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The Russia-Ukraine Conflict Accelerating the Transformation of International Economic Order

Jun 16, 2022
  • Yu Xiang

    Senior Fellow, China Construction Bank Research Institute

Accelerating the Transformation of International Economic Order[1]

The Russia-Ukraine conflict has provided new impetus to the centennial change in global order. Combined with the impact of global pandemic, this conflict has accelerated the transformation of international economic order from a US-dominated globalization process to the globalization driven by coexistence of multiple parallel systems. 

Inherent Tensions underneath the Conflict

From the economic and financial perspective, it was the inherent tensions leading to the outbreak of Russia-Ukraine conflict, with its timing also of great concern to the world. 

First, the inherent tensions between the energy exporting countries and energy importing countries. The Russia-Ukraine conflict reflects the outcome of the combination of complex historical context and recent development. At first sight, it may be regarded as just the conflict between the two countries of Russia and Ukraine. Actually, it has become the new round of direct confrontation between Russia and the West including the United States and EU since the end of the Cold War. Russian economy has been heavily dependent on energy exports, with European countries being its major energy consumers. And Ukraine also benefited from its role as “a bridge” for the energy export and import activities of Russia and the EU. However, Ukraine has become increasingly unwilling to just take the role of “energy corridor” and “world barn”. It hopes to get integrated into the western countries’ economic and financial cycle and transform Ukraine’s economic growth pattern through stronger connection to the EU economic and financial activities. In response to Ukraine’s intentions and policies, Russia had “weaponized” energy export to Ukraine with measures of temporary suspension of natural gas supply and raising the price of energy export to Ukraine. However, although the direct target of such kind of measure was Ukraine, the western European countries at the end of the energy supply-consumption chain actually had been the hardest hit countries. So the European countries, specifically the countries from western Europe, have been at rift with Russia on this issue for quite a long time. 

Second, there is a deeply-embedded conflict between Russian energy exporting economy model and the Western information economy model. In recent years, the western countries have taken measures to block Russia from engaging with their economy and technology, which has led to much slower pace of penetration of new technology into Russia’s national economy compared with the western countries. In the meantime, benefiting from rapid upgrading of new technology and fast development of digital economy, the western economies are evolving from industrial economy to information economy. Compared with energy export economy, the information economy has the advantage of decreasing energy use for every unit output due to the input of modern information technology, thus relatively reduce its aggregate demand for energy use. Another disadvantage of over-reliance on energy export is that the earnings may be affected greatly by price vibrations in global energy market. The Covid-19 pandemic had caused sustained low price in international energy market, which further aggravated Russian economic problems. The long-term effect of differences in the two economic models will be political, economic, and military disequilibrium. The longer differences last, the greater disequilibrium is. So the contradictions between Russia’s energy exporting economy and western information economy are definitely further deepened. 

Besides, the timing for the outbreak of Russia-Ukraine conflict also deserves certain concern. It’s just the beginning of new economic cycle of the American economy. American stock markets have greatly deviated from its economic base, with the US Federal Reserve now being haunted with the question of how to exit previous stimulus policies. It’s interesting to see that the outbreak of the conflict has provided an opportunity for the Biden administration to shift blame on its domestic policies as well as a luring profit prospect for US military industrial complex. 

Short Term Impacts

It goes without saying that it will never be in China’s interest to witness the a conflict between Russia and Ukraine. Actually, China has benefited greatly from the current international economic system. As for certain unequal and unfair elements in the current system, China has made its stance very clear that it hopes to make some incremental reform on current international economic system, on the basis of UN system and the guidance of multilateralism. From the economic point, the minimalist approach in terms of economic and social costs has always been the gradual transition from one stable situation to another stable situation, and a dramatic change is definitely not the answer. In Chinese terms, we should “make construction before deconstruction” rather than “construct after deconstruction”. So it serves China’s national interest better to maintain the stability of current system and in the meantime push for certain incremental reform on current international economic system. 

China is not a direct party to the conflict between Russia and Ukraine. But the spillover effect of the conflict has caused negative impact on China. It’s absurd to assume that China has benefited greatly from this conflict. 

