How Will Russia’s Attack on Ukraine Re-Align International Business Operations and Relationships?

John Micklethwait and Adrian Wooldridge think that the Russian attack on Ukraine will reorder capitalism and business in fundamental ways. Some highlights:

This conflict could mark a lasting change in the way the world economy works — and the way we all live our lives, however far we are from the carnage in Eastern Europe. The “inevitable” integration of the world economy has slowed, and the various serpents in our paradise — from ethnic rivalries to angry autocracies to a generalized fury with the rich — are slithering where they will. 

That doesn’t mean that globalization is an unalloyed good. By its nature, economic liberalism exaggerates the downsides of capitalism as well as the upsides: Inequality increases, companies sever their local roots, losers fall further behind, and — without global regulations — environmental problems multiply. Yet liberalism has also dragged more than a billion people out of poverty in the past three decades and, in many cases, promoted political freedom along with economic freedom. The alternatives, historically speaking, have been wretched. Right now, the outcome that we have been sliding toward seems one in which an autocratic East gradually divides from — and then potentially accelerates past — a democratic but divided West. 

From this perspective, the answer to globalization’s woes isn’t to abandon economic liberalism, but to redesign it. And the coming weeks offer a golden opportunity to redesign the global economic order.

By any economic measure the West is significantly more powerfulthan the East, using the terms “West” and “East” to mean political alliances rather than just geographical regions. The U.S. and its allies account for 60% of global gross domestic product at current exchange rates; China, Russia and the autocracies amount to barely a third of that. And for the first time in years, the West is coming together rather than falling apart.…

But Russia’s invasion of Ukraine marks a bigger and more definitive assault than the previous ones. 

That’s partly because the immediate rupture is so savage. The supply of basic commodities, from wheat to nickel to titanium to oil, has been disrupted. The West is doing everything it can to “cancel” Russia from the global economic system — sanctioning oligarchs, expelling Russian banks from the global financial plumbing, and preventing Russia’s central bank from accessing its reserves. There’s talk of throwing Russia out of the World Trade Organization. 

Even when they haven’t been forced to do so by law, Western companies are boycotting Russia and closing down their Russian operations. Russian consumers can no longer use Visa, MasterCard and American Express. The McDonald’s in Pushkin Square is closed — along with 850 other branches. Photos have appeared on social media of Russians standing in interminable queues for sugar and other basic foods or else fighting over remaining scraps, just as they did in the Soviet days. For its part, the Kremlin has hit back by blocking access to Facebook and threatening to imprison or fine anyone suspected of spreading “fake” news, thereby essentially closing down Western news organizations inside the country….

But this turning point can still lead in several directions. The chances of a regime change in the Kremlin remain slim, given Putin’s popularity and terror machine. Western Europe has heard pious words about integration and immigration before. And look at the West’s leaders! Joe Biden hardly conveys an image of world-changing dynamism; after his initial heroics, Olaf Scholz greeted Volodymyr Zelenskiy’s speech to the German parliament with pudding-like inertia; Emmanuel Macron is bent on winning an election while trying to look like Zelenskiy, in hoodie and stubble; while Boris Johnson has dared to compare the Ukrainian resistance to Brexit.  

As we wait for these giants to act, the facts on the ground are changing in economics as well as politics. In particular, the invasion of Ukraine is accelerating changes in both geopolitics and the capitalist mindset that are deeply inimical to globalization.

The changes in geopolitics come down to one word: China, whose rapid and seemingly inexorable rise is the central geopolitical fact of our time….Regardless of whether China’s leader decides to ditch Putin, the invasion has surely sped up Xi’s medium-term imperative of “decoupling” — insulating his country from dependence on the West….

So, absent any decisive action by the West, geopolitics is definitively moving against globalization — toward a world dominated by two or three great trading blocs: an Asian one with China at its heart and perhaps Russia as its energy supplier; an American-led bloc; and perhaps a third centered on the European Union, with the Europeans broadly sympathetic to the U.S. but nervous about the possible return of an America-First isolationist to the White House and irked by America’s approach to digital and media regulation. Other powers will vacillate between these two (or three) great blocs, much as they did during the Cold War. India may do what it has done so well over Ukraine and play both sides. Pakistan will lean toward China but not fully commit while India is in play. Saudi Arabia will exploit uncertainty over energy supplies to pursue brutality at home and Islamist policies abroad. And so on.  

Just as important as this geopolitical shift is the change in the capitalist mindset….From a CEO’s viewpoint, Putin’s invasion of Ukraine has done more than unleash Western embargoes and boost inflation. It is burying most of the basic assumptions that have underlain business thinking about the world for the past 40 years….Democracy won’t always win (China taught capitalists that quickly), but sensible economics usually will. Businesses could rely on a world in which countries would specialize in their comparative advantage. Commerce and free trade would bring people closer, as Fukuyama argued, rather than divide them, as Huntington warned — and businesses that ran themselves globally and wove the most cost-effective supply chains would prosper. 

Commercially speaking, this bet paid off spectacularly. Over the past 50 years multinationals have turned themselves from federations of national companies into truly integrated organizations that could take full advantage of global economies of scale and scope (and, of course, global loopholes in taxes and regulations). World trade in manufactured goods doubled in the 1990s and doubled again in the 2000s. Inflationary pressures have been kept low despite loose monetary policies. Even with a barrage of political disruptions — Trump’s tariffs, Brexit and so on — profits have remained high, as the cost of inputs (such as energy and labor) have been kept low.

Now what might be called the Capitalist Grand Illusion is under assault in Kyiv….Militarism and cultural rivalries keep trumping economic logic. Putin invading Ukraine is merely one in a long list of economically self-harming decisions that vary from dynastic thuggishness (Saudi Arabia bombing Yemen and murdering journalists) to knee-jerk isolationism (Brexit). And these stupidities reinforce each other: Thus, the French are responding to Britain’s act of self-harm in leaving the EU by cutting their companies off from the continent’s main source of cheap capital in the City of London.

Against such persistent irrationalism, CEOs who used to build empires based on just-in-time production are now looking at just-in-case: adding inefficient production closer to home in case their foreign plants are cut off. The head of one of the world’s most powerful investment firms, with shares in almost every significant Western company, talked privately about “a tsunami of recalculations” on the weekend after Putin invaded Ukraine. The CEO of one of America’s most iconic multinationals admits that he is reexamining production across China. Every Western company is now wondering how exposed it is to political risk. Capitalists are all Huntingtonians now.

…So the second age of globalization is fading fast. Unless something is done quickly and decisively, the world will divide into hostile camps, regardless of what happens in Ukraine. And this divided world will not suit the West. Look at the resolution passed by the United Nations General Assembly to condemn Russia’s invasion of Ukraine. The most trumpeted figure is that only 40 countries did not vote for this (35 abstained, and five voted against it), compared with 141 countries who voted in favor. But those 40 countries, which include India and China, account for the majority of the world’s population.

These deeper changes in capitalism and geopolitics increase the stakes this week. Joe Biden and his European interlocutors have a lot on their plate with Putin’s escalating terror and nuclear-tinged threats, but they also need to address the wider economic ramifications of the war sooner rather than later. Do nothing and the drift toward protectionism will inevitably accelerate. The Chinese, for one, seem pretty sure that the West lacks the collective character to keep up its current stance as energy prices soar and compassion fatigue sets in. But we still have time to shape a very different future: one in which global wealth is increased and the Western alliance bolstered.

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