100 Days of Russia Ukraine Crisis - It's Impact on World Economy & Indian Defence Imports

1.?Background. On 24 Feb 22 as the world watched in horror, as Russia invaded its neighbouring country Ukraine on the pretext that it wanted to demilitarise and de-Nazify Ukraine.??Russian President Vladimir Putin stated that the “aim of the special military operation was to protect Russia and demilitarise Ukraine. The Russian President has been trying to assert pressure on Ukraine which was a part of the United Soviet Socialist Republic (USSR) in the pre cold war era. Shortly after the fall of the Soviet Union, Ukraine voted for independence. The Ukrainian people overwhelmingly support becoming a sovereign state. After the collapse of USSR, North Atlantic Treaty Organisation (NATO) had been gradually increasing its sphere of influence in Eastern Europe with Hungary, Poland, Estonia, Latvia, Lithuania and Czech Republic joining the alliance. The NATO had been steadily making inroads since the 1990s which had always been a cause of concern for Russia.?

?????????Fig 1 – NATO expansion 1949-present

2.?????????????As can be analysed from above map, in the decade from 1999-2009, NATO had been creeping up in Eastern Europe and was coming dangerously close to its Cold War enemy Russia. The Russians started to grow wary of this expansion and in the interim Former Ukrainian president Leonid Kuchma publicly announced Ukraine’s interest in NATO membership in May 2002. Ukraine then applied for a Membership Action Plan (MAP) in 2008 but former President Viktor Yanukovich, a Putin-backed politician who did not want to pursue a NATO relationship stalled it in 2010. The Membership Action Plan (MAP) is a NATO programme of advice, assistance and practical support tailored to the individual needs of countries wishing to join the Alliance. More recently, Ukraine had made its intentions of joining the NATO clear post annexation of Crimea and Donbas areas by Russia in 2014. In 2017, Ukraine adopted a constitutional amendment that committed itself to NATO membership. Ukraine then adopted a National Security Strategy aimed at developing its NATO partnership in 2021. Russia would never have agreed to Ukraine joining the NATO and allowing United States of America (USA) be just at its door-step.??

3.?????????????Chronology of Events.?????The Budapest Memorandum on Security?Assurances was signed on 05 Dec 94 after Ukraine’s agreement to transfer all nuclear weapons from the Cold War to the Russian Federation, making Ukraine a non-nuclear power. Prior to this, Ukraine had physical possession of the world’s third-largest nuclear stockpile. In addition to Ukraine, the Budapest Memorandum was signed by the United States, the United Kingdom and Russia. All the signatories committed to honouring Ukraine’s sovereignty and its rights to its territory. Subsequently, The Orange Revolution overturned the results of the Nov-Dec 04 elections. A presidential election between Viktor Yushchenko, a western-oriented candidate, and Viktor Yanukovych, who was supported by Russia, creates a massive controversy. Yushchenko was mysteriously poisoned before the election but was able to recover. Victory was declared in favour of Yanukovych but the election was widely seen as fraudulent. Ukrainians take to the street wearing orange, which was Yushchenko’s campaign colour. By December, protestors were able to force a re-vote, resulting in a victory for Yushchenko. Victor Yushchenko, then started rallying for a NATO membership in April 08. However, Putin makes his opposition to Ukrainian membership known to NATO leaders, at one point allegedly telling President George W. Bush that Ukraine is “not even a real nation-state.” Ultimately, Ukraine was denied a Membership Action Plan (MAP) by NATO. Protests erupted in Ukraine in Nov 13Feb 14 after President Victor Yanukovych, who came back to power in 2010, changed his political stance and started aligning towards Russia. There were widespread protests about the perceived corruption in the government at Maidan Square in Kyiv in which approximately 130 civilians were killed. Victor Yanukovych fled to Russia and the new regime resolved to orient Ukraine towards European Union. This was followed by annexation of Crimea, a Ukrainian peninsula with predominantly Russian population in Mar 14. The annexation prompted an international outrage and condemnation by United Nations and European Union. In April 14, Russian supported militia seized government buildings in Luhansk and Donetsk and declared independence in May 14 as Luhansk People’s Republic and Donetsk People’s Republic. Together these regions are called as Donbas. Ukrainian forces attempted to retake the regions but failed in the face of Russian forces. Russia threatened to annex more areas and finally a peace deal known as Minsk-I was signed to restore normalcy. The Minsk-I peace deal was short-lived and a full scale fighting began in Jan 15. The separatists got hold of large areas of Donbas and finally to restore peace another peace deal Minsk-II was signed.?

