Russia's Ukraine Invasion Stirs Interest In Economic Self-Reliance

Over the last three weeks, Russia’s economy has been overwhelmed by sanctions. Soon after the Kremlin invaded Ukraine, the West began seizing the assets of the wealthiest individuals close to Russian President Vladimir Putin, prohibited Russian flights in its airspace, and restricted the Russian economy’s access to imported technology, Adam S. Posen wrote for Foreign Affairs magazine.

Photo Insert: A pregnant woman being rushed to safety in war-torn Ukraine

Most dramatically, the US and its allies froze the reserve assets of Russia’s central bank and cut Russia out of not just the SWIFT financial payments system, but of the basic institutions of international finance, including foreign banks and the International Monetary Fund (IMF).

As a result of the West’s actions, the value of the ruble has crashed, shortages have cropped up throughout the Russian economy, and the government appears to be close to defaulting on its foreign currency debt.

The democratic world’s response to Moscow’s aggression and war crimes is right, both ethically and on national security grounds. This is more important than economic efficiency. But these actions do have negative economic consequences that will go far beyond Russia’s financial collapse, that will persist, and that are not pretty. Posen is the president of the Peterson Institute for International Economics (PIIE).

Over the last 20 years, two trends have already been corroding globalization in the face of its supposedly relentless onward march. First, populists and nationalists have erected barriers to free trade, investment, immigration, and the spread of ideas—especially in the US.

Second, Beijing’s challenge to the rules-based international economic system and to longstanding security arrangements in Asia has encouraged the West to erect barriers to Chinese economic integration. The Russian invasion and resulting sanctions will now make this corrosion even worse. There are several reasons why.

First, China is attempting to navigate a non-confrontational response to the Russian invasion. Both its financial system and its real economy are observing the sanctions because of the potential economic retaliation if they finance or supply Russia, let alone bail Moscow out. But anything short of fully joining the blockade will feed anti-Chinese policies in the West, reducing the country’s economic integration.

Second, countries fear being subject to the whims of Washington’s economic might, now that it is re-enamored with its apparent power. Right now, the US’ economic actions may be just, and there may be little risk of countries not invading Ukraine ending up on the wrong side of US policies. But the next time, the US may be more selfish or capricious.

Finally, the damage sanctions are doing to the Russian economy and the substantial costs to central Europe if Russia cuts off its access to natural gas and oil in response may make governments pursue self-reliance and disentangle themselves from economic connections. Ironically, this will be self-defeating. Russia’s current sharp economic contraction shows just how difficult it is for states to thrive without economic interdependence, even when they try to minimize their perceived vulnerability.

In addition, Russia’s attempts to make itself economically independent actually made it more likely to be subject to sanctions, because the West did not have to risk as much to impose them. But that will not stop many governments from trying to retreat into separate corners, looking to protect themselves by withdrawing from the global economy.

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