International Relations: Impact of Ukraine Crisis on International Business - Essay Example

International Relations: Impact of Ukraine Crisis on International Business Introduction The Ukraine Crisis has risen has led to international attention due to the importance that the country holds to various global powers. Although the country has no significant economic might to attract global attention by itself, its proximity and relation with Russia is what has made it acquire significance in global politics. Ukraine has established closer economic ties with Russia over the years especially due to its strategic position as a gateway for Russian oil and gas to reach Europe. However, this positioning has also led to increased conflict within and outside Ukraine as both Russia and the European Union seek to exert their influence over the country. It is therefore natural that the Ukrainian Crises has significant impact in international business as pro-Russian and pro-European forces clash inside the country. This essay makes an analysis of the implication of the Ukrainian Crisis on international business while appreciating the fact that the crisis has ceased being an internal matter to one pitting Russia on one hand and most of European countries and the United States on the other. Background to the Ukrainian Crisis The beginning of the Ukrainian Crisis was greatly influenced by the events leading to the ouster from power of Russian-backed President Viktor Yanukovych. President Viktor Yanukovych was removed from power following widespread protests against his decision to suspend the EU–Ukraine Association Agreement in favour developing closer ties with Russia (Yakovenko, 2014; Fisher, 2014). Pro-Russian separatists in Donetsk and Luhansk were also emboldened by the annexation of the Ukrainian peninsula of Crimea by Russia. The decision by Viktor Yanukovych not to a trade deal with the European Union was seen by many pro-European Ukrainians as propagating the interests of Russia instead of promoting policies positive outcomes for the people of Ukraine. Russia reacted to these assertions by providing financial incentives, which included offering 50 percent price reduction on natural gas in addition to 15 billion dollars as financial aid package for the economically weak country. Following Viktor Yanukovych’s removal from office, and replacement with Arseniy Yatsenyuk who is a pro-Western technocrat, there was an escalation of tension between Russia and Ukraine. Russia reacted to the ouster of its ally by declaring it an illegal revolution followed by deployment of its troops into Crimea to take control of military facilities and ports. The annexation of Crimea following a referendum in favour of self-determination led to more chaos as fighting erupt in eastern Ukraine were separatists took control of multiple towns and cities to the east of the Dnieper River (Clanton, 2014). Russia has also maintained the presence of its troops along its border with Ukraine with a strong presence of thousands of soldiers accompanied by tanks, helicopters and fighter jets. The conflict has continued despite various interventions designed to appease the warring factions, with the Ukrainian pro-European government accusing Russia of helping the separatist rebels with the view of destabilizing the country. Russia on the other hand has voiced its concern over the treatment of Ukrainian citizens of Russian origin in the eastern regions where rebel activities have been high. However, eruption of the Ukrainian Crisis has been blamed on the introduction of policies for radical economic reform without having a clear financial strategy while also widely ignoring consequences for Ukraine-Russia trade and economic ties established over the years (Yakovenko, 2014). The Ukrainian Crisis has since ceased being an internal matter or one involving Kiev and Moscow to one that has drawn interest of international players with different interests in the country. Of greater interest as the conflict morphed is the development of the crisis into one involving Russia on one hand and the US and EU on the other as each side seeks a solution to the Ukrainian Crisis that would be favourable to their interests. The US and EU support of the pro-western regime in Ukraine has faced scrutiny from some commentators who perceive the parties’ insistence on notions of sovereignty and territorial integrity as one that does not address actual needs and aspirations of Ukrainian citizens. Such backing from the US and EU is seen as tempting Kiev to pursue military conflict with Russia thereby escalating the tension which has been worsened by the economic sanctions on Russia (Yakovenko, 2014). Impact on International Business As noted above, the Ukrainian Crisis has attracted interest from different intentional players with interests in the country. Impact on international business will ultimately depend on the effect the conflict has on Russia. Since independence, Ukraine has been involved in several economic partnerships with Russia, which makes Kiev indebted to Moscow either due to the loans or price cuts that the country has received from Russia (Soldatkin and Polityuk, 2014). Therefore, Russia will find it difficult to forego its claim over the status of affairs in Russia. With the western countries continuing with economic sanctions against Russia global businesses tied to the Russian economy are bound to suffer any negative implication such sanctions might have on the Russian economy. According to Yakovenko (2014), the Ukrainian crises have been escalated by the sanctions, which the author perceives as being a middle ground between war and peace. The sanctions imply war against Russia as its effects, although experienced in economic sector, can still result in destruction similar to that of real war. The conflict has developed in to one that resembles the cold war era with Yakovenko (2014) noting there was the