Economic ties between nations foster peace. Or do they?
Russia’s war in Ukraine is not only reshaping the strategic and political order in Europe, it is also upending long-held assumptions about the complex linkages that characterize the global economy.
Millions of times a day, vast exchanges of money and goods cross land borders and oceans, creating enormous wealth, even if unevenly distributed. But these connections have also exposed economies to financial dislocation and crippling shortages when flows are interrupted.
The tangled supply lines and shortages caused by the pandemic have created widespread awareness of these vulnerabilities. Today, the invasion has given new impetus to governments in Europe and beyond to reassess how to balance the desire for efficiency and growth with the need for self-sufficiency and national security.
And it calls into question a tenet of liberal capitalism – that shared economic interests help prevent military conflict.
It’s an idea that goes back centuries and has been endorsed by romantic idealists and steely realists. The philosophers John Stuart Mill and Immanuel Kant wrote about it in treatises. British politicians Richard Cobden and John Bright invoked it in the 19th century to repeal protectionist corn laws, tariffs and restrictions on imported grain that shielded landowners from competition and stifled free trade.
Later, Norman Angell was awarded the Nobel Peace Prize for writing that world leaders were under “a great delusion” that armed conflict and conquest would bring greater wealth. During the Cold War, it was part of the justification for detente with the Soviet Union – to, as Henry Kissinger put it, “create ties that will induce moderation”.
Since the disintegration of the Soviet Union three decades ago, the idea that economic ties can help prevent conflict has partly guided the policies towards Russia of Germany, Italy and several other nations. Europeans.
Today, Russia is the world’s largest exporter of oil and wheat. The European Union was its main trading partner, receiving 40% of its natural gas, 25% of its oil and much of its coal from Russia. Russia also supplies other countries with raw materials like palladium, titanium, neon and aluminum that are used in everything from semiconductors to car manufacturing.
Last summer, Russian, British, French and German gas companies completed a decade-long, $11 billion project to build a direct gas pipeline, Nord Stream 2, which was awaiting approval from a German regulator. But Germany halted certification of the pipeline after Russia recognized two breakaway regions in Ukraine.
From the outset, part of Germany’s argument for the pipeline – the second to link Russia and Germany – was that it would more closely align Russia’s interests with those of Europe. Germany also built its climate policy around Russian oil and gas, assuming it would supply energy as Germany developed more renewable sources and shut down its nuclear power plants.
The benefits went both ways. Globalization saved Russia from financial collapse and skyrocketing inflation in 1998 – and eventually paved the way for Vladimir V. Putin, Russia’s president, to come to power. Money from energy exports accounted for a quarter of Russia’s gross domestic product last year.
Critics of Nord Stream 2, particularly in the United States and Eastern Europe, warned that a growing dependence on Russian energy would give it too much clout, a point President Ronald Reagan had argued 40 years earlier to block a previous pipeline. The Europeans were still under the illusion, it was said, but this time it was that economic ties would prevent brazen aggression.
Yet more recently, these economic ties have helped breed 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 refused to join in what they saw as overblown warnings from the United States. In turn, French President Emmanuel Macron, German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi held talks or met with Mr Putin, hoping a diplomatic settlement would prevail.
The European Union has good reason to believe that economic ties would bind potential fighters more closely, said Richard Haass, president of the Council on Foreign Relations. The proof was the European Union itself. The organization’s roots go back to the post-World War II creation of the European Coal and Steel Community, a six-nation pact designed to avoid conflict by pooling control of these two essential commodities.
“The idea was that if you put the French and German economies together, they couldn’t go to war,” Haass said. The goal was to prevent World War III.
The researchers tried to prove the theory worked in the real world — by studying tens of thousands of trade relationships and military conflicts over several decades — and came to different conclusions.
The Russian-Ukrainian War and the World Economy
When it comes to the current crisis, Haass argued, in some ways the economic benefits were not mutual enough. “The Germans needed Russian gas far more than Russia needs exports, because they can make up for lost revenue with higher prices,” he said.
“This is where Europe mishandled the relationship,” Haass added. “The leverage was not reciprocal.”
Despite its huge landmass, nuclear arsenal and energy exports, Russia is otherwise relatively isolated from the global economy, accounting for 1.7% of global output. And since Russia invaded Crimea in 2014, Mr Putin has moved to further isolate the economy to protect against retaliation.
Adam Posen, president of the Peterson Institute for International Economics, said the drive to impose such devastating sanctions on Russia could point to the flaw in this strategy. If the Russian financial system was more integrated with those of the allies, they might have been more reluctant to take steps that could cause a financial crisis.
At present, economic relations with Russia follow parallel paths. Countries opposed to Russia’s invasion of Ukraine have imposed a series of damaging financial and trade sanctions, but Russian oil and gas – exempt from the bans – continues to flow.
The reality is that economic interdependence can breed insecurity as well as mutual benefit, especially when the relationship is unbalanced.
Philippe Martin, dean of the School of Public Affairs at SciencesPo in Paris, said the 2014 agreement between Ukraine and the European Union may have marked a turning point for Russia. “That translated into more trade with the EU and less with Russia,” he said.
Mr Martin wrote skeptically that economic ties promote peace, saying countries open to global trade may be less worried about fighting with one nation because they have diverse trading partners.
In the case of Russia’s march to Kiev, however, he offered two possible explanations. The first 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,” Mr 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 correct? “I think both interpretations are valid,” he said.