Economics in a Time of Global Conflict Webinar Recap
The Australia-UK Chamber of Commerce was pleased to partner with CPA Australia for a webinar which brought together global thought leaders and economics professionals to analyse the impact of extreme crises on global economic markets.
The world is facing several evolving challenges, with world economic markets riding the tidal wave of the fall out of these challenges: the COVID-19 pandemic, rising inflation and living costs, and the invasion of Ukraine by Russia. These factors are having a significant impact on financial markets: foreign currency exchange rates, migration patterns across Europe, coupled with an escalating refugee crisis, and the role corporate responsibility is playing in denouncing the war in Ukraine.
The webinar connected thought leaders who are experts in geopolitics and economics to discuss the potential impacts these catastrophic issues are having on global stability, financial markets and corporate entities.
Good morning to the UK and good evening Australia. A warm welcome to the Acting High Commissioner Ms. Lynette Wood, Colleen Schooling from the CPA – our sponsors for today, our speakers and guests. I’m Joanne Holland, the CEO of the Australia UK Chamber of Commerce in London and the Australia UK Chamber of Commerce is pleased to be partnering with the CPA Australia for this webinar today.
We global thought leaders and economics professionals to assess the impact of the extreme crises on global economic markets. The world is facing several evolving challenges, with world economic markets riding the tidal wave of the fallout of these challenges. The COVID 19 pandemic, rising inflation and living costs and the invasion of Ukraine by Russia. These factors are having a significant impact on financial markets, foreign currency and exchange rates.
Migration patterns across Europe, coupled with an escalating refugee crisis and the increasing demands for greater corporate responsibility against the backdrop of the war in Ukraine. Today, our topic is economics during a time of global conflict. And we have four excellent speakers to address the many facets of this complex topic. Our excellent speakers today are Ms. Lynette Wood, acting High Commissioner to the UK.
Professor Theo Farrell from the University of Wollongong. James Hayton is Special Counsel to LK Law and John Swieringa, Minister Counsellor Treasury at the Australian High Commission in London. We are expecting a lively discussion. So please submit any questions that arise during the webinar into the Q&A function on Zoom. These will be addressed when we come to the Q&A session later.
Now to introduce our sponsors, the CPA, I welcome Ms. Colleen Schooling. She’s the regional head Europe and United Arab Emirates. Welcome, Colleen.
Thank you, Joanne. And yes, CPA Australia is certainly very pleased to partner with the Australia UK Chamber on this webinar event today. And I also would like to acknowledge our Acting High Commissioner Ms. Lynette Wood joining us today. Together with our esteemed panel of speakers. And I also extend my my own welcome to all of our members and chamber members and guests who are with us today.
It’s a very big group from around the world. And I think that that certainly speaks to some keen interest in this particular topic. Global conflict and crises tragically have an immediate impact on those at the forefront and ultimately on economic sectors, businesses and individuals. We all see the news and other media, of course, but these sorts of forums allow us an opportunity for another means of distilling and evaluating current and future impacts.
So we very much appreciate our speakers giving up their time today and look forward to their insights and commentary. Just before we move to the discussion, I know that we have many of our members online today, but for those of you who are not overly familiar with CPA Australia, a brief introduction. With a 136 year history, CPA Australia has grown to become one of the largest accounting bodies in the world, with more than 170,000 members in over 100 countries and regions, all working in a wide range of industries and sectors.
The CPA designation is recognised globally and it represents financial, accounting and business advisory professionals of the highest training and expertise. The CPA program places great importance on technical knowledge However, what sets our program and our members apart is also our focus on other professional skills such as business strategic ability, strong influencing skills, and being a persuasive and adept communicator.
In addition to the CPA program, CPA Australia is at the forefront when it comes to advocacy and public policy and debate, particularly across the Asia-Pacific region. And we’re recognised internationally for specialist training in accounting and finance for business. With 20 offices around the world, including in London, we welcome any interest from those who may be considering the CPA program or who would like to know more about our bespoke training and development programs for finance and non finance professionals as well.
It’s always a great pleasure working with Joanne and the team at the Chamber who I have to say, run a fantastic program of events throughout the year, and I certainly once again extend my thanks to the team for your collaboration on this event. And with that, I’ll now hand back to Joanne and our speakers today. Thank you all very much.
Thank you, Colleen. And thank you to the CPA guests today. I’m delighted to introduce our first speaker today, the new acting High Commissioner, Ms. Lynette Wood. Ms. Wood was a former ambassador to Germany and has been appointed acting High Commissioner to the UK. She’s a senior career officer with DFAT and was most recently first assistant secretary, Europe and Latin America Division, including the Ukraine Task Force. Prior to that she was first Assistant Secretary, Consular and Crisis Management Division and Australia’s Ambassador to Germany, Switzerland and Liechtenstein from 2016 to 2020.
Welcome. Ms. Wood Thank you very much. And good morning. Good evening to everybody who’s participating today in this webinar. Thank you very much for this excellent initiative. I think the timing is just right. We’re about nearly three months into this terrible conflict with Russia’s unprovoked and unjustified invasion of Ukraine and the consequences which have flowed out of that.
And I think today provides an excellent opportunity for us to have a robust discussion about how we’ve responded to that aggressive action, but also what the economic ramifications are and the ways that we are going to have to factor in the ongoing conflict in Ukraine going forward. And in the context, as you said in your introduction, in the backdrop of coming out of the two years of the pandemic and the consequences that that has already had on the global economy, I thought, I must admit upfront that I am not an economist, so I’m not going to dwell on economic analysis. I’m delighted that
we’re also joined today by John Swieringa who’s the minister counsellor for Treasury here at the Australian High Commission. And I know that he’ll be eminently qualified to provide a technical analysis. What I thought I would focus on is what Australia’s response has been to the invasion of Ukraine. As Jo mentioned, prior to coming to London, I was leading a Ukraine taskforce and there’s a couple of points to make before I go into some specifics.