4.?????????????On 21 Apr 19, Volodymyr Zelenesky, a former comedian is elected as the Ukranian President defeating the pro-Russian incumbent President Petro Poroshenko in the Presidential election. Zelenesky’s political promises included ending the war with Russia and rooting out corruption out of the Ukranian Government.?

5.?????????????In early Dec 21, Zelensky cracked down on pro-Russian Ukrainian oligarchs, including Viktor Medvedchuk, a close friend of Putin. Subsequently, Putin deploys increasing numbers of troops near the Ukrainian border and publishes an article claiming that Russians and Ukrainians are “one people.” By December, tens of thousands of Russian troops are deployed to the borders and Putin issues demands to NATO and the United States. Among these demands is that Ukraine never be admitted to NATO – a request rejected by the Biden administration. In 2014, the Ukrainian regions of Donetsk and Luhansk broke away from Ukraine, under the leadership of what the Ukrainian government considered to be Russian-backed terrorists. Following the breakdown of relations with NATO and the West on 21 Feb 22, Putin recognized these territories as independent states and sent troops in to “keep the peace.”?

6.?????????????Days after recognizing the breakaway territories, Russia launched a full-scale invasion of Ukraine on 24 Feb 22. The invasion began in the eastern Ukrainian territory of Donbas. Zelenskyy declared martial law in Ukraine and officially broke diplomatic ties with Russia and Putin’s actions were condemned across the world and within Russia.?

???????????Fig 2- Russian Invasion

Impact of Russia Ukraine War on World Economy

7.?????????????The Russia-Ukraine war about to enter its 100th?day and presently there is no peace deal between the two warring nations which is in sight in near future. The war has caused an unprecedented damage and destruction in Ukraine. The Ukrainian masses have fled their own homes and innumerable people have lost their lives. The damage to the infrastructure of Ukraine is unparalleled and has sent back the nation decades into antiquity.?

8.?????????????Impact on Global Economy. The Russia Ukraine War has impacted the global economy in terms of financial sanctions, rise in global commodity prices and disruption in global supply chain of essential goods.???

(a)???????????Sanctions. The US was quick on imposing sanctions on Russia post the invasion targeting the Central Bank Of Russia (CBR) and the European Union (EU) soon followed. These sanctions prevent the CBR from accessing about half of the US$643bn that it holds in foreign-exchange reserves by blocking its ability to convert assets held in US dollars and Euros into Rubles. The measure also prevents Russia from tapping its emergency sovereign wealth fund, the National Wealth Fund (NWF). In addition, the US and the EU have announced that some Russian banks will be cut off from SWIFT, the global payments system. The US and EU have previously been extremely cautious with imposing sanctions on Russia. However, the decision to restrict Russian Energy exports has been kept in the back burner as it will have serious ramifications on the EU economies. Financial experts have even predicted that such a step might even send the EU economies into recession. Additionally, economic measures have been instituted to ban new investments in Russia.?

Some of the other sanctions imposed on Russia are as under:-?

• (i)?????????????Ban on items with both civil and military use imposed by UK, EU and US.?
• (ii)????????????Ban on Russian flights from UK, US, EU and Canadian air space and private jets hired by Russians.?
• (iii)???????????UK and EU have banned the export of luxury goods to Russia. Additionally, UK has imposed a tax of 35% on import of certain Russian commodities.?
• (iv)??????????Assets belonging to Russian President Vladimir Putin and his foreign minister Sergei Lavrov are also being frozen in the US, EU, UK and Canada.
• (v)????????????The US?is banning all Russian oil and gas imports?and the UK will phase out Russian oil imports by the end of 2022.
• (vi)??????????EU which imports almost 40% of its oil and gas from Russia is looking for alternative energy sources to mitigate dependency on Russia.?
• (vii)?????????Germany has?put on hold permission for the Nord Stream 2 gas pipeline?from Russia to open. Nord Stream 2 is a 1,200km pipeline under the Baltic Sea, which will take gas from the Russian coast near St Petersburg to Lubmin in Germany and running parallel to the existing Nord Stream 1operating since 2011.
• (viii)????????A growing number of international companies including?McDonald's, Coca-Cola and Starbucks have suspended trading in Russia.?
• (ix)??????????In retaliation, Russia has?banned exports of more than 200 products?until the end of 2022, including telecoms, medical, vehicle, agricultural, electrical equipment and timber.

