The Cost of War: Who is Paying the Price?
The cost of war is haunting nations hurting from rising costs of energy and food. There is a rising sentiment in parts of the world that this is not “their”war. Economic distress may unravel the very order sought to be preserved.
By Shankkar Aiyar | Published: 29th May 2022 07:31 AM |
Henry Kissinger, who turned 99 on Friday, retains an uncanny knack to be on the wrong side, to hurl headlines and attract attention. On Monday Kissinger unsettled dons and divas at Davos off their righteous roost and stirred outrage as he suggested that Ukraine should cede territory to Russia, painting a scary spectre of “or else”.
Compromise or even capitulation is not inconsistent with essential Kissinger. It was the Kissinger doctrine which detailed the pivot of the oldest democracy, the ‘land of the free and the home of the brave’. The US turned a blind eye to the genocide of Bengalis and hugged a dictator in Pakistan to befriend totalitarian Mao in Beijing.
That China is now the next big threat is just Karma knocking. What is surreal is that it didn’t matter to Kissinger that the fight was about sovereign aspiration and that his advice wrenched away the agency/right of a sovereign nation. What would he have advised FDR in 1941? One wonders!
The Kissinger outrage did manage to hit a throbbing global nerve though and for good reason. This week Russia’s invasion of Ukraine will cross the 100 days milestone. Even as the world awaits resolution, the cost of war has come to haunt nations. What was first perceived as a blitzkrieg — takeover of Kyiv and a victory parade by Vladimir Putin — has lasted well beyond the expectations of even the most passionate supporters of Ukraine. Nobody quite knows who is winning — or indeed if there will be a winner.
Volodymyr Zelenskyy informed the World Economic Forum that it would cost over $600 billion — or three times Ukraine’s last computed GDP — to rebuild the nation. That is unsurprising given the pommelling of Ukraine by Russia. It is estimated that Russia is shelling out roughly $900 million a day which adds up to a total spend in 100 days to over $100 billion — that would be more than the annual GDP of Latvia and Bolivia put together.
It is challenging to compute what Ukraine is spending on its own defence. In 2021 the defence budget of Ukraine was $5.4 billion. Last fortnight the United States added $ 40 billion to its aid package for Ukraine — of which the military component is around $20 billion or roughly the equivalent of the GDP of Georgia. The war has disrupted supplies, destructed price stability and upended all forecasts and balance sheets of countries.
Almost every developed and developing nation is reporting record inflation. While it is true that post-pandemic policies have fuelled inflation there is no disputing that the war in Ukraine has aggravated both energy and food security. Crude oil prices which were around $90 per barrel are now hovering between $115 and $119 per barrel of Brent crude. Predictably countries have had to re-tool their pricing policies to provide relief — India cut duties on petrol and diesel to cool price rise and in the UK the government is offering energy bill discounts of 400 pounds per household.
The irony is that Russia, which is under sanctions, has been one of the biggest beneficiaries. New sanctions curb supplies and have resulted in higher prices. Data analysis reveals that Russia is currently earning over $700 million per day in energy exports to just Europe. Estimates suggest that Russia will earn a windfall of profits from higher prices and will garner as much as over $320 billion through energy exports — which is more than 30 per cent higher than the previous year.
Higher energy prices have a direct and second-round impact on the food economy. Increased crude/gas prices impact fertiliser production.Lower availability of fertilisers results in lower foodgrain output and higher food prices. Pricing is critical to preserve output. India, for instance, has had to increase its allocation for fertiliser subsidies by over Rs 1 lakh crore. The price of wheat, a commodity in contentious debate, has already shot up by over 60 per cent. Indeed the Governor of the Bank of England last week warned of ‘apocalyptic’ food price rises.
Upfront and on the dashboard of every finance minister and central banker is the looming threat of inflation and the impact on consumption, investment and growth. The debate in advanced economies is yo-yo-ing around inflation, stagflation and recession. The IMF has downgraded the growth forecasts for every major economy and this has implications for the low-income nations.
The low-income parts of the world do not have the luxury of nuanced debates about cost of capital and recession. Theirs is an existential crisis. If things worsen the support for the cause will evaporate slowly but surely. Already there is a rising sentiment in parts of the world that this is not “their” war.
It is imperative for advanced economies to move beyond verbiage, wield their strength and act to restore the supply-demand imbalance in energy and food markets. Confidence-building measures must start with the evacuation of grains stuck in Ukraine through a peace force and enabling higher gas/oil output to cool prices. Logically funding of the World Bank and IMF for structural assistance must follow to enable hope in the future.
Economic distress — as witnessed in parts of Africa and Asia — is a recipe for the unravelling of the very rule-based world order the fragile coalition is trying to preserve.
Shankkar Aiyar, political economy analyst, is author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at email@example.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here