The Ukraine Crisis Could End Globalization

Remember The Economist’s claim that our era of largely peaceful globalization could come to an end? Four months into the new year, the similarities between 2014 and 1914 have become a bit more obvious.

The magazine was wrong to assume that old-school geopolitics would make its return in East Asia, where disputes over maritime borders could still lead to war. Instead it was Ukraine – the site of the 20th century’s most horrific violence – that cast doubt on the stability of our current world order.

Brookings fellow Thomas Wright recently wrote an article that convincingly explains how much of a threat Russia’s annexation of Crimea is to globalization.

The annexation and following sanctions against Russia brought the world “to the cusp of a period of de-globalization,” he writes.

“The logical response to the prospect of economic warfare is for states and major companies to hedge against the risk of vulnerabilities created by interdependence. They will adopt a strategic approach to integration—pursuing it where it works to their benefit, but stepping away from it when it exposes them to potential actions by a hostile government. This will be a sea change in international economic policy and U.S. grand strategy more generally.”

This selective approach to interdependence would differ sharply from previous decades, when countries strove to participate in the global market as much as possible. Wright argues that this “sea change” would have happened anyway, even if Russia hadn’t invaded Crimea:

 “Globalization was always especially vulnerable to geopolitical shocks. The great power comity of 1991 to 2008 was never going to be permanent. It is perhaps better that this realization comes in a stand-off with Russia, the world’s eighth largest economy and one that has already been distancing itself from the global economy, than a crisis involving China, the second largest economy, which could do real damage to the United States and its allies.”

In theory, a more selective approach to globalization could lead to a boom in protectionism across the world. This is exactly what happened after 1914, when geopolitical disputes ended decades of unfettered globalization and ushered in an era of closed-off national markets and recurring economic crises.

But Wright is optimistic that history won’t repeat itself in this case. He argues that countries will seek to diversify trade rather than not trade at all, which will give them more security without having to resort to protectionism.

“Major powers will identify areas where interdependence creates a real strategic vulnerability—especially on finance, energy, and cyber—and reduce them gradually over time. Rather than erecting barriers, diversification could achieve the same effect with much less cost.  As they look to deter Russia, the United States and Europe should also be cognizant about the precedent they are setting.”

 (…)

 “Done right, a more strategic approach to integration and international order can put interdependence and globalization on more stable footing, which will serve the world well as it faces what could become a competitive and volatile couple of decades.”

Let’s hope he is right. But history – and Putin’s current foreign policy – show that governments often don’t act as rationally as we would like.

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Putin’s foreign policy is scarily similar to Stalin’s

Here’s another post I wrote for the World Policy Journal’s blog:

Angela Merkel is right: Russia’s President Vladimir Putin is living in another world. But what world exactly is this? As the Crimean crisis drags on, it is becoming clear that Putin’s thinking is somehow stuck in 1930s Europe. Replace Putin with Stalin and you get a good sense of what Russia’s leader is doing and, more importantly, how he can be stopped.

Much has been written about how the Soviet Union shaped Putin’s thinking. To him, Russia’s immediate past is not just a tool to foster patriotism. It is a model he is hoping to emulate.

Putin has long tried to recreate Soviet greatness by invading neighbors (think Georgia 2008) and building a Eurasian economic union. Along the way, he has also adopted a way of thinking that is strikingly similar to his Soviet predecessors.

In fact, he invaded Crimea for much the same reasons that Stalin invaded eastern Poland in 1939. Comparing the two invasions not only helps us make sense of a complicated situation, but it also offers clues on how Putin’s expansionism can eventually be defeated

After storming the winter palace in 1917, the Bolshevik leaders set out to export communism across the globe. They founded the latest Communist International and supported socialist movements in a number of foreign countries.

But the world revolution never happened. Instead, fascist takeovers in Italy (Mussolini), Germany (Hitler) and Spain (Franco) left the Soviet Union increasingly isolated. This presented its leaders with a monumental conundrum: how could a system whose success seemed to depend on world revolution survive alone amid a hostile world? Stalin, who assumed power in the late 1920s, found an answer. He called it “socialism in one country” – a maxim first put forth in 1924 and then gradually adapted.

Instead of trying in vain to subvert other countries, Stalin argued, the Soviet Union should focus on securing its borders and becoming autarkic. Its best shot at growing more powerful was rapid industrialization at home and gradual growth by annexing territories at its borders.

