On February 24, Russian President Vladimir Putin ordered a full-scale invasion of Ukraine, launching a war that has already claimed thousands of lives and generated more than one million refugees. Although the United States and its NATO allies have made clear that they will not intervene militarily, they and others have responded with unprecedently harsh sanctions, cutting Russia out of the global financial system and consigning it to a status once reserved for the likes of North Korea or Venezuela.
Heroic resistance from Ukrainian armed forces and ordinary citizens has so far denied Putin the swift victory he was hoping for. But the Ukrainians remain overwhelmingly outgunned, and a prolonged war of attrition seems likely. If Russia’s strategy is anything like what it was in Chechnya and Syria, the next phase of the war is likely to feature mass atrocities and even more indiscriminate targeting of civilian infrastructure and populations.
Whatever happens next, it is already clear that the war represents a historic turning point. The implications of the conflict, and the international responses to it, will be both far-reaching and long-lasting. In this special symposium, Project Syndicate commentators offer exclusive analyses and predictions of what the war will mean for the global balance of power, national and regional economies, energy markets, the global financial and monetary system, nuclear proliferation, and other critical issues.
Mohamed ElBaradei
Perhaps even more disturbing than the sight of dead children or of cities being laid waste in Ukraine is a feature of the war that has appeared almost as an aside: the reintroduction of nuclear weapons as a component in a country’s security strategy. This is something that the world hasn’t seen since the Cold War, when all of humanity stood on the precipice of a nuclear holocaust during the Cuban Missile Crisis of 1962 and the 1973 Arab-Israeli War – two occasions when Soviet and US nuclear forces were placed on high alert.
With Putin insinuating that he might be prepared to use his country’s nuclear arsenal, the world’s nine nuclear-armed states will now embark on a frantic race to modernize their own, capitalizing on the formidable potential of artificial intelligence and cutting-edge cyber abilities. New sci-fi-like weapons and hypersonic missiles will be developed and tested. Some governments will keep their nuclear weapons on a so-called “prompt launch” (high-alert) status, substantially increasing the probability of a nuclear launch (be it intentional, accidental, or as a result of cyber manipulation).
Such is the ominous message of the Ukraine war. Despite all our legal commitments and the progress made in curtailing proliferation, nuclear weapons remain at the heart of global powers’ security strategies, even as we continue to admonish non-nuclear-weapon states to remain so. If there is any hope to be drawn from Ukraine, it is that the world’s major powers will see fit to renew the nuclear agreement with Iran. Still, the double standard will not be lost on anyone.
Mohamed ElBaradei is Director General Emeritus of the International Atomic Energy Agency and a Nobel Peace Prize laureate.
Timothy Frye
Putin is fighting a military battle in Ukraine, but he is also waging a political battle in Russia. Like all autocrats, he must manage the threat of a coup by Russian elites or a revolt by the public. The invasion has heightened both risks. And yet, overthrowing a longstanding personalist autocrat like Putin is not easy. Economic elites will suffer as sanctions start to bite, but they may still fear that they would be worse off defecting. And the elites in the security services who have tied their fates to Putin by backing his war may be the last to jump ship.
Judging how the Russian public views the invasion is challenging, given that a short-term rally around the government at the start of a war is common. However, while Putin’s popularity skyrocketed following the annexation of Crimea in 2014, there are no signs of similar jubilation in Russia this time. Police have detained thousands of anti-war protesters, while much of the population seems to have assumed a wait-and-see attitude.
The fate of Putin’s military campaign in Ukraine will go a long way toward determining his political fate at home. Should the Kyiv government fall quickly, Putin might be able to use state media and heightened repression to turn Russia into a kind of Belarus on steroids – a country deeply isolated from the world, economically stagnant, and even more reliant on natural resources (rather than on human capital). However, a drawn-out battle with mounting Russian casualties – especially one in which the Russian military is seen to have performed poorly – could generate a political showdown between those who back Putin’s “Fortress Russia” project and those who do not. Putin’s fate, therefore, may be decided by Kyiv’s defenders.
