March 25, 2014 ·
The Ukraine crisis will be a turning point for how states think about globalization. For almost twenty years, the United States and all major powers have pursued greater economic, financial, and technological integration as an end in itself. Global integration held the promise of peace, stability, and mutual prosperity.
On several occasions, most notably after the financial crisis in 2008, experts predicted the end of integration and the return of protectionism but it never came. It took the Ukraine crisis to bring the world to the cusp of a period of de-globalization.
The Ukraine crisis shows that at a moment of high tension the major powers will use the leverage they gain from interdependence as a weapon against each other. Thus, this week, the United States imposed sanctions against Russian banks and oligarchs. Russia is employing its own economic weapons against Ukraine and is reportedly considering retaliation of its own against the European Union and America.
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.
Russian companies have already pulled billions of dollars from western banks, presumably to preempt sanctions, while Putin demanded that Russian companies register “onshore” instead of abroad. Western European governments are acutely aware of their exposure to Russia and are looking for ways to reduce their dependence on Russian energy. Western banks are already paying a price while companies like Boeing and General Electric are closely tracking how sanctions on Russia may detrimentally impact upon their interests there.
We saw some signs of hedging even before the Ukraine crisis. The United States and many of its allies prevented Huawei, a Chinese technology company, from investing in critical infrastructure because of concerns it could be influenced by the Chinese government. Some U.S. analysts havewarned against being overly reliant on China’s purchase of U.S. treasuries.