Following the Cuban missile crisis, former United States (US) Defence Secretary, Robert Strange McNamara said “Try to pick an option that achieves your purpose at minimal cost to [your opponent] politically, militarily, and otherwise. That avoids pushing him into an emotional frame of mind in which he is likely to lash out irrationally with great cost to him and you”. Without this wisdom and the tit-for-tat aggressive actions between Russia and the US led NATO coalition, there will be no silver-lining for the Russian – Ukraine crisis.
By Radithebe Rammutle
There was glimmer of hope for normality when recorded cases of Covid-19, a virus that turned the world upside down for the past two years, started to decline and virtually all restriction to contain it where being lifted. That was until 24 February when President Vladimir Putin announced that Russia will undertake a military operation against Ukraine. With the following words “… in accordance with Article 51 of Part 7 of the UN Charter, with the approval of the Federation Council of Russia and in pursuance of the treaties of friendship and mutual assistance ratified by the Duma on February 22 with the Donetsk People’s Republic and the Luhansk People’s Republic, I decided to launch a special military operation” the world was once again turned upside down and the hopes for global normality where once again dashed. Business press, market analyst, private and public leaders sought to provide their insights about the effects of Russia’s action on the global economy, markets, and human lives.
Concerns over energy costs dominated the headlines considering that Russia is a major producer and exporter of Gas and Oil. According to United States Energy Information Administration (EIA) Russia is the third largest oil producer and exporter. Its alliance with Saudi Arabia within the Organisation of the Petroleum Exporting Countries (OPEC) framework accounts for 22% of global oil output against 20% of the US. The oversized role that this alliance plays in the global energy gives it power to push through its wishes. In July 2021 the two oil producers blocked United Arab Emirates’ (UAE) proposal to increase OPEC’s oil output. They argued that such a move would lower oil prices forcing them to sell inventories that accumulated during Covid-19 pandemic at a loss. This has led to commercial inventories reaching their lowest level since 2014.
“The situation in energy markets is very serious and demands our full attention. Global energy security is under threat, putting the world economy at risks of fragile state of the recovery” said International Energy Agency (IEA) Executive Director, Fatih Birol in reaction to the rising oil prices.
At the start of the Russia-Ukraine crisis Brent Crude Oil Futures was trading at $95.85 per barrel. By 2nd March, the futures crossed the $111 per barrel mark, the highest since June 2014. On the 8th it closed at $127.98 the highest level ever-since the Russia’s decision to wage a military operation against Ukraine. At the time of going to press, it appeared to be wishful thinking that the oil price will reach levels below $100 a barrel with neither side involved in the conflict not reaching a settlement in the peace talks.
Earlier efforts to cool down the market including IEA’s release of 60 million barrels of oil from their emergency reserves failed to cool down the market further increasing the possibility of a global economic recession. Net importers of oil such as South Africa felt the pinch as prices are expected to rise even further. Deputy Director General at the Department of Mineral Resources and Energy, Tseliso Maqubela, said that there could be a need to ration petrol if prices increase. He also said working from home is another method that could minimise the impact of petrol price increases.
There was hope that OPEC will offer some relief following UAE’s ambassador to Washington announcement that the UAE intends to nudge OPEC to increase oil production. In a statement to Financial Times Yousef al-Otaiba’s, said “We favour production increases, and we will be encouraging OPEC to consider higher production levels”. However, at the time of going to press there were no signs that OPEC will revise its early March decision taken at the 26th Ministerial Meeting. In its statement on 2 March, the group that includes Russia said “…it was noted that current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market, and that current volatility is not caused by changes in market fundamentals but by current geopolitical developments”. The meeting, co-chaired by Russia’s deputy prime minister, Alexander Novak, endorsed the 19th Ministerial meeting held on 08 July 2021 which set oil production output at 400 000 barrel-a-day.
Western government in Europe that expressed their condemnation of Russia’s activities in Ukraine where careful not to further upset the energy market when they crafted sanctions meant to punish Russia’s economy.
