What Ukraine Is Teaching Us About Geoeconomics

Tai Ming Cheung

Given that we’ve come all this way and we have all these smart people with brilliant insights, we wanted to have an open round table to look at the implications of the Russia-Ukraine war and what it means for the economic, innovation, and national security order. What are the impacts, both in terms of the policy implications, and for us as academics? What is the research agenda for us to think about going forward?

 

James Lee

I’m not generally a fan of the “new Cold War” analogy, but it seems to me that with the Russia-Ukraine crisis, there is a historical parallel in terms of the Korean War, where, initially, it was believed that authoritarian power spread primarily through political and economic means, similar to the initial periods of great power competition where there was a focus on the geoeconomic means of expanding influence. But now we’ve entered a much more militarized phase of this period of great power competition.

The question for me is whether the existing institutional frameworks that we have left over from the Cold War are enough for the United States and its allies to respond to current challenges?

 

Tai Ming Cheung

The economic warfare that we’re engaged in today—and we’re still in the early chapters—is on a scale and intensity and ferocity [unlike before], and just very, very different from what we’ve seen at any time during the Cold War. We have to go back to World War I and World War II to see economic warfare in terms of its completeness, comprehensiveness, and intensity [like we see today].

 

Marc De Vore

Being somebody who mostly studies guns and bombs, there are two things that really strike me as different about this conflict. One is, that it’s becoming exceptionally long as high-intensity interstate conflicts go. If you think of wars since the Korean War, there are either long insurgencies or civil wars or there are very short interstate waters. The India-Pakistan Kargil war was 84 days; the Kosovo war was 78 days; the Gulf War was, I think, 42 days; the 2003 invasion of Iraq until the collapse of the Iraqi military was 42 days; the 2006 Lebanon war was 32 days; and the ‘73 Arab-Israeli war was 16 days, I think. If you go through these conflicts, they all end in less than 90 days.

Another difference is that this is the first conflict involving quasi-alliances. NATO and the EU are not participants in the war, but they’re clearly involved and not neutral. Russia has a series of partnerships— the cooperative treaty organization and its strategic partnership with China—which are also in play.

One of the questions this war raises is: what does the war’s outcome mean for the U.S. pivot toward Asia? And I think that raises two other questions. One is: how diminished will Russia be at the end? Since Barack Obama, the U.S. has been trying to pivot towards Asia because China is clearly the larger and more significant long-term competitor. But Vladimir Putin is sticking around Eastern Europe and kicking the Western order in the shins. That has made it very difficult to pivot towards Asia. On the other hand, if this war ends with Russia being a crippled power, then, in that sense, pivoting towards Asia is going to be much were easier if what one is dealing with in Europe is a very weakened Vladimir Putin with a decrepit military that can’t reconstitute itself.

The second question this war is raising is: how effective are our sanctions at preventing a state from engaging in war making? Stephen Brooks some time ago, wrote intelligently and provocatively that supply chain dependencies are going to make great power invasions impossible, because a great power, once it goes to war to seize territory, is going to be hit by sanctions which are going to make it impossible to continue producing sophisticated military hardware and therefore they’re going to be more likely to lose. That’s being tested at this moment. Russia can’t import electronics and subcomponents for a lot of weapons systems, so the question is: how long will that take to really affect their war-making capability? Can they find workarounds or does this mean that the threat of commercial sanctions basically does make it difficult to wage prolonged wars of conquest?

There’s a third question: what does this mean for nuclear proliferation? There’s been an implicit bargain since the Nuclear Non-Proliferation Treaty that a lot of states agree not to acquire nuclear weapons in exchange for nuclear states agreeing not to use them against non-nuclear states. And this was a very specific part of the Budapest Memorandum with Ukraine. Russia has breached that agreement by repeatedly threatening to use nuclear weapons, which could be an argument for other states to want to acquire nuclear weapons. On the other hand, Russia has not used these nuclear weapons likely because it can’t figure out an advantageous way to do so. So I can see the war either incentivizing proliferation because states look at this and say, “The only way not to be threatened by nuclear weapons is to have them ourselves,” or I could see states saying, “Here we have a country that has repeatedly made nuclear weapons central to its National Security Strategy, has the world’s largest nuclear arsenal, and what do they get from for it? Almost nothing.”

Final question. I think this war should lead us to question the nature of the offense-defense balances at this moment? Did Russia’s invasion fail simply because the Russian military is corrupt and undertrained, or have military technologies shifted such that the defense has become a lot easier than the attack? I don’t think this question can be answered at present; I think we will see once the Ukrainians start trying with Western weaponry to retake ground. But if the state of military technology privileges the defense that could mean that we’re heading into a more peaceful world.