(b)???????????Price of Commodities & Services.?As the global impact of sanctions will be limited, the most serious effect of the Russia-Ukraine conflict for the world economy will come in the form of higher commodities prices. Commodities prices could jump owing to concerns around supplies, the destruction of physical infrastructure and sanctions. The following commodities will take the biggest hit because of the ongoing war:-?

• (i)?????????????Oil prices will remain above US$100/b as long as conflict rages in Ukraine.
• (ii)????????????Gas prices are expected to rise by atleast 50% in this financial year.?
• (iii)???????????Russia is also a major producer of several base metals?(aluminium, titanium, palladium and nickel), all of which will register price jumps.?
• (iv)??????????Prices of agricultural commodities (wheat, maize, barley and rapeseed) will soar.?As a result India has stopped export of wheat.
• (v)???????????World Bank also pointed to the global?impact on services trade as outbound travel was disrupted with airspace closures, travel restrictions, sanctions and increased fuel prices. Russia and Ukraine are among the top 10 countries for total global departures and a key source of revenue for tourism-reliant countries in the Europe, East Asia and the Pacific, Middle East, North Africa and South Asia.?

(c)???????????Debt reservicing and finance.????In March, World Bank pointed to the existence of?high debt among emerging markets and developing economies. As per its estimates, these economies account for about 40% of the global?GDP. The dilemma for policymakers was to trade between containing inflation and preserving economic recovery post pandemic. It added the geopolitical tensions “darkened the outlook” for developing countries that are major commodity importers or dependent on tourism or remittances. Citing?the situation across Africa, it elaborated, external borrowing?costs are rising with bond spreads up by an average of 20 basis points.?Further, the calculus has suddenly changed for countries with high debt, limited reserves and payments due in the near-term, example being Sri Lanka which was considering an IMF funding to service its debt burden.?Financial spill-overs are most likely to be felt in advanced economies with exposure to Russian financial assets, including some Italian, French and Austrian banks, according to World Bank. Their exposure to the sanctioned country’s economy is through business ties and local presence. “As a result, European bank stocks lost more than a fifth of their value since the onset of the war, but high capital adequacy and liquidity ratios have cushioned the impact,” the same report noted.?

(d)???????????Disruption of Supply Chain. Financial sanctions will have an impact on supply chains and trade, financial channels through which to conduct trade with Russia will cease to exist. Additionally, destruction of some transport infrastructure (notably ports in Ukraine) will compound existing supply-chain issues. The countries still willing to trade with Russia will have to find alternate trade routes to export and import products from Russia. This will cause incessant delays in trade and possible accrue much more financial loss to trading countries than normal. Land based air routes between Asia and Europe will be disrupted. Many countries have already negated their air space for Russian aircraft. Sea freight routes through the Black Sea will be cancelled for several weeks following Ukraine’s decision to shut down commercial shipping and Turkey’s move to restrict transit through the Bosphorus.

9.?????????????Impact on?Indian?Armed Forces.???????????India imports defence equipment and spares both from Russia and Ukraine. About 60% of India’s military hardware is Russian-origin, which is sourced from across erstwhile USSR. When the Soviet Union broke up into different countries, many of the factories stayed exactly where they were. The Ukraine was a major manufacturer in the Soviet weapons supply chain and military development research. So several big defence units which had been established in what became Ukraine stayed right there. But there was a free exchange between the two countries so many of the components were made in Russia and transported to Ukraine and vice-versa.?

