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15 May 2014

Restrained by economic mesh what's holding back a major ear

Nayan Chanda 
May 10, 2014

Russia's occupation of Crimea and its military threat to Ukraine's sovereignty have suddenly challenged the commonly-held assumption that the era of territorial annexation ended in 1991, when the world's collective action reversed Iraq's attempt to swallow Kuwait. Those concerned about China's aggressive claims fear the Crimea precedent may have emboldened Beijing in its attempt to set up a giant oil drilling rig within Vietnam's territorial waters claimed by China. Apart from urging restraint on both sides world powers are reluctant to complicate their important relations with China. By employing its law-enforcement vessels rather than navy ships, and water cannons rather than guns, China too wants to keep the conflict at a low boil. 

The muted response to Russia and China's aggressive actions seem to underscore that in an increasingly interdependent world, the power of the state is ever more constrained. The mesh of economic interdependence that deters collective response to egregious behaviour offers some freedom of action to those who dare to challenge the existing order - but only up to a point. Both China and Russia's aggressive yet cautious behaviour underlines an awareness of the limits of their action without incurring the very high cost of tearing up the economic mesh. 

Despite tough talk in Washington, nobody is seriously considering a military response to Russia's absorption of Crimea. Even the limited sanctions on Russia that were adopted by the US and its European allies incurred criticisms by businesses and politicians. China's attempt to bully Vietnam similarly has caused unease among its Asean neighbours but no reaction that would upset their economic ties with Beijing. 

It is not hard to understand why. Since the collapse of communist rule, Russia has been largely integrated into the world economy. Not only does it supply one-third of the gas needed by Europe, its rare minerals supply the needs of western manufacturing. If Russian supplies of titanium were disrupted, so too would be the production of Boeing 787 Dreamliner, which requires the alloy to build its fuel-efficient airliner. Top German companies which count Russia among valued customers have expressed concerns about the impact of sanctions. Major western oil companies have lucrative contracts with Russia's state-owned oil giant Rosneft. 

One cannot also ignore the potential political costs of isolating Russia while the West tries to deal with the Syrian crisis, the Iranian nuclear challenge and the morass of Afghanistan following Nato's withdrawal. Russian rockets currently provide the only means of transporting astronauts and material to the International Space Station. 

This is not to say Moscow doesn't face its own challenges. Russia too has learned the high cost of its military ventures as capital flees ($51 billion in the first quarter), stock markets decline and prices of imported goods shoot up. Russia's dependence on oil and gas revenues (65% of exports and 35% of revenue) makes sustained sanctions a particularly unwelcome prospect. Russia's future productivity growth and investment would require greater integration with the world economy. Such a course would obviously be jeopardised if Russia were to intervene to create a client state in southeast Ukraine. Whether or not Putin's recent soft line is a tactical feint, the economic mesh of globalisation tying Russia's fate with the rest of the world should prevent the Ukraine crisis from escalating further. 

Compared to Russia, China's economic integration with the world is multiple times wider and deeper. As the second-largest economy and the largest exporter, China's economic fate is intimately linked to that of the rest of the globe. While food, fuel and raw materials from the world feed China's growth, the country's export juggernaut and massive investment abroad (China's e-commerce giant Alibaba's billion dollar IPO in New York is expected to reach record valuation) underwrite its prosperity. 

As recent news reports show, like Russia's oligarchs investing in Europe, China's Communist Party aristocracy too have billions of dollars parked in offshore accounts — which could be threatened if their government's actions are so egregious as to provoke western sanctions. This does not mean that China will refrain from pressing its territorial claims in East Asia, but it should ensure it will continue to apply its salami-slicing tactics, advancing its de facto control in small increments that do not raise worldwide alarm and threaten the mutually beneficial mesh of interdependence.

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