 

Giulio Pugliese

I see a growing trend, which, first and foremost is the rebirth of the West, at least in the very short term and in a sense that includes Japan. There is also an end to the idea of “change for trade,” which includes the relationship with China. Public opinion being enraged, especially in Japan and Germany, has led to greater ease and willingness to legitimize weapons transfers and to increase the security focus vis a vis China. The acquisition of offensive capabilities and the willingness to align and lump techno-autocracies versus techno-democracies are coming into some kind of realization. There is growing politicization and ideology underpinning our economic interests that are influencing decisions to align with the West vis a vis China. These dynamics are evidenced by statements made by the President of the Federation of German Industries who stated in an interview that “unilateral dependencies are dangerous in this world of systemic competition, and we must overcome them where they exist today and avert them where they threaten in the future.” These calls have been echoed by major political players, including Germany’s Finance Minister who stated that “Perhaps the time has come when we should give preference to doing business with those who are not only trading partners but also want to be value partners.” So you see that, even the EU’s tripartite approach to China—defining it in 2019 as a “partner for cooperation and negotiation,” an “economic competitor,” and a “systemic rival”—is moving slightly towards systemic rivalry, even in the EU’s core member—Germany—and this is facilitated by the war in Ukraine, because the joint statement of February, which Xi Jinping and Putin announced, is increasingly seen as enabling Russia’s aggression.

 

Etel Solingen

The “systemic competitor” language was already in a 2019 EU document. The terminology was there, so it’s not simply a post-Ukraine position. However, the problem of collective action is going to rear its ugly head sooner or later, and may already be rearing it. Even Italian Prime Minister Mario Draghi seems to be breaking some of the consensus on the new approach to Putin and oil, so that doesn’t look good.

 

T.J. Pempel

I want to turn back to the question of how this Ukraine-Russia interaction plays out in terms of state strategies vis-a-vis economics. We’ve seen a lot of economic cooperation, but at the heart of some of the questions you’ve been asking is this notion that nation-states are going to be predisposed to look for national economic security, which will mean developing a capacity for relative strength—independent strength—vis a vis global changes. The difficulty is that most states can’t do this, and there’s a strong impulse toward economic cooperation along the technological gradient that will allow states to make up for their potential deficiencies. We’ve talked at this conference about semiconductors and it seems pretty clear that no state, even if it does make major moves in that direction, is going to be capable of complete autarky in a whole host of these high-tech areas.

The second piece of this relates to domestic politics in the U.S. What we’re seeing in the United States is a growing resistance on the part of segments of the Republican Party to the development of international support for Ukraine. We’re seeing resistance to U.S. aid for the military, and we’re seeing much broader isolationism that goes back to the MAGA mentality. This has a ripple effect in terms of how other states will perceive their capacity to rely on the United States economically. The idea of the U.S. as a reliable economic and security partner is very much at risk.

 

Tai Ming Cheung

On the one hand, the Russians, following comprehensive sanctions, are emphasizing the importance of both autarky, self-reliance, and militarization of their economy. But even as they talk about autarky, they are also talking about the need to significantly intensify their economic ties with China. And the question is how great the dependency on China will be. China and Russia may be ideological friends, but there’s a lot of distrust between these two sides, which is why they have not decided to engage in a full-fledged alliance, whatever XI Jinping and Vladimir Putin might have said.

 

Will Norris

Of all the large potential authoritarian problems the good guys worry about in the world, Russia is probably one of the least well-integrated globally. I mean North Korea hasn’t been, but in terms of imposing economic warfare, Russia is probably about as easy as it’s going to get [for the West]. So my comments are going to be a little more pessimistic than what we’ve heard so far.

Marc, I agree that the duration is different, but I’m not sure that, on the military side, the Ukraine experience teaches us all that much that’s new about the nature of warfare in contemporary times.

The thing that is different is the economic side, where there’s really a full-scale mobilization that we haven’t seen for a long time. But I’d caution us from thinking that we can cut and paste what we’re doing with Ukraine over to China. It’d be a mistake to think that you’ll have the same alliance dynamics, or the same level of isolation and marginalization.

 

Marc De Vore

I think it’s really interesting that it has become an attritional conflict because that was not what most expectations internationally have been about what occurs when a great power attacks a much weaker military. If I was polled before this thing began, and if many others were, I think the general expectation would be that a Russian invasion of Ukraine would be easier and more likely successful than a Chinese invasion of Taiwan. Ukraine was traditionally considered ideal tank territory; the Ukrainian military was considered much weaker.