West rebuffed no formal closure after the cold war as calls by Russia for the formation of modern security architecture in Europe, which was in favor of the status quo that is supported by the majority. The implication of this ongoing standoff over the crisis in Ukraine is that the performance of international business depends on the effect of the sanctions on Russia and how Moscow reacts to effects (Wood, 2014). The sanctions on Russia have targeted important economic industries therefore affecting energy companies, defence sector and banks, which have been prevented from accessing long-term funding from Western countries (Pfeiffer and Potter, 2014). The sanctions have involved measures such trade limitations product bans, freezing of assets and transactions by financial institutions of own by those close to the Russian authorities (Clanton, 2014). Part of the Russian response has been to target some of the US allies in Europe especially coming in the wake of accusations against Washington for spying against European countries such Germany. There is a perception that increased sanctions against Russia will have a greater negative economic impact on European companies in general as opposed to being limited to those affiliated to the Russians. According to Jolly (2014), the Russian economy is small when viewed in the context of the global economy but has significant implication for European countries. For instance, the author notes Russian is among the ten greatest trading partners with Germany with approximately 300,000 Germans being employed by companies exporting goods to Russia. According to Clanton (2014), the reason why most European countries were initially not ready to support sanctions against Russia was due to the linkages with trade between members of the EU and Russia growing steadily over the past 15 years. The total value of this trade is estimated to around 2 trillion dollars for year 2013 alone. Further, a negative economic outcome in Russia will put at risk the level of trade with countries such as Norway that has investments in Russia to the tune of 900 billion dollars. There are also risks for businesses in Italy, France and Spain whose transaction with companies in Russia resulted in a combined return of over 250 billion dollars in 2013. These businesses are outside the Russian arrangements with almost every EU member states relying on supply of Russian gas and oil. Therefore, sanctions preventing European countries from dealing with Russia over its activities in Ukraine will also affect other business in Europe due to their dependency on the Russian economy. Among the economic advantages, that Russia holds against both European countries and the US is its oil and gas supply. Russia boosts of supporting major European economies because about 30 percent of its oil and gas products are consumed in Europe (Wood, 2014). Most of the gas from Russia is transported to Europe through Ukraine, which has debts that have accrued into billions of dollars. Russia has reacted to these debts by cutting its gas supply to Ukraine although supply to other European countries has not been largely affected. However, the escalation of the conflict could lead to a shutdown in supply to countries that are not seen as supporting Russian interests in the region. If this is the case, major businesses in Europe that relies on gas will experience a sharp decline in supply as the Russian pipeline has been the most cost effective route in gas transportation. Therefore, there is a challenge faced by policy makers who see the international isolation and economic sanction against Russia as one that should be implemented in a way that will not hurt long-term international interests. Avoidance of long-term negative effects on economic positioning of both European and united states interests means there is a limitation over the extend that these countries will support particular forms of sanctions. The economic disengagement from Russia should not affect sectors that will take years to rebuild to original standings. Failure to consider such prospects may prove catastrophic for businesses originating from countries on either side of the conflict (Thesing and McFerron, 2014; Kassam, et al. 2014). The risk of losing out in the long-term is increased by existing alternatives for business originating from Russia and EU and United States. There is therefore concern that inflicting irreparable damage on existing opportunities for business between Russia and EU and united states could result in the traditional markets for products from these countries losing out to competitors, which will make it difficult to regain the markets due to shift in opportunities and consumer brand loyalty (Marshall, 2014). China has emerged as an alternative for Russian businesses especially since the Chinese authority has historically been known to avoid interference in domestic matters affecting other states. The Chinese reputation of non-interference has resulted in closer working relation with Russia as the Asian giant also embarks on asserting itself as a global economic powerhouse. Areas of cooperation between Russia and China have been in the spanning energy, finance and technology, which have suffered from lack of credit and business opportunities as a consequence of the economic sanction. Trade negotiations between Russia and China have led to agreements on credit lines valued at about 4.5 billion dollars for Russian banks and businesses (Razumovskaya, 2014). China has been recognized historically as a country with ability for mass production of technologically uncomplicated goods a factor that resulted in Russians having a preference of European technological advance products by the. The economic arrangement with Europe also had other benefits such as being in close geographical proximity to European industrial centres and the advantage of having knowledge of European markets and