By David Skilling*
February 25, 2022. I am writing on one of the darkest days in Europe for decades, hours after Russia launched a full invasion of Ukraine. It would be tempting to refer to Ms Merkel’s characterisation of Mr Putin as a man using 19th Century methods in the 21st Century. Except that the forces being unleashed have an unfortunately 21st Century flavour to them: big powers coercing smaller states, a fragmenting global system, and the weaponisation of international commerce.
Geopolitical tensions have been building for some time, as Russia, China, and others challenge the global economic and political system. Many Western countries – comfortable in the post-Cold war environment – have been slow to recognise the magnitude of this challenge.
Attitudes have been shifting on China over the past few years. But it is Russian behaviours this week that have crystallised what is at stake. After a period of tentative Western recalibration over the past several years (some sanctions, decoupling), we are now likely to see a more concerted pushback to the various challenges to the rules-based system.
As Winston Churchill said 70 years ago after the second battle of El Alamein, ‘Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning’.
There is much uncertainty on how the Ukraine crisis will develop. But, drawing parallels with the structural impact of the Covid crisis, I discuss three global dynamics that these events are unleashing.
Countries & choices
Just as the Covid shock exposed national strengths and weaknesses, so too the Ukraine crisis exposes the extent of strength and coherence of the West. In particular, this crisis crystallises the need for countries to make strategic choices. Many countries in Europe (and elsewhere) have tried to avoid making choices between their economic and strategic interests – seeking to capture economic value from commercial relationships with Russia, and engaging with Russia despite its repeated transgressions over the past decade.
But choices cannot now be avoided. And despite concerns that Europe would respond weakly, the EU has landed on a good initial set of sanctions; weaponry has been provided to Ukraine; Germany has (finally) decided to cancel Nord Steam 2; and the UK has now announced a tough set of sanctions on Russian capital, individuals, and aviation (after an initially underwhelming response). The US is also imposing measures.
Much more needs to be done, but this has been an encouraging initial response given Europe’s exposures to Russia (energy, trade). I wrote recently that Europe is on the front lines of structural change in the global system because of its highly open economy, and that its behaviour is a useful global barometer. And there is active debate on further EU sanctions on Russian oil and gas and Russia’s banking system. There is not yet consensus on these issues, but more aggressive measures are likely from the EU.
This represents a convergence to the perspective of small economies on Russia’s borders – notably the Baltics and Finland – that have been warning of Russian risks for some time.
Beyond Europe, the US is said to be building a coalition of Asian economies that will stop high tech exports to Russia; and Australia and Japan have announced sanctions. Turkey has urged Russian restraint. But India to China have been reluctant to openly criticise Russia. And several Asian countries – often exercised about issues of sovereignty – have been notably quiet.
After a decade (and more) of prioritising near-term economic benefits (energy supplies, Russian market access, investment flows), Russia’s violent adventurism is a forcing event for countries to make overdue hard strategic choices about their positioning. More Western countries are now prepared to bear costs in order to support the rules-based system.
Accelerating global fragmentation
It is commonly observed that Covid accelerated a range of economic and political dynamics, from the use of technology to supply chain localisation. Similarly, Russia’s invasion of Ukraine will accelerate the ongoing fragmentation of the global economic and political system.
In a direct sense, further sanctions on Russia, together with choices made by firms and consumers to reduce their exposure to Russia, are likely to lead to a decoupling of Russia from the global economic system. Russia will remain an important commodity exporter – although countries will be developing alternatives, particularly in energy – but its high-tech sectors will be deeply challenged, as well as its financial sector (particularly if Russia is removed from SWIFT).
And more broadly, this will likely accelerate decisions by Western firms to reduce exposures to other countries with which there are geopolitical tensions – most notably China. Previous notes have discussed the decoupling that is underway with respect to China. Trade and investment restrictions, as well as shifting consumer preferences, are leading an increasing number of firms to reduce China exposure. This behaviour is being reinforced by the changing economics of global supply chains.