• (a)???????????Russia.??????????During Russian President Vladimir Putin’s visit to New Delhi last December, India and Russia inked a Rs 50 billion deal for 610,000 AK-203 assault rifles to be manufactured jointly in Uttar Pradesh. Russia is also due to deliver one stealth Frigate for the Navy next year and another two are being made by the Goa Shipyard Ltd under a technology transfer deal slated to be delivered in 2026-27. The Russians are also due to deliver a third Akula class nuclear attack submarine in 2025. As regards other planned capital procurements from Russia, such as VSHORAD systems and the Ka-226T utility helicopters, have been put on hold by Government of India. The supply of spares and after-sales support for some of the Russian-origin equipment that form the mainstay of the Army, Navy and the Indian Air Force is going to be a challenge. Due to the economic sanctions, India is finding it difficult to undertake delivery and payments to Russia.
• (b)???????????Ukraine.????????On the other hand, a bigger challenge would be to get spares from war-ravaged?Ukraine. The extent of damage to Ukraine’s military infrastructure is yet to be ascertained. Unlike Russia, payments to Ukraine won’t be as affected since the country is paid in dollars and not facing any sanction. However, it has to be assessed if the production lines for supply of spares for the various equipment and weapon systems in use with the Indian Armed Forces are operational or have seen damages in the conflict. Some of the critical equipment that get their spares from Ukraine include the 130mm medium guns, spares for T-72 tanks as well as the T-90 tanks, the OSA-AK surface-to-air missile system, and Tunguska anti-aircraft weapon system. The gas turbine engines of more than 30 ships of the Indian Navy also come from Ukraine??(M/s Zorya Mashproekt) and the country has also been providing critical parts for the upgrade of the IAF’s transport aircraft AN-32 (M/s Antonov), a programme which has been nearly completed. Both companies are in constant contact with the Indian Navy and IAF supplying parts and doing regular overhauls. The Navy is thought to keep about six to eight reserve turbines. In November 21, BHEL and M/s Zorya Mashproekt formed a joint venture to manufacture components for the gas turbines and also carry out overhauling in India.?India is currently buying ships that are being made in Russia. But since 2014, after the earlier crisis, Ukraine refused to sell the gas turbine engines to Russia. Finally, India had to perform a complex deal by which it bought the engines and then had them transported to Russia.?Four of the Navy’s ships that are being built are scheduled to be fitted with Zorya gas turbines. Two are at an advanced stage of construction in Russia and two more are scheduled to be built at the Goa Shipyard. It’s not known whether the Russian shipyards have already bought the engines for the ships from Ukraine. The Russians are said to be deliberately targeting Ukraine’s sophisticated defence industry as part of its attempts to bring the country to its knees. Russia’s heavy bombardment of Ukraine and the damage to infrastructure in the country could have both short-term and longer-term consequences for India’s armed forces. In the short-term, it may be possible to cope with minor difficulties with spare parts that are already in India. In the longer term, the question arises whether Ukraine will be in any position to resume manufacturing aircraft or gas turbines or even undertake regular maintenance.

10.??????????Conclusion.?????To conclude the article, I would just like to say that no matter what the outcome of the war is, thousands of lives have already been lost. Millions of people have been displaced from their homes and have taken shelters in refugee camps along the borders of Ukraine. The countries of the world need to come together and find a peaceful solution to this conflict as soon as possible. The scale of damage to men, material and infrastructure has already crossed its limits. The world is at the edge of an economical meltdown. As far as resolution to the supply chain management of spares is concerned, the government is exploring different options, including diplomatic routes, to keep the spares’ supply and deliveries of major equipment, a bigger challenge would be to get spares from war-ravaged?Ukraine. Ideally, India should have worked on transfer of technology (ToT) or a joint venture with Russian/ Ukrainian firms (which has recently started) for setting up their manufacturing unit in India long ago. Many countries are still sending military aid to Ukraine. This means the world is asking Ukraine to continue the war with Russia. The longer this war continues, the worse the situation is going to get. It is only a matter of time when the other countries join the war and this becomes a full-fledged World War III. There is an urgent need to find a peaceful solution to this crisis or else we are staring at another World War which will send us back to Stone Age. A lot of people have expressed their opinion that this war could have been avoided. But I would like to end with the words of??Neville Chamberlain, “In war, whichever side may call itself the victor, there are no winners, but all are losers“.