A conflict is raging in Eurasia since late February this year. After decades of conflicts being associated with Afghanistan, Iraq, Syria and parts of Africa, a war is being fought by White men on both sides – Russians and Ukrainians, much to the horror to most of the world, particularly to the Europeans who thought wars were something distant. The response of the West to the Russian intervention in Ukraine has been to forge European unity, huddling together to support and arm Ukraine, condemn Russia as an aggressor, and increase their defence spending to strengthen the NATO. So far, tolerable.
However, the West has also weaponised burgers, credit cards and banking, among other economic measures against Russia. The conflict will cease, hopefully sooner than later, but the impact of weaponisation of the goods of 21st Century is problematic, and inconsistent with many international and economic treaties. The world so hopefully described as ‘flat’ – globalized and interconnected – by Thomas Friedman in his 2005 bestseller The World is Flat does not exist any longer. Unseen barriers have come up.
In March 2022, McDonalds began closing its nearly 850 restaurants in Russia and decided to exit Russia after 30 years of operations. The first McDonalds outlet came up in Moscow in 1990 and symbolized a bridge between the two Cold War rivals who were till then threatening each other with nuclear weapons. In January 1990, there were long queues outside McDonalds in Moscow’s Pushkin Square. It was still USSR and the Golden Arches, American burgers and fries were a novelty. The media termed it ‘Hot food to help end a Cold War.’ Soon Berlin Wall came down, and world was increasingly connected and accessible.
There are many others like McDonalds in Russia – folding up operations or restricting service. In March 2022, French multinational automobile manufacturer Renault announced it was selling its business in Russia. Around this time, Coca-Cola and Starbucks had also halted their businesses in Russia. It was followed by Heineken stopping beer production and sales in Russia. Levi’s suspended sales and the streaming giant Netflix stopped providing services.
Apart from depriving Russians of Levis 501s and Netflix series, these pullouts have economic costs which drive down the global economy, already battered by Covid.
In April 2022, Netflix stated that it had lost 700,000 paid subscribers from Russia. It was Netflix’s first global drop in subscribers in a decade. Russia has threatened retaliation. Leaving Russia potentially exposes companies to a new law that may allow the government to seize local assets of western companies that exit. These counter-measures create legal mazes and discourage investors.
While jeans, burgers or movies were tolerable, the financial transactions were hit by Visa, Mastercard and American Express suspending their Russia operations. Visa and Mastercard cover about 90 percent of credit and debit payments in the world, outside of China, and Mastercard had operated in Russia for more than 25 years. American Express also terminated their business operations in Belarus. Russians were not able to access GPay or Apple Pay. Overnight, the cards issued by Russian banks were not supported by Visa, Mastercard and American Express networks regardless of where they were used. Simultaneously, any cards issued outside of Russia stopped working at Russian merchants or ATMs. There were long lines for cash at banks.
Russian holiday makers in South East Asia were left in lurch – many were unable to pay their bills, while Malaysian students in Russia found their bank cards linked to non-Russian banks unusable. The weaponisation of plastic money may have long-term consequences. Many of them may not use Visa or Mastercard again, while multiplicity of cards to ensure redundancy shall raise transaction costs for customers. The Russian holiday makers in tropical islands of South East Asia, or Asian students studying medicine in Russia had no relation with politics or the ongoing conflict. They were collateral economic damage.
Even more damaging has been the weaponisation of SWIFT – Society for Worldwide Interbank Financial Telecommunication, technically a Belgian cooperative society created in 1973 and providing services related to the execution of financial transactions and payments between banks worldwide. It successfully links 11,000 banks and institutions in more than 200 countries, enabling smooth and rapid transfer of money across borders.
SWIFT incidentally had nothing to do with the conflict, except the fact that it is controlled by the central banks of the G10 countries, the European Central Bank, and the National Bank of Belgium. In March 2022, seven Russian banks were removed from SWIFT system – Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, Vnesheconombank (VEB) and VTB Bank. Halting money flow around the world could harm sectors of the economy engaged in international trade and finance.