languages. However, the Ukraine crisis means Russian companies can no longer take full advantage of these opportunities forcing them to reflect on the benefits of establishing working relationship with Chinese industry (Kashin, 2014). The partnership between Russia and China could also have significant impact in the global financial sector especial in relation to the use of the US dollar as the standard for exchange in the international business. The alliance between these two countries will likely see elimination of the USD as the standard currency in bilateral trade. It is well acknowledged that the two countries together with a few others have been hoarding gold with a view of holding national wealth in a form that has permanent value (Wood, 2014). The unresolved crisis in Ukraine has seen gold reserves held by Russia increase tremendously as the country seeks to shield its economy from effects of declining relations with the European Union and the United States that threaten its euro and dollar reserves. Russia is currently holding gold that is more than what Switzerland and China already hold with the country’s gold reserves standing placing the country as the fifth largest globally (Wilson, 2014). Therefore, the possibility of missing markets that are important for the economy of some of the European countries has resulted in taking cautious steps as these countries seek to increase pressure on Russia to end its support to separatist groups in Ukraine. However, a major turning point in the European treatment of Russia was the downing of a Malaysian jetliner Boeing 777-200ER in 17 July 2014 killing all the 283 passengers and 15 crew on board (Alexander, 2014). Russia was immediately accused of supplying separatist rebels with the missile system that shot done the plane in Ukrainian territory based on available intelligence showing a section of the rebel leadership taking credit for the missile attack (Clanton, 2014). Following global condemnation of this action, majority of European countries indicated wider support for sanction against Russia for its role in interference with the political situation in Ukraine. Countries’ such as Germany has confirmed adherence to the sanctions by restricting it military supply, which has resulted in ending supply of Rheinmetalls combat simulation gear to Russia (Pfeiffer and Potter, 2014). The Russian airline services have also been affected by the sanctions imposed by European states with state carrier Aeroflot being forced to suspend all of its scheduled flights as a result of cancellations of plane lease agreement. The implication of sanctions that has targeted companies and wealthy individuals including Arkady Rotenberg, a major shareholder in financial institutions such the Invest Capital Bank and SMP Bank and billionaire in media Yury Kovalchuk, has resulted in negative economic outcome in the country. Therefore, the implication of Russian interference has also resulted in a shrinking Russian economy as seen in the falling media stocks (Pfeiffer and Potter, 2014). There has also been implication for volume of business conducted between Russian and United States companies as the two states react to the situation in Ukraine. As the most vocal supporter and initiator of sanctions against Russia, the United States has been at the forefront of all efforts designed to increase pressure on Russia. The United States has therefore led the way in preventing the targeted individuals and companies from conducting business with its citizens or US-based business organizations (Smith-Spark and Eshchenko, 2014). Russia has also reacted to the sanctions by imposing ban against businesses originating from united states, which has mostly affected the export of agricultural products particularly meat. Russia has been one of the destinations for American agricultural products accounting for 10 percent of exports, which is about 1.3 billion dollars in sales. Additionally, authorities have also targeted companies originating from the United States and operating in Russia as a form of retaliation. For instance, Russian consumer safety agency has launched investigations against a number of companies that have been accused of breaking laws on consumer goods. One of the organizations is the McDonald’s, which has seen up to twelve of their restaurants closed amid investigations for health and sanitary violations (Marshall, 2014). Conclusion The Ukrainian Crisis is no longer an internal matter for Ukrainians to deal with. It has now escalated to involve major powers in the world as each strives to protect their interests in the country. Consequently, the crisis has transformed into a show of might between the United States and EU on one hand and Russia on the other. One of the significant effects of the Ukrainian Crisis it the increased economic sanctions and isolation of Russia by the United States and EU. These sanctions have had considerable economic impact for international business as Russia also seeks to counter the economic impact. While the sanctions have hurt Russian companies and the targeted individuals, the economic sanctions have also threatened the economy of many European countries as many depend on gas and oil from Russia, while importing and expecting different products. Therefore, businesses on the sides of both cassia and United States and EU have suffered considerable damage because of prolonged Ukraine Crisis. References Alexander, H., 2014. Malaysia Airlines plane crashes on Ukraine-Russia border – live. The Daily Telegraph, [online] 17 July. Available at: https://web.archive.org/web/20140718001608/http://www.telegraph.co.uk/news/worldnews/europe/ukraine/10974050/Malaysia-Airlines-plane-crashes-on-Ukraine-Russia-border-live.html. [Accessed 31 October 2014]. Clanton, R. A., 2014. The Economic Impact of Ukraines War. Thursday Review, [online] 25 August 2014. 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