The Russian tensions will increase the salience of these issues, likely leading to a more rapid decoupling of Western firms from China. Europe has lagged the US in this process, partly because of Europe’s more acute economic exposure. But the hard choices that the Ukraine crisis will force are likely to contribute to a further hardening of European approaches to China engagement.
This is likely one reason why China is not thrilled by Russia’s behaviour. Although it has not criticised Russia in public, neither has it been supportive of the invasion. But despite this, it is likely that China and Russia will continue to strengthen their economic relations in response to this Western decoupling (exactly 50 years on from President Nixon’s visit to China, to prise China away from the Soviet Union).
A systemic global shock
The Covid shock started with a small outbreak in Wuhan, before going global. Similarly, the events across Ukraine will have a global impact.
For example, the behaviour of Russia and the nature of the response by the US and Europe, will impact on how China approaches its territorial disputes – notably its Taiwan claims. The way that the Ukraine crisis plays out will set a precedent, and is being watched carefully in Asia.
And this crisis will have a major global economic impact. Although Russia’s GDP is smaller than the Benelux economies, the widespread sell-off across global equity markets (ex-US) on Thursday gives an indication of the concern about the economic consequences of the conflict and accompanying sanctions on Russia.
There are several channels, most obviously oil and gas prices. Russia accounts for ~8% of global oil exports, which will be sanctioned and constrained – oil prices have been moving higher and spiked up again this week. Russian gas supplies to Europe, already limited by Russia will likely reduce further – putting upward pressure on already sky-high gas prices in Europe. Over time, energy systems (renewables, nuclear, LNG imports) can be developed to reduce reliance on Russia. But this will take several years at least, involving big costs.
Russia is also a significant global exporter of commodities such as platinum, palladium, and aluminium. This makes Russia an important part of global supply chains in areas from semiconductors to cars.
Russia and Ukraine are major exporters of agricultural products; together they account for ~30% of global wheat exports. And Russia is the world’s largest exporter of fertiliser. Any sanctions or disruptions to exports in this space would exacerbate the current surge in global food prices.
And there are other global economic risks: the disruption of fly-over routes from Europe to Asia, stepped up cyberwar measures (with the potential for spillovers), and so on.
Taken together, these exposures mean that economic escalation could do substantial damage – both to an already weak Russian economy (Russia’s equity markets were down by 33% on Thursday, down by ~45% since early January) but also to the post-Covid global economy that is already grappling with inflation, global supply chain pressures, and so on.
A watershed moment
The Ukraine invasion is a watershed moment, and will have far-reaching consequences for the global system. It will likely lead to more intense strategic competition between political blocs, greater economic decoupling, as well as substantial economic costs and frictions around the world. We should not under-estimate how significant this week’s events are. Governments, firms, and investors will need to quickly adapt to the realities of this emerging world.
*David Skilling ((@dskilling) is director at economic advisory firm Landfall Strategy Group. You can subscribe to receive David Skilling’s notes by email here.
99 Comments
So the great Reagan, Thatcher led globalisation, the world marched to their tune, Russia weakened, China exploited. Now here it is. A Sino - Russia pact, economically, militarily coupled with geographical aggression about which the West can only vacillate. To my mind globalisation seems to have now turned out to be a monumental own goal. Two hard line totalitarian regimes between them have tied the West up in knots. Rather than the prospect of de-coupling it looks to be more a question of unraveling the tentacles doesn’t it.
It was 2001 when Helen Clark said that, nine years after Fukuyama incorrectly declared humanity had reached "not just ... the passing of a particular period of post-war history, but the end of history as such". Only a few years back commenters on NBR.co.nz were wont to declare it mattered little who owns New Zealand's land, because we can just legislate over it.
Very little long-term strategic thought from our leaders, but that 1980s-90s period certainly seemed to set the stage for that, full of unrealistic optimism that all problems had been sorted and unbounded use of wealth and resources would continue indefinitely without problem (while climate change was conveniently ignored once Reagan got in charge and swept Carter's efforts away and paved the way for industry-funded denialism).
