Sunday, March 06, 2022

Ukraine conflict may portend end to current world trading system

At the beginning of nearly every war including the current one in Ukraine, there are those who loudly declare that it will be over shortly and then business-as-usual can resume. They are rarely right. While no one can say for certain what the trajectory of the Russian-Ukrainian conflict will be, the economic warfare that is going on alongside it is very likely to destroy the current global trading system.

The last time a worldwide trading system was destroyed was just over a century ago. From the late 1800s up to the eve of World War I the dominance of the British fleet on the high seas and the reach of the British Empire created an era of stability and interconnection highly favorable to worldwide trade.

Then, World War I blew that stability and interconnection apart. Later, the Great Depression led to a global trade war that finished off the remnants of the international trading system. The world did not achieve a trading system that spanned the globe unhampered again until the end of the Cold War—which had split the world into two trading blocks for nearly 50 years.

It is unlikely that Russia will simply back down even in the face of crippling economic sanctions. Things have gone too far and the Russian leadership has staked too much on its position that Russia must have its own sphere of influence free from NATO soldiers and rockets. What the Russians have historically called "the near abroad" must not harbor threats to Russian security, they say. Think of this as Russia's Monroe Doctrine.

The sanctions against Russia are hard to keep track of, ambiguous and ever expanding. Their consequences, however, are clear. Through pressure exerted by the United States and European countries, most of the world will be forced to curtail its trade with Russia sharply.

Russia, however, has potent trade weapons of its own since the country remains the second largest producer of both oil and natural gas in the world behind the United States according the U.S. Energy Information Administration. Russia is, however, the world's largest natural gas exporter and the second or third largest oil exporter depending on where you look. Europeans are especially dependent on these exports. One would expect any reduction of Russian exports to cause prices to soar. This is exactly what has happen since the war began, complicating Russian deliveries—even though these exports are NOT under sanction and Russia actually INCREASED natural gas exports to Europe.

Russia is also among the top two producers of palladium used most notably in catalytic convertors and also in electronics. The same goes for platinum. In fact, Russia is a significant producer of many metals including nickel, cobalt, uranium, gold, silver, lead, zinc, and iron. A quick look at the "Mining Industry of Russia" page on Wikipedia illustrates just how important Russian production of minerals is in world markets.

One of the key exports Russia is considering withholding is potash fertilizer, something that would surely drive potash prices sky high and, in turn, drive food prices even higher than they already are. Russia is the world's fourth largest producer.

Any decision by Russia to withhold commodity exports from the world market would have to be carefully callibrated since such move would, of course, further pummel the Russian economy by reducing or eliminating export earnings from the targeted products.

In yet another blow to the Russian economy, foreign businesses are leaving Russia at an increasing pace. Once gone, it is hard to see them returning anytime soon. And, with Russian assets abroad frozen and in some cases being seized, there is fear that Russia will seize assets within its borders belonging to foreign companies and individuals. Foreign patents might also be disregarded to allow Russia to make some its own goods based on patented technology and designs.

Some Russian banks have been excluded from the world's largest international payments system known as SWIFT which might just push Russia to form its own payment system along with other countries suffering from sanctions such as Iran, Cuba, North Korea and Syria. Don't be surprised if additional countries including China decide to join—while remaining in SWIFT—in order to continue to trade with these countries including Russia.

Given the ferocity of the response to Russia's invasion of Ukraine, it is just as hard to imagine a full-scale retreat from sanctions under practically any likely long-term scenario as it is to imagine Russia withdrawing from Ukraine and saying that it is sorry; it was all just a big misunderstanding. And, there is always the possibility that a guerilla insurgency will continue in Ukraine for years to come so that there is no clear end to hostilities.

The result of sanctions and war so far has been to cause prices of practically every commodity to rise significantly, most notably wheat, which is up 50 percent since before the war. (Russia and Ukraine are the number one and number five exporters in the world respectively.) Oil which was already trading at an elevated level is now comfortably above $110 per barrel, up about 25 percent from the start of the war.

Spikes in oil prices have preceded 10 of the last 11 recessions (not including the COVID collapse). It seems likely, though, that a recession following this spike will not be a mild one given the dislocations in the world economy already and the determination of each side in the conflict to exert increasing economic pain on the other. And, we must also remember that oil and wheat prices are not the only ones going up rapidly. Food prices in general are soaring as are fiber prices (lumber and cotton, for example). Rising energy prices, of course, feed into practically every other good and service. Eventually, high prices undermine economic activity as buyers simply stop buying what they cannot afford.

