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What a Russian financial crisis could mean for the rest of the world


As the U.S. and its allies continue to impose harsh financial sanctions on Russia, the country seems to be nearing a financial crisis. As President Biden put it yesterday in a speech, the Russian ruble has been reduced to, quote, "rubble." Western companies have withdrawn their business. Russian banks have largely been cut off from the global financial system. And this past week, Biden pushed to exclude Russia from the G-20, the group of 20 leading economies.

We wanted to understand what an unstable Russian economy could mean for the rest of the world, so we called Adam Posen. He recently wrote a piece in Foreign Affairs magazine titled "The End Of Globalization?" exploring just that question. He's an economist and the president of the Peterson Institute for International Economics, a nonpartisan group that researches the global economy. When we spoke, I started by asking him to characterize the current state of the Russian economy.

ADAM POSEN: Quite bad, but not horrific. So they have had a sudden stop in access to various technological goods, luxury goods, consumer goods. The purchasing power of their home currency is much lower - a fraction, as you said, of what it was before. And so they're starting to feel real inflation, and they're also starting to feel some interruptions in their banking system and access to finance. But it's not yet a disaster. I mean, it's not yet Greece in 2008.

KURTZLEBEN: Let's turn to some of the countries that are imposing these sanctions, including the U.S. It seems that there's a delicate balance to strike when you're essentially casting Russia out of the global economy. On the one hand, countries imposing sanctions want to inflict pain and induce Russia to end its invasion. But on the other hand, they risk hurting their own economies and the global economy in the process. Is that more or less right?

POSEN: That is more or less right. Economics is always win-win, and - not always, but, I mean, generally in international trade at this scale. And so if you do something to a Russia or a China or a North Korea or a Cuba, you also do something back to yourself because you're foregoing opportunities. You're foregoing markets. You're foregoing what they have to offer. In this case, though, it's pretty asymmetric. Russia really only has to offer, in economic terms, its energy exports. And so Germany, Italy and a couple other European countries are really dependent on those energy exports. But almost everything else can be substituted for. And even those, as we just heard coming out of the G-7 and European Council meetings, the European countries are going to move very far away from Russian sourcing for energy as fast as they can.

KURTZLEBEN: Well, I want to talk about some of the practical effects of all of this. Last week, the Organisation for Economic Co-operation and Development, or OECD, released a report that concluded that this war will weaken global economic growth. By their calculations, growth will be 1.1% lower than if the conflict had not taken place. So I want to ask you, what does that look like in real life? Does it mean even higher prices, greater shortages of certain goods than a lot of people worldwide have right now?

POSEN: I think that's a number that's actually kind of misleading for the practical life for people you're talking about. It's not about global growth in some abstract way. It's about who's being deprived of what. So the Russian people are suffering. The Ukrainian people are obviously suffering. Normal people in northern and central Europe are going to have energy shortages and inflation. U.S. people are going to have a little bit more inflation. But the developing world, particularly in northern Africa and the Middle East, there are many of those countries, notably Egypt, that are very dependent on Ukraine for wheat, which is a huge part of their diet, particularly for poorer people. And it's not easy to substitute for that. There are poorer countries in Eastern Europe that are very dependent on Russia and Ukraine for energy, but also for selling their own goods, and that's going to go away. So where this is going to be felt is very different depending on where you live.

KURTZLEBEN: You make a point in your piece that the sanctions levied at Russia are pushing the U.S. and China further apart. Tell us why you think that is. Why is that happening?

POSEN: Well, obviously, the U.S. and China have been growing more and more suspicious or even hostile towards each other, and I mean their governments, not necessarily their peoples. And so the conflict and the separation were already building. What I think Russia's invasion of Ukraine and then the sanctions do is that they accelerate that process because China's having to be very careful. They've got Russia as a national security ally. They want to weaken the U.S. economically. They want to be a big player. But at the same time, if they go too overtly into supporting Russia, they'll violate the sanctions from the U.S. and the allies, and that'll really hit their economy. But meanwhile, in the U.S., and particularly in the U.S. Congress, as long as China doesn't publicly condemn Russia and join the sanctions, it's going to be seen as not enough. So I think this is a break point, unfortunately, where the two sides are going to separate more even if they were already starting to do so.

KURTZLEBEN: And we're inching here towards one of the bigger ideas in your piece, which is that globalization itself was already under some attack, as evidenced by the rise of populist nationalists in several countries. How lasting is the impact here on global economic integration?

POSEN: Unfortunately, again, I think it's going to be quite substantial. Now, we can have separation for good reasons. As I said in my piece, the - you know, there are things that are more important than economic efficiency, like human rights, like national security. But that doesn't mean you can ignore the economic costs of dividing the world along those lines. And there are going to be major costs. Is this the turning point like, say, unfortunately, again, World War I was? God forbid. But is this a turning point where multinational businesses and governments are increasingly going to be saying, I may have to choose sides? I may have to double up on my investment to make sure I'm in safe places if I want to export or produce in China versus export or produce in the U.S. And then that cascades. Then you start having different business relationships, different technological standards, less competition, less variety. So this is a big deal. It may be necessary because of the ethical and geopolitical divisions, but it is costly.

KURTZLEBEN: That was Adam Posen. He's the president of Peterson Institute for International Economics. You can read his piece, "The End Of Globalization?," in Foreign Affairs magazine. Adam, thank you so much.

POSEN: Thank you so much for having me, Danielle.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

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