Russian forces invaded Ukraine on Thursday, bringing the conflict that has been simmering since 2014 to the boil. For Mauritius, the main effect will be the economic fallout of this conflict. Here is why we are not headed towards World War 3, why NATO expansion helped fuelled this conflict, and why Mauritius should hope that it proves short-lived.
The roots of the conflict
On Thursday, Russian forces invaded Ukraine, dramatically escalating a conflict between the two countries that has been going on since 2014. Russian President Vladimir Putin has laid the blame squarely on the US-led NATO for the conflict and in the days before the invasion, he accused Ukraine of seeking nuclear weapons – in 1994 Ukraine gave up the stockpile of 1,700 nuclear warheads it had inherited from the Soviet Union in return for security assurances from Moscow – and accused the Ukrainian government of being a “neo-Nazi” regime. The Russian president also said that Moscow would formally recognize two breakaway states – the People’s Republics of Donetsk and Luhansk – set up by pro-Moscow separatists in Eastern Ukraine in 2014. The Ukrainian President Volodymyr Zelenskyy has imposed martial law across Ukraine, cut off all diplomatic ties with Russia in response to the invasion and has appealed for outside help.
While the Russian invasion of Ukraine that began on Thursday is a dramatic escalation, the roots of this conflict go back to the end of the Cold War and the expansion of NATO, originally founded in 1949 to counter the Soviet Union, since then. Following the fall of the Berlin wall in 1989 and talks over the reunification of Germany – then divided into West Germany that was in NATO and East Germany that was in the Soviet-led Warsaw Pact – then-US Secretary of State James Baker told then-Soviet leader Mikhail Gorbachev during a meeting in February 1990 that “there would be no extension of NATO’s jurisdiction for forces of NATO one inch to the east”. While the US interpretation of Baker’s words were that NATO forces would not be stationed in Eastern Germany, the Russian government interpreted this to mean a pledge that NATO would not expand eastwards into what used to be the old eastern bloc.
Since the end of the Cold War, Moscow looked on angrily as NATO increasingly moved east. And ever closer to Moscow. In 1949, NATO was founded with 12 members: the US, UK, France, Portugal, Norway, the Netherlands, Luxembourg, Italy, Iceland, Canada, Belgium and Denmark. In 1952, it expanded to Greece and Turkey; in 1955 to include West Germany, and Spain in 1982. After the end of the Soviet Union, NATO looked to absorb states formerly within the communist bloc. Putin was not the only Russian leader to oppose this. In 1997, Russian President Boris Yeltsin warned, “We believe that the eastward expansion of NATO is a mistake and a serious one at that.” What Yeltsin wanted was a guarantee that no former Soviet republics would be added to NATO. No guarantee came. Instead, in 1999, Poland, Hungary and the Czech Republic were added into NATO despite Moscow’s objections. Meanwhile, Moscow’s own view of NATO started to change when that same year it bombed Russian ally Serbia during the Yugoslav wars. Then NATO expansion restarted with another wave of entrants in 2004: Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia. “The main issue is that Russia felt that it was being encircled by NATO,” explains Milan Meetarbhan, Mauritius’ former top UN diplomat.
Things heat up
RUSSIA started hitting back after the 2008 NATO summit held in Bucharest. With US President George W. Bush’s approval, NATO referred to Georgia and Ukraine stating, “that these countries will become members of NATO”. Expanding the military alliance still further. This time, right on Russia’s doorstep. Before the summit, Putin warned that including these two countries “would be a hostile act toward Russia”. The same year the summit took place, Russia embarked on a brief war with Georgia. Since those events, NATO has got four new members, Albania and Croatia in 2009, and Montenegro and North Macedonia in 2020. The Ukrainian problem started in earnest in 2014 after the pro-Moscow President of Ukraine Viktor Yanukovych was toppled by street protests after he rejected a trade agreement with the European Union in favour of a deal with Moscow.
What rankled Moscow was the fact that US diplomats were seen to be encouraging the protestors in the streets. In response to the overthrow of Yanukovych, Russian forces seized the Crimea region (home to Russia’s black sea fleet) and formally annexed the region after setting up a disputed referendum. At the same time, pro-Russian separatists in the eastern regions of Donetsk and Luhansk declared independence from Ukraine. Since then, Russian-backed separatists and Ukrainian forces have been engaged in a low-simmering civil war, while Russia itself has been accused of carrying out cyberattacks including allegedly orchestrating massive power blackouts in Ukraine in December 2015, December 2016 and attacking government and business computer systems in Ukraine in June 2017.
