Sanctions on Russia are proving to be self-serving for the US, which now reaps profits from the sale of energy and arms.
Sanctions on Russia are proving costly, more so for the US’ allies and partners than its adversaries and itself. On top of it, political posturing by sections within Western governments towards members of the developing world has been aggressive.
This has been designed to consolidate geopolitical influence by coercion, even at the cost of economic and political stability in countries that are bystanders to the conflict in Ukraine. As global trade realigns around the market-distorting measures aimed at punishing Russia, the US and China are proving to be the greatest financial beneficiaries. The former is least affected by the sanctions and the latter does not intend to abide by them.
This does not bode well for well for the Indo-Pacific in the long run, and it is likely to raise concerns in New Delhi as India attempts to strengthen the Quad.
EXPORTING ENERGY
With the cancellation of Nordstream 2 and a stated intent by Europe to reduce dependence on Russian gas in the long run, an energy-surplus US has found a new and lucrative export market. Hundreds of billions of dollars’ worth of liquified natural gas (LNG) will be shipped across the Atlantic over the coming years, leading to bumper profits. Meanwhile, Chevron is preparing to produce and trade in once-banned Venezuelan crude when sanctions get lifted on the South American country. Not so long ago, upstream players like Chevron and Exxon Mobil and the oil services firm, Halliburton, profited from the US invasion of Iraq in 2005. Licensing Chevron to expand its Venezuelan operations will only fit into a time-tested tradition of Washington using energy majors to gain from changes in foreign policy.
On one hand, these profits will be used by firms for diversifying into green energy products like hydrogen. By privately self-financing an energy transition in the US which would otherwise have required government subsidies, gas exports serve both strategic and economic purposes. On the other hand, dividends will be paid out to investors, many of which are institutional like pension funds and asset management companies that require steady income in a volatile macroeconomic environment.
Furthermore, from a broader geopolitical perspective, weaning Europe away from Russia into the US sphere of dependence works in Washington’s favour. The US will use LNG as a hook to ensure the EU falls in line with their foreign policy interests. Financially and strategically, the conflict in Ukraine is paying rich rewards for the US.
THE BIG DEFENCE PLAY
As Europe ramps up spending on security, US defence firms eagerly await bulk orders for top-of-the-line military hardware. Germany and Finland agreed to purchase 35 and 64 F-35 fighter jets, respectively, in deals worth $4.4 billion and $9.4 billion. Spain will spend $950 million on eight Sikorsky Seahawk helicopters, while Poland will fork out $4.7 billion for a Patriot air defence missile system. Ralph Acaba, CEO of Raytheon, one of the top US missile manufacturers summed up the surge in sales when he said, “Europe is really big for us now, and that’s a big change in just the last few years and even the last 18 months.”
Arming NATO allies beyond Europe is also priority, and Washington is keen to sell 40 F-16s to Turkey and upgrade 80 existing warplanes for $6 billion. That is despite Turkey not joining the US in sanctioning Russia and continuing to operate the Russian-made S-400 missile system.
Arms exports will benefit the US at an important juncture when its military modernisation is in dire need of cash injection. For example, the $1.7 trillion F-35 program — beleaguered and weighed down by cost overruns and rising breakeven prices -finally found an expanded export market. Profits will likely be used for meeting budgets that were growing increasingly unsustainable and advancing the US’ own next-generation weapons development.
The US has a history of leveraging arms races — from World War II to the Cold War and the Middle East conflicts — to stay ahead of the technology curve. No doubt, Europe’s re-militarisation comes at a useful time when great power competition is forcing the US to reinvent itself.
ARBITRAGING AROUND SANCTIONS
In the short term, inflationary concerns dominate US trade policy. With inflation breaching 40-year highs, the Joe Biden administration is under pressure to reduce the cost of living for Americans. To partly achieve this goal, the US Trade Representative’s office in March waived Trump-era tariffs ranging between 7.5% and 25% on Chinese goods worth over $300 billion.
These include heavy machinery, chemicals, white goods and other commodity-intensive products. The move comes on the heels of 41 senators from across party lines demanding in February this year the exclusion of a wider set of Chinese imports from punitive tariffs they attracted.
This followed similar calls from US Treasury Secretary and former Federal Reserve Chair Janet Yellen in November last year. Tesla CEO Elon Musk, too, weighed in last December, requesting for tariff waivers on Chinese battery components. Bipartisan legislative consensus converged with the views of the establishment and corporate America to push through the waivers.
Given that the production of aluminium, steel, batteries, chemicals, plastics and consumer durables is highly energy intensive, and that China imports vast quantities of Russian oil, gas, coal and metals to produce these goods, the US is a second order beneficiary of China not abiding by the sanctions. As China procures commodities at steep discounts from Russia, the US gains by reducing domestic inflation.
While sanctions on energy have had a cascading effect through countries that are net importers of fossil fuels, the US — a net exporter of oil products — in a largely symbolic move, banned imports of Russian crude oil. But as energy costs spiral across the world, the US is keen to ensure security in imports of key minerals and resources.
In this context, it identified uranium as an area of critical dependence on Russia, Kazakhstan and Uzbekistan. Russia’s Rusatom produces around 20% of the world’s uranium and clearly, the leverage it holds in the world is particularly pronounced today. Half of the US’ nuclear power plants depend on imports from these countries and as a result, uranium has not been sanctioned.
THE RIGHT SIDE OF HISTORY
If the US’ position is taken as an example, the right side of history is the one where self-interests are taken care of and advanced. With this definition in mind, countries like India which exert strategic autonomy are well-placed to carve out their niches and safeguard their economies.
The sanctions are proving to be self-serving for the US, and it is unravelling fast. Recent events may also suggest a possible rapprochement between the US and China, much to India’s chagrin. Yet this serves as a useful reminder that while finding opportunities in periods of crisis may seem amoral at first, the precedent set by the world’s largest economies indeed makes others, who can, follow suit.
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