The war does [upset] a lot of the assumptions about shock and awe campaigns. Russia’s fired 1,200 or so long-range standoff cruise missiles and things like that. Some of the fears of a campaign against Taiwan center on a lot of missiles coming in, which would basically take out the Taiwanese air force on day one. Yet, the Ukrainian air force is still flying. Despite facing an enemy that numerically has a much larger, and on paper, much more sophisticated set of airstrike and counter-air capabilities. So I think this challenges some of the assumptions about how easy it was to wage offensive wars.

 

Friso Stevens

I would say that irrationality of identity and nationalism, so ideas and popular pressure on regime legitimacy, can trump—and in China’s case is likely to trump—long-term economic interests, so basically the liberal assumption of wanting to remain engaged in the global economy.

Another thing that makes the Cold War analogy a misfit is the ideological appeal that is lacking. Before the president-for-life power grab by Xi, some soft power with respect to the China model and traditional Chinese culture [existed], but I would say there’s almost zero left. And Russia similarly with this war crime [has no soft power]. So I think for the new block forming that ideology and an appeal would be absolutely crucial and it’s just not there. I think there will be abstaining countries, especially in East Asia that are what I would say Finlandized, like Cambodia and Laos.

I was surprised that the West was still so powerful. I was wrong in the assumption that we were moving to a multipolar world and not a world where the U.S. and Europe to a lesser extent, could destroy Russia’s economy so quickly. But the American narrative of autocracies versus democracies has a self-fulfilling logic and it’s counterproductive. The EU is also mimicking that, unfortunately. NATO’s also designating China as an enemy, which is also not helpful. From the European perspective, the EU militarizing the relationship with China is undesirable.

 

Laxman Kumar Behera

This war has many implications for India’s strategic posture. Ideally, India would have liked a normal relationship between Russia and the West. The war has created a lot of economic difficulties, particularly through the hike in oil prices and through its cascading impact on general inflation, and this is a big concern for the government which is going to face the general election in the two years’ time. The government is taking it very seriously and is trying to contain the inflation through subsidies, but obviously it has implications on the fiscal balance.

The second implication is on India’s defense preparedness, which has been affected in two ways. One is through sanctions. There are sanctions on Russian banks, and so the Indian government has difficulty in paying for Russian defense supplies.

The war has also disturbed Russia’s companies’ focus on executing contracts with India, and there are certain delays and some modernization projects that have been affected.

But the biggest geopolitical fallout of the war is Russia and China coming together. As Tai said, Russia is increasingly becoming the junior partner of China and that will have implications for India because China is India’s biggest strategic rival and historically, Russia has been a big supporter of India in various forms, including in the UN Security Council. Going forward, it’s unclear whether that will be the case. The key factor that will drive India’s relationship with Russia will be the Chinese factor.

Russia forming a strong partnership with China has not been to India’s strategic advantage. Having said that, India knows that its future lies with the West. Strategic concerns about Beijing is increasingly pushing India closer to the U.S., Europe, and other countries, particularly, Australia and Japan. At the same time, India will also try to retain a degree of strategic autonomy which that has been India’s DNA for a long time.

On sanctions on Russia, India won’t be party to the West-led geoeconomics order because India itself has been a victim of sanctions in the past. So India will try to maintain some balance of autonomy, but I think its future lies more with the West than with Russia.

 

Bernard Hoekman

A few thoughts. One that is short-term is how this is exacerbating the inflation shock. We already had COVID effects on inflation in terms of supply chain shortages, etc. Now we have the food, fertilizer, and energy shocks. The big implication is dealing with political risk, and firms are already doing that. As you know, the World Economic Forum is still meeting and that’s something that came out very clearly from all of the CEOs. Reshoring or friend-shoring or reallocating and redesigning our supply chains—clearly that was already ongoing and is going to become [even] more [important]. The real question is: What does friend-shoring mean, to use Janet Yellen’s term? For all the politicians who would like to see everything being produced at home—complete vertical integration of production—that’s not going to happen, if only because doing so is not going to achieve the objectives. Where do they [firms] go, how do they do it, and are governments going to support this? Are governments going to incentivize firms to do it?

Another thing we’re going to see is analogous to what we saw after the Asian financial crisis. Countries are going to think very differently about self-insurance. Who knows how long this will take, but I think there really is an incentive here for those who are not comfortable with the U.S., to move away from the dollar and think about other systems they can use to pay for their imports and get paid for their exports.

Another thing, which is interesting, and which relates to climate change… we’ve had this huge energy shock. We’re confronting prices that we’d actually want to see [if we were attempting] to induce economies to become greener, to shift towards renewables. This is going to be an interesting natural experiment—to what extent will governments keep those prices high in order to continue that shift? How much are people willing to pay to fight climate change?