Except for the fact there is about a decade lag time between saying we need it and actually producing refined petroleum products....
And the political uncertainty around those sort of decisions are not very favorable to investors that have a decades long time frame.
After a period of tentative Western recalibration over the past several years (some sanctions, decoupling), we are now likely to see a more concerted pushback to the various challenges to the rules-based system.
There's no such thing as an "int'l rules based order." You're making that up. There is international LAW, however, and the only ones undermining that are western states & proxies waging unnecessary wars.
The rules based order is essentially do as I say, not as I do. Which are the same rules for climate change, the elites fly in private jets to meetings about how everyone else is going to have to stop eating meat. Or Bill Gates demonising people for not wanting to wear masks while at a meeting where nobody was wearing masks.
For example, the behaviour of Russia and the nature of the response by the US and Europe, will impact on how China approaches its territorial disputes – notably its Taiwan claims. The way that the Ukraine crisis plays out will set a precedent, and is being watched carefully in Asia.
It played out yesterday - UPDATE: PLA monitors US warship transit in Taiwan Straits amid Ukraine crisis, slams move as ‘hypocritical, futile’
Good article, western economies are going to have to accept a decoupling or be financing their own demise . This is becoming apparent to even the most optimistic globalization bulls . China is doing the same as Russia but using BRI to do it then using debt defaults to take over countries or their assets same end result just more overt in nature. Europe has just had a lesson in the outcomes from financing their enemies enabling their militaries to threaten the way of life they hold dear .
Europe has just had a lesson in the outcomes from financing their enemies enabling their militaries to threaten the way of life they hold dear
So has China and Russia.
by Audaxes | 26th Feb 22, 10:30am
European NatGas Prices Plunge As Russian Flows Via Ukraine Soar
Bloomberg’s Javier Blas, the West just sent Russia the funds to pay for all its initial salvo of bombs and missiles via the commodities they have bought from it. That’s a point I raised more broadly in a Clausewitzian sense when noting the US paid for China’s military spending via its imports and China paid for that of the US by lending the dollars back to the Treasury, which is not the mythical win-win free trade most free-traders think of. Link
Russia’s equity markets were down by 33% on Thursday, down by ~45% since early January)
Market capitalization isn’t “wealth.” It’s the latest price, times shares outstanding. Blotches of ink on paper. Flashing pixels on a screen. If a dentist in Poughkeepsie buys a single share of Apple at a price that’s 10 cents higher than the previous trade, $1.6 billion in market capitalization emerges from thin air. If a single share trades 10 cents lower, $1.6 billion evaporates just as quickly. Whatever happens, every security in existence has to be held by someone until it is retired. Ultimately, the wealth inherent in a security is the future stream of cash flows it will deliver to its holder(s) over time. Price fluctuations don’t change those underlying cash flows. They just provide opportunities for the transfer of savings between investors. High valuations favor the sellers. Low valuations favor the buyers. Investors have never paid higher prices for those future cash flows, or accepted prospective returns so low.
Put simply, the bubble hasn’t changed the wealth, and a collapse won’t change the wealth. What will change is the market cap. I suspect that the erasure of market cap in the coming years, and possibly the coming quarters, may be brutal. Still, no forecasts are required, and our own attention will remain on observable valuations, market internals, and other factors. Meanwhile, even if an investor sells at these extremes, the only thing that will change is who holds the bag. Link
How gullible are these poor nations sequeezed in the power play between super powers and associated rich nations.
Rich European nations now sending weapons to Ukraine so that can kill more. Who are they really killing and destroying? The gullible and the naive Ukrainians don't understand that all those rich nations won't fire a bullet at Russia from their land but will arm Ukrainians. And nothing good comes from weapons except death and destruction.
Surrender, negotiate and live for another day to win. Just learn from history of what France did when Germany came, they surrendered and saved Paris from destruction. Ukraine cannot win from Russia, no matter the amount of weapons. The more they fight, the more it will be destroyed. Be intelligent and smart.
The most important thing is that Finland and other Neighbors between Russia and NATO countries have been neutral and flourishing nations for years. They never talked about joining a military organization.