This philosophy culminated in the Molotov-Ribbentrop Pact of 1939, in which the Soviet Union and Nazi Germany shocked the world by pledging mutual non-aggression. A secret clause divided Poland up between the two states.

Contemporaries saw the pact and eventual Soviet invasion of Eastern Poland, the Baltic States, and Moldova as a sign of Soviet strength. They were wrong. By agreeing to the pact the pact, Stalin gained some territory east of the so-called Molotov-Ribbentrop line, but he also gave up all hope of turning Poland or Germany communist – a hope that had all but faded anyway. The treaty was an acknowledgement of his failure to export the Bolshevik revolution.

Eventually, this failure doomed the Soviet project. Stalin’s autarkic model worked more or less for a few decades, and he won over a number of satellites in Eastern Europe. But the world’s largest economies remained capitalist, and the Soviet Union became more or less isolated from a growing world market. This isolation bred stagnation, decline, and then collapse.

With the benefit of hindsight, we know that Stalin’s autarkic vision was doomed to failure. We can apply this lesson to Putin’s invasion of Crimea.

Putin is no communist, and never wanted to export a revolution. But much like Stalin, his system depends on gaining allies abroad. While Stalin wanted to turn Western European states communist – and then into Soviet satellites – Putin has been working hard at winning over post-Soviet countries.

Surrounded by what he perceives to be a hostile West, Putin’s vision of a powerful Russia centers on the Eurasian Union. So far the economic union set to launch in 2015 only includes Russia, Belarus, and Kazakhstan. Drawing Ukraine into the club was meant to be Putin’s ultimate triumph. After Ukraine’s President Viktor Yanukovych ditched the EU and signed an economic-cooperation agreement with Moscow last fall, it seemed like he had succeeded.

Then protesters chased Yanukovych out of the country, and Putin saw his ideal of Eurasian greatness fall to pieces. Much like Stalin in the 1930s had to accept that Germany wouldn’t become a communist satellite, Putin today understands that Ukraine has fallen out of his orbit for the foreseeable future. He can still exert economic pressure, but a new pro-European government in Kiev will never join his Eurasian Union.

It appears Putin drew the same conclusion Stalin had drawn 80 years earlier: if he couldn’t have it all, he should at least take what he could get. So he invaded Crimea.

Most Western observers have interpreted the invasion as a sign of Putin’s strength. It is in fact a sign of his weakness. By invading Crimea, he may have won some territory, but he also acknowledged that his Ukrainian policy has failed. There is virtually no chance following the invasion that Ukraine will seek closer ties to Moscow anytime soon. Instead, the country is likely to turn west–as it already has.

Like Stalin in the 1930s, Putin has given up an increasingly elusive hope for allies abroad in exchange for modest territorial gains. By doing so, he chose isolation: call it “Putinism in one country.” Even if Russia avoids sanctions, it is now far less likely to attract much-needed foreign investment and has scared off its neighbors, including Ukraine.

Understanding this weakness should guide any Western response to the Crimean crisis. We know from Soviet history that choosing isolation is unlikely to succeed, no matter how many tanks or how much natural gas you have.

Instead of rushing to punish Russia, the West should just let Putinism defeat itself. Investors fleeing Russia in the wake of the invasion have already cost the country dearly.

The U.S. and EU should support Ukraine and other post-Soviet states fed up with Putin, drawing them closer to the West. An already weakened Putin will be left with nothing but a peninsula and the isolation he chose. It will breed stagnation, decline, and eventual collapse.

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Will pogroms make their return in Ukraine?

Here’s a new post I wrote for the World Policy blog:

Could Europe witness its first pogrom against Jews since the 1940s? As Ukraine inches closer to civil war, the country’s Jewish population is growing anxious. Late last month, a Kiev rabbi made headlines when he urged his co-religionists to leave the country. A Ukrainian-born member of the U.S. Jewish advocacy group UJA Federation recently told me that his organization is monitoring the situation in Ukraine with great concern.
Cause for the anxiety is the rise of the Right Sector, a nationalist militant group crucial to President Viktor Yanukovych’s overthrow that now appears to hold great sway over the fragile Ukrainian government. Some members of the Right Sector are overt anti-Semites. Isolated beatings of Jews around Kiev’s independence square have already been reported. This weekend, the Right Sector called for its members to mobilize against a Russian intervention. The prospect of an armed, anti-Semitic mob in a largely lawless country should give everyone cause for alarm.

To Westerners, fighting for freedom and attacking Jews seem like an anachronism. But anti-Semitism has always existed alongside the Ukrainian independence movement. Throughout the 20th century, every uprising or civil war in Ukraine was accompanied by mass murder of Jews. The parallels to today are disturbing.

