Economist Brian Easton asks: What do economic events since the Russian invasion of Ukraine tell us about globalisation?

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The economists’ profession has long seen economic interdependence as an alternative to military conflict. A number of trading integrations – the US, the EU and ASEAN – arose out of conflict avoidance. Sometimes one sees the downsides of such arrangements – yes, there are some as well as the upsides – and thinks ‘well, they are not as bad as the war alternative’.

Putin was long aware of this and embarked on a strategy to insulate Russia from the world economy; whether he always had military ambitions or whether he feared invasion, I leave others to discuss.

He knew that Russian oil and gas would be tradeable even under war conditions, they being too important to be shut off (although Iran’s have been). He used the proceeds from them to build a huge war chest of foreign exchange reserves. And he has gone to war.

The economic side has not worked out as he planned. The West has imposed sanctions. As expected they are not on oil and gas. However, Europe is not expecting a lot of Russian gas as it goes into spring. Its reserves and alternative sources will probably get it through summer; what happens next winter is uncertain. The rest of Europe has long been uneasy about its dependence on Russian gas and has been building terminals for shipping more expensive gas from other sources. The system is not perfect. Spain has terminal ports but its network cannot reticulate a lot of gas into France.

Oil at first seem to have got off lightly, but the West’s financial sanctions against Russian banks and their use of the (Swift) payments system seems likely to handicap Russian oil sales. Russia has also been diversifying sales of gas and oil towards China but the physical links are not yet strong enough to take a big expansion.

The financial sanctions have also limited Russia’s war chest. About 60% has been blocked and some of the rest is gold which is not instantly accessible or tradeable.

The West is also blocking access to its goods, which includes technologies, and withdrawing from investing in Russia. These will have not have a quick effect. War plans are often based on quick victories. A long-drawn-out one favours the invaded and the economically stronger West.

 The Russian economy is beginning to tank. In the past economic contractions, the Russian people have faced hardship but have had little redress. This is because they have little say in running the dictatorship. But the taking over of the Crimea shows that many were willing to trade a bit of economic pain for improvements in Mother Russia. (This may be less true in Moscow and St Petersburg, from which our journalists report – if they are allowed. The rural areas may be more patriotic and less globally focused.)

Whatever the views of the Russian people, those who surround Putin are critical. Apparently most oligarchs will not make a major move without his approval, even when they reside offshore. They are being targeted by the sanctions. The exact effect is difficult to judge but surely some of their recent actions are not a part of Putin’s plans. Perhaps some are becoming more independent of him. Whether they and internal forces will destabilise Putin is a matter I leave Kremlinologists to judge, although it is very hard to envisage a Western ‘win’ without ‘regime change’. There is not a lot of talk of this yet.

We need to learn from the mishandling of events after the fall of the Soviet Union in 1991. The mood of those days was dominated by a nasty capitalism which greedily descended upon Russia to profit by hijacking property rights – ‘neoliberalism’ is a genteel name for it. There was little thought given to the social infrastructure on which a modern non-Communist democratic state depends. (I was involved with one project. The tsar owned all the land and so did his successor communist state. That meant there was no comprehensive record of each property's boundaries (cadaster), so that lenders were reluctant to make an advances on a property (mortgages) since the ambiguities meant they could end up in complicated litigation. The Dutch won the tender to provide one.)

A more thoughtful approach would have been a slower unwinding of the communist mess supported by a Marshall-Aid type program in which grants from the West were made to ease the Russian transition. Perhaps this was too idealistic but with hindsight we can see today’s problems arise from the bungled transition.

So we need to signal to the domestic forces contemplating a regime change that we will do better this time; that we will not try to impose capitalism red in tooth and claw, but support them towards evolving a Russian kind of social democracy which is more akin to that in Western Europe. It wont be easy as what has happened to many of the countries from the Soviet Empire which joined the EU show; it will take a long time.

We need to emphasise that the intention is not to humiliate Russia, but to respect Russians and their achievements. I have been particularly disappointed by what has happened to various cultural Russians activities in the West. The first case I saw was the Wolverhampton Grand Theatre cancelling performances of the Russian State Ballet of Siberia. To be clear, had they gone ahead and I had been near, I would have joined the picket line (much more civilly than the protestors outside our parliament) but it would have been with sadness.

I have been intrigued by the numerous cultural events in the West involving Russians, a reminder that the account of globalisation which focuses on the trade of goods is too narrow. This column has also mentioned financial services, cultural services and migration. It could have added information flows.

The great globalisation driver of exports and imports of goods may be coming to an end. It is impossible for exports to continue to grow faster than GDP forever and there will be limitations on services too.* Yet it is going to be a far more integrated world; one in which it is harder to wage war.

Whether it is sufficient to protect Ukraine this time, I cannot tell.

* There are still areas, such as agriculture, which need trade liberalisation, still a need to roll back administrative barriers, still a need for harmonisation and still a need to enforce agreements.

** An earlier dreadful treatment of Ukraine by Russia was the Holodomor famine, described here.

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.