Uncertain times

Late US senator John McCain once called Russia “a gas station masquerading as a country”. Well, the gas station might soon close its service for European clients. Fears of a Russian attack on Ukraine have reached fever pitch following Putin’s recognition of and military support for breakaway Eastern Ukrainian territories. Since the US administration started raising alarm in early December over Russia’s massive military deployments near Ukrainian border, oil prices have already risen more than 40 percent.

The increasingly volatile situation is a threat to not just hydro-carbon prices, but also food imports, as Ukraine and Russia are among major grain producers and exporters as well. In the backdrop where the pandemic has stressed out the supply chains leading to higher prices, shortages and long lead times, lighting another fire beneath food and fuel prices is likely going to make the macroeconomic outlook even more unsettling for central banks that have been looking to tame inflation without choking growth.

It appears that the Russian saber-rattling isn’t just a theatric, as the stakes are getting bigger amid one diplomatic opportunity being missed after another, with different world leaders trying in vain to cool things down. Analysts now predict that Russia has incentive to escalate gradually – engage in military conflict in installments, in a slow motion, run a marathon than do a sprint. The peaceniks, however, still wonder: is there still an off-ramp somewhere along the highway, to save countries involved from a terrible crash?

There has been a lot of commentary in recent weeks on how it is futile to game possible scenarios because it is so hard to read Putin’s mind. Well, if the ex-KGB strongman is so hard to figure out, analysts and pundits have also been having a lot of difficulty gauging what more punitive counter-measures (beyond economic sanctions) can the US and its European allies resort to, in case the Russian military launched a full-scale assault on mainland Ukraine all the way up to capital Kyiv.

Wielding the threat of imposing economic hardship on Russia, the US and its allies appear as bystanders in this conflict, which has the wild potential to result in a rare territorial conquest by a major power since World War II. Economic costs Russia can bear alright, thanks to its experience with post-Crimea sanctions and its recent growing reliance on China lately. It’s a catch-22: unless the West is willing to push military costs on Russia (a scenario that itself feeds war), Russia may not feel sufficiently deterred.

The West also looks divided on the matter of economic sanctions. While US-sponsored sanctions tend to have a wide reach, Biden wants to coordinate with European allies to impose leakage-proof sanctions. But consensus may be hard to reach at EU, for several Western European countries (especially Germany and Italy) are dependent on Russian gas and a few Eastern European countries (especially Hungary) do not want to antagonize Russia. If Putin is able to slow-walk the invasion, he may get away with less cost.

Meanwhile, Pakistan’s diplomacy seems to have lost its usual balancing act during this crisis. One struggles to fathom how PM Khan’s Russia visit will serve Pakistan’s interests, especially at a time when this country cannot afford to be seen as taking sides in big-power conflicts. At the eleventh hour of a major war potentially breaking out in Europe, Khan’s Moscow trip may be seen in the West as a tacit endorsement of Russia. The sojourn may serve the PM politically, but the optics do not look good at all.