Putin’s War Could Save the Global Economic Order

Russia’s invasion of Ukraine could be seen as a catastrophe for the world economy. Surging oil and gas prices are feeding inflation that in many countries was already at the highest levels in four decades. Financial markets have plummeted, erasing trillions of dollars in wealth. Western sanctions have crossed what used to be redlines, including blocking Russia from accessing more than $300 billion of its own central bank reserves. If the world loses access to Russia’s vast deliveries of energy, fertilizer, grain, and industrial metals, the hit on the global economy could become much worse yet.

But while the short-term economic costs will be steep, the conflict might end up being the savior of the global economic order. For the past two decades, the economic rules and norms built under U.S. leadership after World War II have slowly eroded. Many countries—not just China—chafed at U.S. dominance, skirting trade and other rules or actively undermining them. Washington, fed up at what it saw as others taking advantage of a relatively open U.S. market, launched trade wars with friends and foes alike and paralyzed the World Trade Organization’s ability to settle disputes. U.S. President Joe Biden has championed “Buy American” policies, and his administration has worked on luring manufacturing jobs back to the United States at the expense of trading partners. Washington has avoided any new trade liberalization initiatives, fearful of a domestic political backlash.

Then, Russian President Vladimir Putin ordered Russian tanks to roll across Ukraine’s borders. Since then, the West and its partners have come together in the most dramatic set of coordinated economic actions in modern history. The European Union, United Kingdom, Japan, the United States, Canada, Australia, South Korea, and even Switzerland have worked in mostly seamless fashion to isolate and punish Russia. Most Russian banks have been cut off from their Western counterparts, making it difficult for Russians to conduct the most routine sales and purchases of goods and services from abroad. Sanctions targeting Russia’s central bank reserves have crashed the ruble, driving its value down to less than $0.01; Russia pushed up its overnight interest rate to a punishing 20 percent to prevent an even steeper fall. Coordinated export controls have cut Russia off from imports of semiconductors, telecommunications equipment, oil extraction and refining gear, aircraft parts, and the other tools of modern technology. Airspace bans have blocked Russians from flying to most Western destinations. Canada, the United States, and others are cutting off imports of Russian oil, and Europe—far more dependent on Russian energy imports—is also reducing purchases rapidly. Canada has stripped Russia of its WTO benefits, raising tariffs on most imports to 35 percent; other countries are likely to follow.

Western companies, which have profited enormously from an expanding global market with predictable rules, have piled on. BP announced it would divest its nearly 20 percent stake in Russian oil giant Rosneft, at a cost to the company’s shareholders of as much as $25 billion. Boeing and Airbus halted all parts, maintenance, and technical support for Russian airlines. Carmakers such as General Motors, Ford, and Volkswagen ceased production in Russia and stopped exporting parts and vehicles; Russian carmaker Lada has been forced to halt production as parts imports dried up. Iconic consumer brands, including Coca-Cola, Pepsi, McDonalds, and Starbucks, have quit operating in Russia. Shell, which had bought Russian oil on the spot market well into the war, issued a public apology and promised to halt all future purchases of Russian energy.

The search for historical parallels is always fraught, but today’s economic challenge is not unlike what the West faced in the early 1970s.

While the measures have not been enough to persuade Putin to cease his offensive in Ukraine, Western countries have shown in the crisis an extraordinary capacity to shake off decades of economic policy lethargy. This may show the way toward a future economic order: not a U.S.-led system with others often reluctantly following, but a far more active joint management of the global economy. The United States on its own no longer has the capacity or willingness to lead the global economic system without robust support. Preserving the benefits of a well-ordered global economy will demand a cooperative and coordinated effort.

The search for historical parallels is always fraught, but today’s economic challenge is not unlike what the West faced in the early 1970s. In both periods, soaring commodity prices, especially for oil, worsened underlying inflationary pressures. In both, a weakened United States reeling from failed wars and social divisions at home raised doubts among allies and adversaries alike. President Richard Nixon’s 1971 decision to break the dollar’s link to gold and slap temporary import tariffs were his version of President Donald Trump’s trade wars—a message to the world that the United States was no longer willing to pay the price of leading the global economy.

While the comparison will not reassure investors who recall the bear markets of that decade, the 1970s was also a period in which Western countries recreated an economic order that served the world well for many decades after. Following Nixon’s dollar shock, the United States, Europe, and Japan came together to rebuild the global monetary system around flexible exchange rates. France and Germany launched the first G-6 economic summit in 1975, which later became the G-7, as a forum for coordinating Western responses to challenges such as inflation, unemployment, energy shocks, trade disputes, and currency fluctuations. The Western nations also came together to launch a big new round of global trade negotiations, which eventually led to the creation of the WTO and an explosion in world trade.

The current challenges are going to require the same sort of deep cooperation. Europe, Canada, Japan, Australia, the United States, and many others should recognize that the aggregate gains from close economic cooperation far outweigh the conflicts over relative distribution among and within countries that have drawn so much attention in recent years. In a haunting parallel to the Cold War, when the threat from the Soviet Union strengthened Western economic cooperation, a revanchist Russia has provided strong motivation for the West to put its fraternal differences aside.

The domestic politics of Western countries may also be tilting against the economic nationalism of recent years—and prove more permissive for economic cooperation. As Russians have seen the shelves suddenly empty at Ikea and H&M, ordinary consumers around the world are waking up to the forgotten benefits of low-friction global trade and finance. The new crisis comes on top of the global supply chain disruptions triggered by the COVID-19 pandemic, which have made consumers vastly more aware of the fragile production and trade systems that bring food to their grocery stores, appliances to their homes, and spare parts to their auto shops. After years in which the critics of globalization had all the ammunition, the disruptions to open and efficient trade have made its benefits apparent for all to see.

The biggest difference today is China, which is far stronger than it was in the 1970s and dwarfs Russia in economic importance. But the potency of the Western sanctions against Putin’s Russia will certainly send a strong message to Beijing: If the liberal democracies can overcome their differences and come together in such a fashion, China would be wise to pursue its own ambitions cautiously. The risks of banishment from the global economic system are a hefty penalty.

Much is unknowable, of course. If the war in Ukraine grinds on, Western resolve will be tested more intensively. Americans could react to inflation and soaring oil prices by punishing Biden in the midterm elections and beyond. Europeans, who will pay a much bigger price as Russian energy imports are cut, could similarly lose heart and press for accommodation with Putin.

But the collective outrage at Russia’s actions suggests the resolve may run deeper than that. If so, the crisis could be the catalyst that brings the West together again to start repairing the fraying global economic order.