First, the conflict has greatly affected Chinese economy and financial market. By the end of December 2021, Chinese government made some analysis and judgement on the economic outlook, and also made certain instructions on the future work to stabilize Chinese economy, which had shown us the pressure on the stabilization of China’s economic growth, people’s income level and living standard, and also the aggregate price level. The international economic and financial turmoil brought about by the Russia-Ukraine conflict has prompted China to face even more serious challenges in achieving its major economic targets. 

In the short term, the dramatically rising prices in international energy market and a turbulent international financial market will bring negative impact on investors’ sentiment in China’s financial market. What’s more important, the conflict has disrupted global supply of agricultural products, with the dramatically rising global food prices further increasing pressure on the commodities market which has already been on the highest point in several years. China’s PBOC is now facing the tough challenges of securing economic growth while effectively controlling inflation. The conflict may also lead to great disequilibrium in global food supply and demand, with the combined effects of “restricted selling” policies of major food exporting countries and the rush to increase more food reserves by rich countries bring about even greater pressure on poor countries and regions with food shortages. 

Second, the western countries and Russia has fought back and forth with several rounds of sanctions and countermeasures since the conflict, with lots of trade and financial sanctions adding on each other. The impacts of these measures have already exceeded the limits of relevant countries of Russia, US, and EU, spreading to much wider global economy. 

Despite the proclamations of western countries that western sanctions will have great negative impacts on Russian economy and elites, it may still take some time for us to see the real impact of sanctions.[2] It’s clear that sanctions have always been “a double-edged sword”, with western countries themselves also feeling negative impacts at least in the short term. The western economies are “bleeding” while sanctioning Russia. With sanction measures becoming more severe, the US and other western countries will also receive even greater reverse impacts. And Russia still has certain policy instruments to mitigate the negative impacts of western sanctions. Besides that, western sanctions have made Russia into a new “land of opportunity” of value investment with great attraction to capitals seeking high profits. Some western companies has attempted to buy in assets of Russian companies at the market bottom in order to gain super extra investment returns. In fact, since early March, some western companies have already run into the market purchasing cheap Russian corporate bonds and securities.[3] 

However, the sanctions made by western countries have already brought about great negative spillover effect, which has magnificently increased the business risks for Chinese enterprises. While China is striving to expand trade volume with countries from Eastern Europe and Central Asia, the conflict has increased trade and investment risks caused by geopolitics for Chinese companies in doing business with countries in these regions. China’s city of Yiwu has seen a greatly declining export to Ukraine, with an 80 percent decrease compared with average volume. Some hedge funds even took the opportunity of the conflict to create turmoil in futures markets of some commodities such as nickel, and this has greatly increased international economic and financial risks for Chinese companies.[4] As a result of some Russian banks being excluded from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), many Russian banks now are more willing to conduct trans-border financial transactions through the channels of Chinese banks. However, due to the concern over the secondary sanction effect of western sanctions, Chinese banks may not be willing to take up financial transactions related to Russia.[5] The conflict has also caused certain disruption to China’s Belt and Road Initiative, for instance, the China-EU railway express has to suspend or change the railway routes with destination in or transit Ukraine. 

Furthermore, Chinese companies are faced with more and more complicated western sanction measures, which increase the risk of mistakenly triggering the sanction measures and thus may cause great disruption to normal production process and daily business of Chinese companies.[6] 

Long Term Impacts

The long term impacts of Russia-Ukraine conflict may exceed any regional war since the WWII. It will spawn new divisions and alliances among the countries around the world, and further accelerate the transformation of global order. 

To begin with, it may speed up the creation of parallel international markets. Before this conflict, international economic relations had already received great impact from the Trump administration’s “America First” policy. Now the Russia-Ukraine conflict may even further the formation of various blocs in international economic and financial system. Although the Russia-Ukraine conflict is only a regional armed conflict from the military perspective, the non-military impacts of this conflict has already spilled over to a lot of countries in the world, with the battlefields extended to various areas such as financial market, international trade, high technology, public media, ideology, and even cultures. It’s never been seen since the WWII with such large scale, diversity of tools, and wide scope. The massive sanctions launched by the US and European countries have prompted many countries, including China, to reconsider seriously the way of mitigating western countries’ sanctions. The US and other western countries decided to exclude Russia from the SWIFT inter-bank system, which has signaled a warning to many countries on the necessity to build manageable and controllable international payment and clearing system, so as to protect their own interests. In the future, parallel markets may be built along this line, with the countries supporting Russia constituting a “like-minded market”, and countries supporting Ukraine forming another “like-minded market”. 

