Zafar Iqbal

The repercussions of conflict on national economies vary significantly depending on a multitude of factors, notably the degree of insulation from the US-dominated Western financial system. This insulation, which can arise from strategic choices or through imposed sanctions, refers to a country’s ability to withstand economic pressure from the West. It influences how economies cope with the fallout from ongoing conflicts. A critical examination of two notable examples—the Russia-Ukraine war that commenced in February 2022 and the escalating Israel-Hamas conflict as of October 2023—highlights this complex interplay, revealing stark contrasts in their economic realities and international support.

In the case of Israel, the nation’s integration with Western economies, particularly with the United States, is deeply entrenched. As reported by the US Council on Foreign Relations, Israel has benefited from a staggering cumulative foreign assistance of approximately $310 billion (non-inflation adjusted), enveloping both military and economic aid. This includes around $80 billion in economic assistance and roughly $230 billion earmarked for military needs. Following the events of October 7, 2023, the US ramped up its support to Israel, with military aid reaching $17.9 billion—a record in a single year.

Israel’s financial relationship with the US is supplemented by the presence of over 500 US companies operating within its borders, coupled with substantial Israeli investments amounting to about $41.6 billion in the US by 2021. Moreover, European financial institutions have not remained on the sidelines, providing around $36.1 billion in loans while sustaining significant stakes in firms involved in arms manufacturing for Israel, further solidifying business ties.

Trade agreements, such as the Free Trade Agreement established in 1985 and the EU-Israel Association Agreement formed in 2000, have created a robust framework for economic cooperation. The European Union constitutes Israel’s chief trading partner, with EU transactions accounting for approximately 28.8% of its overall trade. Despite this, Israel’s exports to the EU represent only a fractional 0.8% of the EU’s total trade portfolio.

This extensive support underscores the lasting influence of the pro-Israel lobby in the US, which persists across political lines. However, the current climate reflects a shifting tide, as widespread digital dissemination of graphic imagery showcasing Israeli military actions has ignited protests not observed during previous conflicts. Notably, public sentiment amongst younger generations in the West has shifted, with a growing number expressing disapproval of Israeli policies.

Despite this public outcry, the prospect for immediate alterations in US foreign policy towards Israel appears minimal, potentially not changing until a generational transformation occurs in American politics. Nevertheless, the subsequent impact of the Hamas attacks has undeniably tarnished Israel’s international reputation, stirring concerns among investors. A recent downgrade by Moody’s—lowering Israel’s credit rating from A2 to Baa1—indicates a perception of diminished economic resilience compared to recoveries following past conflicts.

Economic forecasts for Israel, while not as robust as in previous years, still paint a picture of resilience. With a GDP growth estimate of 2% for 2023 and a projected 0.5% growth rate for 2024, Israel’s economy is showing its ability to weather the storm. The Bank of Israel’s indication that inflation control may necessitate interest rate hikes, despite current steady rates, underscores the delicate balance policymakers must navigate amidst economic turmoil.

Contrasting sharply with Israel’s economic framework, Russia, particularly following its targeted sanctions in February 2022, has experienced a unique trajectory. The country has seen its assets, valued around $300 billion, sequestered in Western markets. Standard and Poor’s and Moody’s have both refrained from re-evaluating Russia since rating it negatively in the wake of the sanctions.

One of the most surprising aspects of the current economic landscape is Russia’s unexpected growth. Despite the targeted sanctions and the sequestration of its assets in Western markets, Russia’s economy is projected to grow at a robust 3.9% this year. Analysts attribute this growth to extensive government spending on military production, which has stimulated both labor demand and consumer activities. This growth, despite a high interest rate of 18%, underscores the timeless “guns versus butter” debate in economics—where military production is prioritized, generating employment and bolstering nationalistic sentiment among the Russian populace.

The effectiveness of sanctions has increasingly come under scrutiny. The Biden administration, noted for implementing the largest number of sanctions in US history, has witnessed a twin effect. While it has strived to isolate nations like Russia, Iran, and North Korea, these countries are finding solidarity. The rising tide of nationalism in Russia, coupled with a robust domestic economy fortified by military expenditure, poses questions on the long-term efficacy of such punitive measures.

In contrast, European nations that adhered to US-led sanctions against Russian fuel exports face dismal growth forecasts. Germany, for instance, has seen its growth outlook plummet to negative figures, while Hungary—eschewing complete sanctions—forecasts a more optimistic growth rate. This divergence further highlights the varying impacts of sanctions on opposing parties, revealing the inherent complexities of international economic dependencies.

Meanwhile, ongoing discussions among BRICS nations aim to diminish reliance on the US dollar and the SWIFT financial system. The decline in the dollar’s share of foreign reserves signals a budding shift toward alternative arrangements. However, achieving a systemic reconfiguration away from Western financial supremacy will require significant time and concerted effort. This underscores the resilience of established economic norms, providing a sense of security about the current economic system.

In concluding thoughts, it becomes evident that a comprehensive understanding of the economic repercussions stemming from global conflicts demands extensive empirical research. The juxtaposition of Israel’s and Russia’s economic scenarios encapsulates the broader discourse surrounding the efficacy of sanctions and the evolving geopolitical landscape. As a multi-polar world gains traction, a concept that refers to a world order in which power is distributed among a multiplicity of global actors, the existing paradigms of superpower dominance face challenges, necessitating reevaluated approaches to international relations and economic policy moving forward.