Timothy Frye is the author of Weak Strongman: The Limits of Power in Putin’s Russia.
Sergei Guriev
The sanctions against Russia have already gone much further than anyone expected, inflicting unprecedented damage on the Russian economy. But whether sanctions alone will stop Putin is another matter. Putin doubtless is aiming for a “short victorious war,” as was Russian Interior Minister Vyacheslav von Plehve in 1904, when he welcomed war with Japan in the hope that it would “stem the tide of revolution” at home. That war turned out to be neither short nor victorious. The revolution came the following year, by which time Plehve had been assassinated.
Before Putin’s invasion, financial markets had issued a warning about what a war would cost. Despite high oil prices, the ruble had lost 10% of its value relative to “pre-tension” times, and ruble-denominated stock indices had fallen by 20%. Yet while markets had priced in substantial sanctions against Russia, they did not anticipate the sheer scale of what the West has now imposed. In addition to enacting export controls and barring Russian banks from SWIFT, the West has also taken the monumental step of sanctioning the Central Bank of Russia.
The CBR’s foreign currency reserves ($630 billion, or 40% of GDP) were a key pillar of macroeconomic stability in Russia. Once they were frozen, the ruble went into free fall, prompting Russian authorities to close the currency exchange and the stock exchange, as well as introduce multiple currency controls. Russians cannot wire their dollars abroad, and foreigners cannot sell their Russian assets and repatriate the returns. The impact of these unprecedented sanctions is hard to estimate. JPMorgan thinks the Russian economy will contract by 20% in the second quarter, and by 3.5% in 2022. But we are in uncharted territory. Russia’s ability to pursue technological modernization and economic growth has effectively been destroyed for the foreseeable future.
Sergei Guriev is Professor of Economics at Sciences Po.
Rana Mitter
What will China do about the war in Ukraine? In recent weeks, its government has assumed a succession of stances, in what has seemed to be a desperate attempt to impose some kind of order on events spiraling out of control. At the Munich Security Conference (February 18-20), Chinese Foreign Minister Wang Yi made clear that China recognizes Ukraine as a sovereign state. Since China has a fully accredited ambassador, Fan Xianrong, in place in Kyiv, this was hardly a controversial statement.
Since the invasion, there have been growing calls for China to use its links with Russia to negotiate a ceasefire. It is plausible that China abstained from the two United Nations votes on the crisis because it wants to preserve this option. By taking a neutral stance, China can position itself as an honest broker (as could other abstainers such as India). But any mediator would face a serious problem: Putin seems unwilling to accept any compromise that excludes the complete subjugation of Ukraine. Thus, even a friendly power like China might not be able to come up with a settlement that would satisfy both sides.
Still, if China wants to be bold, it could try to call in a favor with Russia to break the impasse. We have just passed the half-century mark of one of the boldest Chinese foreign-policy moves of the modern era: the opening to America, inaugurated by President Richard Nixon’s visit to China in 1972. The commemoration of that event, however muted, may well inspire new thinking in Beijing, especially now that China’s reputation in the Global North has been so severely damaged by the pandemic and the controversies over human rights in Xinjiang and repression in Hong Kong. Bringing an end to the war would be a massive coup for Beijing’s reputation as a great power.
Is it likely? No. Would it transform China’s reputation? Undoubtedly.
Rana Mitter is the author of China’s Good War: How World War II Is Shaping a New Nationalism.
Kenneth Rogoff
Putin’s merciless, unprovoked attack on Ukraine has created a torrent of uncertainty, and the global economic impact depends very much on what happens next and in the coming months. The West is attempting to thread the needle with surgically precise sanctions that will cause Putin to feel domestic economic and financial pain, but not to the point where he erratically escalates. If things stop here, the main impact on the global economy will be somewhat higher inflation and modestly lower growth; the Russian and Ukrainian economies together are one-tenth the size of the US economy.
