Putin’s War Will Change the World. Here’s How.
By Matt Peterson
A Ukrainian serviceman helps evacuees as they flee the city of Irpin, northwest of Kyiv. Dimitar Dilkoff/AFP/Getty ImagesVladimir Putin probably won’t be able to win his war in Ukraine.
The Ukrainians aren’t likely to win it, either.
And, as the violence persists, the rest of the world will pay a high and rising price.
The integration of global markets that enabled the West to punish the Russian economy in response to Putin’s aggression is leading to higher costs at home, chiefly through rising oil and gas prices, snarled supply lines, and scarcer goods.
Consumers are just starting to feel the negative effects in the U.S. and Europe, and they will worsen.
The war and the response to it could help diminish living standards throughout the West, even as the military conflict reshapes the geopolitical landscape.
But globalization, a hallmark of today’s geopolitics, in some form is here to stay.
Europe’s biggest land war since World War II marks a bookend of sorts to the post–Cold War expansion of markets into nearly every corner of the world.
In its early days, this expansion was accompanied by urgent rhetoric about the democratizing effects of markets, but such illusions should have been smashed years before cruise missiles started flying toward Kyiv.
They are surely gone now; Putin’s assault has taken the world to a dark place, and highlighted a notable downside to a global financial system that has brought pain as well as gain.
Yet the response of the West and its allies has also revealed a surprising resilience, not only among the people of Ukraine but in the very institutions that continue to draw Ukrainians westward.
Although it is too soon to know just what the postwar world order will look like, the realignments that Putin is triggering are apt to make the world less favorable to tyrants of his ilk.
At the moment, it doesn’t feel that way.
The sanctions imposed on Russia will create lasting costs for businesses and governments throughout the world.
The U.S. and a broad coalition of nations have blocked Russian individuals and financial institutions, including the Russian Central Bank, from transacting business in dollars.
They have also cut off high-tech exports to Russia and created a task force to hunt for Russian oligarchs’ illicit assets.
The war and sanctions also precipitated a mass exodus of multinational companies from Russia.
When companies go beyond the legal sanctions framework and make independent decisions to derisk, the economic consequences are stickier, says Daniel Ahn, a fellow at the Wilson Center who worked on sanctions as chief economist at the State Department.
Some sort of political settlement between Russia and the U.S., based on an improving situation in Ukraine, could result in the release of Russia’s central bank reserves.
But it wouldn’t automatically bring foreign businesses back to the country.
“That would then reduce the incentive to change behavior,” Ahn says.
There are no comparable examples of countries walking back sanctions of the sort imposed on Russia.
That means Russia will pay the price of Putin’s war for the foreseeable future, as will the rest of the world.
In the U.S., President Joe Biden has tried to muster a sense of shared sacrifice on behalf of Ukraine.
“Defending freedom is going to cost us here in the U.S, as well,” he said on Tuesday.
It already has.
With national average gas prices up almost 25% in just a month, according to AAA, America is feeling the effect of “Putin’s price hike,” as the president put it.
The consequences of the war will be significant for Americans, says Dana Peterson, chief economist of the Conference Board.
“People may be underestimating the impact and saying to themselves, well, this is something that’s happening on the other side of the world, but not realizing that the world is interconnected.”
Global growth will be reduced by 0.4 to 0.9 percentage points this year, with inflation increasing by 0.7 to 2.7 percentage points, Peterson estimates.
Russia and Ukraine supply the world with key inputs of energy, food, metals, and rare earths.
The sudden absence of those commodities from global markets will raise prices everywhere, even in places such as the U.S. where many of them aren’t consumed directly.
“People are going to go to the supermarket and notice that a lot of things are more expensive,” Peterson says.
The political dynamics surrounding oil sanctions illustrate how difficult it will be for the U.S. or any other government to maintain precise control of the economic course of the war.
The initial round of sanctions was specifically designed not to choke off the money Russia earns from its energy exports.
But the idea of banning Russian oil exports subsequently gained support in Congress, and on Tuesday, Biden pre-empted legislators and said the U.S. would cease Russian oil imports.
Those ran to nearly 700,000 barrels a day last year.
The reasons for caution in the energy sector are both financial and political.
Energy carveouts in the sanctions act as a relief valve for Putin, says Kimberly Marten, a Russia scholar at Barnard College, Columbia University.
Sanctions are intended to be a measure less than war, discouraging a military escalation outside the borders of Ukraine.
Putin could interpret a full energy blockade as an attack on his personal control of the state.
