Russia’s apparent preparation for a full-scale invasion of Ukraine may be the world’s gravest foreign policy challenge. But there is an economic dimension to this crisis too. Indeed, what is playing out in southeastern Europe is better seen as part of the wider crisis of globalisation.
It is the latest manifestation of the way in which financial policy and foreign policy, which for decades operated in largely separate spheres, are increasingly converging in ways that create further geopolitical instability. How this crisis of globalisation is resolved will have profound consequences for the global economy, business and investors.
In many respects the long-running conflict in Ukraine has always been about globalisation. It began in 2014 when President Putin sent his proxies to annex Crimea and occupy the Donbas region in an attempt to prevent Kiev signing a trade deal with the EU, which promised to set the country on a path of economic development similar to fast-growing neighbours such as Poland.
That effort failed, even if the cost of the war and the loss of two of its most industrialised provinces left Ukraine severely economically weakened. And while Ukraine still falls short of western standards of governance, today under President Zelensky it is a vibrant democracy that has made significant progress towards tackling endemic corruption and introducing the rule of law. Hence why Putin has intensified his efforts to destabilise Ukraine, lest its continued successful trajectory gives confidence to domestic opponents of his own authoritarian regime in Russia.
But there are two ways in which this crisis has economic ramifications well beyond the region, feeding into the wider crisis of globalisation. The first is the nature of the western response. Unable or unwilling to threaten a credible military response to a Russian invasion, President Biden, with the backing of his British, French, German and Italian counterparts, has threatened Russia with “strong economic and other sanctions”. Such sanctions would include measures such as denying Russia access to the global financial system and cutting its banks off from the Swift payments network, as well as cancelling the Nord Stream 2 gas pipeline that would allow Russia to transport gas directly to Germany, bypassing Ukraine and thereby denying it vital transit revenues.
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Whether these threats will be sufficient to deter Putin remains to be seen. Certainly Russia has endured western sanctions for many years. It must also be an open question whether western countries would be willing to implement such sanctions, given the high costs it would impose on western companies. Nonetheless, in an era of hybrid warfare, the weaponisation of financial linkages has become the West’s preferred alternative to military action. As the global financial system has deepened in recent decades, with the dollar at the heart of it, so the power of this weapon has increased, along with the willingness of American presidents to use it. The sanctions being threatened against Russia are similar to those imposed by former President Donald Trump on Iran, crippling its economy.
Yet there are good reasons why US Treasury secretaries have become concerned about where this reliance on the sanctions weapon might lead. As things stand it is hard to imagine a global financial system without dollar hegemony. But global acquiescence in dollar hegemony depends on America’s willingness to operate its financial system as a global public good so that governments can have confidence in their access to global pools of liquidity. If that confidence erodes in the face of threats of sanctions, governments will seek ways to build resilience, if necessary by trying to circumvent the dollar system. China’s efforts to create a digital currency may yet provide such an opportunity. However it is done, any fragmentation of the global financial system will carry economic costs.
The second way in which this feeds into the crisis of globalisation also concerns economic linkages, in this case the way oligarchs and kleptocrats from Russia and other post-Soviet states have been able to launder money looted from their countries via the western financial system. It is this illicit finance that sustains the Putin regime and enables him to interfere in the political systems of not just neighbours but America and Britain too. As the intelligence committee’s Russia report last year noted, the global capital of money laundering is the City of London, which threw down a welcome mat to the world’s kleptocrats, allowing them not only to stash their fortunes in Britain but buy their way into the establishment.
Any truly effective sanctions regime would seek to shut down this London laundromat. Indeed a new report by Chatham House published yesterday sets out a number of ways in which this could be done. Those include mandatory reporting of transactions involving “politically exposed persons” over a certain value to the National Crime Agency, rather than relying on advisers to report on suspicious activities; requiring all UK-registered companies to have at least one UK citizen or resident as an officer bearing liability for any impropriety; investigation and penalties for those who submit fraudulent information to Companies House; greater use of unexplained wealth orders; and the use of anti-corruption sanctions to target the enablers, including lawyers, bankers, estate agents and PR executives, who keep the laundromat running.
Yet for all the government’s hawkish rhetoric on Russia, and its claims to be at the forefront of the defence of western values, it has failed to deliver on its own limited promises to toughen London’s rules. It has still not legislated to introduce a register of the true owners of British properties or increase transparency of Companies House.
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Meanwhile none of the committee’s recommendations have yet been implemented. Perhaps that is not surprising given how much of the Conservative Party’s funding is of Russian origin. But as geopolitical tensions grow, so too will the pressure on Britain to address this unwelcome feature of globalisation by taking on powerful vested interests despite the cost to the domestic economy. Ukraine’s fate, and even that of the West itself, will be decided partly in London.
