Some things are already clear.
Overestimated were the benefits of a traditional military offensive; underestimated were the defensive properties of a globalised economy.
The economic and financial war that is being prosecuted by the United States and its allies against Russia is unprecedented in modern times. Russia’s economic growth since perestroika in the late 1980s has been predicated on increasing economic interdependence with the rest of the world. Withdrawing that interdependence imposes a massive and growing cost on Russia.
A Russian economy that is not much bigger than Australia now looks much smaller. Some estimates suggest that all of Russia’s income gains since 1989 will be wiped out if the war goes on into next year. That’s taking Russia back to the Soviet days, when the Eastern Bloc was free from Western ‘coercion’ but also the prosperity it would have brought. Sovereign risk from appropriation has always existed around foreign investment — but now it’s clear that sovereign risk includes the risk your own government will continue to abide by international norms.
The world’s two most populous countries, China and India, are sitting awkwardly on the fence over Ukraine’s invasion. India looks set to buy discounted Russian gas. China hesitates, and is trying to distance itself from the situation. Strategic groupings may in the end be less resilient than economic groupings.
Australian Prime Minister Scott Morrison has characterised the strategic challenge of the Ukraine problem in terms of standing together against the depredations of an ‘arc of autocracy’. A political binary of autocracies and democracies that explains how the world is responding to Russia’s invasion of Ukraine does not stack up against the evidence of international political reality or behaviour. The idea is simplistic, devoid of strategic authenticity and Australia’s own regional backyard in East Asia is replete with a rich variety of ‘autocracies’ that have no truck with Russia’s lurch into aggression. Australia’s close neighbour Indonesia, a democracy of 273 million people, is another country that, like democratic India, has been restrained in criticising Russia.
Indonesia might well exercise cautionary restraint towards Moscow as it faces the challenge of chairing this year’s G20. Inviting Vladimir Putin to the 2022 G20 summit could face a G7 boycott. Moving to a G19 (a G20 minus Russia), given the precedent of Russia’s expulsion from the G8 following its annexation of Crimea, may be a plausible option as the weight of global opinion makes Beijing and New Delhi less likely to veto such a move. But Indonesia would have to manage any suspension of Russian participation in this year’s G20 carefully with collective diplomacy and effort.
It may well be inconceivable for the G20 to host a country in the middle of waging a war of aggression from which the world has clearly distanced itself.
For some the current crisis seems to be reinforcing the idea that autarky equates with security. The world is a dangerous place, the argument goes, and only by embracing ‘self-reliance’ or limiting interdependence to allies, can nations protect themselves from becoming victims of economic coercion.
As Shiro Armstrong and Tom Westland argue in this week’s lead article, ‘this idea is dangerous and false: it will only lead to more conflict in a world in which great powers are allowed to act with impunity’.
Deepening economic interdependence is, in fact, a pathway to both prosperity and security. Nothing can stop truly irrational leaders from making terrible choices, but trade makes conflict less likely. Economic weapons deployed collectively in extreme circumstances like those now can strengthen the established liberal economic order, not weaken it. Unilateral use of economic leverage is like setting alight to your own house in the hope the fire will spread to your enemy’s. Its considered, collective use is an entirely different matter.
As Armstrong and Westland explain, unilateral sanctions almost always backfire: the ‘global economy is large and there are always alternative buyers or sellers’. Sanctions are effective and justifiable when they are an agreed and collective effort.
In the interwar years, too many people have focused on Chamberlain’s appeasement of Hitler as the key lesson. By Munich the die was already cast. It was preceded by a much longer period of the economic decoupling of Germany as it built the ‘Reichsmark bloc’, dumping the economic ballast that would have sided for commerce over conquest.
The consequences of peace after World War I point to important lessons for reconstruction after the current conflict.
‘Economic warfare, like any conflict, needs an exit strategy’, say Armstrong and Westland. ‘Clear, credible exit from sanctions towards rebuilding both Ukraine and Russia’ is needed. Although the ‘world must not reward aggression’, they warn, ‘for very practical reasons, generous support needs to be waiting for Russia to stave off entrenching nationalism and extremism, thus avoiding a tragic repeat of Versailles in 1919, when a defeated Germany was punished so severely that it turned to revenge, rather than rebuilding its connections with the world’.
The US-instigated Biden-Xi virtual summit last weekend is a sign that the United States is focused on locking Beijing into the war of attrition against Moscow. Were China to breach the international embargoes against Russia substantially, that effort would be severely compromised — though there is actually little sign yet that Beijing is of a mind to jeopardise its own interests in doing so. Were China to be effectively subject to such economic isolation, it would suffer a fate much worse than Russia’s, given how much more it is integrated into the global economy.
The United States and its allies are pressing President Xi, who would appear to have more sway and reason to act than anyone else to persuade Mr Putin to back down. But there are also big dangers for China in mediation, with high risks of being wedged on double-dealing and Putin’s intransigence playing still more badly into US-China relations.
And without a common understanding of the economic consequences in brokering a peace in Europe, Washington and Beijing will continue to talk at cross purposes.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.