In January 2021, matters started getting out of control when the Ukrainian President urged US President Joe Biden to allow Ukraine to join NATO. Until now, Ukraine is a “partner country” to NATO along with Bosnia-Herzegovina and Georgia, although Kyiv became the fourth largest recipient of military aid from the US. In October 2021, in response to deepening ties between NATO and Ukraine, Russia began moving troops to the Ukrainian border. It is this build-up that finally led to Thursday’s invasion. “Russia feels that Ukraine is the only buffer left, and it does not want NATO at its door,” says Meetarbhan. But this is more than just keeping a neighbouring state out of a military alliance perceived as hostile. It is also about attempting to roll back NATO and reclaiming space that Moscow has lost since the end of the Soviet Union.
Putin has termed the collapse of the old communist state as the “greatest geopolitical catastrophe of the 20th century”, blamed the founder of the Soviet state Vladimir Lenin for “creating” Ukraine as a state separate from the Russian people and has presented the US with a list of demands including denying NATO membership to Ukraine and removing foreign troops from all NATO countries that joined after 1997 – that is, all of the old communist bloc states. ” a ‘greater Russia’, which would also include Ukraine, Belarus and the Crimea. As time goes by, it’s becoming clear that Putin also wants “
The economic question
The war between Russia and Ukraine puts Mauritius in an awkward position. It has friendly ties with both the West and Russia. But it also recognizes how hollow NATO’s talk about international law and territorial integrity can be. “Many within Mauritius will be asking themselves whether this is not precisely what has been happening in the Chagos all this time,” Meetarbhan points out. The Russo-Ukrainian war breaks out just as a Mauritian-sponsored expedition to the Chagos returns, in defiance of the UK’s occupation of the archipelago. But while the hypocrisy about international law coming from the West might rankle in Port-Louis, it is also uncomfortable about bits of states allowed to be broken up by others with impunity. Once again, remember the Chagos. “Will there not be pressure from the EU and the US forcing us to choose between our friends in the West and in Russia?” asks economist Pierre Dinan, “let us hope we don’t have that kind of choice forced onto us.”
Mauritius, however, is a bit player on the grand chessboard and whatever stand it takes will make little practical difference. More than politics, what it will be concerned with is the economic fallout of this conflict for itself. Russia and Ukraine together account for 29 percent of global wheat exports and Russia is the world’s third largest producer of oil, after the United States and Saudi Arabia. One out of every ten barrels of oil consumed globally comes from Russia. “This will push up prices globally,” says Dinan, “there will obviously be some sort of retaliation from the West to ostracize Russian goods. If an embargo is declared on, say, Russian wheat, the supply on the world market will be restricted and according to the law of supply and demand, prices will go up globally.” Anything, he adds, “that will affect the smooth running of trade will have an effect on global prices”.
The trouble is that the war between Russia and Ukraine comes at a bad time. According to the UN, global food prices were already escalating – the highest in a decade – because of the disruptions to global supply chains caused by Covid-19, recovering consumption increasing demand and a series of droughts and poor harvests in countries such as the US and Ukraine itself. As well as poor harvests in countries such as Ethiopia, Kenya and Somalia pushing up global prices still further. Global oil prices too were already the highest they have been since 2014. “Since June, oil prices have been going up steadily,” explains Megh Pillay, ex-Director General of the State Trading Corporation. Meanwhile the early days of the pandemic in 2020 saw oil dip below zero at times, when oil demand collapsed as economies shut down and US oil companies effectively paid others to take away their oil to free up scarce storage space. OPEC (the cartel of oil-exporting states) reacted by shutting off the taps. “Now what has happened is that consumption has recovered; by the end of 2021 global consumption was already at pre-Covid levels, but OPEC has been slow to release oil on the market so we have been in a situation where we have seen global oil prices rise from $22 a barrel in June last year to $75 a barrel by the end of 2021,” explains Pillay.
Why Mauritius should want a short war
Much of the havoc that the Russian invasion of Ukraine is causing on global commodities markets might not have that much of an effect on Mauritius at all. Provided it is a short war, that is. This has less to do with what’s going on in the local market, and more with the manner in which Mauritian oil is imported and priced. Mauritius, after all, is not a large oil importer like the US, EU or India where oil is constantly being imported on a daily basis and prices fluctuate frequently. Mauritius buys its oil at intervals of between 20 and 22 days. “The price of each oil shipment is set using an average of global prices five days before and five days after the oil is loaded on the ship to prevent suppliers from delaying shipments to get more money in case prices are getting higher,” explains Pillay, “obviously this means that if the conflict is a short one and things stabilize before our next shipment then there will be no big change, but if the conflict is a protracted one and prices remain high at the time we have to buy our next oil consignment then the price will be affected.”
