Winners and losers from the Ukraine invasion

It's coming to nearly three months since Russia invaded Ukraine. The war is now a stalemate and it appears set to continue for some time. As the fog clears, it may be time to look at who have been the winners and losers from this invasion.

It's easy enough to argue that the biggest loser is Russia. Vladimir Putin's decision to invade Ukraine must rank among the worst miscalculations by any major leader in history. It's surely the biggest strategic blunder by any leader since the war. Over the space of three months, Russia's economic prospects have been pushed back decades. More than the freezing of Russian foreign finances and other sanctions themselves, the actions of western countries have shaped expectations among businesses and investors that are deeply detrimental to Russia's long-term prospects. Besides the economic damage and prospect of extended period of economic and political isolation portend bleak future. This is just a long list of companies which have paused or exited Russia. 

Economically too Russia loses its massive captive market for natural gas, coal, and other commodities. While it'll eventually find other buyers, it will come at a steep cost and with all the uncertainties. Politically, instead of deterring the expansion of NATO, the invasion looks set to expand the boundaries of NATO. It has succeeded in convincing Finland to abandon its 75 years of neutrality and apply to join NATO. 

For decades in Finland’s case and centuries in Sweden’s, the thought of joining a military alliance was all but impossible. Now, in the 81 days since Russia launched its full-scale war against Ukraine, the situation has changed so dramatically that Sweden and Finland are rushing into Nato with large majorities in both their parliaments and populations backing them.

In one stroke Putin has upended decades and even centuries long beliefs and trends, materialising exactly the same scenario that he has sought to eliminate! Talk about self-goals...

It's difficult to imagine Russia being seen as anything other than a rogue state as long as Vladimir Putin remains in power. There are also no signs of his hold on power slipping because of the debacle. And even if Putin leaves after a few years, the damage done to the Russian psyche by NATO encirclement and political and economic isolation would be such that it would harden Russian nationalism and prevent a genuine rapprochement. 

The other big loser is China. In fact, in the final analysis, the Russian invasion and the Chinese actions around it coupled with the latest Covid lockdowns, may have hastened the decline in China's fortunes which (as this blog has held) started with President Xi Jinping's authoritarian turn. The internal and external aggressions of recent years, bullying and wolf warrior diplomacy, and the worsening economic relations with US had already sown the seeds for China's economic slowdown. I blogged here.

The large captive western markets and free access to western multinationals and their technologies already look like things of the past. We are already well on the way to a near total freezing out of China from access to strategically important sectors and technologies. The Covid lockdowns and manufacturing supply chain disruptions have highlighted the need for diversification away from China. Economically too, it was inevitable that the debt-fuelled growth reach its limits. The latest developments may be the final blow. 

The biggest winner appears to be the western democracies. As I have blogged here, the speed with which they mobilised together and the resolve with which they sanctioned Russia puts to rest conversations about the steep decline of United States as a global superpower and the imminent demise of the western alliance.  The Russia-China axis has restored the "enemy" which had gone missing after the collapse of the Soviet Union. 

But the gains go beyond the political realm. The Chinese threat had already started to spur transatlantic cooperation in technology sectors and the Russian invasion will only strengthen the trends. A Trans-Atlantic Technology Council (TTC) has been established to respond "to efforts by the likes of China and Russia to build an autocratic digital world and bring the physical supply chains that underpin it under their control". It has the potential to become the platform for US and EU to co-ordinate digital policies. 

The two sides have created ten working groups, ranging from “technology standards” and “secure supply chains” to “investment screening” and “climate and clean tech”. The structure of the TTC allows the relevant agencies and experts in Brussels and Washington to develop working relationships that go beyond ad hoc encounters that have long dominated transatlantic policymaking. It is a practical forum in which they can resolve their digital differences. Officials once barely knew who was in charge of a given topic on the other side of the Atlantic. Now they can just jump on a video call... The TTC has already helped move negotiations along in several areas, particularly with regard to a new version of “Privacy Shield”, an agreement to create a clear legal basis for flows of personal data across the Atlantic... Another project that has benefited from the TTC is the “Declaration for the Future of the Internet”, which was announced on April 28th and signed by more than 60 countries.

The combination of shocks from the Russian invasion and the supply chain disruptions due to Chinese Covid lockdowns and worsening relations with China, means that supply chain re-alignments and reshoring will be hastened. It's no longer a matter of whether such re-alignments will happen, but what will be the degree of re-alignment and diversification away from China. 

Reshoring will revive manufacturing in the west and create jobs. It'll certainly bring back several parts of the manufacturing supply chain. The Cold War will make the western economies refocus on control over critical technologies. All this spur domestic R&D and investments. It's already in motion in several areas, semiconductors being only the most prominent of them. 

Then there is the energy recalibration away from Russia. This has the potential to foster innovation, spur investments, and create jobs across Europe and the US. There will be greater investments in green energy technologies to substitute away from Russian coal and large expansion LNG terminals across Europe. 

Fundamentally, such reshoring and diversification will also mean companies shift away from efficiency maximisation at all costs towards a strategy that combines the pursuit of efficiency with resilience. The result will be higher costs, lower profits, and higher prices for western businesses and consumers. Interestingly, this pain has the promise of laying the foundations for a revival of economic dynamism and more equitable and sustainable economic growth in the western economies.