Will Russia’s war spur trade diversification?

News: Building a resilient economy, particularly after the COVID-19 pandemic became important. Russia’s invasion of Ukraine gave a boost to this ideology.

Why is it important to build a resilient economy?

After World War II, economic actors had put faith in broad-based international commitment to open a global economy. But tensions, fiction, and blockages in global supply chains during the pandemic began to erode this faith. Countries like China and United States have erected barriers to foreign tech firms and market access, citing national security concerns.

Economic and financial sanctions have become a foreign policy weapon for countries like the USA. This can be seen in the Ukrainian crisis, where the NATO response has been economic. EU countries are experimenting with excluding Russia from the SWIFT financial system.

Why economic sanctions on Russia are difficult?

Russia supplies 40% of Europe’s natural gas. Therefore, there was resistance by major EU countries to exclude Russia from SWIFT. Only selected banks were targeted.

Russia also depends on Europe to continue purchasing its gas. This translates into economic mutual assured destruction. Therefore, the Italian president had commented that Europe should look to diversify its supplies.

What should be done to ensure greater diversification?

Though Japan is entirely dependent on the import of fossil fuels, it maintains a highly diversified supply. Japan acquire oil from several countries in the Middle East and natural gas from Australia, Malaysia, Qatar, Russia, and the USA. Europe can adopt similar supply sources.

Countries should also diversify their markets, as market access can also be cut by large economies like the USA. Given these factors, it is important to ensure diversification for a resilient supply chain and global economy.

Source: This post is based on the article “Will Russia’s war spur trade diversification?” published in Business Standard on 3rd March 2022.