The first violent struggle for Ukrainian independence took place during the Russian civil war between 1918 and 1920. Following the collapse of the Tsarist Empire, Ukrainian nationalists declared an independent Ukraine, and tried to defend it against the Red Army and White troops. Anti-Semitism was widespread at the time, and all warring parties on the territory of today’s Ukraine committed pogroms. But the nationalists of the Ukrainian Directorate were especially brutal.

Nationalist troops murdered thousands of Jews – at least partially because they associated all Jews with the hated Bolsheviks. Jews were strongly represented in the Bolshevik leadership (the commander of the Red Army, Leon Trotsky, was a Jew), and nationalists often spoke of the “Jew-Bolshevik” as their enemy. Killing Jewish people was justified as a means of fighting against Bolshevik collaborators. In fact only very few Ukrainian Jews had ties to the Bolsheviks, but that did little to dispel the myth of their collaboration.

During World War II, certain Ukrainian nationalists once again targeted Jews as alleged agents of Bolshevik rule. Following the Nazi invasion in 1941, Ukrainians killed a large number of Jews in pogroms with the help and at the instigation of the Germans. The pogroms would never have happened without German encouragement, and they pale in comparison to the subsequent mass murder at the hands of SS and Wehrmacht. But they are nevertheless continuation of Ukrainian nationalist anti-Semitism.

As historian Timothy Snyder writes in his book “Bloodlands”, the Nazis were able to recruit Ukrainians en-masse because they played on the popular belief that Jews were responsible for the hated Soviet power, which had killed millions of Ukrainians through famine and terror in the 1930s.

Today’s militant Ukrainian nationalists trace their roots back to the nationalists who fought Bolshevik power during the civil war and in the 1940s. They also employ a very similar brand of anti-Semitism as some of their predecessors.

In 2004 Oleh Tyahnybok, leader of the nationalist Svoboda party and one of the three signatories of last month’s interim peace deal with Yanukovych (along with Vitali Klichko and Arseniy Yatsenyuk), alleged that a “Jewish-Muscovite Mafia” is ruling Ukraine. By replacing the term “Jew-Bolshevik” with “Jew-Muscovite,” Tyahnybok continued the tradition of blaming Jews for supposed Russian aggression. That Jews were attacked during the protests against Yanukovych seems to indicate that others think like him.

In 1919, 1941 and today, the suggestion that Ukraine’s Jews are somehow collaborating with Moscow is ludicrous. Moreover, then as now only a small minority of Ukrainian nationalists is anti-Semitic. But Ukraine’s history shows that a radical minority can cause devastating violence and discredit an entire freedom movement.

In many ways, the situation of Ukraine’s Jews is much more secure today than in 1919 or 1941. It is still far from clear if a civil war will break out. And even if the country succumbs to violence, Jews are less likely to suffer. Ukrainian nationalists today are far more dependent on public opinion and support from the West, and would hopefully be loath to jeopardize this by attacking Jews.

But anti-Semitism is never entirely rational, and the West needs to brace for the possibility that a few radical Ukrainian nationalists could attack Jews even if it runs counter to their own interests. To prevent this, the U.S., the E.U., and the Ukrainian government need to make it clear to Svoboda and the Right Sector that any violence against Jews will turn them into pariahs and cause them to lose any potential support. This is not only in the interest of Ukrainian Jews, but of all Ukrainians who hope for closer ties to the E.U. After all, anti-Semitic violence could discredit the Maidan revolution and do more damage to the Ukrainian struggle for independence from Moscow than Putin ever could.

Putin’s invasion of Crimea has already thrown Eastern Europe back into the dark days of 20th century imperialism. Now it is up to Western leaders to make sure anti-Semitic violence doesn’t also make its comeback.

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What if Ukraine had nukes?

Ukraine is caught in a struggle between the E.U. and Russia over influence in Eastern Europe. The E.U. is vocally supporting the protesters, who  demand that President Yanukovich sign an association agreement with the E.U., echoing pro-European demands of the Orange Revolution of 2004. Russia, on the other hand, has granted Ukraine loans and cheap gas in order to keep the country in its own economic and political sphere of influence. This struggle over influence has led to significant tension between Moscow and Brussels.

Now imagine how much higher tensions would be if Ukraine had nuclear weapons.