What I think has been very impressive and in fact quite encouraging from an international diplomatic perspective is the coordinated response. At a time coming in the last few years the pandemic has been an exceptional time in global affairs and there had been questions about the coherence of the West and of liberal democracies. Some differences between all of us on various issues.
But I think what’s been very encouraging about the response to the Russia’s invasion of Ukraine is seeing that when the chips are down that we have all pulled together in a very unified and coordinated way, using a variety of tools. And as I was just saying to John before the webinar started, what has been particularly encouraging is the willingness of Western liberal democratic nations and not only the West, that the West can be taken in a much more much broader sense than Europeans.
And what’s particularly encouraging is that countries are willing to accept a cost because of the principle that we’re defending. When the principle of territorial sovereignty is one that should always have consequences and should not be broken. The international order since the end of World War Two has been founded on the principle of territorial sovereignty. If you have internationally recognised borders, that’s it.
Full stop. There’s not a question of ongoing debate about where your borders are or if you feel that you prefer to have a little bit of your neighbors country, that it’s acceptable to take that unilaterally. And I think that’s the basis for the swift and unified international response to Russia’s actions. So to run through in a in a general overview about what Australia has done in response to Russia’s invasion of Ukraine, we have responded on a number of levels.
First I’d like to mention, of course the Australian Government’s response supporting its own citizens who have been affected by the circumstances in Russia and Ukraine. A consular team worked very quickly and very proactively to place teams not in Ukraine but around its borders and in neighboring countries to assist Australians who are fleeing the violence. And that was a substantial effort.
The Australian Government has also announced visa possibilities for Ukrainians to find pathways to Australia. To date, around 7400 visas have been issued to Ukrainians in Ukraine. And of those about 2800 have since made their way to Australia. It’s understandable that many of those will be staying in the neighborhood and hoping that the conflict will be resolved in the short to medium term so they can return home.
But we have issued the visas so they can move to Australia if they wish to do so. On the hard side, like many other countries, including the UK. And since we’re sitting here in London, I also want to acknowledge the strong response and leadership by the United Kingdom to the events in Ukraine and its strong support along with many other countries to Ukraine. From Australia the Australian Government has pledged well over $220 million in military assistance to Ukraine.
This has included lightweight Howitzers, Howitzer ammunition, over 20 Bushmaster protected mobility vehicles and a range of other assistance which is kept confidential for obvious reasons. Australia has also pledged well over $65 million in humanitarian assistance to meet the urgent needs of the Ukrainian people. And we’re working with trusted humanitarian partners, including the UN and NGOs, to address immediate needs such as food, water, shelter, health and protection.
And I think we’re all aware that the humanitarian dimension is serious and growing. Australia has also supported Ukraine’s energy security by donating at least 70,000 tonnes of thermal coal and blocking exports of alumina to Russia, which has seen us power over 10 million Ukrainian homes, and cut off one source of crucial energy supplies to Russia. The other two tools, which I’d like to highlight, are sanctions and the multilateral system.
And this is why I think it’s very impressive seeing a unity of the international system. In the multilateral system there was very quickly the conclusion that there must be costs for Russia for what it’s done and that must be at all levels and in many different fora. So in the multilateral system, we’ve worked with partners to exclude or isolate Russia so that it’s not
it cannot simply be business as usual when international rules have been violated in the way they have been. So we have joint statements condemning Russia and its actions. We’ve supported in March two UN General Assembly resolutions condemning Russia’s invasion. In April, we supported a resolution to suspend Russia from the United Nations Human Rights Council and a range of other areas.
We provided support, such as $1 million to the International Criminal Court to support its investigation into the situation in Ukraine. So I think it’s important to see that a unified global response means acting in a range of fora. Finally sanctions I know there’s often debate about whether sanctions are a useful, wise tool. And of course, there are implications for all of us when we impose sanctions on another country.
So far Australia has listed over 812 individuals and 47 entities in Russia and Belarus for targeted financial sanctions and travel bans. We’ve also introduced other trade measures, such as with import. We’ve banned the import of Russian oil refined petroleum products, coal and gas. We find the export of alumina and bauxite to Russia and we’ve banned the export of certain luxury goods to Russia, including wine and cosmetics.
And in the multilateral trading system we have denied Russia access to most favored nation tariff treatment, which is imposing additional tariffs of 35% on goods produced by Russia or Belarus, shipped to Australia, which are not captured by our bans. To put this in context and going to my point about joining international consensus imposing costs on Russia, before the conflict
Australia actually had not very substantial trade with either Russia or Ukraine. In 2021 goods exports to Russia, for example, totalled only $655 million or just 0.2% of Australia’s exports. So it’s not as if we have taken this proportionate to our trading situation or mindful of our trading situation. It’s more a principle based approach to impose costs on Russia.
Finally, before I conclude, because I’d like to leave time for the other speakers and to make sure we have time for a robust discussion on the sanctions side. I wanted to give you some example of who we’ve targeted As you would expect, we have targeted Russian President Putin, his daughters, Foreign Minister Lavrov, his daughter, defense minister Shoigu, the Prime Minister, the Belarussian president and his family, all the permanent members of Russia’s Security Council and senators who voted at the very beginning of the conflict to recognise Donetsk and Luhansk as independent republics.
110 Russian oligarchs and senior officials. 460 members of the Russian parliament 22 Russian financial institutions, including the Central Bank of Russia, four Russian defense industry entities, 34 Russian army and military commanders. The armed forces of the Russian Federation. 32 persons with key roles in Russian disinformation. 25 figures in the Belarussian government and 34 senior members of the Russian led movements in Donetsk and Luhansk.
