The Ukraine war and its impact on the future world order

This post examines a possible long-term consequence of the Russian invasion, especially in terms of how it could shape expectations in China and also the prospects for the western alliance. 

I have blogged here, here and here positing an alternative narrative on the Russian invasion, as argued by John Mearsheimer. As I mentioned there, it's important to not confuse the possible motivations of Vladimir Putin with the justifiability of his actions, which they are definitely not. Also, as Adam Tooze has written, it's also not to overlook the rightful agency of Eastern European nations, who in the aftermath of the collapse of communism and since then have sought to join the NATO and EU. 

Even the critics of the view acknowledge that Ukraine was a red-line for the Russians and the real possibility of an imminent NATO expansion may at least have been the trigger for the current crisis. When you think about it, there is only a very thin line between defensive realism (which is what Mearsheimer's critics say he's pointing to) and offensive realism (which is what the likes of Paul Poast claims is the Russian motivation in a brilliant twitter thread here). Offensive or defensive, and completely setting aside any moral calculus, I think it's reasonable to assume that great powers would lash out against attempts to interfere in their neighbourhood, especially with a view to contain them. And that, I think, is the larger point that Mearsheimer is making. 

I have also blogged here about some possible long-term consequences of the war. In so far as the war diverts western attention away from China thereby allowing the country to pursue its globally subversive agenda with far less glare of attention and scrutiny, I've written that China is the big winner from the invasion. 

But that view does not pay adequate attention to the pace, scope and sweep of the western sanctions unfurled against Russia. The sanctions have been more or less universally embraced by western democracies and their companies and covers several hitherto uncharted areas. Besides it has firmly united the western countries as never before in the post-communist era. Sample this from John Mauldin,

I was frankly amazed by the speed and unanimity with which countries slapped all kinds of sanctions on Russia... The US and others have done something almost no one anticipated by freezing Russia’s central bank reserves. Some $300 billion is on deposit in Western institutions. Russia is now unable to access it, which is why the ruble is collapsing.

This is all the more surprising given that the Trump era had seriously dented the trans-Atlantic alliance. The sanctions have in one stroke dispelled all doubts about the unity and strength of the western alliance when faced with a common enemy. For evidence look no further than Germany's actions over the last two weeks - political consensus against the invasion and for the sanctions, cancellation of Nordstream 2, German companies whole-heartedly joining the western sanctions, sending arms to Ukraine and soldiers to the borders, sharply increasing its defence budget etc. 

Some 3,650 German companies were active in Russia before the war in Ukraine, according to the Association of German Chambers of Commerce and Industry (DIHK). They had invested €25bn in the country by 2019, according to Bundesbank figures, and employed 280,000 people there... Despite the sudden large-scale commercial losses and disruption, Volker Treier, DIHK’s head of foreign trade, said, “we have not heard a single critical voice from the German business community arguing that the sanctions are wrong”.

The resolve and leadership of the Americans to rally the alliance too has been impressive. It was thought, and the Chinese lost no opportunity to highlight it, that the American political system had atrophied so much that it was captured by vested interests and could not gather itself to take tough decisions. America was on an irreversible decline and the western alliance was in disarray. Besides, the Americans were in a permanent retreat from being entangled with global geo-political concerns. All that's now history. The resolve to press ahead with the widest range of sanctions, despite knowing fully well that the costs would include not just higher inflation and economic slowdown but the near inevitability of an economic recession, is very impressive. 

China would have closely observed and taken note of the rapid roll out of the western sanctions on Russia, the resolve and unity of the western alliance, and the American leadership. It's hard not to imagine that decision makers in Beijing have not been unsettled by the force of the western response. Gideon Rachman makes the point very clearly,

A short, victorious Russian war would have suited China. Beijing’s favoured narrative about the inexorable decline of American power would have looked even more credible. The stage might have been set for a Chinese attack on Taiwan. Instead, Russia has got bogged down. The western alliance has been revived, and the US and its allies have unveiled a new armoury of economic sanctions that will look very threatening in Beijing. China is now having to digest the news that, as a result of western sanctions, Russia has lost access to most of its foreign reserves. As the economist Barry Eichengreen points out, one of the main reasons that countries hold foreign reserves is “as a war chest to be tapped in a geopolitical conflict”. But China, which has the world’s largest foreign reserves, has just discovered that it could lose access to its war chest overnight... The fact that the EU, UK, Swiss, South Koreans, Japanese and Singaporeans have joined in the financial sanctions on Russia has created a united front of developed economies that should concern Beijing. China has repeatedly measured itself directly against the US, ticking off milestones as it goes: largest trading power, largest economy measured by purchasing power, largest navy. Yet if China now has to measure itself against not just the US, but also the EU, UK, Japan, Canada and Australia, its relative position looks much less powerful.

Mixin Pei has this to write about the Chinese reaction,

The unprecedented economic sanctions imposed by a united West on Russia have demonstrated the awesome power it possesses despite talk about its decline that is popular in Chinese leadership circles. For China, which might have benefited from a prolonged period of tensions between Russia and the West, the paths ahead have suddenly become far more treacherous. Instead of being a net beneficiary of a conflict between Russia and the West, China now finds itself perilously close to being collateral damage...