The other thing to consider is that when it comes to the price of oil, the government has a lot of room to manoeuvre. The pricing structure of the State Trading Corporation that imports the country’s oil, currently pays just over Rs25 for each litre to bring the oil in terms of cost, insurance and freight. But another Rs29 is added onto the price in terms of others levies and taxes by the government. “Let’s say that at the time when we next buy oil, global prices have jumped from $75 to $90 a barrel. That’s not much, just an additional Rs5 a litre. You can absorb that cost by removing any number of these taxes and levies from the price you charge for oil,” Pillay points out. Such as for instance the Rs2 per litre that the government is taking to buy Covid-19 vaccines or the additional rupee it diverts into the Covid-19 Solidarity Fund or the Rs1.80 diverted to the Road Development Authority.
Doing this is not too difficult: unlike the excise duties charged on fuel that have to be approved by parliament, these additional taxes and levies can be imposed and taken away through mere regulations from the foreign ministry. The current finance minister Renganaden Padayachy should be familiar with all this: when the STC’s Petroleum Pricing Committee was founded in 2011, he was one of its first members. “Let’s not forget that when in May 2021 global oil prices had shrunk to between $20-25 a barrel, none of those savings were passed onto the consumers, the government thinks that people are used to paying high prices for fuel; so, it keeps prices high to build up its funds, should the war continue to rage for long, these windfall gains that have been built up should be used to keep oil prices stable domestically. Now is the wrong time to inflict more costs,” argues Pillay. The danger he warns, is that reading headlines about oil reaching $105 a barrel might lead to bad decisions, “These are peaks, amid war you have a lot of speculation with bankers and hedge funds moving into oil expecting prices to rise, but these generally don’t last, the market corrects itself eventually and now we can be comforted by OPEC saying it will boost oil production and the possibility of a deal between the US and Iran that could see Iranian oil coming in and changing the market entirely.”
The bad decisions he has in mind concern the one in 2008 by Air Mauritius to hedge its fuel costs spooked by headlines of high oil prices. “They did it at a time when everybody got scared and in August hedged at a high price above $100 a bar- rel without realizing that by the end of July itself prices had already started coming down,” he argues, “similarly in this case, we should not start getting alarmed and reacting right away, we have to see how long this conflict actually lasts. There is absolutely no reason for the government to start raising oil prices right away.” Either it would be a naked cash grab, or an exceedingly poor decision taken out of fear.
The same is the case for wheat. The government charges Rs4.20 on every litre of fuel to subsidise rice, LPG and flour. While Russia and Ukraine are big wheat producers, Mauritius has traditionally bought its wheat from countries like France and Australia. Should supply from Russia and Ukraine be interrupted, that would lead to a scramble by their mostly Middle Eastern and African wheat customers to buy from other markets, driving global food prices up generally. Once again, Mauritius would not be too affected in the short-term. Why? Because like oil, Mauritius buys its wheat at intervals. This time at intervals of a year between shipments and has a lot of capacity within the country to store flour. So, no dramatic price increases in the short-term, unless the conflict drags on until the next shipment has to be bought.
Why the war is unlikely to escalate
All of this points to the fact that Mauritius won’t be much affected unless the war drags on. Which it looks unlikely to for a number of reasons: first, while Ukraine is a vital security matter for Russia, it is not a vital interest for the US. While the US has responded by sending troops to NATO members in Eastern Europe, Ukraine is not a member of NATO that the alliance is obligated to militarily defend. This much became clear when the US started pulling out its trainers and advisers after Russia started building up its forces on the Ukrainian border. And so far, the reactions seem to be limited to imposing sanctions on Moscow, targeting banks, figures close to the regime and restricting access to technology. A much safer way to react to Russia; which along with the US collectively controls 8,000 nuclear warheads.
And what Mauritius would hope for is that the current war proves to be as short-lived an affair as the dramatic, but brief, Russian war with Georgia in 2008 that lasted just 12 days or the annexation of Crimea that took place over little more than a month in 2014. “The most plausible outcome is for Russia to install a pro-Moscow government in Ukraine so that it once again becomes part of Russia’s sphere at least formally,” outlines Meetarbhan. Here is Pillay: “This is not something to ignore, but not something to exaggerate either. Unless the war proves to be a long one.”