And the point about this being a unified, coordinated joined up international effort is to mean that there are no gaps in the international system, so that the costs that were imposed in Russia with the intent of halting the invasion and reversing its aims and hence in Ukraine is as effective as as possible. So on that note, I will conclude and thank you again very much for the invitation to join today Thank you very much, Ms. Wood.
And I’m sure there’ll be lots of questions for you later. A very robust response from Australia. Thank you. I’m now going to introduce Professor Theo Farrell. He’s the deputy vice chancellor responsible for innovation, excellence in education and student experience at the University of Wollongong. And he joined the University of Wollongong in 2017 as an executive dean and was promoted to the Deputy Vice Chancellor in 2019.
He’s a fellow of the Academy of Social Sciences in the UK. Fellow of the Royal Society of Arts in UK. Fellow of the Royal Society of New South Wales. Senior Associate Fellow of the Royal United Services Institute, and Visiting Professor in War Studies at King’s College, London. Professor Farrell is Britain’s leading expert on the War in Afghanistan. He acted as strategic advisor to the UK Government and US led command in Kabul and participated in track two talks with the Taliban. Professor Farrell’s research focuses on transformative change in the character of armed conflict, and he’s held ten UK Research Council awards including a prestigious three year Global Uncertainty Research Fellowship.
His latest monograph, Unwinnable Britain’s War in Afghanistan, one was shortlisted for three National Book Awards and selected Book of the Year by the Sunday Times. Welcome, Professor Theo Farrell. Thank you very much, Joanne, and thank you to the Australian UK Chamber of Commerce for the invitation to speak at this evening and to everyone who’s on this call. I’d just like to say hello from Durrell Country in New South Wales, and I’d like to recognize and pay my respects to Aboriginal elders past present and emerging.
So just I thought I’d offer a few kind of comments to kind of recap on what’s happened in the war Ukraine and then just in the brief time available to tease out five geo strategic implications. Let’s just remind everyone the war started 28th February. The Russians expect it to be over in a matter of days and they weren’t alone.
I think most observers expected it to end quite quickly. Here we are, 80 days on and it looks like this war is not going to end anytime soon. Russia mobilized about 190,000 troops to conduct the war and committed well over 90 of its battalion tactical groups into the fight. Now Russian army is vast you know its million regular troops, 2 million reserves.
So this doesn’t sound like huge numbers in that context. But the key point to realize is that Russia committed its best military units and forces into the fight. An initial attempt by Russia principally by air assault to seize Kyiv failed. And so in that by failing, Russia failed to topple the Ukraine government. And then what we saw were three main lines of attack, a push down from the north from Belarus and from Russia.
It carried north towards Kriv Russian forces breaking out from the east, from the Donbas region and Russian forces quite successfully actually breaking out from the south in Crimea. But overall and and through very hard fighting, Ukrainian self-defense forces have managed principally to defeat the Russians in the north and contain contain them in the east and the south. Russian army losses in this war have been absolutely staggering.
Reasonable estimates put Russian losses at around about 28,000 troops. That’s just an unbelievable figure. And Russia appears to have lost about one third of the battalion tactical groups it committed to the fight. And it’s going to be extremely difficult for the Russian army to regenerate those forces. They’ve lost about 4000 tanks and other armored vehicles, over a thousand artillery pieces and air defense systems, over 200 warplanes have been shot down.
And I just can’t underestimate the extent to which these losses inconceivable before the war. And yes, this is what Russia’s has suffered. Principally one of the reasons. But part of the I think principally part of what’s happened here is that Ukraine, Ukrainian defense forces undertook very successful reforms after the invasion of Russia in 2014. And and the US, UK and Poland deployed training missions and to support comprehensive reform of the Ukrainian defense forces and Ukrainians have been conducted military operations on the basis of these reforms using the tactics that they’ve been taught by the UK, US and the Polish military trainers.
But most of all this is a failure a comprehensive failure of Russian strategy and tactical operations. So Russia’s special operation as it as it announced and you know what we’ve seen in this is absolutely staggeringly bad strategy by Russia. I mean I taught at Kings College London for a decade. I taught modern war studies. You know, basic first years could do a better strategy than the Kremlin conducted in Ukraine.
And principally, one of the core principles and strategy is that you have a main effort. But what we saw in Russia’s war in Ukraine is they tried to go for everything all at once. And so there was a diffusion of effort. That’s a fundamental mistake in strategy. There was no attempt by the Kremlin to prepare the population and its own military for war.
So there was no national mobilisation in the initial phases of the war. And there were multiple accounts of Russian forces going into Ukraine thinking that they were conducting an exercise and not realizing that they were actually committed to a war. And we saw appalling tactics by Russian troops, very poor logistics. All of these were ruthlessly exploited by the Ukrainians.
And the impact, of course, has been felt most profoundly on Ukraine itself and only on the immense suffering that many people suffered. Around about 25% of the entire Ukrainian population has been displaced from their homes. Half of those people, over 6 million people, have fled across international borders into neighboring countries. Creating the worst refugee crisis that Europe has experienced since World War Two.
So this has been a absolutely monumental event Now, what are the geostrategic implications? Well briefly there are five that I’d like to just tease out. The first concerns the persistence of inter-state conventional war. So there might be a temptation to say this is a black swan event. Who could have predicted it? Well, it was actually pretty well predicted in advance that there would be some Large-Scale Russian military action against Ukraine.