While the crippling economic blows against Russia are applauded in the West, Chinese leaders watch them with great alarm. Their country is far more economically tied to the West than Russia is. Although the same type of economic sanctions leveled at Russia would unavoidably hurt Western economies, they could be catastrophic for China in the event of a war across the Taiwan Strait. The only insurance China has to protect itself against such perils is to sanction-proof its economy. This may sound appealing in theory, but in reality, the costs would be astronomical. Besides completely reversing China's opening to the West that began in 1979, such a fateful pivot would mean transforming a globally integrated economy that recorded $6.05 trillion in total foreign merchandise trade in 2021 into a closed war economy. Even if this can be done, as demonstrated by North Korea, the horrendous loss of efficiency could impoverish China again. The gap between China and the U.S. would expand as a result and make China weaker, not stronger.

Further, apart from unsettling the Chinese decision makers, the force of western sanctions may also have reset norms. Things imagined difficult or impossible suddenly become possible. A new normal emerges in the collective psyche of everyone. Consider this from Rachman

Many western multinationals have put China at the centre of their business strategies. For that reason, even some of America’s China hawks have accepted that economic interdependence between the US and China is a given. But a global crisis causes people to re-examine basic assumptions. The idea of an economic severance of China from the west, once unthinkable, is beginning to look more plausible. It might even appeal to the growing constituency of economic nationalists in the west who now regard globalisation as a disastrous error.

One important prevailing norm that has been reset has been the weaponisation of SWIFT and the freezing of Russian central bank reserves,

This new knowledge that a central bank’s reserves are subject to freeze will give leaders a good reason not to hold their reserves too far from home... Every country in the world now realizes its reserves and assets in foreign banks are subject to seizure if they don’t play “by the rules.”... Now the rules say that your assets can be seized. Even if you have no intention of ever breaking the rules, you would be foolish not to notice that the rules have changed, especially if you are China.

See also this nice explainer by Patrick McKenzie on SWIFT. 

Another norm that has been reset involves the belief in a cold peace involving Russia and China. Michael Beckley and Hal Brands write in a Foreign Affairs article

Democratic populations believed that globalization had rendered old-fashioned conquest and imperialism obsolete. They assumed that Putin and Xi were savvy, cautious leaders pursuing limited objectives—staying in power, maximizing economic growth, and gaining a greater say within the existing order. Russian and Chinese paramilitary forces might engage in “gray zone” operations below the threshold of war. But if push came to shove, Moscow and Beijing would cut deals and de-escalate crises... Russia’s invasion of Ukraine shattered these comfortable myths. Suddenly, great-power war looks not only possible but perhaps probable. Western policymakers have rediscovered the value of hard power and have started taking Putin’s and Xi’s imperial aspirations literally. The idea that the United States can focus on China while pursuing “stable and predictable” ties with Russia has become laughable: the Chinese-Russian entente could violently challenge the balance of power at both ends of Eurasia simultaneously. As a result, moves previously thought impossible—accelerated German and Japanese rearmament, EU arms transfers to Ukraine, the near-total economic isolation of a major power—are well underway.

In other words, there is the real possibility that the shock and outrage generated by the Russian invasion may get channeled towards a more comprehensive strategic policy to contain China.  

Furthermore, the struggles of the Russian military too would have sown seeds of doubt among the Chinese military generals,

China’s military calculations also suddenly look more complicated. If the experienced Russian army cannot easily prevail in a land invasion of Ukraine, how could China carry off the much more complex seaborne invasion of Taiwan? The Ukrainian experience suggests that the Taiwanese would fight back and that China would have to accept heavy casualties — as the west poured in military aid to Taiwan. And while President Joe Biden has repeatedly ruled out fighting for Ukraine, he has suggested that the US would defend Taiwan.

China would also have noticed the near total absence of rumblings and pushback from Wall Street, Big Tech, and big corporate brands at the sanctions. As Alan Beattie has argued here, this may have less to do with ethical qualms and more to do with the legal and operational risks posed by the sanctions. More importantly, this may even trump the large financial incentives western corporates have with China. 

Looking at their operations in Russia and elsewhere, most multinationals seem far more driven directly or indirectly by official sanctions than by sudden fits of corporate conscience... it’s created an environment of such legal and financial hostility that risk-averse companies are staying clear. Being cancelled by indignant consumers is an important issue — that’s probably what’s driving the McDonald’s and Coca-Cola decisions — but many corporates have more fundamental concerns. Will they unknowingly end up doing business with a sanctioned individual? Will they get prosecuted? Will they get paid? They might still earn profits in Russia, but can they get them out?

... The European sanctions on Russia are extraordinarily tough by historical standards, but the US remains by far the biggest player because of Washington’s control of the dollar payments system, including the Swift messaging facility and the long reach of correspondent banking. Compliance becomes so complicated that even if an activity or an entity isn’t specifically sanctioned, any company wanting to retain access to the US banking and payments system needs a strong profit incentive to bother picking its way through the legal thicket.