What's wrong with being neutral?
All ex iron curtain countries have had endemic corruption issues, which some are trying to recover from. A move back to Russia means a move back to institutional corruption. I would be interested in seeing your evidence that the donors mentioned constitute serious corruption?
Rich don't have a perspective of the poor. Rich investors think of making more from others misery and do all their life. Zero contribution to society. Mostly parasitic contributions to suck blood of others to feed their needs. ( any reflections or self conscious thoughts here?)
Poor only wants to earn enough in the day to feed himself and this family at dinner.
Poor only wants to earn enough in the day to feed himself and this family at dinner
And maybe not get murdered.
The little man you're wanting to champion fares a lot better in open market democracies than under despotic regimes.
It's fine if you want to construct yourself a "greed is bad, m'kay" soapbox, but it makes a lot of your observations kinda blind.
Yeah everyone who doesn't live in western democracy is already suppressed and is declared dead or non existant and there are ghosts living in all those countries. Still all the stuff western countries wear and use is made there. Such irony.. Some of those living in those countries are in space station but yeah that's too much truth for greedy with closed eyes.
Brain fade and frog in a well is what would describe. Anything we explain to frog in a well, frog would not understand that there is a bigger would out there.
Brain fade and frog in a well is what would describe. Anything we explain to frog in a well, frog would not understand that there is a bigger would out there.
Possibly the best paragraph ever written.
In Cambodia in the 70s, the new guys had to find more and more economical ways of dispatching people. A hammer was best bang for buck. If you had glasses, you were deemed educated, and thus goneburger. There's a tree at one of the fields that was used to swing infants against. Every rainy season, mud washes away, and more clothing from the dead is revealed.
Theres greed, and then there's tyranny. It's not all the same out there.
Several times.
You're of the opinion if you keep your head down, you'll be ok. The people of Ukraine have decided they're not interested in doing things the Russian way, and for good reason.
You've got a do nothing approach, and are also judging western nations for at least doing more than nothing.
So you're continuing to claim you're in posession of superior enlightenment and information, but simply to refuse to elaborate. Everyone should act like Vichy France, because it worked out ok for anyone except the hundreds of thousands of civilians that were murdered or excecuted en masse under occupied government collusion.
A superior perspective would be able to put up a much more compelling case.
Germany and Italy, both heavily dependent on Russian natgas, will fight to the last Ukrainian to keep the C molecules moving.
And Russia has, sotto voce, funded the Western NGO's which have been so influential in vastly increasing Western dependence on unreliables, shutting down dispatchables, and generally foobarring the energy landscape of most of Europe. They are, indeed, Useful Idiots.
And now the bills are falling due. To be settled via non-SWIFT trx, in non-USD currencies......
Europe is sitting there flapping its gums in the UN, while militarily doing little. This inaction is really underlining Trumps comments about NATO, the member nations are not pulling their weight. NATO is literally fiddling while Ukraine burns.
The US should shut the 40 odd bases in Europe and use the savings to reduce its debt addiction.
Indeed:
It goes back to the statement, most likely made by then Vice-President Dick Cheney, on the ‘reality-based community,’
“That’s not the way the world really works anymore … We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do’“
For now Russia is creating the realities.
We've been wrapped up in the fog of war for a long long time -
The war against poverty
Ther war against drugs
The war against crime
The war against terrorism
The war against Covid
The war against tyranny
The war against communism
The war against socialism
Mankind seems to have a particular affinity for war...
The oligarchs can financially withstand them, but the average Russian will be worse off, and the legitimacy of the government will be diminished.
As has been suggested, there's wider ramifications for the likes of China and its own designs for expansion, so the costs to Russia for this have to make an example.
Both of these states (China and Russia) are backed into a corner. The US still has large control over global trade, but it needs uncontested waterways to do so.
Personally I feel Russia and China just have too much internal security to conduct, and too much corruption, to wage effective long term expansionist campaigns.
Just so long as everyone keeps their fingers off the red buttons.
