Russia’s Ukraine invasion could be a global economic ‘game changer’
But the war’s long-term consequences could be more profound. Even before Russian President Vladimir Putin sent tanks and missiles hurtling toward Ukraine, years of deteriorating U.S.-China relations and failed global trade talks had stalled the tighter integration of finance and trade flows that had been anticipated during globalization’s heyday.
What comes next is unlikely to mirror the Cold War’s distinct blocs. Even as the global economic order fractures, no rival ideologies compete for supremacy. And China’s harsh authoritarian turn under President Xi Jinping co-exists with extensive commercial ties to the United States, Europe and Japan. But governments, corporations and investors all are adjusting to a new reality.
“It’s the end of one era and the beginning of another, which is a less complete form of globalization than we had ambitions for in the immediate post-Cold War era,” said Michael Smart, managing director of Rock Creek Global Advisors. “We have to think differently about what we mean by the global trading system. There are certain requirements that, if you don’t meet them, you’re not part of it. You can’t be in the club.”
With the United States, Europe, Canada, Britain and Japan uniting to punish Russia with unprecedented financial sanctions, the war has triggered a “major geopolitical realignment” akin to the aftershocks from the 9/11 terrorist attacks, according to Citibank analysts.
Virtually overnight, most major Russian banks were blocked from moving money across borders. Moscow’s stock market has been closed for a week. Russian customers are cut off from much of the world’s most advanced technologies.
On Friday, Russia’s isolation deepened as the country’s communications regulator blocked access to Facebook, one of the few sources of information that the government already did not control, saying it had discriminated against Russia media.
In Washington, top Democrats and Republicans have begun demanding that the United States stop importing oil from Russia, a move that would intensify Moscow’s financial plight if European nations followed suit.
Russia’s financial exile caps more than a decade of erosion in globalization, beginning with the 2008 financial crisis and continuing through the rise of Xi in 2012, the U.S.-China trade war that began in 2018, and diplomats’ repeated failures to agree on trade liberalization. The coronavirus pandemic, which highlighted the risk of ocean-spanning supply lines and restricted international travel, further thinned cross-border links.
Together, Russia and Ukraine account for 3 percent of global output, according to JPMorgan Chase. Putin’s brutal invasion of his neighbor, however, will have broad economic repercussions, economists and government officials said.
“There’s a chance — which increases with every human rights outrage that Putin commits — that Russia is shut out of the global economy for a long time. … You are removing this big chunk of the global economy and going back to the situation we had in the Cold War when the Soviet bloc was pretty much closed off,” said Maury Obstfeld, an economics professor at the University of California at Berkeley. “But that doesn’t mean the rest of the world can’t be tightly integrated in terms of trade and finance.”
Expectations for an enduring era of peace and prosperity were high in the early 1990s. After the Soviet Union ceased to exist in December 1991, Russia embarked on a helter-skelter series of economic reforms, including establishment of the country’s first stock market, and welcomed foreign investors.
China, meanwhile, was also moving along a market-oriented path that relied upon access to foreign technology, capital and executives.
From the outset, many U.S. officials saw a link between political and economic freedom. By 2000, when Congress was debating China’s entry into the World Trade Organization, President Bill Clinton saw trade ties heralding “very profound change,” including in the country’s political system.
“By joining the WTO, China is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values: economic freedom,” Clinton said at the time. “The more China liberalizes its economy, the more fully it will liberate the potential of its people — their initiative, their imagination, their remarkable spirit of enterprise. And when individuals have the power, not just to dream but to realize their dreams, they will demand a greater say.”
Hopes for a steady forward march of free markets and free people have proved unrealistic. Globally, democracy is down. Poverty is up.
The number of countries considered “not free” by the nonprofit Freedom House and those with annual average economic growth of less than 3 percent have risen in tandem.
Even before the pandemic drove the developing world into deeper poverty, about 70 percent of the world’s countries were experiencing subpar growth, roughly three times the figure in 2008, according to the World Bank. Nondemocratic rule similarly spread across much of the globe.
In 2020, for the first time in more than two decades, global poverty increased, according to World Bank data. Russia’s recession will intensify that trend, including in the Central Asian republics that once were part of the Soviet Union. Remittances from migrant workers from Central Asia who work in Russia make up about 30 percent of the economy in both the Kyrgyz republic and Tajikistan and are almost certain to plummet as Russia plunges into a deep recession and the ruble sinks.
“We moved out of that benign era a while ago. But this [war] has brought it home very forcefully,” said Carmen Reinhart, chief economist for the World Bank. “The golden era for globalization ended with the global financial crisis in 2008.”
Global trade and financial links also have plateaued.
World trade volumes would be nearly twice as high today if they had continued on their 2000-2008 path, according to data from CPB Netherlands Bureau for Economic Policy Analysis, an independent research institute.
Likewise, major cross-border financial flows have virtually stagnated even as the global economy grew about 30 percent larger since 2008. Top banks have $31.1 trillion in foreign exposure today, little more than the $30.4 trillion in early 2008, according to data from the Bank for International Settlements in Basel, Switzerland.
Financial markets that once rose and fell in near lockstep are increasingly going their own way, according to MSCI research. A decade ago, markets in different regions moved together about 80 percent of the time. Today, the correlation is a bit more than 50 percent, reflecting “less of a globalized economy,” according to Peter Zangari, MSCI’s global head of research and product development.
It’s not that globalization is over. But it will be different.
“It’s closing the door on a chapter that never had a strong intellectual basis,” said economist Joseph Stiglitz of Columbia University. “It won’t be the same. What we’re going to see is a process of delinking, disengagement. But it’s going to be slow, particularly in the case of China.”
Indeed, the United States since 2018 has been limiting the flow of high-tech goods to China and raising tariffs on Chinese imports. Chinese authorities, watching the United States and its allies deliberately shove Russia into a deep recession, are expected to intensify their efforts to become more self-sufficient in production of goods such as semiconductors.
The United States, too, is moving in that direction with President Biden’s “made-in-America” initiative designed to spur domestic manufacturing.
China’s economy, however, is 10 times the size of Russia’s and is far more intertwined with the outside world — making it unlikely that Beijing or its trading partners would seek a complete divorce.
The war’s immediate impact on the U.S. recovery is likely to be limited. Total U.S. two-way trade with Russia and Ukraine last year amounted to $40 billion, and Wall Street banks have less than $15 billion at stake in loans to Russian borrowers.
But there will be collateral damage from the sweeping U.S. and allied sanctions that have slashed most of Russia’s links to global trade and finance. Gas prices in the United States, which now average a nine-year high of $3.84 per gallon, may soon smash $4, according to Capital Economics.
Russia also is a major producer of other commodities, including wheat and industrial metals. The price of palladium, which is used to make catalytic converters, is up more than 60 percent this year for automobiles.
Renewed supply chain disruptions also will put upward pressure on inflation. Both Federal Express and United Parcel Service have halted shipments to and from Russia. Maersk, the giant ocean cargo carrier, stopped accepting new bookings this week for Russia-bound goods, causing cargo to begin piling up at terminals across Europe.
“Cargo is getting delayed and our already congested transshipment hubs are getting more pressured,” Maersk said in a customer advisory. “This is a global impact, and not only limited to trade with Russia.”