But the point is rather that inter-state conventional war has not disappeared from the world system. And we’ve seen a number of times where they’ve been very large inter-state conventional wars. Think of 1990 to 1991 Gulf War, I think the 2003 U.S. invasion of Iraq. And now of course with the Russian invasion of Ukraine where you know, the scale of the war so large it had ramifications and ripple effects across the entire world stage.
So I mean if I were in the business of international finance, I would be saying, okay, we always need to price in and prepare for large scale inter-state warfare. Second, geostrategic implications concerns Russia as a malign actor was already evident from Russia’s invasion of Georgia in 2008 that Putin’s regime was going to cause problems. But what we’ve seen since then of course with the 2014 invasion of Ukraine is growing realisation in the West that Russia was not going to be it was put it this way it was going to be difficult to get Russia to become a cooperative and productive partner in the world system.
With what we’ve seen now of course of the latest invasion with a more comprehensive invasion of Ukraine is is some moves within Europe that really signaled the extent to which European countries now see Russia as as a malign actor that must be contained. It wouldn’t be it wouldn’t be an exaggeration to say that we are now in the midst of what is a new Cold War.
And so we saw, for instance, big shift in German. Germany’s historic position with regards to its Pacific as foreign policy. And so the German government has authorised the export of lethal weapons. Germany is has created a massive fund to rearm, to rearm its armed forces. Historically, we’ve seen Finland and Sweden and it commit to NATO membership and shifting off their decades long position of neutrality.
And also equally important, we’ve seen within the United States its strategy shift from being of is just trying to contain the Russian advance the Russian armies and try and try and bring things to a ceasefire to actually you know, it’s been the US have revealed that their principal strategy now is to attrit the Russian military to such an extent that its ability to conduct these kinds of aggressions in the future would be contained for some time.
The third strategic implication concerns Western resolve. We saw that with the unity of EU response, principally with the sanctions that were to the extent to which the European Union came together, and particularly in imposing sanctions around banking international financial transfers was really quite remarkable. But also this is a has has been quite important in reviving NATO. NATO before this latest Russian action was it was had stagnated.
But now we’ve seen a comprehensive revival of NATO. The other people will talk about the international finance, but of course the extent to which the international financial sanctions have really impacted on Russia, and that has been quite material. But what I would point out also is the extent of arms supplies and training being provided by several Western countries.
It was noted the United Kingdom, of course Australia, but the United Kingdom has actually been very important in this respect. But also the United States. The United States has provided $3.8 billion in military aid to Ukraine. And now aid is getting to the level of aid that’s been provided, it’s getting to such an extent that we’re now facing the prospect that NATO is going to have to backfill its own military arsenals. So the U.S. sorry the Ukraine Democracy Land-Lease Act that is being signed by the Biden administration and most likely will pass Congress that would provide $11 billion.
That’s U.S. dollars in aid to Ukraine. That’s a staggering sum. And at that level, the United States will be drawing down very comprehensively its own military arsenal and will then have to. So it’s going to have to acquire more weapons to refill it. The fourth geostrategic implication concerns, implications for Asian security. And in particular, a key question this part of the world is what lessons would China draw?
Now, of course, the context here is a decades long military moneterisation modernisation effort by the People’s Republic of China and the PLA and growing assertions by China in the region and its willingness to use the military instrument. One quick and obvious lesson is that invasion invading a country is actually much more difficult than it might appear. And that has a very important consequence with respect to Chinese plans and ambitions towards Taiwan.
An important lesson surely must be for and for any aspiring and, you know, tyrant and dictator is don’t believe your own hype in terms of what the military tell you. And, you know, a lot of these authoritarian regimes they conduct military exercises where they’re their militaries. You know, these are very carefully staged, managed military exercises where the militaries appear to be incredibly efficient and high functioning.
But actually, when it comes to war, well, you know, war and wars is immensely chaotic activity. And what we’ve seen here is that the Russian army has grossly underperformed against what was expected by observing its previous military exercises. The one caveat I put around this, of course, is that Putin, before this latest comprehensive invasion of Ukraine, Putin was seen as a pretty clever operator.
He was seen as pretty strategically pretty canny. But, of course, he overreached himself. And you know, what we’re hearing now in terms of why why this happened is that is growing isolation of Putin within his own government, a small cabal of advisers around Putin and Putin being out of touch. And arguably, some of those characteristics also apply to Xi Jinping.
So that one would have to be. There have to be caveats around the extent to which we can expect China to be a rational actor in drawing out lessons from Ukraine and the fifth and final geostrategic implications concerns Australian defense. And principally, I think the war in Ukraine just affirms the position that was taken in the 2020 defense strategic update.
This this very important strategic update by the Australian Defense Department of Defense it points to the fact that Sino-U.S. strategic competition will be the primary strategic drive in the Indo-Pacific. It said it was time now for Australia to put aside its traditional planning assumption of a ten year strategic warning time of major conventional attack that now seems quite prudent.
It committed to a major program of investment in defense so that the Australian Defense Forces could be self-reliant and saying that Australia would spend 270 billion us – pardon me Australian dollars in the coming decade. It said that Australia would adopt a less risk averse engagement industry to develop, deliver defense capability and quite importantly of course, Albanese has come out and said that if Labor is elected into government it will be no, no reduction or deviation from this level of defense expenditure.
Yet. The final comment I would note is that of course at the core of this huge investment in Australian defense or is a real focus on major weapon platforms and Putin, for instance, the future submarine, and there is a very large degree of risk around those and in fact notwithstanding what seems to be a strategic clarity in the Department the Department of Defense is simply matched by a state a as of yet inability to deliver major platforms and equipment on time in budgets and to the capability that’s that’s expected.
