When Russia invaded Ukraine on February 24, no one expected the United States, the European Union, the United Kingdom, Japan, Canada and other nations to separate Russia from the world economy in retaliation. Instead of a limited and symbolic punishment, all that Russia faced when it took Crimea and occupied eastern parts of Ukraine in 2014, this latest response has had very serious consequences.Key Russian banks have been denied access to the U.S. dollar, foreign exchange and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system, which banks use to transfer financial information to each other. The United States and its allies have blocked the export of high-tech semiconductors to Russia’s technical and defense sectors, as well as software, oil, gas, gas, and other equipment. As one US law firm pointed out, it is now illegal to deliberately provide a toothbrush to a company that occasionally helps to repair Russian military equipment.
What is even more amazing is how this is done – through the use of weapons networks that encompass the global economy. Financial and supply networks have chokepoints, powerful countries that can be used to punish individuals, businesses and nations. Some of these points are well known; many have not been identified.There has been very little learning in these pressing points, however. Policymakers do not have the data needed to make informed decisions. Companies hold information about supply chains closed; governments and society have no vision. The data of financial networks and information and their vulnerability are the same.
Data scientists, political scientists, economists and major financial scholars urgently need to map these networks to find points that place many threats and dangers. As a first step, the United States has begun to explore supply relations. Detailed information will allow policymakers to close the risk where possible, and reduce it where it does not.Policymakers need to consider major financial risks1. Some analysts have predicted that the liquidation of Russian banks at SWIFT could lead to the near-term collapse of the global system when Lehman Brothers, a New York City financial company, failed in 2008. groups, which creates a sense of insecurity that I can be proud of. Those previous predictions are not accurate at this time. But they point out that there are uncertain consequences of removing large parts of the system from its deep work and stability sources that remain off the map.
Global economy is unequal ,Networks as weapons:
Globalization has led to amazing economic efficiency. Transfers occur in nanoseconds, not days or weeks. Chains offered worldwide allow hundreds of providers in many countries to build sophisticated products, such as smartphones. Some supply chains are owned by one country. For example, China controls almost every phase of photovoltaics production. These links make the economy dependent on each other. Businesses in different countries may rely on a single supplier for efficient operations that pose a risk if that provider fails. As the war spreads throughout Ukraine, German car factories collapsed because they could not afford electronic cabling systems, or ‘cable harnesses’, manufactured by Ukrainian suppliers.
The global economy is unequal, an open link system that offers many different options when one closes, as common sense would have thought. It is asymmetric: commercial and financial mobility depends on a small number of harps or nodes with multiple connections. Control over those institutions allows governments to restrict access to key components of global economic networks.
Few nations or corporations have a disproportionate influence on financial and trade matters. For example, SWIFT is based in the EU, but is managed by banks that rely on the US financial system. Transactions between non-US groups often depend on the US dollar, which means that they must be eliminated by a small number of US-controlled financial institutions. And Silicon Valley in California controls much of the world’s advanced technology and computer.
A targeted attack on chokepoint can quickly disrupt an entire network. In 2012, the United States and the EU cut Iran off the global financial system by denying its banks access to the issuance of dollars and SWIFT. Iranian companies found it difficult to pay for oil, which led to a dramatic decline in exports. Complex trading systems emerged: oil was exchanged for tea, zippers, and bricks. The effects can extend far beyond those from conventional conditions, such as supply chain disruption from the COVID-19 epidemic. Now, the US refusal to allow other Russian banks to access the dollar removes them from the global financial system.
Other races can be added to the queue. The United States also regulates important inventory and design software for semiconductors. Fearing loss of access, non-US semiconductor manufacturers, including the Taiwan Semiconductor Manufacturing Company in Hsinchu, complied with a US ban on exports to Russia. Manufacturers based in China, such as Semiconductor Manufacturing International Corporation in Shanghai, will face the threat of retribution if they do not cooperate.
Black money
Key aspects of the global financial system are in conflict with understanding and regulation. The amount of money hidden in tax havens can only be measured indirectly and overseas dollars are difficult to monitor or control. ‘Black pools’, where large amounts of sophisticated financial instruments are sold, are not visible to outsiders.