As Steven Pfifer, a former U.S. ambassador to Ukraine, points out in an article for the Brookings Institution, Ukraine could well have become a nuclear power. The young country inherited “176 intercontinental ballistic missiles (ICBMs), 44 strategic bombers and some 1900 strategic nuclear warheads” from the Soviet Union. Luckily it agreed to surrender all its nuclear capabilities in the Tripartite Agreement of 1994. It would have been extremely expensive for Ukraine to keep its nuclear weapons anyway – but not impossible. Had Ukraine’s leadership chosen a different course, Pfifer writes, consequences could have been catastrophic:

“Had Ukraine tried to hold on to a nuclear arsenal, the last 20 years would have seen a very different history. It is hard to imagine the very positive developments that took place in U.S.-Ukrainian relations in the mid-1990s—greatly expanded reform assistance, frequent summit meetings, the establishment of a strategic partnership and the creation of the U.S.-Ukraine Binational Commission, chaired by Vice President Al Gore and President Leonid Kuchma—had Kyiv held on to nuclear weapons.

Nuclear weapons also would have thwarted the development of Ukraine’s relations with Europe. NATO would not have agreed to a “distinctive” NATO-Ukraine partnership or a NATO-Ukraine Council in 1997, and Kyiv would have had little reason to expect much from the European Union.

Moreover, no issue between Moscow and Kyiv would have proven more contentious. Had the Russians believed that Ukraine would seriously try to keep nuclear arms, they would have resorted to all kinds of diplomatic, political, economic and other pressure to force a change of policy course.  If—or when—the issue boiled over into a full-fledged crisis, the Ukrainians would have faced Russia alone, with no international support whatsoever.”

In 2014, a Ukrainian nuclear arsenal would have substantially raised the stakes in the Russian-European power struggle over Eastern Europe. Russia would certainly be more anxious over the possibility of losing Ukraine to the West, and perhaps more willing to intervene in its neighbor’s affairs. Nuclear weapons are often said to guarantee a country’s independence. But in Ukraine’s case, the opposite seems true.

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Three stories from 2013 that will matter 20 years from now

In reviewing 2013, The Atlantic recently took a deep look into the future. Rather than list the most significant events of the past year by their immediate impact, editor Moses Naim presented us “the stories from 2013 that will reshape the world long after this year draws to a close”. The stories Naim chose were: the shale-gas boom, America’s battered reputation abroad, tensions in the Middle East, China’s new assertiveness, and growing discontent over social inequality.

There is no doubt these stories are big, and will matter for years to come. But Naim only picked stories from the headlines, while the developments that matter in the future are often those contemporaries overlook. Take the 1980s, for example. Everyone back then knew that the slow collapse of the Soviet bloc or China’s turn towards a market economy would be a big deal for years to come. But hardly anyone foresaw that the rise of Islamist militancy in Afghanistan or Reagan’s financial deregulation would shake the world two decades later. In this spirit, here are the three most overlooked stories from 2013 that will shape our world for years and decades to come:

1. Crowdfunding

Following the 2008 financial meltdown, the U.S. government embarked on a string of regulatory reforms culminating in the Dodd-Frank Act. In effect, the new regulations made lending more difficult and less profitable for banks, discouraging the type of risk taking that led to the crisis. But while banks are curtailed, private equity and hedge funds are largely left to do whatever they want. In commercial real estate, which I cover for the Real Estate Weekly, this regulatory imbalance has already led financing to shift from traditional bank loans, which have become more rare and expensive, to private equity.

This is where crowdfunding enters the picture. In September, the Securities and Exchange Commission made it legal to raise funds from accredited investors in the U.S. via the internet. Since then, crowdfunding startups have become almost hyperactive. Much like private equity, crowdfunding is now subject to less stringent regulations and capital requirements than banking, which means they can delve into more risky projects and offer higher returns.

Such legal incentives matter. With banks constrained, the newly liberated crowdfunding firms will join private equity in shifting financing away from banks. Ten years from now, will you still deposit your $5,000 savings with a bank if you can get twice the return by investing them in a crowdfunded skyscraper or in private equity funds, which are increasingly targeting small-time savers?

For centuries, financing has been dominated by the banking sector. 2013 could be the year this begins to change.

2. East Africa’s Monetary Union

We can ignore Africa because the whole continent is a basket case full of corruption and civil wars, right? Wrong. One day, Africa’s economy will be huge. And 2013 might be the year its turnaround finally took off with a surprisingly little-noticed policy decision.

