A thorough analysis by the Institute for International Finance sums all this up: "We expect sanctions imposed in recent days to have a dramatic effect on Russia's financial system as well as the country as a whole." A big share of the country's US$630 billion in liquid reserves will be rendered useless. The central bank has already had to double interest rates. There are runs on banks. With the exception of energy, the economy will be substantially isolated.
The pain will not all fall on Russia. Costs of oil and gas will be high for longer, exacerbating global inflationary pressure. Food prices will also rise. Should Russia cut off its energy exports (at great cost to itself), the disruption would be even more severe. Russian natural gas generates 9 per cent of gross available energy in the eurozone and the EU as a whole. But winter, the season of greatest need, is at least passing.
Beyond these relatively specific effects, the combination of war, nuclear threats and economic sanctions hugely increases uncertainty. Central banks will find deciding how to tighten monetary policy even more difficult. The same will be true for governments trying to cushion the blow of energy shocks.
In the long term, the economic effects will follow geopolitics. If the outcome is a deep and prolonged division between the west and a bloc centred on China and Russia, economic divisions will follow. Everybody would try to reduce their dependence on contentious and unreliable partners. Politics trumps economics in such a world. At a global level, the economy would be reconfigured. But in times of war, politics always trumps economics. We do not yet know how.
Europe will surely change most. A huge step has been taken by Germany, with its recognition that its post-cold war stance is now untenable. It has to become the heart of a powerful European security structure able to protect itself against a revanchist Russia. This must include a huge effort to reduce energy dependency. Tragically, Europe needs to recognise that the US will not be a reliable ally so long as Donald Trump, who views Putin as a "genius", commands the Republican party. Britain, for its part, has to recognise that it will always be a European power. It must commit itself more deeply to the defence of the continent, above all of its eastern European allies. All this will need resolve and cost money.
In this new world, the position of China will be a central concern. Its leadership needs to understand that supporting Russia is now incompatible with friendly relations with western countries. On the contrary, the latter will have to make strategic security an overriding imperative of their economic policy. If China decides to rely on a new axis of irredentist authoritarians against the west, global economic division must follow. Businesses have to take note of this.
A war of choice on the children of a peaceful democracy is not an action we in the west can allow ourselves to forget. Nor can we forgive those who started it or those who support it. The memories of our own past must forbid it. We are in a new ideological conflict, not one between communists and capitalists, but one between irredentist tyranny and liberal democracy. In many ways, this will be more dangerous than the cold war. Putin holds unchecked and arbitrary power. So long as he is in the Kremlin, the world will be perilous. It is not clear whether the same is true of China's Xi Jinping. But we may yet learn that it is.
This is not a conflict with the Russian people. We should still hope for them a political regime worthy of their contribution to our civilisation. It is a conflict with their regime. Russia has emerged as a pariah ruled by a gangster. We cannot live in peace and security with such a neighbour. This invasion must not stand, since its success would threaten us all. We are in a new world. We must understand that and act accordingly.
Written by: Martin Wolf
© Financial Times
