Stress fractures

The large-scale sanctions imposed by the US and Europe on Russia are having a systemic impact on the global economic order

The escalation of the Russia-Ukraine conflict and the large-scale sanctions against Russia by the United States and Europe mark a turning point in the 30 years' development of economic globalization and are changing its direction.

In the decades since the end of the Cold War, the rapid process of globalization, which has promoted the division of labor, specialization and global scientific and technological innovation in the framework of openness and multilateralism, gradually formed an overall pattern of circulation between the US and China and the circulation between Russia and Europe.

In the Russia-Europe circulation, Russia supplies energy to Europe to obtain capital goods and consumer goods, in return, Europe ensures its manufacturing competitiveness and innovation profit margins based on the stable and low-cost energy supply. But the escalation of the Russia-Ukraine conflict and extreme sanctions by the US and Europe break this circulation.

In imposing sanctions, the US and Europe have expanded the connotation and application of the concept of national security by promoting so-called values-based trade and creating small clique corporation around the world, which undermines the international division of labor and disrupts the existing global supply chains.

In May 2022, the US launched the "Indo-Pacific Economic Framework for Prosperity", which covers 14 countries with a population of 2.5 billion and a GDP of about 40 percent of the world's total and establishes rules and standards in areas such as trade, supply chain, and clean energy. In August 2022, Joe Biden signed the CHIPS and Science Act, which restricts regular scientific and technological cooperation between China and the US.

The strategies of containment and competition among the world's major economies will undoubtedly have a serious negative impact on global trade, investment and the stability of industry chains.

In addition, the US has infinitely extended the list of technologies and products involving national security to pursue its domestic economic securitization. In his State of the Union address on Feb 7, Joe Biden even abandoned the spirit of the US-Canada-Mexico Free Trade Agreement, demanding the use and purchase of US-made products, which came on the heels of a trade war with the European Union over the Inflation Reduction Act.

As the US has abandoned its advocacy of free trade and undermined the multilateral international trade order, the theme of the world economy has shifted its priority from development to security.

The global financial system is also at a watershed. The US and Europe's weaponization of international financial public goods, such as SWIFT and the US dollar, has made many countries question the foundations of the international financial order, such as the International Monetary Fund and World Bank, damaged the credibility of the US dollar as an international reserve currency, and raised the importance of alternative international currencies.

Against the backdrop of intensifying geopolitical conflicts, countries are rapidly diversifying their foreign exchange reserves. Russia has abandoned the dollar and euro in its foreign exchange reserves in favor of gold and the renminbi; China and Saudi Arabia completed important transactions with renminbi payments for the first time at the end of 2022; India and Middle Eastern oil-producing countries will try to expand energy settlement in local currency this year, while South African Foreign Minister Naledi Pandor told the media that BRICS countries are forging a new payment system to get rid of the dollar's control.

Since oil settlements have previously been made in US dollars, settling in national currencies will change the global financial landscape. Many economies such as Russia, China, India and Turkiye have chosen to reduce the use of the US dollar in their international settlements and foreign reserves, and the status of alternative currencies such as the renminbi as a foreign reserve currency has risen.

Although the current dominance of the US dollar is still hard to shake, its share in international reserves is gradually declining. In the mid-1980s, the US dollar accounted for 85 percent of the world's foreign reserves, and this share fell to 59 percent in the first half of 2022.

The existing global trade patterns and flows are shifting as well, due to the impact of the US-driven values-based trade and the abuse of national security measures. In particular, in the last six months, the US refused to fulfill the World Trade Organization's anti-dumping and countervailing ruling on its improper use of tariffs in the steel and aluminum trade, which has undermined international trade rules.

The status of the US as China's largest trading partner has been replaced by Association of Southeast Asian Nations and the EU, while the US' imports from major European economies (the EU and the United Kingdom) have exceeded imports from China since 2019, and its exports to Europe have continued to rise.

The global energy landscape is undergoing restructuring. The US and European sanctions against Russia have led to a "hard decoupling" of European and Russian energy relations. The push for price limits on Russian oil and natural gas is driving the restructuring of the global energy landscape.

Russia is strategically rebalancing its energy exports toward the Asia-Pacific and the Global South, while the US and Europe are taking advantage of sanctions and price restrictions on Russian oil to seize energy pricing power from oil-producing countries, resulting in significant changes in the energy relations between the Organization of Petroleum Exporting Countries and the US.

The restrictions on demand for Russian energy have not only changed the geopolitical and economic structure of oil and gas supply and demand, but also forced an adjustment of the global energy transition process, especially in European countries, and will very likely delay the global goal of achieving carbon neutrality.

The global supply chain is reshuffling. With the escalation of the Russia-Ukraine conflict, prolonged military confrontation and depletion on the battlefield will ultimately test the potential of the manufacturing industry chain to sustain the supply of war materials. It also sheds light on why the US is pushing to move manufacturing back and restructure the international supply chain.

As it imposes sanctions, the US is attempting to establish an industry and technology alliance with the friend-shoring strategy and build conglomerate supply chains. The EU's decoupling from Russian energy entails industrial decoupling. The "Indo-Pacific Economic Framework for Prosperity" built by the US, the US-EU Technology and Trade Council, and the CHIPS and Science Act are reshaping global industrial chains and supply chains toward conglomeration, friendshoring and nearshoring.

The author is the director of the Department of Russian Economy of the Institute of Russian, Eastern European and Central Asian Studies at the Chinese Academy of Social Sciences and a researcher of National Institute for Global Strategy at the CASS. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.