A final thing that I personally think is quite interesting, in terms of teasing out the implications from an economic perspective, is that you suddenly see the 21st century being tested. In Putin’s mind, this is all about energy—it’s about natural resources. It’s very much a 19th-century view of the economy. Whereas, in fact, a lot of what was going on in Ukraine involved software and services related to the digitalization process, and that continues despite the war. Now, of course, you need the Internet to do that, so you can shut all that down if you really want to. But in terms of thinking about resilience and the consequences of these types of events, it gives us an opportunity to think more about the fact that Ukraine was not just a wheat, fertilizer, or energy exporter, but was heavily involved in 21st-century economic activities such as software engineering. To what extent is that [relevant to] self-insurance and resilience? What kind of a structure of an economy would we like to have? Where do we need to diversify? Where do we want to intervene; where do we want to do things that will make us more resilient to these types of shocks?

 

Eli Berman

I want to add just one thing, which is that, if this war goes on, as it looks like it will, Russia’s economy could start to collapse for lack of spare parts. The demonstration value of that collapse might be that, in two or three years, people will look back and say: this was a war that was won by the sanctions  –an unprecedented event.

Granted, there was a period in between the World Wars where trade embargoes were strong, but trade in intermediate goods, and financial markets make economies more interlinked now, and more vulnerable. We’re in a world where the hundred designers of chip manufacturing facilities in Taiwan are critical to global supply chains. Russia is no longer the simple command economy that the neo-Stalinists want to make great again. Its consumers use imported smartphones and cars, full of chips. Its military is also dependent on imported parts and components.

People are going to look back and say: Wow, the authoritarians really killed that place, didn’t they? It was an economy with remarkable human capital and now it’s a dinosaur, like North Korea. I think that’s going to make countries reconsider not just their economic models, but also the models of authoritarian regimes, because of the effect on human capital. Refugees from Russia who you see now everywhere, not just in Europe, but also in Israel, are highly educated, angry, and disappointed people whose lives fell apart. Just like that. They thought that they could deal with the regime but now that hope is gone. They’re very, very talented people. The demonstration value of this authoritarian debacle may end up being the most important part.

 

Barry Naughton

Let me start where Eli finished. What probability would you attach to that outcome [a Russian collapse]? Because there are like three other possible scenarios right now.

We received four wonderful pieces of news in response to this horrible Russian invasion. That the strength of the Ukrainian people was astonishing, the fact that the Ukrainian command and control system didn’t get destroyed—that was amazing. The fact that the military equipment that Ukraine had and their ability to use it; that they were able to stand up to the Russians—that was amazing. And the fact that all of the developed countries could hold together in an unprecedented set of sanctions—wow, that’s fantastic right?

This is all incredible. But the war’s not over. I mean I’m no expert on sanctions, but it seems to me the sanctions are working, but barely.

 

Eli Berman

Right. I could be wrong on this and I don’t have any inside information. But Russia is still a complex consumer economy. Almost everything they plug in has chips in it, and when you can’t get those anymore, then everything stops working.

 

Barry Naughton

Yeah, and in the meantime, the Ukrainians are taking, what, 200 casualties a week?

 

Eli Berman

I’m not minimizing Ukrainian losses, or the global hunger that’s going to come from this war stretching on and on. If it were finished tomorrow that would be awesome. I’m just saying that a Russian loss eventually enabled by sanctions would indicate that geoeconomics is more potent than we realized. Perhaps much of NATO’s effort on the military side could be replaced with economic incentives.

 

Etel Solingen

I don’t know whether sanctions will work, and there’s a big debate about whether or not they work, and about what kind of outcome would be enough for somebody to say that sanctions did work. The outcome for some seems to be regime change (Putin’s ouster), but there are other outcomes that are unleashed by sanctions, second- and third-order effects that might have positive consequences from the perspective of stopping or deterring bad behavior in the future. I discussed that standard of evaluation of the effects of sanctions in Sanctions, Statecraft, and Nuclear Proliferation (Cambridge UP) which was also connected to IGCC.

There is a tendency to be tough in the literature and say that “sanctions don’t work”—that’s kind of the default position in political science and international relations. But one thing I think is clear is that what Europe does will be a defining input, with important consequences for the half-life of sanctions as we see them today. Europe will be crucial in the rest of this process.

 

Barry Naughton

I didn’t mean my comment to be that we were on opposite sides of this I just mean, in this discussion, it seems to be the thing that we haven’t discussed enough, because of the way we want things to be. But we might not prevail in this. I mean, I think there’s a 30 percent chance that things are going to go to hell.

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