Wars and Economic Weapons: Different wars, same methods

02 December 2022 /

8 min

In October 1973, Egypt and Syria decided to simultaneously launch an attack against Israel, to recover some of the territories lost by Egypt (in particular the Sinai peninsula) in the 1967 war, also known as the Six-Day War, on the day of the most important holiday for Jewish people (Yom Kippur). Egyptians and Syrians military intelligence knew that the Israelian army would observe the recommendation of the holiday, as it forbid working and requires to participate in religious services. As a result, by taking advantage of this “surprise effect”, Egypt crossed the Suez Canal and regained control over the Sinai peninsula.
Taken aback by the attack, the Israelian government solicited assistance from the United States, which at first showed some hesitation to get involved in the War. However, the US changed its stance the moment the Soviet Union started to military support Egypt and Syria: this became, then, an indirect confrontation between the USA and USSR. The Western countries decided to back up the USA and to support Israel, supplying it with weapons and money. On the other side, a coalition of Arab countries decided to support Egypt and Syria with countries like Iraq and Jordan intervening directly in the conflict. At the end of the conflict, the war was very short, as on the 25th of October 1973, through the United Nations, a cease-fire was able to be reached between Egypt and Israel.

The economic effects of the Yom Kippur War

One of the purposes of this article consists in the analysis of the worldwide effects on the economy due to this short war, which were extraordinarily devastating, especially in the most developed and, simultaneously, most oil dependent countries. The economic repercussions began to be felt when the Arab countries decided to support Egypt and Syria, as they felt that the Arabian’s interests were never rightly considered by the international community; plus, with the significant intervention of the USA and the support of the other Western Countries to Israel, made this sentiment rise rapidly.

During the 1960s the replacement of coil by oil started to spread all over the Western countries, as oil was cheaper and it could be used not only as an energy resource but as well as to produce essential products. Most of the oil was extracted in the Arab countries especially in the Sinai peninsula, and since the world scenario was changing (extensive decolonisation), the main producer of oil decided to create an organisation with the aim of defending their national interests. This organisation, known under the name of OPEC (Organization of Petroleum Exporting Countries – Saudi Arabia, Iran, Iraq,Venezuela, Kuwait, United Arab Emirates) was formed in the 1960’s, and between 16 and 20 October 1973, decided to reduce the production of petroleum and to increase its prices, as a retaliation to the intervention of the Western countries in the Yom Kippur War. Furthermore, OPEC decided to enforce a ban on the export of oil to the USA and The Netherlands, since both countries were primarily involved in supporting Israel. As a consequence, the price of oil went from 3$ per barrel to 12$ per barrel in just a few months.

The embargo employed by OPEC caused shortages of oil in all the Western economies, from the US to Europe, as well as an increase in prices in general products. After a long period of stable growth and wellness (the so-called “Golden Age of Capitalism”), Western countries started to suffer high inflation (a double digit one), high unemployment rate and recession. It was the first time that such an economic phenomenon occurred, a phenomenon which many economists didn’t think could  happen: the “stagflation”.
To try to recover from these devastating effects, all the western governments had to significantly intervene in the economy with aid as well as to nationalise some of the enterprises. Furthermore, to try to reduce the shortages of fuel (and other petroleum products) several measures were applied in order to reduce the oil consumption, such as the “Walking Sundays”, curfew during the evenings and nights and limitation of public lighting which helped to save millions of litres of fuel.

The unjustified invasion of Ukraine

Returning to the present, on February 24 2022, the Russian army began the invasion of Ukraine, after the decision of President Vladimir Putin to unilaterally recognize the eastern regions of Ukraine, Donetsk and Lugansk, as independent countries. The unprovoked aggression resulted in a general negative reaction of the majority of the international community as the unilateral act of the Russian government, sustained by the claim that the citizens of those regions wanted to be part of Russia, did not justify a military intervention. Similarly what happened in the Yom Kippur War, the US decided to massively support Ukraine by sending weapons and money.

