Is the war in Ukraine no more than a patch of cloud in an otherwise bright sky? This seems to be the Panglossian opinion of some elites in Western democracies who, like French President Emmanuel Macron, are anxious not to humiliate Vladimir Putin over a mere peccadillo.
However, fact is that Putin’s war has shaken the global system in ways that might affect us all for a long time to come.
Shaped over the past seven decades, that is to say after the Second World War, what is known as the world order has been based on three principles which, although not always observed, have helped keep the edifice intact.
The first principle was what is known as international law built around the United Nations’ Charter and over 10,000 international treaties and protocols endorsed by a majority of the existing 198 states. The invasion of Ukraine has violated that principle in a dramatic way. Because the aggressor is a veto-holding member of the Security Council, the issue cannot even be handled even formally by the United Nations.
In other words, the court of last resort has its doors shut.
The second principle was consensus in favor of free trade subject to bilateral and/or international accords. It took decades of negotiations at various levels for the General Agreement on Tariffs and Trade (GATT) to morph into the World Trade Organization. With the advent of globalization support for the free flow of goods and capital, and in some cases labor, cut across ideological divides among the larger nation-states.
That principle, too, has been violated as a consequence of the Ukraine war. The ban imposed by some 40 nations on imports of energy from Russia is a clear violation.
So is Russia’s decision to stop Ukraine’s farm exports by blockading its Sea of Azov ports while violating several international conventions on freedom of navigation. We are now witnessing scenes that remind one of the Middle Ages rather than the 21st century. Turkey, presumably with tacit Russian accord, is hoarding Russian and Ukrainian wheat and corn for possible sale on the grey market.
A grey market has also developed around Russian oil with China obtaining discounts in exchange for switching imports from Iran. Meanwhile, Senegal’s President Macky Sall has called on Putin in Moscow to secure a grey market deal on wheat and corn exports for black Africa. Egypt, too, is reportedly seeking a grey market deal to re-stock its grain reserves that are slated to last for four more months.
The third principle, that helped globalization spread all over the world, was the protection of capital by major Western economies. Seizing the assets of people labeled Russian oligarchs, the US and the European Union and their smaller allies have shaken confidence in a system that has attracted trillions of dollars, some of it dirty money, from China, Russia, Ukraine and over 100 other countries to European and American banks and stock exchanges.
Putin has done his bit in that direction by seizing assets of Western companies leaving Russia or, at best, imposing forced sale on them at a fraction of their real value.
Suddenly a global economic system that worked like a clock is hit with numerous hitches.
The “no inventory” culture under which Western businesses operated with down-to-the wire deliveries of goods, industrial parts and raw material is badly shaken. Major economies suddenly discover their dangerous dependence on foreign imports.
That, in turn, has given rise to a new wave of economic nationalism under the slogan of “re-localization”. Suddenly the game of comparative advantage and specialization formed centerpiece in globalization that seems too risk even for the strongest economies.
European television these days is full of reportage about firms that are closing down or reducing the size of their factories in China and the so-called “tigers” of the Third World to manufacture the same cheap products that came from abroad.
Fear of shortages is also affecting China, especially as far as energy and food are concerned.
Beijing is hoarding oil in hastily built reservoirs and even on oil tankers kept at sea. It is also buying farmlands in Africa and Central Asia to grow food for the future.
All that has led to inflation, a monster kept at the door thanks to cheap labor from China and the “tigers” plus cheap energy from Russia, the Middle East, Africa and Central America.
When we say inflation it means a fall in the average citizen’s purchasing power, an issue moving towards the top of the agenda in most Western democracies.
To deal with it Europe, the US and Canada have abandoned decades of dogmatic insistence on balanced budgets and started borrowing on a no-tomorrow basis, distributing what amounts to political bribes to their respective electorates.
How long that spending spree might last is anyone’s guess.
Thanks to Himalayas of floating cash on the global market and historically low interest rates, the policy of subsidizing consumers might continue for a while. But that is bound to fuel inflation further which, in turn, would lead to demands for higher wages, a vicious circles producing stagflation.
Western democracies have deluded themselves into believing that central banks, or Federal Reserves in the US, could always tame inflation with a wink and a nod. And for some two decades that seemed to be the case, making heroes of central bank or Federal Reserve governors.
The former Federal Reserve chief, Ben Bernanke once quipped that what he and other central bankers id was “98 percent talk and 2 percent action.”
In other words when the weather was fair and the sails aloft, the captain could pose as a hero by merely being there.
Now, however, the weather is changing with storms piercing holes in the sails. This means that shock therapy may be needed, especially as the cost of defending Ukraine, now around $5 billion a month, continues to increase.
For his part, Putin is also witnessing a rapid depletion of the war chest he had built, something like $400 billion, in preparation for his adventure. As he owes a good part of his support to the economic boom that Russia has experienced since 2010, demanding that Russians tighten their belts won’t be painless.
Finally, Putin’s war may have damaged the democratic process even in Western democracies. One example is the decision by Sweden and Finland to join NATO after a bland parliamentary debate. The dramatic expenditure on defense, again without adequate debate and public information is another example.
Yet another example is the speedy approval of funds to finance the Ukrainian resistance by governments that played Shylock for decades and now play Cresus.
As you can see, we have more problems than not trying to humiliate Tsar Vladimir.