So those are the geostrategic implications I’m going to hand back to Joanne. Thank you. Professor Farrell, thank you so much. Huge amount of information to absorb absolutely fascinating. I’m sure there’ll be lots of questions in relation to your topic on implications. Thank you. Our next Speaker is James Hayton, who’s special counsel at LK Law. It’s an Australian firm with an office in London, and James has extensive experience with resolving disputes through commercial litigation and international arbitration across a variety of industries, including financial services, professional services and the art world.
James has been published in leading journals on topics of international arbitration and civil procedure. Welcome James Hayton. Thank you very much, Joanne. Thank you to the Australian UK Chamber for the invitation to speak today. It’s a pleasure to be on such a distinguished panel. Both previous speakers are a hard act to follow, but I’ll do my best. As Joanne said, I’m a lawyer, so I’m going to approach this from a legal perspective and talk about three points.
The first one is sanctions, which you’ve had a bit about already, and the other two ways in which the law both international law and I’m going to talk about English law. There are similarities of course in Australian law, in other common law jurisdictions, how the law tries to do justice to private parties who are feeling the consequences of conflict. And I’m going to focus mainly on businesses.
So first of all, sanctions. We’ve already heard from Her Excellency the acting High Commissioner and Professor Farrell about the the immense growth of sanctions, the widening of scope of sanctions that has taken place and are imposed by not only America and the EU and the UK, but also Australia. So I’m not going to spend much time talking about what those are.
Instead, I’m going to say a few words about where I think those sanctions might be heading next. First of all, it would be a mistake to think that they’re just limited to the provision of goods or commodities. And I think all of us well, certainly the members of the CPA, if you’re doing any business out of London, should be aware that the US and the UK certainly are going to soon impose bans on the provision of accountancy as well as management consultancy and public relations services by any US and UK firms to Russians, not just Russians, on the sanctions list, as I understand it, but any Russian businesses.
So the amount of work being done from London anyway, and the US is probably already pretty small at this stage, but it’s just going to it’s going to be wiped out entirely. Legal services will be exempted. And if you want to know more about that, you can perhaps ask in the Q&A. But there are some good reasons for that.
Perhaps I would say that. There’s no indication that sanctions are going to be extended at least as far as the US and UK are concerned to energy in the near future for reasons which you probably read about in the media. European countries are far too dependent on Russian energy. Australia is in the fortunate position of not being. Second,
Russian attempts to avoid sanctions by transferring trade to third countries which don’t have sanctions regimes could well prompt the Americans to begin imposing what they call secondary sanctions. These are sanctions which are directed towards people who are not just US citizens or residents firms, but they are totally outside the US and they may be doing business with a sanctioned entity which is entirely lawful under the local law and has nothing to do with the US territory whatsoever.
But the US says, Well, if you’re going to trade with sanctioned entities, you’re not going to trade with us. And so if we find that you’re doing it, we may ban you from US Trade, trading with US markets and ban you from the US financial system or even possibly put you on the sanctions list yourself. So the fear of losing access to the US markets and the financial system is a very powerful tool and that’s the reason why.
If you’ve ever tried to get payment made from anybody on any international sanctions list through one of the large international banks, even if you’ve got approval from all relevant governments who are actually directly involved then UK, for example, EU, you’ll find it practically impossible because the international banks simply don’t want to take the risk. And that will almost certainly have been having a massive effect already on Russian business.
So even before any sanctions actually bite on the big banks, for example, they will already pulled away from doing that work. Thirdly, and finally, on sanctions, whatever sanctions are imposed, as I say, they’re going to grow incrementally at least towards services very shortly. They’re likely to be in force for the long run. The UK foreign secretary said last week to G7 foreign ministers that she thinks the sanctions should stay in place until Russian troops withdraw from Ukraine.
That probably is a bit a bit optimistic if you’re Russian because there’s going to be little appetite in my view anyway to remove sanctions to any significant degree without a long term negotiated peace. Between Russia and Ukraine or the end of the Putin regime. And his replacement with somebody far more acceptable to the West. And as neither of those things looks particularly likely in the near term, sanctions are here to stay.
The second point and the third point I’m going to descend from the macro level to the micro level and talk about how individual businesses are being affected or might be able to or might be affected in the coming months. The first one is supply chain disruption. You may find you or your clients if you’re providing professional services. Your clients may have had commercial dealings with Ukrainian businesses, even the government or Russian parties and may now be finding that services or goods that were ordered have not arrived.
And the law has something to say about what happens in this situation and what the effects of war should be. I’m going to focus on English law, but as I said, there are parallels with Australian and US law. First point obviously is your contract may well say something about what the consequences should be. You’ll you’ll often find that it will contain something that’s frequently called the force majeure clause and that what that generally seeks to do.
There’s no single form of force majeure clause. We have to read each one individually. But what they generally seek to do is relieve a party from having to perform its obligations, for example, to deliver goods if it cannot do so because of an event outside its control. And often these clauses will contain examples of what kind of events will count.
And war is often there. Government legislation, for example, sanctions are often there too so, that could mean that the party can’t perform. It doesn’t have to. But a note of caution, the devil’s in the detail and these clauses can often have unforeseen loopholes. And it’s not unknown actually for businesses in our experience who’ve made bad deals prior to this kind of event, trying to take advantage of that event and argue that they should be able to get themselves out of their contract because they see that as as a useful excuse.
So you have to scrutinise any claims quite carefully. If you haven’t got a contract, which is unlikely, or if your contract doesn’t have a force majeure clause, then English law does still have a doctrine which might help you, which is called frustration. For a contract to be frustrated by an event, which means it will be treated as terminated.
The events must occur after the formation of the contract be so fundamental as to strike at the root of the contracts and be entirely beyond what was contemplated by the parties when they entered the contract. It can’t be due to the fault of either party, and it must render further performance impossible, illegal, or make it radically different to that which was contemplated by the parties when they entered into that contract.
