The ongoing conflict between Russia and Ukraine has not only raised military and humanitarian concerns but has also triggered a complex international diplomatic and economic silent struggle. While the conventional narrative involves robust economic growth supported by energy and metal industries, there are claims of significant challenges, including the withdrawal of many foreign companies and purges from the financial system. Despite the domestic perception in Japan of becoming suddenly distant from the rest of the world, American experts continue to maintain a keen interest in the enigmatic nation.
Aftermath
Contrary to the mainstream narrative that suggests Russia’s economy remains robust despite global sanctions and business setbacks, a comprehensive analysis by Sonnenfeld at the Yale School of Management challenges this assertion. According to their research, Russia is facing economically devastating downturns, with over 1,000 international companies withdrawing and the impact of international sanctions. The experts employed elegant methods, including the use of Russian private data, unusual data sources, high-frequency consumer data, cross-channel checks, information from Russia’s international trade partners, and data mining of complex shipping data. They conducted a thorough analysis of Russia’s economic activities five months after the invasion, assessing the economic outlook. The key conclusion is that business withdrawals and sanctions have dealt a severe blow to the Russian economy. Russia is attempting to “pivot” to Asia amid the loss of major markets and decreasing demand, facing numerous challenges. The investigative research also indicates near-collapse of Russia’s imports, widespread supply shortages in the domestic economy, stagnation in domestic production, and a lack of capacity to replace lost companies, products, and talent. Consequently, Russia’s domestic innovation and production infrastructure are crumbling, leading to soaring prices and heightened consumer anxiety. Looking ahead, the analysis suggests that as long as the allied nations maintain and strengthen sanctions pressure on Russia, there is no economic solution in sight. They point that ‘any headlines suggesting Russia’s economic recovery are inaccurate.’ Russia’s strategic position as an exporter of goods has significantly weakened, hindering a successful transition to alternative regions. Importantly, the analysis emphasizes the adverse effects on Russia’s domestic production, innovation, and overall economic stability.
Energy Export
Babina at Columbia Business School argue that while Russia redirected oil exports from Europe to alternative markets such as India, China trade, and Turkey, the EU’s export ban resulted in significant discounts in market segments, such as exports from the Baltic Sea ports, leading to more pronounced effects after the imposition of embargoes and price caps. However, the discount reflected in the Urals price until the end of 2022 was not as significant, and segments unaffected by lower European demand, such as exports from Russia’s Pacific coast ports, did not experience significant price drops and continued shipping without adhering to price caps. The EU’s export ban and G7’s crude oil price cap fundamentally fragmented Russia’s crude oil market. Based on their research, the central focus of future policies is expected to be the enforcement of existing sanctions on Russia’s oil and a reduction in the cap on crude oil prices. Conversely, redirecting exports of petroleum products from the European market is deemed significantly challenging.
Financial Sanctions
A key element in the global response to conflicts is the introduction of sanctions as a modern form of financial warfare against the challenges posed by conflicts. In a research by Lin from Temple University Law School, finance is identified as the most potent weapon in this new type of warfare, where bullets are not fired, financial institutions are the targets, and almost everything is exposed to risk. They discusses the reality of modern financial warfare, emphasizing economic sanctions, financial constraints, and cyber programs as chosen tools in contemporary financial warfare, as opposed to conventional wars. The research broadly examines the modern financial infrastructure and the new stage of warfare, providing a detailed inventory of weapons in the arsenal of financial warfare. This includes not only traditional weapons like economic sanctions, anti-money laundering regulations, and banking restrictions but also cyber weapons such as distributed denial-of-service attacks, data manipulation hacking, and destructive intrusions. The research further explains how these weapons are being utilized in current conflicts involving entities like Al-Qaeda, Iran, ISIS, North Korea, Russia, and Syria. It discourses new tensions related to financial warfare, cyber attacks, and legal issues concerning non-state actors triggered by financial warfare, offering recommendations for both current and future financial warfare scenarios.
In 2022, the United States, the European Union, and the United Kingdom jointly announced a prohibition on transactions with the Central Bank of Russia and other sovereign entities. The United States specifically imposed a complete ban on all transactions with the Central Bank of Russia. According to a research work announced by the Federal Reserve Bank of New York, coinciding with the ECB meeting, the Foreign Sovereign Immunities Act (FSIA) provides two types of exemptions concerning foreign assets: immunity from jurisdiction and immunity from attachment and execution. There is a specific exemption for central bank assets to prevent assets owned by a foreign central bank from becoming subject to litigation. In the United States, the legality of freezing and seizing foreign assets is based on the International Emergency Economic Powers Act (IEEPA) of 1977. If sanctions under IEEPA affect the assets of a foreign central bank, the exemption protection of the FSIA may be applied. A notable case in the past involves the freezing of assets of the Central Bank of Afghanistan (DAB), highlighting complex legal issues related to DAB’s assets in the U.S. and exceptions to the FSIA related to terrorism. The U.S. government froze some of DAB’s assets and transferred a portion to a newly established fund to address Afghanistan’s humanitarian and economic crisis. The Federal Reserve in New York suggests that continuous legislation may be necessary concerning Russia.
Foreign central bank assets are generally exempt from enforcement under international law. However, recent cases suggest that exemptions for certain types of sovereign wealth funds held by central banks may be limited as governments expand the use of central banks. Sanctions on the assets of foreign central banks are posing legal challenges. Brunk from Vanderbilt Law School focuses on lawsuits against sovereign immunity funds in Sweden, U.S. sanctions on the assets of the Central Bank of Afghanistan, and sanctions imposed on the Central Bank of Russia after the invasion of Ukraine. Caution has been urged regarding proposed lawsuits in the United States aiming to seize assets of the Central Bank of Russia or transfer assets of the Central Bank of Afghanistan to private plaintiffs. Meanwhile, experts have issued a warning that such actions could significantly jeopardize the consensus in international economic law regarding the immunity of foreign central banks.
Commentary
According to U.S. experts, the severity of the economic challenges facing Russia amid the conflict in Ukraine is evident. The destruction of the “Nord Stream” gas pipeline, commissioned by Russia’s state-owned energy companies, has global implications, impacting nations including Japan. Notably, the damaged pipeline was a project undertaken by Japanese firms Nippon Steel and Sumitomo Corporation. As the international community grapples with this intricate geopolitical landscape, carefully crafting strategies to address the evolving dynamics of the Russia-Ukraine war becomes imperative.
In European universities, the Mediterranean studies course is often present, but alongside the Black Sea, our focus is directed towards the heart of the world. Centuries ago, during a pivotal point in global civilization, the Greek War of Independence against Turkey held symbolic significance. Even in distant Britain, the eccentricities of Lord Byron had a profound impact. Conversely, Europe’s intellectual elite maintained a continuous interest in the Persian world. At one point, “Arabesque” served as a watchword, albeit becoming considerably massified after the 19th century.
This year, influenced by the Russia-Ukraine conflict, there have been rumors of increased trade across both sides of Cyprus. Indeed, such news has been present in Mediterranean media. The clashes in the West Bank, with non-state but trans-national strong entities playing a major role, offer a crystallized narrative for Western media. Nevertheless, the Black Sea remains crucial, and we Japanese might need to recognize the West Bank as “Grenzen.”
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