China has obstacles invading Taiwan, the Taiwan strait is trecherous and has limited time for safe passage and US & Taiwan will have subs waiting to test their torpedos. A build up will be obvious, the small strip of flat land on the beach and surrounding hills plus pre laid lines for petrol to light up the beach makes a fiersome barrier to overcome. Chinas lack of experience in ocean transport make result in low morale if troops see their mates taking a swim. There is little to gain and much to lose hopefully Xi will see sense and just trade with Taiwan.
Nobody really gives a shit about Ukraine. If it was some country not in the middle of Europe it wouldn't even make the news. I think we should be more concerned about Taiwan. If China takes a page out of the Russian playbook and goes for Taiwan then we really have problems.
Hmm, thought they may hold that one poised in the air. Another red flag to Putin undoubtedly. Troops stationed in Transnistria will be reinforced & Moldova taken, a replication of Ukraine all at the ready. So NATO had better start putting extra heavy boots on the ground the three Baltics, Poland, perhaps others too. Otherwise NATO ain’t going to be worth the paper it’s printed on.
Truly saddening to watch the entire planet sit by as a sovereign nation is invaded by a hostile force.
We all know the vile and disgusting things that will be happening. Yet no retribution, no punishment, and no action.
All because we need the gas/oil.
The West have long since faded as the bastion of freedom and democracy. We are a disgrace.
Agreed the US/ NATO should have prevented this by rescinding the invitation for the Ukraine to join NATO and demanded Ukraine remain neutral as was the case untill 2008. Russia's actions should be viewed in the context of the Monroe Doctrine as is enforced by the US (e.g. Cuban missile crisis). The US would never allow Mexico to enter a military alliance with a hostile nation (e.g. Russia/ China), to think Russia would sit back and allow Ukraine to do so, beggar's belief.
The flipside of that coin is then why didn't the USA put the Ukraine in NATO years ago ? The reason is they did not and would not fight a war in Ukraine. The USA made it clear before the invasion even started that there would be no boots on the ground in Ukraine. The American public are sick of fighting other peoples wars.
Yeah and it's funny that the bastion of freedom and democracy was built on colonizing already free peoples.
Where was the outrage when the West invaded under the pretext of WMD's.
It's suggested that the Allies were aware of Nazi atrocities and did nothing to stop it until Hitler became more of a direct threat to them.
Yeah I'm still sickened by events but the West was never far from disgrace.
What the hell are you talking about? There was huge outrage in the West when the West went to war in Iraq on the pretext of WMDs. I was in a friggin big street protest against that war.
Many former Labour supporters in the UK vowed to never support Labout again after Blair's part in that.
Talk about selective memory!
Relevant post from @meh
No one can condone Russian invasion BUT
lets not forget, Hiroshima, toppling Government in Iran in 50s, Vietnam, Latin American intrusions by CIA, , Afghanistan, Iraq, Libya , Genocide in Yemen by Saudi/ Western alliance, Palestine issue etc
Post Colonisation era America has bullied and invaded far too many countries aided and abetted by its lackies and abuse of IMF, UNO etc . Who could have issued financial sanctions against America and Uk for invading Iraq when the reasons for invasions were fabricated. How America is treating its own citizens is disgusting unless you are the top percentile
"The Ukraine invasion is a watershed moment, and will have far-reaching consequences for the global system...
Governments, firms, and investors will need to quickly adapt to the realities of this emerging world."
Covid was a watershed moment, as was the GFC, and various other incidents throughout history, but we seem to continue with the same rhetoric, the same ineffectual policies and "laws". The same beliefs in imperialism and global supremacy. The same beliefs that more competition, technology, and economic growth will be our saviour.
Nations and people will have to adapt and make big changes but governments, firms and investors continuing BAU doesn't sound like anything changes.
For the Ukraine, a nation of some 40 million plus people (or was) what's currently going on in their own front yards is a big deal. As we watch the destruction from the safety of our own lounges, 40 million people are scrambling into holes, into subway lines, into neighbouring countries, anywhere they can to escape the death & destruction coming their way.