European Union’s Response

On its side, the European Union started to sanctionate the Russian attack, coupled with the efforts of several European Leaders who tried to convince the Russian President to stop the attack and to find a peaceful solution. Nevertheless the diplomatic meetings didn’t produce fruitful results, resulting in the European Commission deciding to issue several waves of economic sanctions to “attack and weaken” the Russian economy as well as the main exponents of the Russian regime, with the objective to try to persuade Russia to withdraw its army from Ukraine. Furthermore, the bordering countries of the European Union began to receive significant flows of incoming people from Ukraine, which resulted in a European plan of support and welcoming these refugees.

The Russian reactions

Just as it happened in the Yom Kippur War with OPEC- that reduced the offer of oil to the Western countries- few weeks later of the European sanctions, the owned state company, Gazprom, started to reduce the flow of gas through its main pipelines under the guise of technical problems that were never confirmed by independent parties. This decision, like in 1973, started a big crisis as most  European countries (like Germany, Italy, Finland) depended on Russian gas for the functioning of their industry as well as for domestic use. Furthermore, the need of stocking gas for the next winter caused a spread fear of shortages, since there was the need to find new suppliers in order to substitute the missing supply from Russia. In addition, being gas a commodity listed on the stock exchange, a generated rise in its prices ensued as the demand increased while the offer remained mostly the same, or even lower than before. Plus, the increases of gas price also affected the price of electricity and oil as they are all related.

The economic consequences of the Russian Invasion

As the north-american writer Mark Twain once said “history doesn’t repeat itself but it often rhymes”. The worldwide economic scenario, already exhausted from trying to recover from the Covid-19 pandemic and its negative effects, worsened. The increase of energy’s prices affected their respective consumption, with costs more than tripled for enterprises and households, requiring a significant broad based intervention of the State. A rapid rise in inflation started with some countries facing (again) a double-digit inflation; some enterprises risked bankruptcy entailed by an increase of unemployment rate. Most of the international economic institutions, like the International Monetary Fund and the World Bank started to revise the economic outlook of all the economies, with an important reduction in the GDP growth rate for 2022 and 2023. The situation of Ukraine will be significantly worse with an expected reduction of over one third of its GDP in 2022; while Russia will face a GDP reduction of about 10% between 2022 and 2023. In the end, the war caused higher energy prices; lack of food exports; increased prices globally (particularly in Europe), and economic slowdown or even recession in some of the countries. As in the past, we now risk to face a new wave of stagflation, an economic situation from which is hard to recover as the effects of the remedying policies can only be seen after some years.

Different wars, same devastating economic effects

The objective of this article is to underline how wars are intertwined with countries’ economies by showcasing the similarities between the Russian Invasion of 2022 and the Yom Kippur War in 1973. In the wars mentioned, one of the parties used “economic weapons” (the reduction in the oil or gas offer) to try to win the war, disregarding the potential negative economic effects; similarly to the  OPEC in 1973, Russia is employing the same method in order to disincentivize third countries’ support for Ukraine, at cost of destabilising international markets. Furthermore, both wars caused the stagflation phenomenon that is usually unlikely to happen. The fact that only a few companies or countries control such a strategic energy resource that can affect the entire economic system, based on political decisions, can be put into question. Due to the aforementioned reasons, it is possible to deduce that every war has its “economic weapon” (“economic blackmail” actually), whether it is oil/petroleum or gas, nevertheless these  always being a significant primary source for some countries. Warmongers States rely on this dependence, since they believe that  other States will not dare to face them.

When history is not taken in consideration

It seems that the saying “learn from past mistakes”  is not trumping the government’s self interests, especially in a country that does not have a fully democratic system, to the detriment of its own people. Nevertheless, not only authoritarian regimes use or produce weapons, spending billions of euros in the process, but it is a practice that is increasing worldwide, even though all states agree that wars should be avoided at all costs. 
In conclusion, wars cause recessions and other distorting economic effects, not only in the countries primarily involved but for all the others that are economically, diplomatically connected to the belligerent countries. But what about the lives of people that are turned upside down overnight? Thousands of people die or live in horrible conditions due to the decision of a single person being kept safe in his own ‘bubble’.  In light of the current situation we are facing, where most of today’s repercussions are similar to the ones suffered in 1973, the aggressor State should reconsider  the effects of its actions by putting first the wellness of its citizens and to achieve its objectives via cooperation and collaboration.

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