“If Putin believes his regime is threatened, all bets are off on his escalation ladder,” Marten says.
The need for global energy to flow may force Washington to embrace transactional relationships with authoritarian governments that control spare energy capacity.
The White House has said that the U.S. has discussed “energy security” with Saudi Arabia and Venezuela recently.
On Wednesday, the United Arab Emirates said it supports greater energy production, which would help to bring down prices.
That said, one potential driver of the war’s future course may lie closer to home: a possible change in the U.S. political landscape.
Much will depend, says Marten, on “how the U.S. midterms go, and then on who ends up winning the presidential election in the U.S. [in 2024].”
If domestic or international politics shift away from support for the North Atlantic Treaty Organization and the pro-sanctions coalition, it may fall apart, inviting further Russian aggression.
Russia’s invasion of Ukraine has contributed to a surge in oil prices, with gasoline now topping $5 a gallon in some parts of the U.S. Signage, above, displays fuel prices at a Shell station in San Francisco in early March. / David Paul Morris/BloombergAttempting to forecast the Russian economy right now is a bit like taking a snapshot of an egg thrown out a window.
You might learn something about how fast it’s falling, but what really matters is where it lands.
The Russian state went into the war with roughly $640 billion in financial reserves, but sanctions have frozen the country’s access to most of that money.
Michael Bernstam at Stanford University’s Hoover Institution estimates that 60% of those reserves are in bonds and deposits in Western central banks and private financial institutions, which are now barred from processing Russian transactions.
Another slice, $135 billion, is in gold, which still holds value but also can’t be converted to currency because the dollar is off-limits to Russia.
Russia likewise holds Chinese securities, but those holdings aren’t as useful as dollars in paying for what Russians need.
Only some 5% of the country’s reserves might actually be useful in the short run, Bernstam estimates.
The list of foreign companies that have left Russia is so long that experts have switched to counting the ones that have stayed.
Even in a sector like agriculture that is largely exempt from sanctions, Russian businesses will have a hard time operating without the global economy providing parts and labor, says Susanne Wengle, a professor at the University of Notre Dame who has studied Russian agriculture.
Nonetheless, Putin has been preparing a “food sovereignty” agenda to insulate Russians.
“They’re not going to drink Starbucks coffee anymore, but are they going to have enough food to eat?
Yes,” says Wengle.
On the other side of the war zone, in the European Union, the conflict will hit hard, particularly as energy prices rise.
“We’re talking about half a point to a point of GDP growth shaved off of European growth already,” says Ludovic Subran, chief economist at Allianz.
Inflation that might otherwise have begun to decelerate is likely to stay elevated at 5% to 6% for the remainder of 2022.
“Gas prices have decoupled from market economics, and are instead following the impulses of fear and speculation,” wrote Greek Prime Minister Kyriakos Mitsotakis on Wednesday, citing analysis by European agencies.
He called for price caps and other measures to “reset and rebalance energy markets.”
European officials are debating plans to reduce Russian gas imports, which totaled 155 billion cubic meters in 2021, according to the International Energy Agency.
Europe might be able to scrape together a third of that amount this year in new imports, notes Nikos Tsafos of the Center for Strategic and International Studies, but it won’t be easy: “It requires outbidding consumers in emerging markets, which could trigger energy crises there, too.”
Europe will need to get its gigawatts somewhere.
One place to look is at home.
This could be the moment for a serious push toward energy efficiency, says Jonathan Maxwell of SDCL, an investment firm.
“What else are you going to put first?
Iran?
Nuclear-power plants that are going to be ready in 2033?
New gas fields that are going to be ready in 2035?” he asks.
The energy debate will test newfound European solidarity over the Russian threat.
One date to watch is April 3, when Hungary holds parliamentary elections that will determine whether Prime Minister Viktor Orban continues in office.
He has played spoiler on key European decisions before, including how to deal with the refugees who fled Syria’s war in the past decade, but has largely closed ranks with European leaders on the Russian invasion.
France will vote in its first-round presidential election on April 10.
President Emmanuel Macron has cast himself as a wartime leader, and polls suggest that he is gaining traction.
Putin may have expected the crisis to shatter European unity, but so far he has brought about the opposite.
One reason is that the political and economic institutions underlying European postwar prosperity are still dominant.
The crisis “may be in a crazy way a positive for the strength of the EU,” says Irene Finel-Honigman, an adjunct professor at Columbia University’s School of International and Public Affairs.
