Igor Grussak/picture-alliance/dpa/AP Images
The logos of various payment systems appear under that of Russian bank Sberbank in the window of a store, March 6, 2022, in St. Petersburg, Russia.
I keep thinking of August 1914. Before World War I, Europe’s economy was tightly intertwined by trade and finance. Capital exports were Britain’s leading product. Imports and exports of goods were a major share of every nation’s economy. You could travel anywhere on the continent without a passport. It was as if there were already a European Union.
Norman Angell, prefiguring Tom Friedman, won a Nobel Peace Prize for his 1910 book with the unintentionally ironic title The Great Illusion. Angell condemned the arms buildup of that era, and assured the public that with this degree of economic interdependence, there should never be another major European war. Europeans, unwilling to disrupt summer vacation plans, expected that the August war would be over in a matter of weeks.
World War I not only killed 20 million people and the era of prewar prosperity. It irrevocably put an end to Globalization I. The catastrophic 1919 Treaty of Versailles failed to resurrect global commerce and finance in a sustainable way.
There followed two other brands of globalization. After World War II, the Bretton Woods system created a managed form of global trade, in which countries had plenty of policy space to pursue full employment, creation of welfare states, and economic planning. Globalization II coexisted with a Cold War, in which the Soviets had no economic contact with the West.
But as capitalists recovered their normal political influence in a capitalist system, this bout of shared prosperity and mixed economy gave way to Globalization III—the attempt to resurrect something like laissez-faire. Tariffs were cut, regulations reduced, and global deals promoted by domestic policy shifts and World Trade Organization rules.
Meanwhile, the Cold War ended. Russia and China each displayed variations on dictatorship combined with elements of capitalism.
Russia’s was built heavily on exports of oil and gas, blending corrupt klepto-capitalism with deals with new Western partners. China’s was more productive, combining extensive state subsidies with market exports, and even more deals with Western corporations and banks.
Both violated supposed Western norms about both capitalism and democracy. But Western capitalists and their allies in government didn’t mind, because there was so much money to be made.
The West will not be inclined to reward Putin by reverting to the prewar economic status quo.
Now, Vladimir Putin has blown Globalism III to hell. Even if he were to suspend military operations in Ukraine tomorrow, Humpty Dumpty will not be put back together again.
In the space of a week, economic links with Russia that took decades to create have been abruptly severed. Some banks and corporations ended commercial ties because official sanctions required it, others out of concern for reputational damage.
If the war ends well, with a retreat by Putin, he will still have killed thousands of Ukrainians and destroyed billions of dollars’ worth of homes and buildings. The West will not be inclined to reward him by reverting to the prewar economic status quo. Corporations and banks will be wary of future crises and sanctions. And if an attempted Russian occupation of Ukraine drags on, the West will act to further isolate Russia’s economy.
The fact is, the Western economic system, with more than half of the world’s GDP, got along just fine without Russia before 1989, and it can get along without Russia now. Oil prices averaged $110 a barrel between 2011 and 2014, and we adjusted to it. If oil prices stay high, that will help accelerate the shift to renewables.
Putin’s war also upends pre-existing assumptions about China and the global economy. Until Putin invaded Ukraine, there was an ongoing conflict between traditional corporate free-traders and those in the Biden administration who wanted a tougher stance on China.
The goal of the hard-liners was to limit China’s violations of trade norms and its geopolitical expansion, and also to rebuild U.S. production capacity. A middle ground called for resetting the U.S.-China relationship, and establishing a new modus vivendi, allowing each nation to pursue its own domestic model but constraining predatory trade.
Now, the hard-liners win by default, because Putin is suddenly far more dependent on China. But this is far from the desired China reset.
In the short run, China can partly finance Russia and provide a market for some of Russia’s energy exports. In the medium term, as Western corporations deny Russia everything from maintenance of Boeing and Airbus planes to Apple computers and iPhones as well as Western-based credit cards and banking services, China has the means to replace all of these.
Three major Russian banks are already working with Chinese banks in the hope of replacing lost Western credit cards. But the more China bails out Putin, the more China chills its relationship with the West. Chinese banks could be vulnerable to secondary sanctions.
Cold War II could restore the pre-1989 alliance of Russia and China, but with a far more muscular China as the dominant partner, and with both nations as even more iron dictatorships. This can only chill the U.S.-China relationship even further.
“I have trouble imagining that this plays out in a way that improves China’s relationship with the U.S. unless China plays the improbable role of peacemaker,” says James Mann, author of several books on China and the newest member of the U.S.-China Commission.
The signs so far are that Xi Jinping is less than thrilled with this new role and new risk, because China’s goal is to become a larger global economic player, not a global economic pariah like Putin, and China needs the West more than it needs Russia. China abstained on the U.N. resolution calling on Russia to withdraw.
It also remains to be seen whether Xi can act as any kind of restraint on Putin. In principle, China has a lot of leverage, but using it is another matter.
It feels almost obscene to speak of silver linings in this grotesque war. However, the laissez-faire brand of globalization, relentlessly promoted since about 1990 by U.S. banks and corporations at the expense of American workers, is now caput.
The abrupt imposition and acceptance of economic sanctions makes clear that democratic governments do have the power to rein in global corporations and banks. If they can be restricted because of gross violations of human rights, maybe labor and environmental rights are next. Let’s hope that will be a core principle of Globalization IV.
