Russia’s war in Ukraine not only changes the strategic and political order in Europe, it also overturns long-held assumptions about the intricate connections that characterize the global economy.
Millions of times a day, widespread exchanges of money and goods crisscross land borders and oceans, creating enormous wealth, however unevenly distributed. But those connections have also exposed economies to financial turmoil and crippling deficits when flows are interrupted.
The pinched supply lines and shortages caused by the pandemic have created widespread awareness of these vulnerabilities. Now the invasion has given an invigorating new impetus to governments in Europe and elsewhere to reassess how they can balance the desire for efficiency and growth with the need for self-sufficiency and national security.
And it questions a principle of liberal capitalism: shared economic interests help prevent military conflict.
It’s an idea that goes back through the ages and has been endorsed by romantic idealists and hard-core realists. The philosophers John Stuart Mill and Immanuel Kant wrote about it in treatises. British politicians Richard Cobden and John Bright in the 19th century called for the repeal of protectionist corn laws, tariffs and restrictions on imported grains that shielded landowners from competition and stifled free trade.
Norman Angell later received the Nobel Peace Prize for writing that world leaders were under “A Great Illusion” that armed conflict and conquest would bring more wealth. During the Cold War, it was an element of the rationale for détente with the Soviet Union — to, as Henry Kissinger put it, “create links that will encourage moderation.”
Since the breakup of the Soviet Union three decades ago, the idea that economic ties can help prevent conflict has partially guided the policy toward Russia by Germany, Italy, and several other European countries.
Today, Russia is the world’s largest exporter of oil and wheat. The European Union was its largest trading partner, receiving 40 percent of its natural gas, 25 percent of its oil and a significant portion of its coal from Russia. Russia also supplies other countries with raw materials such as palladium, titanium, neon and aluminum used in everything from semiconductors to automotive manufacturing.
Last summer, Russian, British, French and German gas companies completed a 10-year, $11 billion project to build a direct pipeline, Nord Stream 2, which was awaiting approval from a German regulator. But Germany withdrew certification of the pipeline after Russia recognized two separatist regions in Ukraine.
From the outset, part of Germany’s argument for the pipeline — the second to connect Russia and Germany — was that it would align Russia’s interests more closely with those of Europe. Germany also built its climate policy around Russian oil and gas, assuming it would provide energy as Germany developed more renewable resources and closed its nuclear plants.
Benefits went both ways. Globalization saved Russia from financial collapse and staggering inflation in 1998 – eventually paving the way for Vladimir V. Putin, Russia’s president, to take power. Money earned from energy exports last year accounted for a quarter of Russia’s gross domestic product.
Critics of Nord Stream 2, particularly in the United States and Eastern Europe, warned that increasing reliance on Russian energy would give it too much power, a point President Ronald Reagan made 40 years earlier to block a previous pipeline. . Europeans were still in an illusion, the argument went, but this time it was that economic ties would prevent bare-bones aggression.
But more recently, those economic ties contributed to skepticism that Russia would launch an all-out attack on Ukraine in defiance of its major trading partners.
In the weeks leading up to the invasion, many European leaders were hesitant to join what they perceived as the United States’ exaggerated warnings. One by one, French President Emmanuel Macron, German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi spoke to or met with Mr Putin, in hopes of a diplomatic settlement.
There are good reasons for the European Union to believe that economic ties will link potential combatants more closely, said Richard Haass, chair of the Council on Foreign Relations. The proof was the European Union itself. The organization’s roots go back to the creation after World War II of the European Coal and Steel Community, a pact between six countries designed to prevent conflict by pooling control over these two essential goods.
“The idea was that if you merged the French and German economies, they wouldn’t be able to go to war,” Mr Haass said. The goal was to prevent World War III.
Scholars have tried to prove that the theory worked in the real world — studying tens of thousands of trade relations and military conflicts over several decades — and have come to various conclusions.
The war between Russia and Ukraine and the world economy
In terms of the current crisis, Mr Haass argued, the economic benefits were not mutually enough in some respects. “The Germans needed much more Russian gas than Russia exports, because they can make up for lost revenue with higher prices,” he said.
“That’s where Europe got the relationship all wrong,” added Mr Haass. “The leverage was not reciprocal.”
Despite its vast land mass, nuclear arsenal and energy exports, Russia is otherwise relatively isolated from the global economy, accounting for 1.7 percent of global output. And since Russia’s invasion of Crimea in 2014, Mr Putin has taken steps to further isolate the economy to protect against retaliation.
Adam Posen, president of the Peterson Institute for International Economics, said a willingness to impose such devastating sanctions on Russia could point to the flaw in that strategy. If Russia’s financial system had been more integrated with that of the Allies, they might have been more hesitant to take measures that could trigger a financial crisis.
At present, economic relations with Russia run parallel. Countries opposing Russia’s invasion of Ukraine have imposed a series of damaging financial and trade sanctions, but Russia’s oil and gas – exempt from the bans – continues to flow.
The reality is that economic interdependence can create uncertainty as well as mutual benefits, especially when the relationship is skewed.
Philippe Martin, dean of SciencesPo’s School of Public Affairs in Paris, said the 2014 agreement between Ukraine and the European Union could be a turning point for Russia. “That translated into more trade with the EU and less with Russa,” he said.
Martin has written skeptically that economic ties promote peace, arguing that countries open to global trade need worry less about fighting a battle with a single nation because they have diverse trading partners.
However, in the case of Russia’s advance towards Kiev, he gave two possible explanations. One is that no one – including the European leaders who imposed them – expected such crippling sanctions.
“I think Putin miscalculated and was surprised by the severity of the sanctions,” Martin said. “The second interpretation is that Putin doesn’t care” about the impact sanctions have on the well-being of most Russians.
What does he think is right? “I think both interpretations are valid,” he said.
