Welcome to Eureka Street

back to site


Blowback to Russia sanctions in Europe as gas crisis looms

  • 03 October 2022
Will Australia soon be offering to the Germans an opportunity to set up their industry base here? Manufacture their BMWs and Mercedes Down Under? It is certainly possible because the geo-economic war between Russia and the West, which has shattered the architecture of globalisation, is fast turning into the biggest financial own goal in history. Europe and America’s sanctions and financial cancelling of Russia were supposed to bring the Moscow economy and banking system to its knees. Instead, it is Europe and to a lesser extent the United States, that is teetering on the brink. Meanwhile, Russia looks like it will suffer only a mild recession. 

To recap, when Russia invaded the Ukraine Western governments mounted an economic and financial war strategy that had not been used before. They implemented sanctions against all Russian exports, which was conventional. They also froze about two thirds of the Russian central bank’s foreign exchange reserves and banished the rouble from SWIFT, the system used for foreign exchange transactions. The latter option had not been used before.

Normally, economic and financial interactions are based on mutual interest. To make it a weapon of war raises the possibility of losing if the opponent successfully responds. That is what happened. It remains to be seen if other war time measures that the West has taken against Russia, including America’s $US40 billion in military assistance, will have the desired impact. But an important lesson has been learned about the limitations of economic warfare. The worst case scenario is not that it is toothless but that it ends up having the opposite effect.

Russia was well prepared. After years of sanctions its economy was close to self-sufficient and it had no trouble finding markets in China and India for its oil and gas, especially as about two thirds of the world’s countries did not go along with the sanctions anyway. Russia’s revenue from energy exports has risen this year.

The financial tactic also did not go as imagined. It apparently came as a surprise to the West when Russia said it would only sell its oil and gas in roubles, given that it was no longer able to sell in US dollars or Euros. Buyers had no choice but to comply and the rouble, which initially fell sharply after it was taken out of SWIFT has since soared. It is currently trading at 30 per cent higher than before the ban.

It is Germany that