With so little to come, the impact is hard to predict. Even limited efforts to equip global networks can have far-reaching consequences. For example, in 2018, the United States ‘appointed’ Russian oligarch Oleg Deripaska and his companies – meaning that US businesses were banned from doing business with them, and businesses outside the United States could not facilitate their trade. This puts customers and suppliers of major conglomerates, such as the Moscow-based aluminum processor, based in Moscow, at legal risk. It soon became clear that the Rusal appointment could be devastating to European car manufacturers and other businesses. The United States has successfully reduced some sanctions by requiring Rusal and other companies to reduce Deripaska’s ownership stake.
Domino results
As powerful governments use chokepoints, they are at risk of escalation, disruption and retaliation. The Ukrainian war is already affecting food markets. Ukraine and Russia together account for about 30% of global wheat production. Ukraine is a major producer of barley and maize (maize) and produces about 50% of the world’s sunflower oil by volume. Among them, Russia and Belarus produce about 31% of the world’s potash – an important fertilizer ingredient. Lack of fertilizer increases food shortages and human suffering.
Russia denies ever blocking nickel exports and stops gas flow in Western Europe Russia’s retaliation could spark a vicious cycle of retaliation. Nuclear war debates and cybersecurity disputes focus on the shared understanding of the ‘escalation ladder’, from the smallest to the most extreme, can reduce the risk6. No typical picture of armed economic networks exists.
It is likely that a strong network of countries in the North Atlantic Treaty Organization and its partners will prevent counter-measures. Equally, the target countries may consider alternatives to retaliation. Between the First and Second World Wars, fears of economic sanctions helped to encourage Nazi Germany to occupy the area to protect itself from foreign oppression7. After the United States separated Iran from the 2018 global financial system, Iran allegedly attacked a ship in the Strait of Hormuz, an area that is the center of global power flow.
The economic downturn and the economic downturn caused by military coercion can wreak havoc on a globalized world and may make it difficult or impossible for governments to work together to solve international problems, such as climate change, epidemics, and global health.
The next steps would be taken:
• The first step is to map the earth-bound networks. The administration of U.S. President Joe Biden has already pointed to a shortage of supply chain data as a critical priority for emergency policy. It is not yet clear whether Congress will provide enough funding to repair it. Some governments, too, should collect data and consider how to reduce shared security risks. The first map exercises in the United States and Europe highlight areas of dependency, including battery production.
• Researchers should check networks for risk. Network analysis algorithms can identify bottles8. Economic models can test the strength of networks in external shocks or attacks9. A high level of understanding must be built, including co-operatives and global financial policy. Interdependence between networks needs to be learned. For example, although oil markets are relatively strong (because one oil source can reasonably be replaced), oil supply depends on financial networks10 and shipping insurance, both of which contain chokepoint.
• Policy makers should consider how they can reduce the risk before it is exploited. Strategies will depend on something. Changes with other providers can be found, as has happened in the rare world. Some nations, including the United States and Australia, are beginning to embrace the natural effects of mining and to explore the world’s unusual resources to undermine China’s sovereignty.
• Governments may subsidize domestic suppliers, as South Korea does. This may be more difficult than it seems. Provisional relationships are complex, and businesses may choose to work with older partners. South Korea has found it challenging to reduce its dependence on Japanese electronics. In the United States and in the EU, domestic political tensions make it difficult to agree on an increase in renewable resources, a gas and oil frack, or an increase in nuclear power. Understanding the effects of the changing security environment for climate change and climate change following the Russian invasion is a major challenge for research and policy.
• Creating financial networks will be even more difficult. SWIFT system and dollar cleaning networks created during the Cold War. For better or worse, few were paying attention to their strategic implications. Countries that do not like current governing networks will find it difficult to pursue other attractive ways under distrust. They may establish workarounds. For example, Iran developed a small, secret financial system to protect itself from US sanctions. Russia is trying to avoid trading in US dollars. Some economists argue that India may try to maintain its neutrality and be a safe haven for financially dangerous financial assets.
Source Journal Reference:Henry Farrell & Abraham L. Newman, Weak links in finance and supply chains are easily weaponized, Nature 605, 219-222 (2022), doi: https://doi.org/10.1038/d41586-022-01254-5
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