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The West thought money could tame dictators. Has Putin proved it can’t?

by Edward Alden and first published in The Washington Post 11 April 2022

Edward Alden is a senior fellow at the Council on Foreign Relations, a visiting professor at Western Washington University, and the author of, ‘Failure to Adjust: How Americans Got Left Behind in the Global Economy’.

Globalisation was supposed to bring peace through capitalism

Since the end of the Cold War, the United States and other Western powers have pursued a noble idea — that by tying themselves economically to their rivals, they might escape the dismal cycle of great-power conflicts. In that spirit, Germany encouraged gas and oil imports from Russia over the last decade even as Vladimir Putin was stepping up his aggression against neighbouring states. Europe and the United States embraced trade with China, expanding ties as the Asian nation became the world’s largest exporter, including of some critical goods. For several decades, Western powers seemed satisfied that, in the words of the German philosopher Immanuel Kant, the “power of money … perhaps the most dependable of all powers,” would compel nations “to prevent war wherever it threatens to break out.”

All of that now seems hopelessly naive. Putin invaded Ukraine despite unambiguous Western threats that Russia would be immediately isolated from the global economy through sanctions. China under Xi Jinping has crushed democracy and press freedom in Hong Kong, increased military threats against Taiwan, and entered a loose alliance with Russia to challenge the U.S.-led global order. Rather than moderating the ambitions of authoritarian leaders, their rising wealth — brought about in good part by foreign investment and trade — has emboldened them to challenge Western democracies head on. So has economic engagement been a catastrophic failure?

The purest version of this “capitalist peace theory” — that economic interests naturally discourage war — was certainly optimistic. Western leaders had hoped that trade would not only temper the ambitions of their rivals but also nurture a middle class in those countries that would demand democratic reforms. The Germans had a name for the policy — “Wandel durch Handel,” or “change through trade” — and stuck stubbornly to it even as growing wealth in Russia and China brought greater political repression. Germany’s trade with Russia grew by nearly 6 percent annually from 1995 to 2021. The European Union’s trade with China today — some $828 billion in 2021 — is now larger than EU trade with the United States. In the same spirit, the United States welcomed China into the World Trade Organization in 2001. Bringing China into the global economy “has succeeded remarkably well,” Robert Zoellick, deputy secretary of state in the George W. Bush administration, said in 2005. “From China’s perspective, it would seem that its national interest would be much better served by working with us to shape the future international system.”

There were reasons to be hopeful, as China seemed on a path to reform in the 1990s and 2000s, and Putin welcomed foreign investment after being elected Russian president in 2000. But economic growth ceased to be the top priority as Putin and Xi, who became China’s president in 2013, came to see themselves as leading historic missions to restore national greatness. And Western politicians were far too confident that these leaders would be unable to constrain the liberalising forces of capitalism. President Bill Clinton once quipped that China’s plan to control the Internet was like “trying to nail Jello to the wall,” although China was succeeding in building the largest censorship system in history.

Despite these dispiriting developments, though, it is too soon to declare that the heirs of Kant have failed. Russian arms have proved deficient in Ukraine, but the power of money has never been more on display. Sanctions against Russia have cut off access to hundreds of billions of dollars of its central bank reserves, crashing the value of the ruble (it has recovered only because of capital controls that make the currency all but worthless outside Russia). Russia’s manufacturing industries, from steel to cars, have ground to a halt since the flows of Western parts and technology have ceased and foreign markets have been blocked. Its citizens have lost access to most Western goods and services — companies including McDonald’s, H&M, Visa and Mastercard have left. Thousands of Russians have already fled the country in what is looking like a massive brain drain of the nation’s best and brightest. The Institute of International Finance forecasts that Russia’s economy will contract nearly 18 percent by the end of 2023, wiping out the last 15 years of economic growth.

China, which only months ago declared its friendship with Russia to be “without limits,” is watching closely. While it appears to have adhered to Western sanctions against Russia, capital has nonetheless been flowing out of China. Investors, seeing massive losses in Russia, are recalculating the risks they face in authoritarian countries. If China were hit with similar sanctions, it would have many more economic weapons to fight back than Russia does. China’s economy is more diversified; its trade with the ASEAN nations is now larger than with either the United States or Europe. It has invested heavily in developing countries through its Belt and Road Initiative, and those countries might be reluctant to enforce Western sanctions. And China has a near monopoly in some critical sectors, such as the processing of rare-earth metals, a vital component of many consumer products including electric and hybrid vehicles, and for military applications such as jet engines and satellites. But China still relies on the West for the most advanced technologies, especially semiconductor equipment and fabrication capabilities. In an economic conflict, its vulnerabilities exceed its strengths.

The West’s economic embrace of China and Russia, of course, was not all about peace. Businesses have profited handsomely. Former German chancellor Gerhard Schröder became board chairman of the Russian oil giant Rosneft, and he used his close relationship with Putin to champion the Nord Stream 2 gas pipeline project, which Germany halted just before Russia’s invasion of Ukraine. U.S. companies lobbied furiously to bring China into the WTO, lured by cheap labor and the huge Chinese consumer market. It is easy to see how Putin would miscalculate, believing corporate interests to be so strong in the West that governments would be dissuaded from truly damaging sanctions.

But those profits are exactly the point. Economic interdependence breeds peace only if the costs of breaking those ties are high enough — and just as important, if all sides recognise that the costs are high enough. If the West can remain united on sanctions in response to the invasion of Ukraine — a big if as energy prices soar and inflation hurts consumers — Russia will pay high and sustained costs. That cooperation is already being tested as pressure is growing in Europe to cut off gas and oil imports from Russia in the wake of the Bucha massacre, which Germany fears would throw its economy into recession. But a demonstration of unity may discourage Xi from following Putin’s example.

We can do more to help Ukraine without provoking World War III

To prevent wavering, the United States and its allies should be working to ensure that economic vulnerabilities are as one-sided as possible. The Biden administration is properly seeking to bring home production in strategic industries such as semiconductors and electric-vehicle batteries, while denying the most advanced U.S. technologies to China and Russia. It is cooperating with Europe to find alternatives to Russian oil and gas as quickly as possible. The administration should also put aside its affinity for narrow “Buy American” approaches and pursue “friendsharing” — working with allies to build up critical supply chains and limit Chinese and Russian economic leverage. And it should work with partners to minimise the harm from sanctions in the developing world.

The Kantian ideal has certainly been damaged; the line between economic interdependence and peace is at best a crooked one. But the power of money has also been reinforced by the robust Western response. Demonstrating the high economic price that countries will face for choosing war remains one of the best ways of sustaining peace.