If the next recession is deep and drawn out, as I believe it might be, it may hasten the breakup of current trading arrangements as people around the world seek to protect their home industries from those abroad by restricting trade even further (just as countries did during the Great Depression).

The Russians sought to reorganize the security framework in Europe by making sure Ukraine does not join an alliance hostile to Russia. In the bargain, the Russians may get a reorganization of the world trading system, one that may break up into relatively closed trading blocks with more and more emphasis on self-sufficiency as a prudent bulwark against unexpected disruptions including wars.

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,, OilVoice, TalkMarkets,, 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


Ed Suominen said...

Excellent column as always, Kurt. We are all in for a world of hurt as petroleum depletion starts really hitting hard and nations fight over the dregs.

I personally am all in favor of the West making some sacrifices to contain and punish Russia for its brutal unprovoked attack on a European democracy, but let’s be real: We have all been making moral compromises for years—the theocratic fanaticism of Saudi Arabia, the ecocide in the Niger Delta and the Alberta tar sands, our making a pincushion of huge swaths of the U.S. with depletion of freshwater, sand, steel, even seismic stability—all to keep our vehicles gassed up and our food cheap. There is no ethical way out of this except to let the economy collapse and then prepare to starve.

One little quibble: No country is obligated to observe U.S. patents for making, using, or selling stuff within its own border, or selling to countries other than the U.S. In my years of practice as a registered patent agent (now retired; this may be dated and certainly isn’t legal advice), I never heard a client express any interest whatsoever in obtaining a Russian patent. There is a PCT international patent application, but it serves only as a launchpad for possible individual patent applications down the road in the various countries or the EU. Few clients ever followed up with those up anywhere but the major industrial powerhouses.

dirt15 said...

Yes, a great column, thank you Kurt.We do seem to be at some turning point now with no going back.

I wonder if you have heard the views of Professor John Mearsheimer? His excellent talk to Kings College students on Ukraine is well worth watching as it throws the spotlight on Natos' pressuring of Russia for many years now, giving the lie to the West's outraged claims that Russia's attack is "unprovoked", which of course, it is not.

I expect we will now see a great deal of human misery as energy depletion accelerates.

JAD said...

I feel the need to reply to dirt15's comment. I can see how the expansion of NATO under Clinton and GWB may look to Putin like "pressure" and may have been strategically unwise. But anyone who has traveled in any of the former Soviet states in eastern Europe knows how much their citizens passionately hate Russia for its decades of occupation and repression. NATO began and has always been a defensive bulwark against Russian imperialism. Everyone hoped that the integration of the world economy through trade would promote peaceful relations and prevent things like the current Ukraine war from happening. But it appears that Ukraine's desire to join the European economic community and NATO - a desire that NATO members could have pursued years ago but didn't, for reasons which are today painfully obvious - has been the tipping point to trigger Putin's anger at his failure to reverse the tide of the decline of Russia as a world power. In summary, his attack on Ukraine was absolutely unprovoked in any true sense of the word; this is clearly demonstrated through all the bogus reasons he is offering for the war. Ukraine's independence presents a clear threat, all right, but only to Putin's grandiose dreams of reviving the Soviet Union.

Rubicon said...

Thank you for your common sense and plain-spoken words that seem to be in very short supply in the West.

As you note, countries may end up having to be self-reliant. A trait that today's America and its Financial powers will balk at doing. After all, by the early 2000s, the US Govt. and the US Financial World, purposely destroyed all its Industry by off-shoring several millions jobs overseas.
Unlike most all other nations, who still maintain their industries and labor forces, the US no longer produces anything that, in the past provided good paying jobs, food, and a good quality living standard. All that has long since been destroyed.

As an aside, we recommend people here watch the new online documentary by Oliver Stone. He reveals what really happened in Ukraine in the early to later 2000s. Between that film and speaking to Russians and Ukrainians in Europe, it certainly broadened our understandings as to why and under what conditions President Putin & his staff launched a few weeks ago.

Anonymous said...

Interesting, West seizes Russian luxury yachts and Russia seizes western factories. How is this going to work out?