In November, Rwanda, Uganda, Tanzania and Kenya signed a deal to establish a single currency within ten years.This could be a huge step for several reasons. First of all, it is undisputed that enlarging a market spurs growth. Rwanda and Kenya, despite all their troubles, are already very innovative, for example in their use of mobile-phone banking. With wages rising in China, a unified, low-wage market in East Africa with improved communications and innovative financing could attract much more foreign and domestic investment.

Monetary union could also make the region more politically stable. Once countries are tied together in a single market, each member state has an interest in keeping the others peaceful and stable. If an insurgency broke out in one state, other governments would be far more likely to help and  intervene quickly than they are today, in order to prevent the union from losing credibility. In essence, this would be the military version of the bailouts we recently saw in the Eurozone. Rebellions frequently break out in Africa because governments and their armies are weak. But rising up in rebellion against four governments simultaneously is daunting, even in East Africa.

There are still many factors that could derail the monetary union – from inter-ethnic tensions over corruption to spillover from Somalia’s civil war. But if it succeeds, the union could grow to include more and more countries, kick-starting a new age of African stability and prosperity.

3. Commercial Drones

In November, Amazon CEO Jeff Bezos announced that he intends to use drones to deliver parcels. This could be the first step towards the use of commercial drones across the world. Dystopia? Probably not.

According to Neil Jacobstein, commercial drones could be the next internet – developed by the military but soon spreading out to transform the world. In The World Policy Journal’s recent fall issue, Jacobstein makes the case to legalize their use, albeit with strict security regulations.

He has a point. Drones, if safe, can revolutionize our world much in the way the internet has. They could drastically reduce transportation costs, bringing the world closer together and boosting growth. In the long run, they could also lead to a revival of remote areas. Who needs to live close to shops if you can have everything you need (maybe even Thai Food from your favorite restaurant?) delivered by drone into the Canadian wilderness?

Commercial drones can create a new world of physical (not just technological) connectivity. This is why, twenty years from now, Bezos’ 2013 announcement  could be far bigger than any speech by Barack Obama.

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The Economist says 2014 is like 1914. Is it?

Here’s an interesting thought: we may be months away from World War III. This, in essence, is the argument by an op-ed in The Economist’s holiday issue. Looking back at new year 1914, the (unnamed) author concludes that the world back then was living in globalized prosperity and no one saw the catastrophe coming. This complacency, the author writes, was in part to blame for the war’s outbreak. A hundred years later, the author finds a similar complacency with regard to the territorial dispute in the South China Sea:

Yet the parallels remain troubling. The United States is Britain, the superpower on the wane, unable to guarantee global security. Its main trading partner, China, plays the part of Germany, a new economic power bristling with nationalist indignation and building up its armed forces rapidly. Modern Japan is France, an ally of the retreating hegemon and a declining regional power. The parallels are not exact—China lacks the Kaiser’s territorial ambitions and America’s defence budget is far more impressive than imperial Britain’s—but they are close enough for the world to be on its guard.

Which, by and large, it is not. The most troubling similarity between 1914 and now is complacency. Businesspeople today are like businesspeople then: too busy making money to notice the serpents flickering at the bottom of their trading screens. Politicians are playing with nationalism just as they did 100 years ago.

The comparison between China and Germany – and Europe in 1914 and Asia in 2014 in general – seems like a stretch. Germany went to war because it felt its back against the wall and was loosing the peace. It was encircled by a hostile triple entente that had more economic and military strength, and was fearful of falling behind the booming U.S. and industrializing Russia, as historians like Niall Ferguson have argued. A quick victory through a surprise attack in the near future seemed like Germany’s best chance to become a true world power.

China today, on the other hand, knows that it is destined to become the world’s leading economy and a military superpower within the next few decades. Unlike Germany in 1914, time is working in its favor, and going to war over territorial disputes now would only derail its rise. Similarly, Japan can’t afford any war in the near future, crippled by government debt and a weak military. A war may still happen once China is no longer on the rise and feels its time has come, and once Japan has built up a stronger military. But that won’t be anytime soon, and certainly not in 2014.

While World War III isn’t imminent, the article makes the important point that we should never underestimate the potential for another great war. Much like 1914, Westerners today have taken over the naive view that wars only happen in poor countries. The lesson of World War I suggests otherwise.

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Is the Iran Deal as Bad as the Munich Agreement?

Not at all. Read my take on why Munich’s failure makes a strong case for appeasing Iran, written for the World Policy Journal’s blog: http://www.worldpolicy.org/blog/2013/12/03/munichs-failure-reason-iranian-appeasement

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