Is the war in Ukraine nothing more than a cloud in an otherwise bright sky? Such seems to be the Panglossian view of some elites in Western democracies who, like French President Emmanuel Macron, are keen not to humiliate Vladimir Putin for a mere peccadillo.
However, the fact is that Putin’s war has shaken the global system in ways that could affect us all for a long time.
Shaped over the last seven decades, that is, 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 to maintain the building intact.
The first principle was what is known as international law built around the Charter of the United Nations and more than 10,000 international treaties and protocols approved by the majority of the 198 existing states. The invasion of Ukraine dramatically violated this principle. Because the aggressor is a member of the Security Council who holds the right of veto, the issue cannot even be dealt with, even formally, by the United Nations.
In other words, the court of last resort has closed its doors.
The second principle was consensus in favor of free trade subject to bilateral and/or international agreements. It took decades of negotiations at different levels for the General Agreement on Tariffs and Trade (GATT) to become the World Trade Organization. With the advent of globalization, support for the free movement of goods and capital, and in some cases labor, has transcended ideological divides between major nation states.
This principle was also violated following the war in Ukraine. The ban imposed by some 40 countries on energy imports from Russia is a flagrant violation.
The same goes for Russia’s decision to stop Ukraine’s agricultural exports by blockading its ports in the Sea of Azov while violating several international conventions on freedom of navigation. We are now witnessing scenes reminiscent of the Middle Ages rather than the 21st century. Turkey, presumably with Russia’s tacit agreement, is stockpiling Russian and Ukrainian wheat and corn for possible sale on the gray market.
A gray market has also developed around Russian oil, with China getting discounts in exchange for transferring imports from Iran. Meanwhile, Senegalese President Macky Sall has called Putin to Moscow to strike a gray market deal on wheat and maize exports to black Africa. Egypt, too, is reportedly seeking a gray market deal to replenish its grain reserves which are expected to last another four months.
The third principle, which helped globalization spread around the world, was the protection of capital by the major Western economies. Seizing the assets of people branded as Russian oligarchs, the United States, the European Union and their smaller allies have shaken faith in a system that has drawn billions of dollars, some of it dirty money, from China , Russia, Ukraine and more than 100 other countries for European and American banks and stock exchanges.
Putin has done his part in this direction by seizing the assets of Western companies leaving Russia or, at best, imposing a forced sale on them at a fraction of their real value.
Suddenly, a world economic system that was running like clockwork is hit with many problems.
The culture of “no inventory” in which Western companies operated with run-of-the-mill deliveries of goods, industrial parts and raw materials is seriously shaken. Major economies are suddenly discovering their dangerous dependence on foreign imports.
This, in turn, spawned a new wave of economic nationalism under the slogan of “reshoring”. Suddenly, the game of comparative advantage and specialization has become the centerpiece of a globalization that seems too risky even for the strongest economies.
European television today is full of reports of companies closing or downsizing their factories in China and of the so-called Third World “tigers” to produce the same cheap goods that came from abroad.
The fear of shortages also affects China, particularly with regard to energy and food.
Beijing is storing oil in hastily built reservoirs and even on tankers held at sea. It is also buying up farmland in Africa and Central Asia to grow food for the future.
All of this has led to inflation, a monster kept at the door thanks to cheap labor from China and the “tigers” as well as cheap energy from Russia, the Middle East , Africa and Central America.
When we talk about inflation, it means a decline in the purchasing power of the average citizen, an issue that comes close to the priority in most Western democracies.
To deal with it, Europe, the United States and Canada abandoned decades of dogmatic insistence on balanced budgets and began borrowing without a future, doling out what amounted to political bribes to their respective voters.
No one can guess how long this spending spree might last.
Thanks to the Himalayas of liquidity floating in the global market and historically low interest rates, the consumer subsidy policy could continue for some time. But this is bound to fuel further inflation which, in turn, would lead to demands for higher wages, a vicious circle producing stagflation.
Western democracies were mistaken in believing that central banks, or the Federal Reserves in the United States, could always get inflation under control with a blink of an eye and a nod. And for about two decades, that seemed to be the case, making central bank governors or the Federal Reserve heroes.
Former Federal Reserve chief Ben Bernanke once joked that what he and other central bankers identified was “98% talk and 2% action.”
In other words, when the weather was good and the sails high, the captain could make himself look like a hero just by being there.
Now, however, the weather is changing with storms punching holes in the sails. That means shock therapy may be needed, especially as the cost of defending Ukraine, which now stands at around $5 billion a month, continues to rise.
For his part, Putin is also witnessing a rapid depletion of the war chest he had amassed, something like $400 billion, in preparation for his adventure. Since he owes much of his support to Russia’s economic boom since 2010, demanding that Russians tighten their belts will not be painless.
Finally, Putin’s war may have damaged the democratic process even in Western democracies. An example is the decision of Sweden and Finland to join NATO after a bland parliamentary debate. Another example is huge defense spending, again without adequate debate or public information.
Yet another example is the rapid approval of funds to finance the Ukrainian resistance by governments that have played Shylock for decades and are now playing Cresus.
As you can see, we have more problems than not trying to humiliate Tsar Vladimir.