But it is difficult to walk a sanctions tightrope. Events could easily morph into a cyberwar or worse, in which case the global economic implications would be far greater. Prolonged uncertainty would surely hinder consumption and investment around the world. Either way, the economic impact on Russia itself will be significant, even though Russia has long been preparing for this day (more than 20% of its central bank reserves are in gold).
Western leaders must be mindful that confronting Russia too aggressively could lead to escalation with a country that has a vast nuclear arsenal and potent cyber and biological warfare capabilities. If gas supplies to Germany and Italy are cut back, those economies will go into a deep recession. Unless the West believes it can achieve regime change in Russia (something that equally drastic sanctions have failed to achieve in North Korea, Iran, and Venezuela), the world might have to live with Putin for a long time to come. It is important for policymakers to decide on what realistic endgame they are trying to achieve. And it is no less important that, from now on, they preserve fiscal space for extreme emergencies.
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University.
Kori Schake
With its unprovoked invasion of Ukraine, brutal attacks against civilians, and expansive political demands, Russia has offered a disturbing glimpse of what an international order not built on the values of free countries would look like. It is a world where no one is safe, and where compromise only encourages predation. While our focus should remain on Ukraine’s sovereignty and the restoration of Ukrainians’ safety, I believe Putin’s war will also elevate America’s global standing. Indeed, it has already strengthened America’s position at the center of the international order that it created from the ashes of World War II.
Seeing early on that Putin posed a genuine threat, the US shared intelligence with friends and allies so that they would have time to coordinate their responses. It communicated clearly to the Russians what would happen if they invaded. It defanged Russian disinformation by consistently getting out ahead of the Kremlin’s propaganda machine. It used international institutions to showcase Russia’s isolation and the world’s solidarity with Ukraine. It rushed arms to Ukraine and encouraged allies also to play a leadership role. And it was able to orchestrate historically punitive economic sanctions (while making the compromises necessary to sustain unity).
Moreover, President Joe Biden has shown that the US has a bevy of non-military tools to shape the international order. He has demonstrated that the US is prepared to take risks and bear economic burdens for the sake of security. And he has proven that if America is still willing to lead, others will help it do so.
The brave people of Ukraine have bought time for the rest of us to fight back against the dark, dangerous vision that Putin and his authoritarian allies in China would impose on everyone if given the chance. We in the US still have the power to protect ourselves, our allies, and our interests. The more we do now to strengthen free societies and band together, the less likely any of us will have to suffer such outrageous aggression in the future.
Kori Schake is Director of Foreign and Defense Policy at the American Enterprise Institute.
Paola Subacchi
The litmus test of a crisis is not how it started, but how it ends. We don’t know how the conflict in Ukraine will end, but we do know already that the sanctions will work – unlike in 2014, when Russia’s invasion of Crimea triggered a timid and inadequate response.
True, since 2014 Russia has invested in resilience, accumulating $630 billion in foreign exchange reserves and shifting domestic demand through some degree of import substitution. But in a global economy that remains financially interdependent, there are no escape hatches. Capital flows will be one of Russia’s critical vulnerabilities, as the collapse of the ruble and its de facto default have shown.
China is the only country that could lend Russia liquidity. A swap agreement between the two countries’ central banks has been in place since 2014, and it was used a few times after Putin’s annexation of Crimea, when those lighter sanctions dragged the ruble to its lowest levels in 20 years. All told, Russia used approximately CN¥150 billion ($24 billion) to pay for imports and settle investments. But that is a negligible amount, and though China could also lend dollars, few think Chinese leaders will be willing to run such a huge financial and political risk.
So far, the war has had the positive effect of bringing Europe together, delivering a unified and unambiguous response to Russia’s aggression. Politically, it now seems clear that some European leaders will gain from the crisis, including French President Emmanuel Macron, in his bid for re-election this spring; Italian Prime Minister Mario Draghi, who leveraged his vast prestige in international finance to help push the financial sanctions through; and German Chancellor Olaf Scholz, who is now showing that he is more than “Mrs. Merkel’s replacement.”
