Russia Continues to Be Pushed Away From Western Trading Systems, to Form New Systems With China

The current global trading system is about to come to a devastating and abrupt end.

Kurt Cobb, reported on the history of wars and the economic effects and the disintegration of the current world trading systems:

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 blocs 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.]

Cobb notes that Russia has its own trade weapons and because it is the second largest oil producer behind the United States, and number one in natural gas production. Because of this, Russia is in a really good position as countries, especially in Europe, heavily rely on Russian supplies.

“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.” Wrote Cobb.

Adding that, “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 calibrated since such a move would, of course, further pummel the Russian economy by reducing or eliminating export earnings from the targeted products.” Said Cobb.

Foreign businesses are however, leaving Russia in droves and because of Russian assets being frozen overseas, foreign companies are concerned that Russia will seize the assets of foreign individuals.

The world’s largest international payment system, SWIFT, has cut off several Russian banks and this move could potentially see Russia and other sanction burdened nations like North Korea, Iran, Cuba and Syria, developing their own payment system, by passing the Big Banks all together. China could also join this, while also still using SWIFT and continue to trade.

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.” Noted Cobb.

Adding that, “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).” Wrote Cobb.