This should worry the Chinese. It implies that if, propelled by public opinion and strategic considerations, their governments summon the resolve to impose sanctions, the corporates are most likely to fall in line for fear of landing on the wrong side of the law, with all its messy and damaging implications. Profit incentive of losing access to the massive Chinese market may not be enough to hold back companies faced with these legal implications and operational risks. 

Finally, as Beckley and Brands write, the current Russian invasion may well have reunited the western alliance and may even signal a return of Pax Americana. An America recommitted to the liberal order and a reunited western alliance would have been the last thing that China would have wanted at this stage of its emergence as a superpower. 

In shocking them out of their complacency, he has given them a historic opportunity to regroup and reload for an era of intense competition—not just with Russia but also with China—and, ultimately, to rebuild an international order that just recently looked to be headed for collapse.

They draw a parallel with the Korean War in 1950 which woke up America and galvanised the western alliance into pursuing the successful containment strategy of communism and USSR. They paint a picture of the US and allies on much the same complacent mode as now with respect to the Soviet threat.

Even as Cold War crises broke out in Berlin, Czechoslovakia, Iran, and Turkey, U.S. military spending plummeted from $83 billion at the end of World War II to $9 billion in 1948. The North Atlantic Treaty was new and feeble: the alliance lacked an integrated military command or anything approaching the forces it needed to defend Western Europe... U.S. statecraft combined sky-high ambitions with a bargain-basement approach to achieving them... U.S. officials hoped that the United States’ overall military superiority—especially its atomic monopoly—would compensate for weaknesses everywhere along the East-West divide... It took a brazen international land grab to shake Washington out of its torpor. North Korean Premier Kim Il Sung’s assault on South Korea, undertaken in collusion with Mao and the Soviet leader Joseph Stalin, changed everything. The invasion convinced U.S. policymakers that the dictators were on the march and the danger of global conflict was growing. The conflict also dispelled any hope of dividing Moscow and Beijing: Washington now faced a communist monolith applying pressure all around the Eurasian periphery. In short, the North Korean invasion made the Truman administration fear that the postwar world was hanging in the balance...

The Korean War thus turbocharged the emergence of the global network of alliances and the enduring military deployments that constituted the backbone of containment. It precipitated the revival and rearmament of former enemies, Japan and West Germany, as core members of the free world. Underpinning all this was an enormous military buildup meant to make Soviet aggression unthinkable. U.S. defense spending more than tripled, reaching 14 percent of GDP in 1953; the U.S. nuclear arsenal and conventional forces more than doubled.

While there are important differences, the actors are the same - Russia and China on one side, and the US-led alliance on the other side. Brands and Beckley call for the Americans to forge a "trans-regional coalition of democracies" by moving rapidly to capitalise on the outrage and unity created by the Ukraine invasion, while at the same time not "going too far" as to precipitate a direct confrontation. Their exhortation,

Putin’s aggression has created a window of strategic opportunity for Washington and its allies. The democracies must now undertake a major multilateral rearmament program and erect firmer defenses—military and otherwise—against the coming wave of autocratic aggression. They must exploit the current crisis to weaken the autocrats’ capacity for coercion and subversion and deepen the economic and diplomatic cooperation among liberal states around the globe. The invasion of Ukraine signals a new phase in an intensifying struggle to shape the international order. The democratic world won’t have a better chance to position itself for success.

The Russian invasion may have been the right trigger that the Americans and the western allies needed to shed their complacent "strategic lethargy" and summon themselves to demonstrating serious intent in tackling rogue states which seek to infringe the territorial sovereignty of other countries.  

As Paul Romer is reported to have said, "A crisis is a terrible opportunity to waste". The coming weeks and months present an Overton Window which can potentially shape the contours of the world order for a generation. It remains to be seen how much of it will be seized by both the Americans and the western alliance. 

PS: Ramez Naam has a twitter thread on an article by Hu Wei, a Chinese policy maker, which predicts that the war would lead to a return of American supremacy, growth in the power of the western alliance, and further isolation of China and Russia.

Update 1 (16.03.2022)

I've been blogging about the remarkable unity shown by the western democracies and, also, Eastern European countries in rallying against Russia. Two graphics capture the pace and extent of this convergence. This is what FT reported just on February 21, 2022

Peeved at the Polish government's recent decisions to subjugate the judiciary by creating a disciplinary chamber in the executive to punish judges, including the Constitutional Court, for the content of their rulings, the EU had made accessing the Covid 19 relief package (amounting to 36 bn Euros for Poland), conditional on its reversal. 

And just three weeks later, this was reported by The Economist

As the closest NATO member to Ukraine, Poland has become the staging ground for NATO's supplies of weapons to Ukraine. It has also been turned into the country with the second-largest refugee population in Europe. 

From the "brink" to being the "linchpin" in just three weeks!