Paola Subacchi is the author of The Cost of Free Money: How Unfettered Capital Threatens Our Economic Future.
Helen Thompson
Russia’s invasion of Ukraine has generated a serious energy shock, primarily for Europe. The war has upended an entire order. For 50 years, Germany’s energy relationship with Russia has grounded German foreign policy in Europe. Yes, Germany still must import as much gas as ever from Russia. But by promising to build two liquefied natural gas (LNG) ports and open Germany up to sea-borne imports, German Chancellor Olaf Scholz has suddenly created a medium-term rivalry between the United States and Russia over the German gas market. That is a momentous development.
Beyond Europe, we are witnessing a continuation of an energy crisis that was already coming into sharper focus last year. Because Chinese demand for gas is accelerating, there is an intensifying competition between Europe and Asia over a limited global supply of LNG. Oil, too, faces a supply problem. The shale oil boom has faltered, most Western oil companies are pulling out of Iraq, and some of the smaller OPEC-Plus countries are failing to meet their production quotas. Under these circumstances, an economic recovery from the pandemic was always going to mean higher oil prices – especially in the absence of a new Iran nuclear deal.
The market cannot accommodate the sharp reduction in Russian energy exports for long, nor can the Biden administration tolerate oil prices above $80 per barrel, let alone above $100. But changing the market and political dynamics will be difficult. Persuading OPEC-Plus to increase production means dealing with Russia; and reigniting the shale boom means encouraging shale companies to prioritize short-term production over a return to investors (never mind the implications for climate-change mitigation). It may be that the only remedy for rising prices is curtailed demand, lower economic growth, and all the accompanying social and political ills.
Helen Thompson is Professor of Political Economy at the University of Cambridge and the author of Disorder: Hard Times in the 21st Century.
On February 24, Russian President Vladimir Putin ordered a full-scale invasion of Ukraine, launching a war that has already claimed thousands of lives and generated more than one million refugees. Although the United States and its NATO allies have made clear that they will not intervene militarily, they and others have responded with unprecedently harsh sanctions, cutting Russia out of the global financial system and consigning it to a status once reserved for the likes of North Korea or Venezuela.
Heroic resistance from Ukrainian armed forces and ordinary citizens has so far denied Putin the swift victory he was hoping for. But the Ukrainians remain overwhelmingly outgunned, and a prolonged war of attrition seems likely. If Russia’s strategy is anything like what it was in Chechnya and Syria, the next phase of the war is likely to feature mass atrocities and even more indiscriminate targeting of civilian infrastructure and populations.
Whatever happens next, it is already clear that the war represents a historic turning point. The implications of the conflict, and the international responses to it, will be both far-reaching and long-lasting. In this special symposium, Project Syndicate commentators offer exclusive analyses and predictions of what the war will mean for the global balance of power, national and regional economies, energy markets, the global financial and monetary system, nuclear proliferation, and other critical issues.
Mohamed ElBaradei
Perhaps even more disturbing than the sight of dead children or of cities being laid waste in Ukraine is a feature of the war that has appeared almost as an aside: the reintroduction of nuclear weapons as a component in a country’s security strategy. This is something that the world hasn’t seen since the Cold War, when all of humanity stood on the precipice of a nuclear holocaust during the Cuban Missile Crisis of 1962 and the 1973 Arab-Israeli War – two occasions when Soviet and US nuclear forces were placed on high alert.
With Putin insinuating that he might be prepared to use his country’s nuclear arsenal, the world’s nine nuclear-armed states will now embark on a frantic race to modernize their own, capitalizing on the formidable potential of artificial intelligence and cutting-edge cyber abilities. New sci-fi-like weapons and hypersonic missiles will be developed and tested. Some governments will keep their nuclear weapons on a so-called “prompt launch” (high-alert) status, substantially increasing the probability of a nuclear launch (be it intentional, accidental, or as a result of cyber manipulation).