It is a big deal for Europe too. The EU is currently poorly led & has been for some time, but none-the-less, what's happening on their eastern border is still a big deal for what's left of their democracies. They too should take it very seriously, and they are, but as you can see, there are differences appearing amongst the nations, which is even more reason to take it seriously, as their own survival as a group is on the line.
And it's obviously a big deal for Putin. His ego needs to regain the control (influence) of old. Despite the fact that it communist Russia was a disaster from the beginning to the end, Putin wants to put it back in place. The Russian people are paying heavily for his ego right now. They have been for almost two decades while he & his rich mates run the cutter to their huge advantages. I feel for the Russian people right now as much as I do for the people of the Ukraine.
And it's a big deal for me right now. I hate war. And I hate watching other people at war, especially when they're getting close to where my own roots are. Perhaps I should go back & help them fight the good fight? Perhaps I will. In the meantime I can donate through the churches & other networks who have plenty of people in trouble to care for right now. Women, children, babies & the elderly.
But right now,I have a new hero. His name is Volodymyr Zelenskyy.
I have heard some people say that certain countries in Europe were making a push for Ukraine to become part of NATO(rather than Ukraine simply having a desire to). Does anyone know how credible that claim is?
If it's true it would make Putin's actions seem more rational and understandable (rather than it just being some sort of loony historical grievance).
Junior British defence minister James Heappey said:
...if Ukraine wanted to reserve its position and say that in the future it may want to join NATO, we would support that too because that's what sovereignty is and that's what we support
Ukraine was recognized as an aspirant country by the North Atlantic Council after the 2014 Ukrainian revolution.
How is this going to play out? Anyone have any good links?
Presumably it could be somewhat attritional, over a few weeks, and presumably Russia 'wins'.
Then - they occupy or establish puppet regieme?
Then, I assume, sanctions become permanent and Cold War 2 develops.
It would certainly seem that'd be likely.
It's hard trusting any information at this stage, but some reports point to a haphazard invasion, armoured columns getting too far ahead of supply, a limited amount of guided munitions, Russian troops who were expecting to return home from a training exercise that have little compulsion to fight, etc.
On the other hand these first few days could be probe attacks, and once it becomes established that the Ukraine public are as much of an enemy as the government maybe Russia will be less discriminate in their attacks.
Any Ukranian over the age of thirty was once a Russian, and vice versa. The two are not natural enemies. There will be links of that nature, in the Russian army. There will be soldiers who did not expect to have to fight what amounts to kindred, in that way a civil war. It is the depth of a Russian winter. Neither a nice time nor place to fight and die.
Kviv has survived anotrher night. And Ukraine did not capitulate in the face of terror strikes on civilians, Zelensky did not flee. Putin might have gambled on a quick win, in any case, he will have to face the consequences. A flurry of sanctions against Russia from global finance to airspace and even sports is a ko.
Putin is trying to play the nuclear weapons card, perhaps to kept enemies at bay.
Meanwhile, Xi and the CCP are watching this show.
Looks like Putin's Russia is now an outcast, and joins the likes of North Korea.
New alliances arise, broadly into authouritarian regimes and the established West.
Russian oil and gas will be sold to Europe, economy contracts and more vodkha is consumed.
The dawn of a new era, when homo sapiens self-destruct.
Why did all this happen now; because Ukraine was determined to join NATO. NATO is solely a military alliance so I guess Ukraine saw the need to have some up-scaled military might to back it's continuing political separation from Russia. If that is so then maybe military conflict was always going to happen simply because Ukraine is economically quite strategic for Russia (most of it's gas and oil pipelines to Europe, redundant now, go through Ukraine) and Russia would never want to be in a position to be held to ransom by Ukraine. Maybe by moving on Ukraine now we have avoided an almost certain global war between Russia and the West which would have been likely if Ukraine was actually a full member of NATO.
Anyway, this will get messy for absolutely everyone because of the coupling of Russia and China which recent US tariff wars and sanctions must have helped to ferment.
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