluminum, rare metals) could disrupt global supply chains, which have not been running smoothly. How deep an economic crisis could this cause in the region? What role can the region and Hungary play in these changing economic chains?
The war and the sanctions exacerbate the negative trends; however, the effects are difficult to estimate. Not just because of the unprecedented situation and the complexity of the world economy, but also because the primary unknown in the equation is when the war will end, what will be in the involved countries’ agreements, and how the international community will react. It is unknown yet what kind of countersanctions Russia will impose. Many experts underestimate the real strength of the Russian economy; thus, they also underestimate the global economic impacts of the steps to isolate the country. The American expert community has not only fact-checked President Biden’s respective false statements but has also provided evidence-based literature that more accurately describes the Russian economy. For example, cutting Russia out of the microelectronics supply chain can lead to severe problems for chip manufacturing worldwide, which has already been struggling in the last two years. Oleg Izumrudov, the executive director of the RosSHD Consortium, said the reason is that Russia corners 80% of the global market for sapphire substrates used in optoelectronics and microelectronics to build up layers of various materials, such as silicon. Their utility is such that they are present in every chip in use worldwide. Russia also holds 100% of global deposits of rare earth elements used in special chip etching chemistry. “The ban on finished products for Russia will result in a retaliatory ban on the supply of production components and will cause an acute shortage of processors for the whole world. By comparison, the end-2021 supply disruption situation will appear relatively light”–Izumrudov warned. Nonetheless, even in an arguably negative situation, it is possible to find new opportunities that did not exist before. The collapse of the Russian air cargo sector due to the sanctions is becoming increasingly inevitable, and the Turkish carriers have become the primary beneficiaries of this situation. Russia is the world’s leading exporter of wheat, but the indirect impact of sanctions and logistical difficulties will force it to find new markets. Countries like India can partially fill in the wheat market’s emerging gaps. Hungary and other Central Eastern European countries should actively look for similar opportunities to exploit the loss of Russian and Ukrainian economic links to the global market. They can strengthen their economies and mitigate the adverse global economic impacts this way. It is advantageous that Hungary recently started rebuilding its defense industry; it can be further supported by increased military expenditure in Hungary and Europe.
Sanctions imposed by the West may pose new economic risks to boost Russia’s policy of economic self-sufficiency, thus contributing to Russia’s isolation from the world economy and further strengthening political and economic relations between Russia and China. Can such isolation work in a globalized world? Is it possible that such a multipolar arrangement will provide the region with an opportunity for further development, or is a recession inevitable?
Firstly, it is essential to understand that all indications suggest that Russia’s isolation is far from reality. Major global players such as India or China have so far rejected imposing sanctions on Russia. Many regional powers are not cutting their economic ties with Russia either. Notable examples are Iran, Iraq, and Algeria from the Middle East, several African countries from Burundi to South Africa, a few Latin American states such as Bolivia and Nicaragua, major regional players in Asia such as Vietnam, and not surprisingly the Central Asian countries. Secondly,the attempts to isolate have not worked even with small countries such as Cuba, Iran, or North Korea. Compared to them, Russia is an immeasurably more significant player in the global economy, with a potentially self-sufficient territory and raw material base. Thirdly, there is indeed increasing cooperation between Russia and China. It is a constraint for both countries in the current geopolitical situation, but it builds on a 20-year voluntary rapprochement. Moreover, Russia and China are completely complementary economies. Fourthly, the global economy can hardly function without several products and raw materials for which Russia is a significant supplier. For instance, 6% of aluminum production, 7% of nickel supply, 12% of oil production, 18-19% of wheat and natural gas exports, and a quarter of copper supply comes from Russia. Despite these negative trends, Hungary and the whole region still need to focus on the aforementioned emerging new opportunities of a global transition. The current economic opportunities can be filling some segments of the emerging economic void, utilizing the new spending priorities, and monitoring the evolving financial systems in parallel to diversify. Because each crisis creates opportunities, we have already seen that during the pandemic in the last two years.