Such is the ominous message of the Ukraine war. Despite all our legal commitments and the progress made in curtailing proliferation, nuclear weapons remain at the heart of global powers’ security strategies, even as we continue to admonish non-nuclear-weapon states to remain so. If there is any hope to be drawn from Ukraine, it is that the world’s major powers will see fit to renew the nuclear agreement with Iran. Still, the double standard will not be lost on anyone.
Mohamed ElBaradei is Director General Emeritus of the International Atomic Energy Agency and a Nobel Peace Prize laureate.
Timothy Frye
Putin is fighting a military battle in Ukraine, but he is also waging a political battle in Russia. Like all autocrats, he must manage the threat of a coup by Russian elites or a revolt by the public. The invasion has heightened both risks. And yet, overthrowing a longstanding personalist autocrat like Putin is not easy. Economic elites will suffer as sanctions start to bite, but they may still fear that they would be worse off defecting. And the elites in the security services who have tied their fates to Putin by backing his war may be the last to jump ship.
Judging how the Russian public views the invasion is challenging, given that a short-term rally around the government at the start of a war is common. However, while Putin’s popularity skyrocketed following the annexation of Crimea in 2014, there are no signs of similar jubilation in Russia this time. Police have detained thousands of anti-war protesters, while much of the population seems to have assumed a wait-and-see attitude.
The fate of Putin’s military campaign in Ukraine will go a long way toward determining his political fate at home. Should the Kyiv government fall quickly, Putin might be able to use state media and heightened repression to turn Russia into a kind of Belarus on steroids – a country deeply isolated from the world, economically stagnant, and even more reliant on natural resources (rather than on human capital). However, a drawn-out battle with mounting Russian casualties – especially one in which the Russian military is seen to have performed poorly – could generate a political showdown between those who back Putin’s “Fortress Russia” project and those who do not. Putin’s fate, therefore, may be decided by Kyiv’s defenders.
Timothy Frye is the author of Weak Strongman: The Limits of Power in Putin’s Russia.
Sergei Guriev
The sanctions against Russia have already gone much further than anyone expected, inflicting unprecedented damage on the Russian economy. But whether sanctions alone will stop Putin is another matter. Putin doubtless is aiming for a “short victorious war,” as was Russian Interior Minister Vyacheslav von Plehve in 1904, when he welcomed war with Japan in the hope that it would “stem the tide of revolution” at home. That war turned out to be neither short nor victorious. The revolution came the following year, by which time Plehve had been assassinated.
Before Putin’s invasion, financial markets had issued a warning about what a war would cost. Despite high oil prices, the ruble had lost 10% of its value relative to “pre-tension” times, and ruble-denominated stock indices had fallen by 20%. Yet while markets had priced in substantial sanctions against Russia, they did not anticipate the sheer scale of what the West has now imposed. In addition to enacting export controls and barring Russian banks from SWIFT, the West has also taken the monumental step of sanctioning the Central Bank of Russia.
The CBR’s foreign currency reserves ($630 billion, or 40% of GDP) were a key pillar of macroeconomic stability in Russia. Once they were frozen, the ruble went into free fall, prompting Russian authorities to close the currency exchange and the stock exchange, as well as introduce multiple currency controls. Russians cannot wire their dollars abroad, and foreigners cannot sell their Russian assets and repatriate the returns. The impact of these unprecedented sanctions is hard to estimate. JPMorgan thinks the Russian economy will contract by 20% in the second quarter, and by 3.5% in 2022. But we are in uncharted territory. Russia’s ability to pursue technological modernization and economic growth has effectively been destroyed for the foreseeable future.
Sergei Guriev is Professor of Economics at Sciences Po.