As the West pulled out, China has been a gainer in this conflict. Several Russian banks are planning to issue cards that use the Chinese UnionPay system, coupled with Russia’s Mir payment network. Even Russia has been developing alternate systems. As a substitute for SWIFT, Russia has developed its cross-border transfer system called System for Transfer of Financial Messages (SPFS). Moscow is also working with Beijing to connect to China’s Cross-Border Interbank Payment System (CIPS). CIPS is a Chinese alternative to SWIFT which processes payments in Chinese Yuan. All these shall raise the cost of doing business worldwide, increase financial disputes, and create distrust in global economy.
A pragmatic approach has been taken by the arch-rival of McDonalds – the fast-food chain Burger King which had nearly 800 outlets in Russia. Burger King halted corporate support for its Russia locations in March but has kept its stores open. It committed USD 3 million to support the Ukrainian refugees and dished out free Whopper meal vouchers to people fleeing to European nations.
The economic sanctions on Russia have been a quiet reversal of the Western policy of greater economic integration of the world. The general thought process, around the time China joined World Trade Organisation (WTO) in December 2001 was that as China will become increasingly integrated in world economy, it shall become more democratic and respectful of human rights. It did not happen. The reverse policy is now being experimented. While China is too integrated with the world economy to be disconnected, Russia has presented an easy target with its actions in Ukraine. ‘Free Trade’ is no longer holy.
The essential intention of the 1947 General Agreement of Trade & Tariff (GATT) and 1995 WTO was to minimize the threat of ‘trade wars’, whereby mechanisms such as tariffs, non-tariff barriers and embargoes are imposed for strategic political and economic motives. The current measures against Russia raise questions about the validity of trade measures being used in a political setting or for security interests. The law is little ambiguous here. In previous case related to revocation (post 2014 Crimea takeover) of Russia’s Most Favoured Nation (MFN) status from the EU, the United States and other G7 countries, the WTO panel had concluded that every WTO member may define what it considers to be its essential security interests. However, it may be noted that MFN clause is the foundational principle of the GATT and WTO.
We cannot blame Thomas Friedman for his enthusiasm about a peaceful, interdependent and interconnected world. He was the propagator of the ‘Golden Arches theory’, first published as an opinion piece in The New York Times in December 1996, and later in his 1999 book The Lexus and the Olive Tree. It was called the Golden Arches Theory of Conflict Prevention, and simply stated that ‘No two countries that both have a McDonald’s have ever fought a war against each other.’ He could never imagine that burgers would be weaponised.
After years of an interconnected world, where foreign capitals were only a flight away, and world was turning into a global village working for common prosperity, tackling common challenges of climate change, and acknowledging environmental degradation; the barriers have come up again. There are long Visa queues for everywhere, most flights do not fly over Russia (increasing fuel consumption and ticket costs), credit cards do not work in many countries (harming tourism and local economy), all-time high oil prices are causing inflation in India (with the poor most affected), and export paperwork has increased manifold. These second-order effects are undesirable. Isolating Russia from the world economic system could drive it closer to China – a highly undesirable scenario for India and the West, while prioritizing politics over economics could trigger further increases in energy and food prices that were already elevated due to Covid, supply shortages, and supply chain disruptions.
Typically, there are surpluses and shortfalls in any economy – from food grains to oil – and it is best if the world remains connected so that the food can reach the hungry without price escalations, and oil prices can stabilize at reasonable levels. A divided world shall be a distrustful, angry and regressive place – prone to radicalization and distrust in the governments. An interconnected world may be a prosperous world. After the US-led boycott of 1980 Moscow Olympics and the retaliatory Soviet Union-led boycott of 1984 Los Angeles Olympics, the world had decided that mixing politics and games does no good. Maybe it is time to decide that mixing politics and economics does no good to the hungry and underprivileged. Let us not weaponise food, oil, insurance, or coffee. Let law prevail in times of war.
The author is a retired Army officer and a Supreme Court lawyer.