So there’s some pretty stringent conditions, and it’s actually quite rare in practice for those to be satisfied but if they are, the contract is under English law anyway viewed as terminated, other laws have different effects. Continental jurisdictions deal with things differently, for example, as does the UN convention on the contracts of the international sale of goods. So the third point I’d like to mention is states causing losses to investments or breaching international investment law.
You or you or your clients may well have made an investment in the territory of Ukraine or Russia, and you may now be wondering what’s happened to your investments. It may have been totally destroyed. It may still be there but have been damaged in value. Well, you are not necessarily without some form of remedy and I hope none none of this will be taken as insensitive, given the humanitarian catastrophe that’s taking place in Ukraine. But private parties, businesses individuals are often affected by war. And it would not be just, in my view, if they’re forced to bear all of the consequences of that. If the state has breached its international obligations. So both Russia and Ukraine have entered into numerous bilateral investment treaties, including with the United Kingdom, for example.
And in summary, these treaties say that each state promises the other state that if its investors come to it and invest in its territory, then it will protect those investors. And their investments in certain ways as specified in the treaty. And importantly, these treaties give investors the right to sue the host state of the investment for breach of those obligations, as usually done through arbitration in a neutral forum by an independent and impartial panel.
So it really does have teeth, and you don’t necessarily have to have made a concrete physical investment in the territory of the host state to qualify. Perhaps that’s the paradigmatic case site. You’ve opened a factory, for example, in Ukraine. But both the Russian and Ukrainian treaties contain broad definitions of investment, which would include, for example, claims to money under contracts.
So if you do have an investment within the meaning of the treaty, then the treaties provide two main types of protection for your investment. First of all, if the state takes your investment expropriated, then it must pay appropriate compensation under international law, sovereign states are allowed to take your property, but they have to pay compensation. Secondly, the states must afford your investment and you, the investor what’s known as fair and equitable treatment and also full protection and security.
So if your contract is cancelled, for example, or your factories taken by the state, you could well have a right to be compensated through Investor-State Arbitration. And if you win in the arbitration and the state still fails to pay, then you can take your arbitral award and with relative ease, provided you can find assets to enforce it against you can take that around the world and enforce it.
Thanks to an international convention called the New York Convention on the Enforcement of Foreign Arbitral Awards, which actually makes it easier to enforce arbitration awards on the whole than it does court judgments. So what’s the effect of war on this? Is that is that an excuse to take your property or breach these duties? Well, the answer is not necessarily.
It isn’t necessarily a defense for a state just to say we are at war and therefore we didn’t have to do any of this. Those obligations continue anyway. And the UK Ukraine treaty for example, specifically provides for investors to be compensated if they suffer a loss of their investments due to war in Ukraine, whether through requisitioning of property or through destruction by Ukrainian forces otherwise and in combat or which was in combat, but where the destruction was not necessary. For any other causes of lost investments, you can still potentially recover compensation provided you can show the state failed in its duty of fair and equitable treatment or full protection, security and those standards of care are in very crude
terms, a standard of what’s known as due diligence or perhaps you can say reasonable care. And it’s a very fact sensitive exercise in working out whether that was breached or not and war being the chaotic phenomenon that it is. Naturally, claimants might struggle to prove exactly what’s happened to their investments, although they might actually find it easier in this war than past wars given the amount of videoing that’s been done reporting that’s been done almost in real time.
So that’s all I have to say for now. On those three topics, it’s been a bit of a whistle stop tour, but hopefully that’s something that is of interest to you. And of course, I’m happy to answer any questions later up in the Q&A. Thank you. Thank you, James. We’re hoping that we’re running over time but we’re hoping people can stay on for a little bit longer.
We can probably cover off the questions. And just to remind the audience to pop your questions into the Q&A on Zoom. And next speaker is John Swieringa, minister, counselor, Treasury, Australian High Commission, London, John. Is the Australian Treasury’s Department senior representative to Europe and the United Kingdom covering economic and financial developments. In 2021 John managed the health, disability and Social Security branch at Treasury, working closely with other agencies on health policy through the coronavirus pandemic and on the development of income support payments to assist individuals through lockdowns.
And prior to this he managed Treasury’s national security team and has worked with the Macroeconomic Modeling and Policy Division. John worked for the Reserve Bank of Australia, managing many aspects of Australia’s foreign exchange reserves and open market operations, including management of the RBA’s US Treasury portfolio in New York during the financial crisis. He has a PhD in finance from ANU and undergraduate degrees in economics and finance.
Welcome, John. Thanks so much, Jo, and thank you to the Chamber as well as CPA Australia for today’s event. In the interest of time, I’ll try to be really quick. So what I thought I might do is just provide a little bit of discussion on the context in which we’re operating in the current macroeconomic challenge and then talk a little bit about the outlook, particularly with respect to energy prices, which is such an important driver of inflation at the moment.
So one of the things about the current context that I think gets forgotten in some of the headlines and what’s going on in Russia and Ukraine is absolutely important is that I think what we’re experiencing the moment is both strong aggregate demand as we come out of the coronavirus pandemic and the supply shock that’s coming at the moment most acutely through energy prices and food prices from what’s going on in Russia and Ukraine.
So if I try to unpack those two things separately, the demand shock probably leads to higher growth and also higher inflation. Whereas the supply shock should lead to lower growth, but also higher inflation. And so you put those two things together. And the one thing you get unequivocally is higher inflation. And depending on where the demand of supply is driving things at the market in particular economies, the growth prospects are then again a bit more clouded.
