What a Russian financial crisis could mean for the rest of the world: NPR

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NPR’s Danielle Kurtzleben talks to economist Adam Posen of the Peterson Institute for International Economics about the large-scale effects of Russia’s faltering economy.



DANIELLE KURTZLEBEN, HOST:

As the United States and its allies continue to impose harsh financial sanctions on Russia, the country appears to be on the verge of a financial crisis. As President Biden said in a speech yesterday, the Russian ruble has been reduced to, in quotes, “rubble.” Western companies have withdrawn their activity. Russian banks have been largely cut off from the global financial system. And last week, Biden pushed to exclude Russia from the G-20, the group of 20 major economies.

We wanted to understand what an unstable Russian economy could mean for the rest of the world, so we called Adam Posen. He recently wrote an article in Foreign Affairs magazine titled “The End Of Globalization?” just explore this question. He is an economist and president of the Peterson Institute for International Economics, a nonpartisan group that studies the global economy. During our conversation, I began by asking him to characterize the current state of the Russian economy.

ADAM POSEN: Pretty bad, but not horrible. So they had a sudden stop in access to various technological goods, luxury goods, consumer goods. The purchasing power of their national currency is much lower – a fraction, as you said, of what it was before. And so they’re starting to feel real inflation, and they’re also starting to feel disruptions in their banking system and their access to finance. But it’s not yet a disaster. I mean, it’s not Greece in 2008 yet.

KURTZLEBEN: Let’s move on to some of the countries that impose these sanctions, including the United States. There seems to be a delicate balance to be struck when essentially pushing Russia out of the global economy. On the one hand, countries imposing sanctions want to inflict suffering and get Russia to end its invasion. But on the other hand, they risk harming their own economy and the global economy in the process. Is this more or less true?

POSEN: That’s more or less true. Economics is always win-win, and – not always, but, I mean, generally in international trade on this scale. And so if you do something to Russia or China or North Korea or Cuba, you are also doing something to yourself because you are giving up opportunities. You give up markets. You give up what they have to offer. In this case, however, it is quite asymmetrical. Russia really only has to offer, in economic terms, its energy exports. And so Germany, Italy and a few other European countries are really dependent on these energy exports. But almost everything else can be replaced. And even those, as we just heard coming out of the G-7 and European Council meetings, European countries are going to very quickly move away from Russian energy supplies as fast as they can.

KURTZLEBEN: Well, I want to talk about some of the practical effects of all of this. Last week, the Organization for Economic Co-operation and Development, or OECD, released a report concluding that this war will weaken global economic growth. According to their calculations, growth will be 1.1% lower than it would be if the conflict had not taken place. So I want to ask you, what does that look like in real life? Does that mean even higher prices, greater shortages of certain products that many people around the world currently have?

POSEN: I think that’s a number that’s actually rather misleading for the practical lives of the people you’re talking about. This is not about global growth in an abstract way. It is a question of who is deprived of what. So the Russian people are suffering. The Ukrainian people are obviously suffering. Normal people in northern and central Europe are going to experience energy shortages and inflation. The Americans are going to have a little more inflation. But in the developing world, especially in North Africa and the Middle East, many of these countries, including Egypt, are very dependent on Ukraine for wheat, which is an important part of their diet, especially for the poorest people. And it’s not easy to replace that. There are poorer countries in Eastern Europe that are very dependent on Russia and Ukraine for energy, but also to sell their own goods, and that will go away. So where this is going to be felt is very different depending on where you live.

KURTZLEBEN: You point out in your article that the sanctions imposed on Russia further alienate the United States and China. Tell us why you think this is the case. Why does this happen?

POSEN: Well, obviously the United States and China have become increasingly suspicious or even hostile towards each other, and I mean their governments, not necessarily their people. And so conflict and separation were already building. What I think about Russia’s invasion of Ukraine and then the sanctions is that they are accelerating this process because China has to be very careful. They have Russia as an ally for national security. They want to weaken the United States economically. They want to be a great player. But at the same time, if they support Russia too openly, they will violate US and allied sanctions, and it will really affect their economy. But in the meantime, in the United States, and especially in the US Congress, until China publicly condemns Russia and joins in the sanctions, it will be seen as insufficient. So I think that’s a breaking point, unfortunately, where the two sides are going to drift further apart even though they were already starting to do so.

KURTZLEBEN: And here we come close to one of the biggest ideas in your article, which is that globalization itself was already under attack, as evidenced by the rise of populist nationalists in several countries. How long is the impact here on global economic integration?

POSEN: Unfortunately, again, I think it’s going to be pretty substantial. Now we can have a separation for good reasons. As I said in my article, the – you know, there are things that are more important than economic efficiency, like human rights, like national security. But that doesn’t mean you can ignore the economic costs of dividing the world along these lines. And there will be significant costs. Is this the turning point like, say, unfortunately, again, the First World War? God forgives. But is this a turning point where multinational corporations and governments are increasingly going to say, maybe I should pick a side? I may have to double my investment to make sure I’m in safe places if I want to export or produce in China rather than export or produce in the United States. And then it cascades. Then you start having different business relationships, different technology standards, less competition, less variety. So it’s a big problem. It may be necessary because of ethical and geopolitical divides, but it is costly.

KURTZLEBEN: It was Adam Posen. He is president of the Peterson Institute for International Economics. You can read his article, “The end of globalization? in Foreign Affairs magazine. Adam, thank you very much.

POSEN: Thank you very much for inviting me, Danielle.

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