3 Economic Implications of Russia’s War on Ukraine
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Economics Apr 6, 2022

3 Economic Implications of Russia’s War on Ukraine

“We are seeing a world that’s going to be less than the sum of its parts.”

planet earth seen from space cracking on the surface

Yevgenia Nayberg

Based on insights from

Sergio Rebelo

Russia’s unprovoked war with Ukraine has been a disaster on many levels, first and foremost in terms of human suffering, displacement, and death.

But the war has also highlighted some uncomfortable truths about the global economy. “We are seeing a world that’s going to be less than the sum of its parts,” says Sergio Rebelo, a professor of finance at Kellogg.

He spoke about the economic implications of the conflict in a recent The Insightful Leader Live webinar. Here are three takeaways.

We Could See a Diminished Role for the Dollar

The U.S. only produces about 16 percent of the world’s goods and services. Yet, the U.S. dollar is involved in about half of all financial transactions and accounts for 60 percent of the world’s foreign reserves, giving it an outsized role as a global currency.

But this role may diminish somewhat in the wake of U.S. sanctions, which froze Russian central bank assets. “So, suddenly, Russia could not use that money, making it hard to conduct transactions and pay for things that Russia needs to buy,” says Rebelo.

Before the war, Russia had begun diversifying its reserves away from the dollar, and the trend is almost certain to continue. Going forward, other undemocratic countries might want their reserves in an alternative currency, too; they may even want to develop an alternative financial system to the one controlled by the West. That way, should sanctions be directed at them next, the impact would be partially blunted.

“We might see an erosion of the role of the dollar in world affairs,” says Rebelo. He envisions the possibility of a world with two or three global currencies instead of just one.

So far, though, Bitcoin doesn’t seem to be a viable contender for an alternative currency of choice. “This was the moment for Bitcoin to shine!” says Rebelo. But it remains difficult to transact with, and its values are highly correlated with the stock market, dropping sharply when the invasion began and recovering with the market. This correlation suggests that “Bitcoin is more a speculative asset than anything else.”

Privatization Does Not Always Mean Prosperity

The West generally believed that quickly privatizing Communist economies would create prosperity. Under Communist regimes, firms were inefficient; creating market economies would increase efficiency and spur free trade with other countries. Trade would encourage specialization, which would further increase efficiency. Incomes would rise, more democratic norms would take hold, and nations would flourish.

This war highlights just how naïve this belief looks today. “We now realize that creating market economies is difficult. You need institutions such as courts that can enforce the rule of law. You need a functioning government,” says Rebelo.

“We are seeing a world that’s going to be less than the sum of its parts.”

— Sergio Rebelo

In the Soviet Union, income was relatively low—only about 25 percent of U.S. income. But income inequality was also low. Then the privatization process was rushed and manipulated, allowing a few people to accumulate vast amounts of wealth.

“What was created is an economy that is controlled by a very small number of people,” says Rebelo. “We now have in Russia very high levels of income inequality.” He notes that a relatively small group of oligarchs controls roughly 40 percent of employment and sales.

Meanwhile, far from adopting democratic norms and flourishing, Russia is becoming increasingly authoritarian and experiencing an astonishing “brain drain.” Forty-three percent of those who have emigrated to the U.S. from Russia have a Master’s degree or Ph.D., while another 47 percent have at least some higher education.

“Russia is losing a lot of skilled people that could modernize its economy and reduce its dependency on oil and gas,” says Rebelo.

There Are Limits to Globalization

The current war has also splashed cold water on the hope that trade would, in addition to lifting incomes, reduce conflict around the world. The thinking was that “if you brought together the entire world and had free trade, you would drastically reduce the risk of war because countries that trade, they know each other and have common commercial interests,” says Rebelo.

To some extent, trading relationships do extend to broader political partnerships. For instance, China, India, and Turkey are all significant trading partners with Russia and have generally been very careful not to criticize Russia on a global stage. But Ukraine and Germany are also major trading partners with Russia, showing the limits of globalization’s ability to keep the peace.

While globalization has many benefits, a broader view suggests that it is not “an unfailing antidote to war,” says Rebelo. He points to data suggesting that decades of increased globalization have not led to a commensurate decline in conflicts around the world.

Rebelo is concerned that the war will only speed up the world’s rejection of globalization, a trend spurred first by the global financial crisis and then hastened by the pandemic. The shift would upend “a lot of the progress that we’ve made in bringing the world together, which makes economies more efficient through specialization,” says Rebelo.

“We are going to see less of that going forward.”

Featured Faculty

MUFG Bank Distinguished Professor of International Finance; Professor of Finance

About the Writer

Jessica Love is editor-in-chief of Kellogg Insight.

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