So when we look at where we come from coming out of the pandemic, as most economies sort of revert towards that trend, they experienced very strong short term growth. So when I looked at the EU and the European Commission’s forecast for the European economy for this year up until their update this week, they would think that the European economy would expand by 4%, which is pretty strong by European standards.
You know, a lot of the support that’s been given to households and businesses coming out of the pandemic is sitting on balance sheets. Savings rates became very high. They started to drop, but they still remain quite elevated by historical standards. So for the majority of households and a lot of businesses, their balance sheets are strong. Even even if high prices are starting to erode this that consumption or their real incomes and squeeze their profit margins of a little.
So I guess, you know, in that context, I’d probably just highlight don’t forget that we are entering this period from a position of relative strength in some ways. When we look at what’s going on on the supply side of the economy, we were sort of rattled by these supply shocks coming into this episode. So, you know, disruptions in supply chains have been going on for the last couple of years.
With, you know, lockdowns in China and other places, making us sort of reexamine our resilience in our production processes and things. Energy is clearly driving inflation in Europe at the moment, and it’s the biggest driver in the UK and their inflation update yesterday. Energy inflation that jumped 54%. I mean, it’s it’s just incredible. The UK has a very peculiar set of arrangements whereby sort of household energy bills are sort of capped and every six months that cap is sort of rejigged.
And so it sort of comes through with the lag in the UK, but nonetheless in Europe, when it put out its inflation yesterday, you know, energy prices were still driving. That was, it was still rising that 27, 28%. So energy is definitely a big driver. Inflation at food prices is also a big driver. But I guess in trying to unpick whether, you know, a particular economy, you know, has stronger demand or is suffering more from this supply shock, one way to try and unpick it is to look at core inflation, which sort of excludes volatile items like energy prices.
In that respect, if you look at the UK core inflation, the UK, they came out at 6.2%. So headline inflation is nine core 6.2. There’s clearly broad, but and it’s clearly a broader category of goods that are rising in price and services in the UK than just energy. And so that tells you that the demand picture is relatively strong.
We can see that in the labor market. You know, we’ve got unemployment at 3.7%. There are more job vacancies than there are unemployed people. And I think that’s the first time ever in that particular series that that’s happened. So the economy is looking good. On the other hand, if you look at Europe, got headline inflation about 7.4% and you’ve got core inflation of about 3.5.
So core inflation is rising. But perhaps you could infer from that that the supply shocks probably dominating a little bit in Europe. And you see this in the difference in the monetary policy responses that you’re getting now. This confluence of events is undoubtedly one of the biggest challenges for monetary policy authorities in recent years. Now, we think that unconventional policy and quantitative easing for guidance will be tricky.
Well, you know, trying to deliver rate rises in an environment where a lot of households have their real incomes going backwards. That’s an incredibly challenging environment and one where the communication challenge is very difficult. So I think on that basis, you know, we’ve seen the ECB sorry, the Bank of England move preemptively and start to tighten rates over the last few months.
And that probably does reflect that broader and stronger demand picture. The ECB, on the other hand, is, I think, coming around to it that actually some of those inflation pressures are broadening out. But so far, you know, just stuck to their original plan of winding down their bond purchases and then thinking about whether they raise rates later in the year, they may move a bit quicker.
But we’ll have to see. The main thing that I think both central banks are watching quite closely is wages. You know, we want wages to rise, want to rise with productivity. But if they chase inflation and create that reinforcing dynamic of wages chasing prices and then reinvesting in higher prices, then central banks are going to act more aggressively. And the risk will be that they will drive the economy here into recession.
And so so that that’s a key risk. When we look at the outlook, I guess, you know, the the main risks, I guess, on the demand side, that high inflation and some in some circumstances can kill high inflation because as households experience, that real income shock, they lower their consumption and that should lead to a slightly weaker picture for aggregate demand and the economy.
On the supply side, clearly the risks remain around food and energy prices. If we do get to a situation where there are abrupt sort of changes in energy supply to Europe, we could expect that prices energy prices will take another one and that will then feed back into inflation again. It’s incredibly hard to say what the prospects of that are when we look at things like the variety of forecasts have been put out about the German economy, which is heavily dependent on Russian gas, as to what the economic impacts would be.
You get a range of outcomes from and all from reputable sources that say it could be a hit to the economy of anywhere between two and 12% The ECB on Monday or the European Commission on Monday put out its spring forecast and in that they did a couple of pieces of scenario analysis. The main one was a severe shock to energy supply.
And their sort of thinking is that will knock two percentage points off of GDP to two and a half percent percentage points of GDP growth, which would effectively take the forecast back to close to zero for this year. So you know, further energy sanctions or the cut off of supply unilaterally by the by the Russian side certainly puts the European economy at risk.
In some ways, though, you know, I think when I talk to my colleagues at the European Commission and we spoke to them in Brussels last week, what one thing I took away is just how engaged they are in continuing to drive forward that sanctions agenda that, you know, they see that the position they are in where the EU is effectively paying almost €1,000,000,000 a week to Russia for energy It’s just it’s indefensible in the current environment.
And so they’re moving as quickly as they can to reduce reliance on Russia, to push countries to come together on sanctions. And obviously that’s difficult with 27 member states. But but the one thing I take away from my meetings with my counterparts is that they will continue to push for further sanctions to reduce and eliminate that dependance on Russia for energy because they know that they can’t stand behind that equation.
€1,000,000,000 a week to Russia where on the other side of it so far the EU has contributed 2 billion in aid to Ukraine. And so I think that those two things are playing in their minds and that’s the direction of travel for them. So in the interest of time, I’ll probably finish up there and we can jump to questions. Thank you, John, for the excellent economic analysis.
