A trade war with Russia would be Lehman Bros 2
MORALITY and foreign policy make uneasy bedfellows. In 1997, when Tony Blair called for an ethical foreign policy, the country cheered; 17 years later, any politician calling for such idealism would be laughed out of town. After 9/11, Afghanistan, Iraq, Georgia, the Arab Spring and so on, a battlehardened realism is the order of the day. Foreign policy is tough and dirty; compromises sadly necessary.
To understand why the world stands so debilitated in the face of Russian aggression, a little context is necessary. The West is in a fragile state: its mixedeconomy model is under internal attack, its debt levels high, its monetary and financial systems unhealthy and many countries have barely exited a recession which began seven years ago. Belief in capitalism is in decline, populism is on the rise, political and financial elites are discredited and democracies are becoming less liberal, with increased surveillance and ever more burdensome regulations.
Appetite for wars overseas has waned dramatically post-Iraq. While the terrorist threat has been kept at bay, it hasn’t gone away. The UK is torn between its desire to try and take part – if only symbolically – in conflicts but is unable to protect Gibraltar, one of its outposts, from endless vexations and would stand no hope of rescuing the Falklands if Argentina were to invade again.
It is not just the West that is tired, economically troubled and intellectually confused. China’s economy has slowed dangerously, its debt bubble is immense, its labour costs have risen, it is facing various forms of internal unrest, including terrorism, and its current economic and political status quo is not tenable. It needs to change and evolve, not least by reforming its currency and making its banking system work better, but that is easier said than done, and the probability that it will all end in revolution, bloodshed and horror is far from negligible. Other emerging countries, such as India, are starting to look healthier – but at some stage China will start to throw its weight around in foreign affairs in a much more aggressive manner.
Russia is in an even worse place: it faces demographic collapse, its manufacturing output is shrinking again, growth is feeble and its political system horribly authoritarian. It was forced to jack up interest rates by 1.5 percentage points yesterday and spend two per cent of its $493.4bn cash pile defending the rouble, which collapsed to an all-time low. The prospect of war, possible sanctions and extreme uncertainty triggered a stock market crash yesterday. For all of these problems, the rich democracies trade more than ever before with Russia and other unsavoury regimes; this has been a mutually beneficial arrangement and has helped hundreds of millions of people escape abject poverty. In the case of Russia, Europe is hugely dependent on its oil, gas and coal; any suspension of supplies would be catastrophic. London serves as a key finance and service centre for Russia, while the UK’s industrial heartlands also benefit: 9.5 per cent of car exports went to Russia last year.
Given all of this, what should be done? Military intervention would be madness – but Europe’s defences must be bolstered. We are no longer in a post-Cold War detente; Poland and the Baltic states are terrified. Nato needs to mean Nato again; a forcible statement should be issued making it clear that the old doctrine of mutually assured destruction would be back in the event of attacks on further countries. A new missile defence system and US military support is needed.
Iranian-style sanctions on Russia would be extremely painful for all concerned. It is unclear who would blink first: the Russians, who would face economic implosion, or Europe, which would be tipped back into a vicious recession. Global banks could go bust if they suddenly couldn’t trade with Russian firms anymore, Russia could default on its debt, the price of grain, energy, oil and commodities would rocket and we would face a new Lehman moment. Germany, whose ties with Russia are even closer than London’s, would never risk it, and voters would not tolerate the pain. Some targeted sanctions on specific individuals may help, but could easily backfire. Longer-term solutions include developing shale gas to be less dependent on Russian imports, and hoping that Putinism doesn’t last forever.
The simple, horrible truth is that we are stuck. The best outcome is to contain Russia, prevent the pro-Western parts of Ukraine from being swallowed and stop chaos breaking out elsewhere. The Chinese and Iranians are watching carefully. The West may be in crisis, and forced to confront the reality of its unethical foreign policy, but it needs to show that it is not quite finished yet.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath