It’s the Politics, Stupid!
Russia’s invasion of Ukraine may go down in history as the moment in the current geopolitical cycle when politics took over from economics as the main decision-making driver. The next manifestation of this may be an early EU embargo, in whole or part, of energy imports from Russia despite the economic consequences.
People keep acting apparently against their own self-interest, from Brexit voters making themselves poorer to antivaxxers risking death, to the Russian state destroying the wellbeing of its citizens.
Simon Kuper, Financial Times, 31 March 2022
A 28 February article in The New Yorker by John Cassidy begins as follows:
When Vladimir Putin was a schoolboy, one of his biographers tells us, he spent a lot of time reading the works of Marx, Engels, and Lenin, all of whom regarded economics as the driving force of history, and political forces as secondary. Evidently, the future Russian leader took these lessons to heart. In ordering an invasion of Ukraine, he apparently assumed that the countries of Western Europe were so dependent on Russian energy imports and so economically beholden to the Kremlin that their governments wouldn’t introduce sanctions that would do serious harm to the Russian economy.
Thus, it would probably be going too far to describe Mr Putin as an economic illiterate (a description which one could reasonably apply to a significant number of other autocrats!). Remember the 2000 Gref Plan? However, the true author of the plan, Herman Gref, stepped down as Economics Minister in 2007 (he is now Chairman of Sberbank), and for Russia’s economy it has been pretty much downhill all the way since shortly thereafter. As Ben Aris and Ivan Tkachev noted in a wide-ranging article on the Russian economy under Mr Putin’s stewardship for the (independent) Moscow Times in August 2019 (ie the twentieth anniversary of the start of his brief first sojourn in the Prime Minister’s office):
In the 10 years from 1999 to 2008, Russian GDP grew by 94% and per capita GDP doubled. The value of the economy rose from $210 billion in 1999 to a peak of $1.8 trillion in 2008. The crisis knocked the value back to $1.2 trillion and with the stagnation now the economy is not expected to get back to $1.8 trillion until 2023. Looking at Russia's share in global GDP, Russia has returned to where [Mr] Putin started in the late 1990s. Russia's role in the global economy was at its peak in 2008, but Russia is now in danger of getting left behind as the rest of the world grows faster than Russia does.
To be fair to Simon Kuper, quoted at the start of this essay from an article which I highly commend, it is not entirely clear whether, in citing “the Russian state destroying the wellbeing of its citizens”, he is referring exclusively to the invasion of Ukraine; or if he also has in mind Mr Putin’s overall management of the Russian economy. However, I am not sure it matters. In either case I would argue that (putting to one side personal enrichment which is certainly a long-standing self-interest), Mr Putin has consistently been acting in what he considers to be Russia’s best long-term interests. Furthermore, as the second sentence in the quote above from the Cassidy article implies (to my mind, at least), Mr Putin’s error over Europe’s response to the invasion was, essentially, a political, rather than economic, one (and one in which he was far from alone).
In this respect, as he sets about considering why “opponents of [the aforementioned] movements, like me, keep failing to foresee their next illogical choices”, Mr Kuper hits the proverbial nail squarely on the head as follows:
The first is the self-interest fallacy: the notion that people will always choose their own economic advantage. From Karl Marx until 2016, it was widely believed that ‘it’s the economy, stupid’ — an analytical error that I kept making. Almost the only argument of the Remain campaign ahead of Britain’s referendum was that Brexit would make the country poorer. But post-referendum research by academics Roger Eatwell and Matthew Goodwin showed that most Leavers cared more ‘about perceived threats to their identity and national group’. I’ve finally grasped that when people have to choose between their status, their income or life itself, many choose status, suggesting Russia’s elite might prefer European war to status-destroying retreat.
I have recently crossed a similar watershed in my own thinking. As some readers may be aware already, I have been lecturing on and writing about globalisation and what to expect at the end of a geopolitical cycle for 15 years or so now. In so doing, very often my starting point has been the tectonic shift from west to east in the global economic centre of gravity which has been ongoing since about 1980 and which has accelerated greatly since China joined the World Trade Organisation in December 2001. I have consistently argued that where economics has been leading geopolitics would inevitably follow, marking the end of the geopolitical cycle which has been dominated by the United States’s hegemony since 1945. As Ronald Findlay and Kevin H O’Rourke describe in Power and Plenty (2007), their history of globalisation throughout the last millennium, the end of such cycles — concurrent with the fall of a hegemony — is marked by, inter alia, rising barriers to trade and a surge in what we would today call nationalism. Furthermore, a frequent consequence of this is war, i.e. what Graham Allison has termed ‘Thucydides Trap’, which is surely the moment when politics visibly and conclusively takes over from economics as the principal driving force in geopolitical decision-making.
Focussed as geopolitics has been on China/US in this context, even now we seem to have failed explicitly to spot that this is where Russia, under Mr Putin, finds itself today, i.e a nation state in relative, if not absolute, decline electing to start a war in an attempt to arrest that decline. In mitigation for our failure:
a) The war which Mr Putin has chosen to fight is with a smaller and weaker nation state rather than directly against the EU or Nato — but it remains one which is clearly aimed ultimately at re-establishing Russia’s lost hegemonic status in central and eastern Europe; and,
b) Despite the (admittedly surprising) strength of the Western response to date, we have been distracted by the relative (in global terms) weakening of the West and the reliance which Mr Putin himself seems to have placed on this in determining his move against Ukraine.
So, not quite ‘classic’ Thucydides Trap as defined by Professor Allison; but, to my mind, a clear case of history rhyming.
Thus, accepting that one of Mr Putin’s top priorities — and, therefore, a key factor in his starting a war — is reestablishing Russia’s geopolitical standing in the world, even at the expense of its economy (and no matter how questionable such thinking may be), it is perfectly logical in the current circumstances that he demand that “unfriendly countries” pay for Russian gas and oil in roubles. Yes, it is almost certainly the case that this move stands to be a further blow to Russia’s longstanding status as a reliable supplier of energy and therefore to the country’s longer-term economic wellbeing. But, as a 31 March FT leader acknowledged, his move was “heavily political” offering him a small propaganda victory domestically at, seemingly, no immediate economic cost to Russia itself — indeed, perhaps even some marginal benefit by further boosting the ongoing recovery in the rouble — and, thanks to a certain amount of sleight of hand involving (unsanctioned) Gazprombank, an in-built workaround which would be acceptable to Western importers.
If the clock had stopped at this point, flows of Russian coal, oil and gas to Europe (worth around USD108bn in 2021, close to a quarter of which is accounted for by Germany alone) would have almost certainly continued much as before, at least pending major steps by the Europeans to reduce their energy dependence on Russia. But, of course, it did not.
The withdrawal in the past few days of Russian forces from around Kyiv has uncovered credible evidence of extensive war crimes in formerly occupied areas. This has, in turn, added to the already non-negligible pressure on Europe to embargo, in part if not in whole, energy imports from Russia. In short, to take a major step primarily for political reasons which would run entirely contrary to Europe’s short- to medium-term economic interests.
This being said, French President Emmanuel Macron was almost certainly demonstrating an admirable grasp of real politik in proposing on 4 April a more or less immediate EU-wide ban only on imports of Russian coal and oil, i.e. leaving gas sanction-free for now at least. Similarly, the European Commission in its subsequent proposal to embargo coal only for now. They are both no doubt well aware that, although it is Germany (to which I shall return) which is very much the centre of attention as far as objections to sanctions on gas are concerned, other EU Member States are happy to let Berlin take the lead — and the rap — on their behalf. (Indeed, the real barrier to unanimity is likely to be not Berlin but Budapest where Prime Minister Viktor Orbán, who prides himself on his close relations with Mr Putin, may prove even more difficult to keep on board following his unexpectedly resounding general election victory on 3 April.)
Nevertheless, I still expect to see significant steps taken following the 6 April meeting of EU Ambassadors towards embargoing energy imports, with further pressure being brought to bear on waverers at the 6/7 April meeting of Nato Foreign Ministers at which both the Ukrainian Foreign Minister and the EU’s top diplomat are present. If this fails to produce agreement, Mr Macron (with one eye to the second round of the French Presidential election on 24 April and his narrowing poll lead) will likely call a special meeting of the European Council early next week at which, with evidence of atrocities continuing to mount, I would expect there to be agreement.
Even then, we cannot assume that this will be the final word. The debate which kicked off in Germany in early March over what the impact of an immediate ban on imports of Russian gas would be is by no means over; indeed, if anything it has become even more heated as the war has escalated still further as an article in the 2 April edition of The Economist (subscriber access only) makes clear. To be fair, even the advocates of an early total ban accept that the ‘hit’ to Germany’s GDP this year could be as high as three percent, i.e. still less than covid’s impact in 2020, and ‘only’ around half the number touted by the country’s trade unions and supported by business which also appears to be close to where the government stands at present. Even a three percent downturn is, of course. by no means negligible. However, as Spanish MEP Luis Garicano, among others, has pointed out, nor are the (less immediately obvious) costs to Europe of a protracted war in Ukraine.
The economists will, no doubt, continue to disagree. But ultimately their differences may prove irrelevant. As Germany’s highly respected former Finance Minister Wolfgang Schäuble opined in a 24 March article for Welt am Sonntag (cited by The Economist) “people sometimes have to make substantial sacrifices for their way of life and their freedoms”.
Which is precisely when economics generally and Marx’s teachings in particular come a poor second.
Alastair Newton, an alumnus of the LSE, is a professional political analyst who was based in the City of London from 2005 to 2015. As such, he sought to anticipate, analyse and explain political and geopolitical events worldwide which may impact on financial markets. In addition to regular commentary on current political “issues” he is also co-author of major studies on China, India, Indonesia, Israel/Iran and North Korea.
[Author’s Note: This article is a lightly edited version of one first published (for subscriber access only) by macro research consultancy Heteronomics on 6 April 2022.]
Photo by Victor Katikov