On 26 February, European Ministers of Finance met to discuss possible economic sanctions against Russia. During an interview with journalist at the meeting, Germany’s Finance Minister Christian Linder said “Our hearts are with the great people of Ukraine who fight for liberties, who fight for their right to choose their own future. We are underlining our solidarity with Ukrainian people…and both EU and G7 have prepared a serious package of sanctions…The first sanctions are on Russia, and they harm the Russian people, and they block the Russian economy seriously”. The ministers agreed on sanctions that broadly included:
• Stopping financial inflows from Russia into EU
• Restricting Russia’s access to Europe’s key technologies
• Targeting Russia’s banking sector, wealth oligarchs and diplomats.
During the ministerial negotiations, British opposition parties put pressure on Boris Johnson to push for measures that would deny Russia’s banks access to the SWIFT messaging system used to facilitate cross-border payments between banks. Though Germany initially opposed this move it eventually agreed and the EU is in unison on the Russia – Ukraine crisis. The agreed EU package of sanctions affected nearly 70% of the Russian banking institutions.
Even Switzerland traditionally known for its neutrality adopted all EU sanctions on Russian. “Countries that advocate international law should be able to depend on Switzerland” said Ignazio Cassis president and foreign minister in Bern on 28 February 2022. This move allayed fears in the EU bloc that the traditional neutrality stance of Switzerland will create space for Russia’s wealthy who are estimated to be holding cash over €10 bn in the mountainous Central
Despite sanctions that blocked Russia from the world’s financial system, it was able to pay $117 million of interest payment due on 18 March for two Eurobonds. Before these payments, investors feared Russia will not only be unable but unwilling to cover its foreign debts. In a move to stymie foreign currency from leaving the country, the reserve bank of Russia barred payments of ₽11.233 billion ($107.5 million) of rouble- dominated sovereign bonds, known as OFZs. In addition, corporates were also barred from paying dividends to overseas investors. These moves and sanctions against Russia triggered a flurry of credit ratings agencies’ downgrades. Fitch and Moody’s downgraded Russia by six notches to “junk” status citing that the country will be unable to service its debt due to a compromised economy.The tit-for-tat economic and business sanctions amongst the global powers did not lead to cessation of conflict between Russia and Ukraine. In fact, there is no silver lining that the conflict will end because both sides to the conflict are unwilling to back down from their stance. Realising that a UN Security Council resolution will not be adopted, 90 countries sponsored a General Assembly resolution calling on Russia to withdraw all its forces from Ukraine immediately. The resolution was adopted with the overwhelming majority of 141 votes out of 193 member-states.
Russian security concerns over the arming of Ukraine by US-led big powers were left-out in the UN resolution signalling a clear sign that they consider them illegitimate even though Russia argued that its actions were based on established international norms. To date there is no big power (Russia or China) that has a defence alliance with countries in the western hemisphere because in 1962, the US government stopped the Cuban – Russian defence alliance that would have resulted in building of a Russian backed missile base in Cuba.
The strategic efforts in Cuba of the then Russian president, Nikita Khrushchev, was a response to US military advantage over Russia which had nuclear weapons based in allied countries much closer to the Soviet Union. These weapons were based in Great Britain, Italy, and Turkey.
The US invoked the Monroe doctrine, a US policy originated by President James Monroe, which prohibited intervention by external powers in the politics of the Americas, to justify a sea blockade that stopped Russian vessels carrying arms from reaching Cuba. This culminated into a 13-day standoff, known as the Cuban Missile Crisis, which ended with the US military base in Turkey being dismantled and Russia backing down from its intentions.
Reflecting on the lessons from the Cuban Missile Crisis the then US Defence Secretary, Robert McNamara said “In situations which there is a risk of direct conflict, give your opponent an outlet, look at the crisis from his point view. I don’t mean to say be weak. That’s not my point at all, but my point is, look at the crisis from his point view, look at the options that you are considering from his point of view. Try to pick an option that achieves your purpose at minimal cost to him politically, militarily, and otherwise. That avoids pushing him into an emotional frame of mind in which he is likely to lash out irrationally with great cost to him and you”. The current crop of leaders in Europe including Russia and Ukraine as well as the US could learn more from these 20th century politicians to avert a full-blown global crisis.