Watch | West Will 'Shrug and Do Nothing' If India Buys Russian Oil During Ukraine Crisis

In an interview with Karan Thapar, the Financial Times' Martin Wolf discusses the new economic world that is being born out of the Ukraine crisis.

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In a comprehensive tour d’horizon where he discusses in detail the new economic world that is being born out of the Ukraine crisis, the impact of sanctions imposed by the West on Russia as well as on the West itself and the implications of the West sequestering Russian reserves (just over $300 billion), one of the most admired and widely read financial commentators in the West has said that if in the present circumstances India were to conclude a deal to buy discounted Russian oil the West would “shrug and do absolutely nothing”. Martin Wolf, who is the chief economics commentator of the Financial Times, added that the West will “grudgingly accept India’s sitting-on-the-fence position”. He said the West “won’t jeopardise relations over this”, adding “it won’t be problematic”.

In a 50-minute interview with Karan Thapar for The Wire, Martin Wolf spoke about the implications of the West sequestering Russian reserves. He pointed out that whilst countries with large reserves, of hundreds of billions or even trillions of dollars, are recognised as economically powerful and rich, the fact those reserves are mainly, if not predominantly, held in American dollars makes them very vulnerable to any action America might take to sequester or hold back their reserves. As he pointed out in explanation, these reserves are, in fact, the US’s debts adding “the view that America’s debts are reliable is a very naïve view”.

Wolf wrote about this in a book published in 2008. He says, at the time, no one took his apprehensions and concerns seriously. Now, after the sequestering of Russian reserves, those fears are coming home to roost. He added, “The debts of other countries are not safe money.”

He pointed out the problem is “there’s very little countries can do about this”. They can either transfer their reserves to other fully tradable currencies, such as the Euro and Sterling, or increase their holdings in gold. The problem is that, because of the political and economic alliances in the West, reserves in sterling and euros may not be any safer. Secondly, those currencies may not be able to handle the trillions of reserves presently held in US currency. As regards gold, there’s a limited amount of the metal available. Wolf pointed out most of it has probably already been mined. Of course, the price of the metal can go up but, again, how much would countries want to keep in gold?

This means that whilst geopolitics can make reserves held in dollars vulnerable there’s not much countries can do about it. They have very limited alternate options. So, much as China may be deeply concerned about the sequestration of Russia’s reserves, there’s little it can do to protect its own reserves, which are perhaps six times greater at $3.5 trillion and predominantly held in dollars.

Speaking about the new world that is emerging out of the Ukraine crisis, Wolf said, “The combination of war, supply shocks and high inflation is destabilising … financial instability now seems very likely … (and) a prolonged bout of stagflation seems certain.” He pointed out that in many ways the economic situation facing the world, particularly in the wake of inflation, stagnation and possible looming recessions and high oil prices, is very similar to the situation that prevailed in the 70s.

Wolf spoke in great depth and detail about the impact of western sanctions on Russia. He estimates that they could produce “a very big shock to Russia’s economy ranging between 8 and 15%”.

The interview covers issues such as the impact of sanctions on the Russian economy, whether the pain will start relatively soon or after weeks and months, the impact of major western companies like Visa, Mastercard, McDonalds, the Hilton and British Petroleum opting out of Russia, the extent to which Chinese banks and financial institutions like Unionpay can provide an alternate financial route to Russia or relieve some of the pain of sanctions, the medium and long term impact of oil sanctions on the oil price, the sort of blowback the West is likely to experience as a result of the sanctions on Russia, the differences in the impact of that blowback between Europe and the US, why gas sanctions will be a much bigger problem for Europe than oil sanctions, the possibility of gas rationing in some European countries and, what he called, “a massive reconsideration of exposure to Russia” by Western companies over the long run.