Can the world afford a new Cold War ?

Future historians may view the July 17 downing of a Malaysian airliner and subsequent imposition of stringent Western sanctions on Russia as marking the start of a new Cold War. The ensuing isolation of Moscow might produce a diplomatic bonanza for China and make resolution of hot global issues more difficult. It would also pose new challenges for India and other formerly ‘non-aligned’ countries that would prefer to steer clear of great power confrontations.

The new Cold War would be quite different from the old one, of course. Far from the ideological struggle between two nuclear-armed rivals of the last century, it would represent a battle of political will between a democratic alliance of 28 European countries and the US on one side and an authoritarian pseudo-democracy challenging the existing political order on the other. In today’s interconnected world, the outcome of this clash will naturally be felt across the globe.

The origin of the current crisis goes back to February, when prolonged demonstrations in Kiev demanding that Ukraine join the EU resulted in the overthrow of the country’s pro-Russian president. Fearing that a pro-Western government in Kiev would oust the Russian navy from its strategic port in Crimea, Putin engineered a pro-Russia revolt and subsequently annexed the peninsula. (Although it was once under Moscow’s control, Crimea was gifted to Ukraine by Nikita Khrushchev, while maintaining its hold on the Soviet navy’s only warm water port in Sevastopol.)

Emboldened by the West’s muted response and enthusiastic support at home, Putin sought to consolidate Russia’s position and encouraged a rebellion in eastern Ukraine. He was determined not to let the anti-Russian government in Kiev defeat the separatists, allowing the EU and Nato to come right up to Russia’s doorstep. His growing involvement in supplying heavy arms to separatists set the stage for the destruction of flight MH17 and worldwide outrage.

The anger at Russia and its Ukrainian allies shook the mutually beneficial economic ties that saw European banks funding half of Russian private investment. Now sanctions raise the risk of Russia defaulting on its external debt. Putin’s options are perilous. The EU has pledged to repeal the sanctions if Russia “starts contributing actively and without ambiguities to finding a solution to the Ukrainian crisis”.

To accept that condition when Putin’s Crimean annexation has been so popular domestically would be a bitter pill to swallow. But to invade Ukraine outright could cost him much more. Foreign investors are already fleeing Russia, sending the rouble into free fall amid fears of a full-blown recession. Russian patriotism could see the public rally around Putin for a time, but the backdrop of a declining economy would not sustain the fervour for very long.

In anticipation of sanctions, in May Russia rushed to sign the $400 billion, 30-year gas deal with China in terms advantageous to Beijing. Now with its Western partners backing away, Russia will be seeking to deepen economic and military ties with China. As Western sanctions shut off the taps of investment capital, Moscow may turn to the Chinese renminbi, and the Hong Kong and Singapore dollar markets.

After the friendly Modi-Putin meeting in Brazil Moscow might be spurred to count even more on India’s diplomatic support and economic cooperation. But the impending credit crunch could complicate its economic and military ties with other countries. For example, recent US sanction against defense companies like Kalashnikov could complicate the firm’s plan to set up manufacturing facilities in India. The closing of credit window and loss of Western technology, especially in oil and gas technology, could hurt Russia’s growth prospect.

However, Russia’s significant oil and gas reserves and its close ties with Western oil majors may help soften the sanctions blow. EU officials took care, for example, not to hinder continued supply of Russian gas. Given that British Petroleum owns nearly 20% of Russian oil giant Rosneft, long-term sanctions would adversely impact the company’s performance and indirectly undermine Western economies.

The West may also soon realise that turning a power like Russia into a pariah would undermine efforts to address many of the world’s burning issues — from negotiations around Iran’s nuclear programme to a bloody and seemingly interminable Syrian civil war. A new Cold War would not be in anybody’s interest.

~ by Nayan Chanda

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