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Economic War Games: Are they worth the effort?

Dan Hadley Management Consultant and Economist in The Australian Business Executive

The 1983 science fiction thriller, “WarGames” provided viewers with a view into the deadly possibilities of thermonuclear war. Starring Matthew Broderick as David Lightman (a high school teenager interested in computers, hacking and games), the film sees the main character, accidentally hacking into the United States nuclear launch capabilities at NORAD. Speaking to the Computer known as “Joshua” or WOPR (War Operation Plan Response) David thinks he is playing a fun computer game, whilst he unwittingly puts the entire US Military on high alert who believe a Nuclear War with the (then) USSR is about to ensue. The film, though very entertaining, causes the viewer to think about how escalating events could lead to world ending outcomes. The film is best known for Joshua’s 80’s robotic voice asking the question: “Shall we play a game…?” referring to the game of nuclear war.

Governments across the West have imposed an array of financial, travel and trade sanctions on the Russian economy. Five months after the invasion and the West’s response, we can see the effect of these measures on Russia, the globe as a whole and Russia’s ability and willingness to continue waging war. The ultimate goal is the end of the war and to stop any possible escalation to global war.

Measures to date and their effects thus far

The game of economic warfare is as much a two-way street as military warfare is. One player makes a move and a response will follow of some kind. The initial short-term impact on Russia was substantial within the first 30 to 60 days of commencement. However, the Central Bank of Russia (CBR) moved to stabilise its exchange as a strategic response. This entailed a freeze on approximately half of the CBRs international bank reserves.

With the Russian Rubel falling more than 40%, the CBR also moved to exercise capital controls and raised interest rates. Although this had the effect of restoring value to the currency, its status as a non-convertible currency means it has a much lower practical value.

The CBR proceeded to double its previously planned interest rate to 20 percent after the war began. Following mid-April, the CBR then began gradually cutting the rate. As of mid-June, the Russian interest rate and banking sector levels of liquidity have returned to those of pre-Ukraine invasion.

Russia has also suffered reduced access to imported technologies through embargos. Coupled with a large migration of foreign private investment and Russian skilled labour, Russia is likely to face long-term side effects, even if war ceased today. Netflix has ceased streaming services, Disney won’t release new productions into Russia and McDonalds have closed stores. As much as 12 percent of foreign firms have scaled back Russian based activities, 35 percent have suspended their operations, and approximately 24 percent have announced a complete withdrawal as of mid-June according to a study by Yale University.

Efforts by Western countries to no longer use Russian energy sources such as oil and gas have also had a partial “strangulation” effect on the economy. Although not all countries have engaged in this, a significant reduction in the demand for Russian energy has been felt. This comes with the price of paying higher energy costs from Western sourced options but seems to be a price many will pay to help Ukraine.

While foreign sanctions had the effect of freezing the majority of Russia’s foreign assets, the Red Bear continues to receive revenue from its remaining exports of oil and gas. Russia continues to sell approximately $1 Billion USD (equivalent) per day. A large percentage of this does make it into the Russian Government’s hands due to fuel taxation. Current estimates put the current war effort from Russia at $325 million USD (equivalent) per day.

The West’s efforts to cut the level of structural energy dependence on Russia is significant as it represents a long-term goal of energy independence and the change from feeding the very war machine they are seeking to stop. This rapid move away from Russian energy comes with a high cost for many countries and industrial sectors. This filters down to the end user with increased transportation costs for food and other items. If there is a lesson for the West in all of this, it’s that interdependence can have negative consequences and be used against us.

Is it really working?

Russia continues to be the globe’s second largest producer of oil and continues to earn large amounts of revenue from selling its oil globally, particularly to Asian nations. These sales from Countries such as China, continue to help fuel the war in Ukraine. Over the long term however, the Russian oil sector will suffer severely. This will arise due to the increasing difficulties in Russia accessing required input technologies like horizontal drilling services as well as the exodus of foreign operators. Russia’s oil industry is interdependent on other countries in this regard.

Another side effect of this dance with the oil industry is the likely effect on the Russian airline industry. With the world’s largest land space, transportation by air is vital for nearly all Russian industry sectors. Approximately 65% of Russia’s 1,100 civilian aircraft are foreign owned. Russia may see a significantly reduced domestic and international airline capacity causing massive strains on instar-state logistical abilities. Furthermore, Russian-produced airline planes are highly dependent on input parts and raw materials from other countries, particularly those in the West.

The last time an economy of Russia’s relative size saw such an extensive scope of economic sanctions and restrictions was in the 1930s with efforts against Italy and Japan. Economic sanctions in the modern era deliver larger global shocks than ever before and are easier to counter for the sanctioned country. These sanctions hurt other countries though as Russia is a major contributor to the global food chain exporting grain, oil, barley and other key food stuffs. As such, economic sanctions are a double-edged sword. Cutting the enemy means taking some cuts yourself. Economic warfare requires patience, strategic planning and commitment as they take time to produce the desired effect.

Other likely sanctions and Western economic strategies we may see include Western Governments placing prohibition orders on insurance companies insuring Russian oil companies and other sectors, increasing the risk of doing business exponentially. We are also likely to see a flurry of import levies and taxes on importing any number of Russian goods. All of these are aimed at collectively creating a heavy load of pressure on the Russian Government.

Remembering the people on the ground

Even with a focus on Economic warfare and the effects on both Russia and the West, it’s important for this article to note the most affected parties in this equation, the Ukrainian people. At the time of writing this article, a total of over 14,000 Ukrainian citizens are believed to have perished in the fight for freedom. The Ukraine economy, responsible for so much of the global food production has been devasted, homes have been destroyed and despite a valiant fight, land is being taken. Important too, are the Russian people, dead against this war and keen to see it come to an end. Thousands of Russian citizens have been detained in prison for protesting the Russian Government’s invasion of Ukraine.

Conclusion

Most people would agree that war is ultimately useless. Great wars of history have had their winners and their losers. The most worrying element of the current Russian-Ukraine crisis is that it holds the potential to escalate things to a point where there would be no winners, only losers. Economic warfare measures hope to end a war before it escalates. This situation is anything but a game and one hopes things can change before they get uglier.

WarGames was also famous for another quote. At the end of the film, David and the WOPR’s creator Professor Stephen Falken must find a way to stop Joshua from launching nuclear missiles of its own accord. In a strange end twist, David forces Joshua to play tic-tac-toe against itself in an attempt to make it learn and understand that not all games and scenarios can be won (futility). David hopes that it will understand the concept of mutually assured destruction before launching its real missiles.

Just as Joshua obtains the final launch code, it runs through every possible scenario of both tic-tac-toe and thermonuclear war in an attempt to find a winning strategy. After rapidly playing through all of them and not finding a single scenario where anyone survives or wins, Joshua delivers a thought-provoking quote in reference to global thermos nuclear war itself:

“A strange game… The only winning move is not to play…”.

Dan Hadley (MBA, BCOMM, CMC, IML) is a Management Consultant and Economist based in Adelaide, South Australia. His services include strategic advisory services, risk management and consultation in Quality, Safety and Environmental Management systems as well as economic consultation, www.linkedin.com.

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