Rana Mitter
What will China do about the war in Ukraine? In recent weeks, its government has assumed a succession of stances, in what has seemed to be a desperate attempt to impose some kind of order on events spiraling out of control. At the Munich Security Conference (February 18-20), Chinese Foreign Minister Wang Yi made clear that China recognizes Ukraine as a sovereign state. Since China has a fully accredited ambassador, Fan Xianrong, in place in Kyiv, this was hardly a controversial statement.
Since the invasion, there have been growing calls for China to use its links with Russia to negotiate a ceasefire. It is plausible that China abstained from the two United Nations votes on the crisis because it wants to preserve this option. By taking a neutral stance, China can position itself as an honest broker (as could other abstainers such as India). But any mediator would face a serious problem: Putin seems unwilling to accept any compromise that excludes the complete subjugation of Ukraine. Thus, even a friendly power like China might not be able to come up with a settlement that would satisfy both sides.
Still, if China wants to be bold, it could try to call in a favor with Russia to break the impasse. We have just passed the half-century mark of one of the boldest Chinese foreign-policy moves of the modern era: the opening to America, inaugurated by President Richard Nixon’s visit to China in 1972. The commemoration of that event, however muted, may well inspire new thinking in Beijing, especially now that China’s reputation in the Global North has been so severely damaged by the pandemic and the controversies over human rights in Xinjiang and repression in Hong Kong. Bringing an end to the war would be a massive coup for Beijing’s reputation as a great power.
Is it likely? No. Would it transform China’s reputation? Undoubtedly.
Rana Mitter is the author of China’s Good War: How World War II Is Shaping a New Nationalism.
Kenneth Rogoff
Putin’s merciless, unprovoked attack on Ukraine has created a torrent of uncertainty, and the global economic impact depends very much on what happens next and in the coming months. The West is attempting to thread the needle with surgically precise sanctions that will cause Putin to feel domestic economic and financial pain, but not to the point where he erratically escalates. If things stop here, the main impact on the global economy will be somewhat higher inflation and modestly lower growth; the Russian and Ukrainian economies together are one-tenth the size of the US economy.
But it is difficult to walk a sanctions tightrope. Events could easily morph into a cyberwar or worse, in which case the global economic implications would be far greater. Prolonged uncertainty would surely hinder consumption and investment around the world. Either way, the economic impact on Russia itself will be significant, even though Russia has long been preparing for this day (more than 20% of its central bank reserves are in gold).
Western leaders must be mindful that confronting Russia too aggressively could lead to escalation with a country that has a vast nuclear arsenal and potent cyber and biological warfare capabilities. If gas supplies to Germany and Italy are cut back, those economies will go into a deep recession. Unless the West believes it can achieve regime change in Russia (something that equally drastic sanctions have failed to achieve in North Korea, Iran, and Venezuela), the world might have to live with Putin for a long time to come. It is important for policymakers to decide on what realistic endgame they are trying to achieve. And it is no less important that, from now on, they preserve fiscal space for extreme emergencies.
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University.
Kori Schake
With its unprovoked invasion of Ukraine, brutal attacks against civilians, and expansive political demands, Russia has offered a disturbing glimpse of what an international order not built on the values of free countries would look like. It is a world where no one is safe, and where compromise only encourages predation. While our focus should remain on Ukraine’s sovereignty and the restoration of Ukrainians’ safety, I believe Putin’s war will also elevate America’s global standing. Indeed, it has already strengthened America’s position at the center of the international order that it created from the ashes of World War II.
Seeing early on that Putin posed a genuine threat, the US shared intelligence with friends and allies so that they would have time to coordinate their responses. It communicated clearly to the Russians what would happen if they invaded. It defanged Russian disinformation by consistently getting out ahead of the Kremlin’s propaganda machine. It used international institutions to showcase Russia’s isolation and the world’s solidarity with Ukraine. It rushed arms to Ukraine and encouraged allies also to play a leadership role. And it was able to orchestrate historically punitive economic sanctions (while making the compromises necessary to sustain unity).