However, this kind of parallel markets is not in conformity with China’s development goals. China has been advocating for deepening globalization to achieve the goal of efficient distribution of resources around the globe. Exclusive blocs and parallel markets will increase the cost of trade and investment facilitation and bring hurdles to the raising of universal welfare for all the human societies around the world. To prevent this scenario from coming into reality, China needs to work together with other countries on the post-conflict rebuilding process, and also advocates for building more inclusive and open community for cooperation rather than setting up new fences against each other. Countries around the world should enhance cooperation in addressing global issues including green development, climate change, poverty reduction, privacy protection, debt alleviation, and countering terrorists activities, reducing the possibility of confrontations between different blocs. 

Second, the weakening of dollar hegemony in global financial market may have gained new momentum. Under the guidance of “America First”, the Trump administration launched large scale “trade war” and pursue a “zero-sum game” with its trading partners, which happened just at the price of the US international leadership. Under the Biden administration, the US has not made great change to the economic policies of Trump administration, with the credibility of US dollar at much greater risk. In the meantime, the US Federal Reserve implemented the “unlimited quantitative easing” policy during the Covid-19 global pandemic, which has further demonstrated to the world that the US planned to use dollar’s unique status in international financial market to shift the economic burden and cost of domestic disease control. Since the Russia-Ukraine conflict, the US joined with EU to use the dollar hegemony as a tool to enhance the effects of their financial sanctions against Russia. As a result, other countries are also feeling the potential dangers of dollar hegemony, with many of them beginning to explore the possibility of alternative trading and payment system beyond the dollar system.[7] 

Meanwhile, China has a well-balanced position on the possible decline of dollar hegemony. It argues that the dollar system has been an important platform for economic globalization and China doesn’t want to challenge the dominant status of dollar in international financial market. What China really pursues is just the appropriate role of RMB in international economy, with it comparable to the importance of China’s aggregate economic capacity in global economy.[8] 

Third, the conflict has accelerated the transformation of international energy market. European countries have realized that they need to diversify energy supply sources. On one hand, this trend may make the international energy production and consumption market more flat and diverse. In another word, it will change from “concentration” to “decentralization”, from “linear” to “matrix”. On the other hand, the new trend may raise the speed for the coming of new energy revolution, with the weight of new energy such as solar power, wind power, and hydro power in energy consumption continuing to rise. A more flat and diverse or decentralized and matrixed international energy market will also have important geopolitical implication by changing the subject matters covered by the concept of national security. Major powers may reduce struggles in controlling traditional energy supply corridors and as a result turn to new type of energy facilities. 

While the transformation of international energy market may be accelerated due to the ongoing conflict, we still need to bear in mind the utmost urgency of the work for human beings to address the challenges of climate change. The UN Intergovernmental Panel on Climate Change (IPCC) recently published the new report of Impacts, Adaptation and Vulnerability, which has made the warning again that the window for the adaptation to climate change around the world is closing and the environment for the existence of human beings will face a irreversible future if no action is taken now.[9] As the two leading economies in the world, China and US need to enhance cooperation to address challenges brought about by the conflict, so as to prevent the consensus achieved in the Glasgow Climate Change Conference from being sidelined. China and the US can and should work together to improve global energy and climate governance; expand the scope of emergency response on the basis of oil security assurance mechanism under international organizations such as IEA and OPEA; and use the G20 platform to seek for consensus building on energy governance between developed economies and emerging market economies.   

[1] Yu Xiang, author of this article, is the Adjunct Fellow of Center of Strategic and Security Studies of Tsinghua University and Senior Fellow of China Construction Bank Research Institute.

This article only reflects the author’s personal opinions, without any reference to the institutes the author works or affiliates with.







[8] -system-of-currencies

[9] AR6      Climate   Change   2022:      Impacts,  Adaptation             and         Vulnerability,

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