The world as economic blocks

Prof. Satya Narayan Misra*

The end of World War II resurrected divergence in ideology between USA and the USSR and paved the way for NATO, a military alliance between 28 European countries and USA and Canada in 1949. USSR in response formed the Warsaw Pact in 1955 with 7 East European countries. However, in parallel, the French diplomat Jean Monet was building an economic alliance between erstwhile arch enemies, Germany and France. The ECSC (European & Coal Steel Commission) in 1951 was based on the concept of sound economic partnership and abdication of nationalism, which was the prime cause of the two world wars. Interestingly, the post-world war security order and military alliances also paved the way for a new energy order in which Russia eventually emerged as the gas station of the world. The US was keen that oil to west Europe should be sourced from west Asia and middle eastern fields which were controlled by the US companies, while East Europe would be serviced from the giant oil fields of USSR. The 1960s witnessed massive expansion in capacity of Druzba pipeline network which offered West Europe oil with low prices. 1970s witnessed European energy transforming natural gas. This paved the way for a geo-economic linkage of Soviet gas fields with west European markets. When the Nord Stream 1 was being built under the Baltic sea US fiercely opposed the proposed construction. The then chancellor Helmut Schmidt   has famously said “the pipeline between Germany and Russia will be built’.

It is to the credit of Vladimir Putin though, who leveraged oil and gas production to build a massive foreign exchange reserve of $ 498 B, enough to cover import of 15 months. Gone were those days in disintegrated Russia of the early 90s, when people were selling their pets in the by lanes of Moscow for a few dollars! Nord stream 1 was followed by Nord stream 2, which is fully controlled by the Russian oligarch Gazprom. All these developments have made Russia the 3rd largest oil producer and the 2nd most influential member of OPEC. They cater to 50% of Germany’s needs, 40% of the European Union and 100% of eastern Europe including Ukraine with whom it is presently in an internecine conflict. The politics of gas became a strategic weapon with Russia when they signed the Kharkiv Treaty in 2010 which allows Russia to keep its naval fleet in the Baltic sea upto 2042 in exchange for supply of gas at 30% discount.

The US and European union have imposed a slew of sanctions against Russia. The hardest of it is the restriction of the Russian central bank to access 430 hundred billion dollars kept in central banks in different countries and more importantly access to the Swift interbank messaging system. However, many analysts believe that such action by the USA of freezing dollar reserves strikes at the heart of a global economic system where the dollar was considered as the global reserve currency in 1944 with the creation of the IMF.  The European Union is stuck between a rock (inflation) and a hard place (low growth),  with increase in the gas prices  likely to witness  high inflation driven by the energy prices. Russia will take protective measures like using its forex reserves to support its largest enterprises to counteract western sanction. The assessment is that the impact of the sanction will be at the level of enterprises without affecting the aggregate economy. The Moody analytics have assessed that the conflict in Ukraine could reduce the level of global GDP by 1% (dollar 1trillion) by 2023. They also estimate that Russian GDP will contract by 1.5% in 2022 and by 2.5% by 2023. However, they also apprehend that the present conflict will lead to Mutual Assured Destruction of the European Union and Russia, given the mutual energy dependence.

Many people are surprised that Mr Modi is following the footsteps of Nehru in his foreign policy with Russia, by abstaining   from voting in the UN. He has been a pragmatist in this regard as India’s defence tie up is too deep rooted to be trifled with. Beginning with the license agreement for Mig21 aircrafts India has technology tie up with Russia for frigates, tanks and fighter aircrafts. The joint venture for Brahmos cruise missile was also inked in 1998 with Russia. Despite a small hiccup during 2011 to 2015with the share of import from Russia dipping to 49%, the overall average imports of Russia’s arms and ammunition account for 66% of India’s import budget.  They have been a stable partner in providing technology and spares at low prices and have stood by India during tectonic moments like 1971 war. In contrast though USA is emerging as a major player in India’s import from them of late, they are extremely chary of sharing technology with India. The American approach towards India defence sector is one of a seller whereas with Russia it is one of an enduring technological collaborator.

It is indeed deeply frightening that the world is getting divided into economic blocks where Russia along with Germany, Eastern Europe and China are becoming a major alliance while America is trying to build an overarching economic alliance with western Europe and Japan to checkmate the rise of countries like China, India and Russia. President Barack Obama tried to have a Trans Pacific Pact with western Europe and Japan,essentially to keep emerging economies like China and India in check. Noam Chomsky had observed that the TPP is a neo liberal project to maximise profit of MNCs and increase in security in the world. All countries including Russia realise that the balance of economic power in finance and technology lies with the USA. America supplies most of the semiconductor devices to Russia. Any sanction will affect Russian industry like aviation and quantum computing which can never be replaced by Chinese substitutes. The world can ill afford economic blocks and India’s alliance with Russia is too deep to go against them. It’s unfortunate that after the dystopia of Covid, Russia has foisted this senseless invasion against hapless civilians in Ukraine. NATO must refrain from its grand design to check Russia by co-opting Ukraine as a member in cohorts with the USA .The time for sober statesmanship has come. Both Biden & Putin must shed their obduracy to be the lone ranger in global economic and military power.




*Prof Misra was Joint Secretary (HAL) . Views are personal.


DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.

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