Moreover, President Joe Biden has shown that the US has a bevy of non-military tools to shape the international order. He has demonstrated that the US is prepared to take risks and bear economic burdens for the sake of security. And he has proven that if America is still willing to lead, others will help it do so.
The brave people of Ukraine have bought time for the rest of us to fight back against the dark, dangerous vision that Putin and his authoritarian allies in China would impose on everyone if given the chance. We in the US still have the power to protect ourselves, our allies, and our interests. The more we do now to strengthen free societies and band together, the less likely any of us will have to suffer such outrageous aggression in the future.
Kori Schake is Director of Foreign and Defense Policy at the American Enterprise Institute.
Paola Subacchi
The litmus test of a crisis is not how it started, but how it ends. We don’t know how the conflict in Ukraine will end, but we do know already that the sanctions will work – unlike in 2014, when Russia’s invasion of Crimea triggered a timid and inadequate response.
True, since 2014 Russia has invested in resilience, accumulating $630 billion in foreign exchange reserves and shifting domestic demand through some degree of import substitution. But in a global economy that remains financially interdependent, there are no escape hatches. Capital flows will be one of Russia’s critical vulnerabilities, as the collapse of the ruble and its de facto default have shown.
China is the only country that could lend Russia liquidity. A swap agreement between the two countries’ central banks has been in place since 2014, and it was used a few times after Putin’s annexation of Crimea, when those lighter sanctions dragged the ruble to its lowest levels in 20 years. All told, Russia used approximately CN¥150 billion ($24 billion) to pay for imports and settle investments. But that is a negligible amount, and though China could also lend dollars, few think Chinese leaders will be willing to run such a huge financial and political risk.
So far, the war has had the positive effect of bringing Europe together, delivering a unified and unambiguous response to Russia’s aggression. Politically, it now seems clear that some European leaders will gain from the crisis, including French President Emmanuel Macron, in his bid for re-election this spring; Italian Prime Minister Mario Draghi, who leveraged his vast prestige in international finance to help push the financial sanctions through; and German Chancellor Olaf Scholz, who is now showing that he is more than “Mrs. Merkel’s replacement.”
Paola Subacchi is the author of The Cost of Free Money: How Unfettered Capital Threatens Our Economic Future.
Helen Thompson
Russia’s invasion of Ukraine has generated a serious energy shock, primarily for Europe. The war has upended an entire order. For 50 years, Germany’s energy relationship with Russia has grounded German foreign policy in Europe. Yes, Germany still must import as much gas as ever from Russia. But by promising to build two liquefied natural gas (LNG) ports and open Germany up to sea-borne imports, German Chancellor Olaf Scholz has suddenly created a medium-term rivalry between the United States and Russia over the German gas market. That is a momentous development.
Beyond Europe, we are witnessing a continuation of an energy crisis that was already coming into sharper focus last year. Because Chinese demand for gas is accelerating, there is an intensifying competition between Europe and Asia over a limited global supply of LNG. Oil, too, faces a supply problem. The shale oil boom has faltered, most Western oil companies are pulling out of Iraq, and some of the smaller OPEC-Plus countries are failing to meet their production quotas. Under these circumstances, an economic recovery from the pandemic was always going to mean higher oil prices – especially in the absence of a new Iran nuclear deal.
The market cannot accommodate the sharp reduction in Russian energy exports for long, nor can the Biden administration tolerate oil prices above $80 per barrel, let alone above $100. But changing the market and political dynamics will be difficult. Persuading OPEC-Plus to increase production means dealing with Russia; and reigniting the shale boom means encouraging shale companies to prioritize short-term production over a return to investors (never mind the implications for climate-change mitigation). It may be that the only remedy for rising prices is curtailed demand, lower economic growth, and all the accompanying social and political ills.
Helen Thompson is Professor of Political Economy at the University of Cambridge and the author of Disorder: Hard Times in the 21st Century.