Ukraine’s globalisation lesson | Business Standard Column

Clipped from: https://www.business-standard.com/article/opinion/ukraine-s-globalisation-lesson-122032800010_1.html

Actually, interconnectedness and co-dependence preserve strategic autonomy

Mihir S Sharma

Twenty years ago, the countries of the world seemed to be permanently being bound together by ever tighter chains of globalisation; today, those chains may have been broken beyond repair. Frayed after the financial crisis, they were further damaged by an upsurge in populist protectionism and then the pandemic; and now sanctions after Russia’s Ukraine war may have broken them permanently.

The most potent intervention in the Ukraine war that the United States and the European Union felt was possible, given Moscow’s nuclear arsenal, was expelling some Russian banks from the SWIFT inter-bank messaging system alongside personal sanctions on some well-connected Russians and military-connected companies. To this was added the decision to prevent access by the Russian central bank to some of its dollar reserves. These sanctions may not have the desired effect of making it difficult for the Kremlin to prosecute its Ukraine invasion. But they certainly cut off Russia’s otherwise closely integrated economy in an unprecedented manner.

The West has essentially weaponised Russia’s economic interdependence with Europe and America in a manner that will have raised alarms everywhere else in the world, including in India and China. Leaders in the latter at least have already been speaking of a “dual circulation” economy —meaning that one track of the economy will be focused on growth-enhancing interaction with the West, while the other will create a purely domestic economic network insulated from such action.

It was already being considered somewhat old-fashioned to think of globalisation in terms of the trade in goods and services as welfare-enhancing for both sides. In spite of considerable evidence that such trade is broadly beneficial for both economies, populist politicians in multiple countries had harnessed the anger and energy of those small groups and regions that had not benefited as much from the increase in trade.

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Yet in all this, the globalisation of large flows of investment was not as controversial. As long as it was not crisis-inducing “hot money”, such investment was generally welcome.

Now that too has been rendered unsafe. A country’s investment in US government securities is not sufficient to protect it from chaos on the external front, some would argue, given the example of the Russian central bank. Oligarchs have had their large-scale investments in property and other offshore assets rendered unavailable. And the balkanisation of the integrated financial system has been rendered a real possibility by cutting off Russian banks from SWIFT.

Writing in Bloomberg, John Micklethwait and Adrian Woolridge have argued that the “great illusion of capitalism”, that interconnectedness would last forever, has been shattered. Yet it is equally likely that what is being dispensed with in this new era —excessively insecure and thin supply chains, for example —are not central to the growing economic interdependence that is the bedrock of globalisation. In the end, even the United States will not be able to bring the entire supply chain for, say, the iPhone, home without rendering that product ruinously expensive and unaffordable. At most some aspects of the supply chain could be moved to different countries than it currently is, and some excess capacity built in to insulate it from future pandemics or invasions, or from hasty responses thereof.

It is certainly the case that the unilateralism of the Western response was ill-judged. However, seeing this as a sign of the insecurity inherent in economic co-dependence may also be a somewhat short-sighted view. After all, genuine co-dependence is when both sides need something from each other. The West needs Russia’s oil and gas; and they have not been able to prevent that from continuing to flow, because, as Germany’s chancellor has pointed out, cutting that trans-national trade would lead to recession across the European continent. Why is not the lesson of this response to the Russian war that greater co-dependence in fact prevents trade that is crucial to both sides from being weaponised?

Indeed, it is essential that it be understood that globalisation has severely limited the scope of economic action that is possible against Russia. For that matter, if tomorrow the mainland invades Taiwan in similar fashion, the true lesson is that co-ordinated economic action against China will likely have even less effect than what we have seen against Russia. Expelling Chinese banks from SWIFT will just lead to settlement in yuan, something that the authorities in Beijing would welcome. The Russians may struggle to enforce their demand for the settlement of fuel exports in roubles, given that there are few other Russian goods that can be bought with those roubles. With China, that is not a problem.

Those who use this example to argue that policies of self-reliance are smart should pause to consider two things. First, if Russia was truly self-reliant —i.e. it had nothing to offer economically to China and India —what would have been its position today? Would it not have been truly isolated, instead of being able to claim that countries representing the majority of the world’s population did not vote against its Ukraine invasion in the United Nations? If the Kremlin did not have the security of knowing that it still has oil and gas to sell, not to mention weapons, would it have been able to prosecute a war that isolated it from the entire world? It is the degree to which Russia is interconnected that is what protects it.

And second, what has been revealed in this war and the reaction to it is that economic instruments are used only as far as they do not hurt the countries using them. Cutting off Russian banks or oligarchs makes very little difference to Western economies. In other words, the central banks’ investment in sovereign debt or the oligarchs’ investment in real estate did not create interdependence. Nor are American or European companies worried about losing their investments in Russia and thus lobbying their government to minimise sanctions. Had they more to lose from a cut-off Russia —as they do in China, for example —economic action against Russia by their governments would have been more difficult. In other words, to the degree that sanctions on Russia are biting, it is because Russia is not interconnected enough.

If anything, therefore, the true lesson of the past months at least has been that it is inter-connection and co-dependence that preserves strategic autonomy. Oh, and also that if you don’t invade a much smaller neighbour then you are probably safe from sanctions anyway.

The writer is head of the Economy and Growth Progreamme at the Observer Research Forundation, New Delhi

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