The world still depends “on the institutions created at Bretton Woods, the idea of NATO, the U.N., the IMF,” she says.
The U.S. and its allies are able to “export recession” to Russia because this post–World War II financial system is still in place, says Edward Price, a former British diplomat.
That’s a marked difference from the prior conflict between the West and the Soviet Union.
“What does it mean if we take a country like Russia and we’re not just containing it, as in the Cold War, but we’re punishing it?” he asks.
For one thing, it means the West has economic power it can use even when military action isn’t available, and that owes partly to the enduring primacy of the U.S. dollar.
The holdings of the world’s central banks are allocated roughly 60% to U.S. dollars and 20% to euros, an arrangement that hasn’t changed in decades, notwithstanding the global financial crisis, European debt crises, and Covid, says Finel-Honigman.
“In a way, this is very positive, and yet, in many countries, this is increasing resentment about global dollar dominance,” she says.
The West’s demonstration that it can shut off Russia’s access to dollars will only heighten the resentment, although there is little in the near term that China and other financial powers can do about it.
In many ways, Russia’s war isn’t deglobalizing the world so much as revealing how globalization works.
“If you take a brand-new sports car, take it out on the road, put your foot down, plow into the back of a truck, and die, the car didn’t do anything wrong,” says Price.
“Just because you get an outcome you didn’t like doesn’t mean that you’re witnessing a malfunction.”
Just as the U.S. effort to bring China into the World Trade Organization two decades ago played a role in the election of President Donald Trump, who campaigned against China’s influence on the global economy, the Russian war and sanctions will produce unforeseen political and geopolitical consequences, Price says.
The inability of states to abandon the dollar may drive other reactions, such as a reinvigorated interest in technological self-sufficiency.
The sanctions include a lower-profile but potentially significant set of restrictions on technology exports to Russia that could potentially choke off the advancement of Russian industry for years to come.
They prohibit not just U.S. but also foreign companies from shipping certain products to Russia that contain a degree of American technology.
The U.S. used similar export controls to hobble Chinese technology company Huawei Technologies.
That its allies have now signed on to use that tool against Russia suggests it could be employed to coerce China in the event it invades Taiwan or takes some similar action, says Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics.
The limits on exiting the dollar system and the threat to future technology development may combine into a “real-economy pivot,” says Sebastian Mallaby, a senior fellow at the Council on Foreign Relations.
China and other countries are already accelerating efforts to build their own technology ecosystems independent of the U.S. and its allies.
The coming boom in capital spending will be duplicative, exerting a drag on growth and driving up inflation, Mallaby says.
And then there is Putin.
Nothing in the laundry list of consequences he has faced so far has deterred him from pursuing war in Ukraine.
Russia’s forces are all but certain to press on.
“There’s just a high, high probability they will overwhelm the Ukrainians,” says Michael Rogers, a retired admiral and the former director of the U.S. National Security Agency and commander of U.S. Cyber Command.
That said, Russia is unlikely to be able to install an effective, Eastern-aligned government in a country that has repeatedly rejected pro-Russian leaders.
“The Ukrainian people aren’t going to change their mind because they’ve got a knife at their throat,” Rogers says.
Putin is in a bind that he can’t easily escape.
But his removal by disaffected Russian elites is difficult to handicap.
“Revolutions only succeed when there’s a shadow state in place before the operation happens,” says Marten, the Russia scholar.
Putin’s ruthless intelligence services have made the organization of a surrogate government difficult, if not impossible.
More likely, Russia’s leader will strive to inflict further economic pain on the West through cyberattacks, disinformation campaigns, and other nonmilitary capabilities, adding further uncertainty to financial markets.
“A guy who pulls out the nuclear card, the very first thing?
I don’t think he’s so inclined to be thinking about, all right, how do we stop this?” says Rogers.
Putin’s parasitic position in the global economy makes him exceptionally difficult to dislodge.
But that also means solving the world’s Putin problem could unlock a better future for everyone.
A financial system that disfavors oligarchs might be one that spreads the benefits of rising wealth more broadly.
A global economy that doesn’t rely on a few authoritarian states for energy could pay dividends in climate and health.
And a world where tyrants can’t order their troops into a neighbor’s home and hide behind the threat of nuclear war would be safer for all and less disruptive to markets.
Putin’s invasion of Ukraine may have ended one geopolitical era, and in doing so set the world to work toward establishing another where he and his ilk are no longer relevant.
The path to that world isn’t obvious right now, but if Putin has taught the world anything, it’s that far-reaching change can come in the blink of an eye.
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