World War III is here, but it's not what we expected

Movies and books have often portrayed World War III as either the final chapter of the human epoch or as a new but primitive restart for those who survive the nuclear conflagration. We cannot know if such prophesies will ultimately come true. For now World War III appears to have started with Russia's attack on Ukraine, but without nuclear missiles so far.

Make no mistake. The battlefield for this war is worldwide; it's just that it is primarily an economic battlefield. When Russia attacked Ukraine, the other great powers did not send soldiers and tanks. Instead, they orchestrated one of the most comprehensive economic warfare schemes ever devised.

Measures included cutting Russia out of the international payments system called SWIFT, blocking Russian exports (except most commodities) and discouraging commerce of many kinds with Russia. Many countries froze accounts owned by Russia's central bank and also accounts owned by prominent wealthy Russians. Wealthy Russians targeted by sanctions also saw yachts moored outside Russian territory seized. The value of the yachts runs into the billions of dollars.

In the wake of these unprecedented sanctions, many non-Russian companies have reduced, suspended or eliminated operations in Russia. Here is a list of over 400. Not all were forced to take action because of the sanctions. But companies expected that doing business inside Russia would become extraordinarily difficult and also did not want to get on the bad side of governments around the world participating in the sanctions.

Russia has responded with an export ban covering more than 200 products. Notably, Russia did NOT include its major exports, energy and other minerals in the ban. It did curtail wheat and sugar exports temporarily. Wheat has become a scarce commodity after Ukraine, the fourth largest wheat exporter in the world—behind only the European Union, Russia and Australia— announced a halt to those exports to preserve grain stocks for domestic consumption in the war-torn country.

The United States and the United Kingdom have banned Russian oil exports. But this is mostly symbolic as oil can be rerouted quickly so that Russian oil will go to countries accepting its oil while oil bound for those countries from other suppliers is rerouted to the United States and the UK.

What has astonished those operating in the oil market is the voluntary decisions made by companies NOT to buy Russian oil even though (except in the United States and the UK), sanctions do not prohibit such purchases. As a result, oil futures hit $130 per barrel briefly in early March. On Friday oil futures in New York closed at just under $105, well above the price in late January of around $85.

A ban on fertilizers may be the most consequential Russian export restriction. Russia produces 23 percent of the world's ammonia, 14 percent of its urea and 21 percent of its potash. (Ammonia and urea are major sources of nitrogen for crops and potash provides potassium.) Without adequate amounts of fertilizer, crop yields could decline worldwide causing food prices to jump even higher than they are today.

The length of the economic war depends in part on the length of the Russia-Ukraine conflict. It is, however, difficult to see why those sanctioning Russia would want to reward it by lifting sanctions if the conflict ends with Russia forcing an agreement on Ukraine that includes recognition of Crimea as part of Russia (seized in 2014) and independence for two of Ukraine's primarily Russian-speaking provinces. The Russians will also insist that Ukraine be prohibited from joining NATO and likely restrict the size of the Ukrainian armed forces.

The sanctioning countries will reasonably ask: Who can trust that the Russians will abide by the agreement which will probably include a military withdrawal and respect for Ukraine's new boundaries? Won't Russia simply invade Ukraine again when it has something else that it wants?

This is what I mean when I say we've entered World War III. I see no clear end to the economic warfare or geopolitical jockeying. Countries opposing the invasion of Ukraine will want to keep the pressure on Russia with the hope of undermining Russia's war-making capability. Russia will counter with attempts to integrate its economy with that of China, India and other countries in Asia, Africa and Central and South America including Mexico and Brazil which have not embraced sanctions.

That means the United States, European nations and their allies around the world will have to decide whether to impose secondary sanctions on those countries retaining normal trading relationships with Russia. It's a complex situation and could turn out to be a real mess.

It's instructive that China understood that power in the 21st century would be primarily economic and so focused on growing and diversifying its economy. Russia seems to have missed this important development.

China's Gross Domestic Product (GDP) for 1989 was almost $344 billion. Russia's GDP for that year was $506 billion. Chinese per capita income was less than a 10th of that of Russia in 1989. Thirty years later in 2019 China's GDP was $15.47 trillion and Russia's was $1.67 trillion according to the International Monetary Fund. The Russian economy expanded three-fold in that time though its emphasis remains on the extraction of natural resources. China's economy grew 45-fold and China's emphasis has been on manufacturing—though real estate development, finance, retail (both online and brick-and-mortar) and a variety of services are figuring more prominently. Chinese companies operate worldwide, competing with their largest international competitors. Russia has few such successes.

Russia's per capita income as of 2019 still exceeds that of China ($11,436 vs. $10,679). But China's dynamism and entrepreneurial culture suggests that it will blaze past Russia soon and keep going.

This is why the Russian perception that its security comes primarily from military strength and from control of land near its border seems strangely outmoded and misinformed. But therein lies the danger. If Russia is further crippled by economic sanctions, it will fall even further behind in the economic contest. This outcome is not a given because sanctions may not be enforced well and because Russia may successfully integrate its economy with that of China, India and other neutral and friendly countries. (See my recent post, "Ukraine conflict may portend end to current world trading system.") But, if Russia ultimately feels backed into a corner, the Russian leadership may see no alternative but to draw its main competitors into a wider war with the hope of instilling enough fear of a nuclear confrontation that both sides relent and a political settlement and security guarantees follow that include an agreement to end all economic warfare.

It is in just such circumstances that both sides may miscalculate or may misconstrue the words of the other and choose to escalate the conflict in a way that will make prophets out of all the screenwriters and novelists who depicted World War III as the end of civilization.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He can be contacted at kurtcobb2001@yahoo.com.