Kenneth Rogoff was chief economist and director of research at the International Monetary Fund from 2001 to 2003. He wrote several economic books, including The Curse of Cash and This Time is Different: Eight Centuries of Financial Folly.
The West hesitated to enter into a direct military confrontation with Russia because of Ukraine, but a global economic war has already erupted, its first arrows were launched towards Moscow and may soon reach Beijing, he believes.
The scourge of this war will not be limited to those targeted by Western sanctions, as its shards will spread, and the flames may catch the European and Western dress itself in light of the intertwining global economy, he fears.
Al-Ahram: With the war, sanctions on Russia, and disruptions in the energy market, do you think the world economy has entered a dark tunnel? For how long will these impacts sustain?
Kenneth Rogoff: Russia’s war on Ukraine is going to have far-reaching effects and lasting effects on the world economy, though of course at present there is massive uncertainty for the global economy. Obviously, Russia’s actions are extremely difficult to predict, so is how Putin will retreat from his massive overreach. But for the global economy, what China decides is ever more important. If China firmly sides with Russia, it too will be subject to sanctions. If this happens, the supply chain issues the global economy is currently experiencing due to the pandemic and the Ukraine war will get much worse in the short run. In the long run, there will be a new iron curtain and a second cold war.
AA: Will the sanctions affect Russia like when the USSR collapsed? Does Russia have the means to ride out the sanctions, especially through relations with other major actors, such as China?
KR: The sanctions imposed on Russia are utterly remarkable. By far the most unusual and dramatic has been the freezing of roughly half of Russia’s central bank assets and the closing of the global interbank messaging system SWIFT to a large swath of the Russian banking system. Even with China’s help, there is a high probability that the payments system in Russia will collapse in the coming months. For the moment, it is too soon to say if the depression will be as bad as after the collapse of the Soviet Union in the early 1990s, or the Great Depression of the United States in the 1930s. But for sure, Russia is on a track towards a calamity if Putin or the West does not back down.
AA: US National Security Adviser Jake Sullivan warned that China will face "consequences" if it offered a "lifeline" to Russia. Could China be sanctioned as well?
KR: Indeed. The US and Europe will likely only impose symbolic sanctions, but if Russia expands the conflict, for example by using tactical nuclear weapons, then yes it is highly likely severe sanctions will be imposed on China if it fails to denounce Russian actions. The situation is extremely unstable.
AA: Some G7 officials fear that removing Russia from SWIFT will accelerate efforts by Russia and China to create rival payment systems that do not use the US dollar, is this possible? Is the domination of the dollar in danger?
KR: There is absolutely no question that US actions, not just removing Russia from SWIFT, but the freezing of Russia’s central bank assets as well, will dramatically increase the speed at which China moves to develop an alternative financial infrastructure to the current dollar-based global financial system.
However, anything China can do in the short run will be a very poor substitute. It will takes years – perhaps a decade – to develop a robust alternative.
But yes, the long-term effect would be a weaker dollar dominance and then we will eventually have to pay higher interest rates to fund debts.
AA: Russia says it will impose sanctions in retaliation against the West? What cards does Russia have?
KR: Russia is a small economy, less than one tenth the size of China, the United States, or Europe. Cutting off oil to Europe will have a little long-term impact since China will then buy less from other sources, freeing supplies to go to Europe. Cutting off gas to Europe would certainly have a short-term impact, but winter is almost over, and there would be time to adjust. Russia can seize the assets of European and American companies, and is already moving in that direction.
While significant, the effect is moderated by the fact Russia is not a major economy anymore. Of course, if Russia widens the war through the use of chemical weapons (as the web is warning), tactical nuclear weapons, or cyberwar, it will be opening a Pandora’s Box.
Putin will be bringing even greater hardships to his people, the West will be forced to answer in kind with, at a minimum, the kind of limited war Kissinger envisioned in his 1957 book.
AA: The business sector in Europe is still suffering from the repercussions of the sanctions imposed on Russia after the Crimea war in 2014. Looking at the new sanctions, how badly could it affect the West, taking into account that shutting off a G20 central bank (of Russia) from the international financial system, or at least the dollar and euro economy, is a massively destabilising move?
KR: If Russia cuts off gas to Europe, Germany and Italy will quickly go into recession. But as the war widens, public support in Europe for pushing back against Russia will only strengthen.
AA: Do you think Egypt's economy can cope with the new economic challenges in light of the crisis? And how will the Middle East fare?
KR: There was already concern before the war that many emerging markets would have problems stabilising their economies and servicing their international debts, thanks to rising global interest rates and continuing supply chain problems due to the pandemic.
The war has only made these risks worse for many countries, other than those that are benefiting from higher commodity prices. On the other hand, the war is likely to push international lending and aid agencies to exercise continued forbearance in light of the unstable geopolitical circumstances. And if Russia and China are shut off partly from global trade, this will open huge opportunities for emerging markets to fill the void.