So I’m opening up the floor for questions I do have a question from the audience. And I think maybe John, or the High Commissioner might answer that, but anybody else can jump in. And the question is, in an era of increased political tension, how should we protect free trade, global cooperation, and seamless travel? So I think that’s a great question.
I mean, trade is in a way about trust and that the moment we sort of reevaluating the level of trust we have in certain parties. I don’t think that it’s changed our attitudes to free trade in broad. And you can see that in the great enthusiasm we have for the free trade agreements we’re about to have ratified in the UK.
But it does mean that we are increasingly thinking about our reliance on partners with whom we have questions about trustworthiness, and I can’t see that going away for a long time, the geopolitical circumstances seem like that. If for quite, quite a while. And just to add to that, I think it’s vitally important that we continue to press ahead and maintain an open and free trading system such as through the Australia UK FTA or the FTAs that we’re negotiating at the moment and maintain that confidence in open systems, because once everybody regresses into borders and restrictions, it’s it’s actually a downward cycle.
So I think it’s important that we defend free trade. Thank you. Theo have you got any comments on that question. No, no, no, thank you. Oh, okay. Right. What are Russia’s likely long term prospects for its economy now that the West is weening itself of Russian hydrocarbons? Will the surplus oil and gas all be purchased by other non-Western countries, or has Russia shot itself in the foot economically speaking?
So maybe I’ll start with that one. But I mean, that’s the million dollar question, if you like. Or perhaps it’s the $7 billion question. You know, it depends exactly on whether sanctions come in on Russian oil and gas from Europe. It depends how forceful they are and how quickly they come in. You know, a lot of Russia’s infrastructure, just as EU countries are dependent, particularly Central Eastern Europe, Central and eastern European countries are dependent on Russia for gas and oil.
I mean, Russia is equally dependent on supplying it. You know, there is pipeline infrastructure that can’t be rerouted. Everyone’s got the refineries set up, grades of crude oil and other things. But equally, if Russia can’t keep pumping that stuff out, they can’t store it necessarily either. And so you know, there’s every reason to think that if sanctions come into effect quickly, that they will be quite debilitating to the Russian economy.
It might even ruin some of their ability. And if you look at particularly the UK sanctions, which really and the European ones, to a great extent, they’re really about exports of the material that’s used to keep refineries working and operating and that infrastructure operating. So in the long in the sort of medium term, I mean, there’s going to be you know deterioration in their capability in that respect anyway.
So the prospects for the Russian economy look miserable for quite a while. You know, inflation is obviously high at the moment and capital flight has been a risk and they’ve sort of jacked up interest rates to try and prevent that. But their problems are only just starting. And I think as other people have said, it’s hard to see a scenario in which these sanctions are unwound.
Any time soon. And so as long as that remains the case, we’re going to see a slow deterioration of their infrastructure and their capability. Thank you, thanks John, would anybody else like to comment on that or jump on? No, no. Many expected Putin to lean heavily on China for economic and moral comfort during his invasion of Ukraine. To what extent has China been forthcoming in providing economic and diplomatic aid to Russia? I think that’s the million dollar question, really.
I think the 4th of February meeting between Putin and Xi just ahead of the Winter Olympics and a declaration of a no limits friendship caught everybody’s attention. And we’ve all been interested somewhat, also concerned, obviously, to see the extent to which that partnership strengthens and that China backs in Russia’s actions. This is a short response to what could be a very long answer, but I think China itself is is mindful of the consequences.
It was taken aback by Russia’s unilateral action. And I think it’s watching closely the unity of the international response. I was interested yesterday to see reports that China itself, some of its exports to Russia had slowed down dramatically, for example, in the export of laptops to Russia because they contain components which are manufactured either in the United States or using U.S. software or manufacturing equipment.
A point was made earlier about the extraterritoriality of U.S. sanctions. And I think that weighing very carefully the consequences and in it diplomatically were also pointing out that a unified international response by everybody is very important so that Russia feels the cost of its actions. Thank you. Thank you. And just on that point, and this is one for you Theo, Australia’s relationship with China has changed dramatically over the past decade, both economically and politically.
Considering your learnings, what lessons might there be for Australia to take away from the most recent conflict between Russia and Ukraine? And yes, what are those lessons? Yeah, I mean, I think the lessons are around the importance of having an alliance alliance structures that you can operationalise in a time of war and if that’s necessary, I mean, one of the reasons is being prepared for that, and that includes obviously, of course, and in terms of partners in the region, supporting those partners to develop their own defense capabilities.
So the critical thing here is nature of NATO’s ability to provide the institutional structure that enables European and US, the United States, European countries to channel military aid to Ukraine has been critical. The EU, of course, has been a critical institutional structure in galvanising the action with respect to financial sanctions, but also very importantly, the military assistance that was provided by UK, Poland and the United States to the Ukraine self-defense forces in preparing for this invasion.
Those are all been really important. And I think what’s different in in the Asian context is there are, of course, various structures for military cooperation here. But you don’t have the depth of of institutionalised mutual cooperation that you have with NATO. And of course, you don’t have the Article five guarantee. And so that’s quite significant. So I think in this context, as much as the the focus still, you know, between Australia and the U.S. and the UK may or may not results in a Nuclear-powered attack submarines.
What it has done, however, is further deepen Australian ties with the United States and the UK. And I think that that actually is going to be very important as they cooperate both to develop next generation of military technologies but also as we continue to cooperate with those partners in preparing for, you know, the prospects, unfortunately, of some form of conventional warfare in in this part of the world in the future.
Excellent. Thank you. We are now out of time. So I’d just like to thank all our speakers and the High Commissioner, Theo Farrell, James Hayton, Colleen and John Swieringa. Thank you so much from the Chamber of Commerce in the UK and we wish you a wonderful day. Thank you.