An era came to an end in 2022. The Russian invasion of Ukraine dealt a knockout blow to a system that had been battered by repeated financial crises, the COVID-19 pandemic, fragile supply chains and public hostility. Meanwhile, much of the Global South seems to be adopting the path of ‘neither their war nor their peace’.
Knock-on effects of the Russian invasion of Ukraine
Russia’s invasion of Ukraine has fractured key pillars of world order: food security, supply chains, energy security and international political alignments. The World Food Program estimated that the number of people who are acutely food insecure or at high risk soared to 345 million, an increase of almost 200 million people compared to pre-pandemic levels. An estimated 50 million people were at emergency levels of food insecurity. The ripple effects of the invasion drove this increase. At least half of the wheat bought by the United Nations for food assistance worldwide came from Ukraine. Famine-stricken countries such as Yemen were the worst affected. The United Nations Deputy Secretary-General said that as the price of food skyrocketed around the world, there was ‘the real risk of growing hunger on an unprecedented scale’ such that achieving the internationally agreed Sustainable Development Goals was ‘even more difficult now’.
Even before the invasion, extreme weather and the pandemic had resulted in higher shipping costs, energy price inflation, labour shortages, and rising food prices. Then Russia, the world’s biggest producer of wheat, invaded Ukraine, more than 70 per cent of which is prime agricultural land. Together, the two countries made up a quarter of the global grain trade. Ukraine’s exports of wheat, corn, barley, rye, sunflower oil, and potatoes to the European Union, Northern Africa, and the Middle East plummeted as ships taking supplies from the Black Sea region to world markets stayed away. Many developing countries, such as Egypt, Indonesia, Turkey, and Bangladesh, were affected because they import billions of dollars worth of Ukrainian wheat annually. The spike in vegetable oil prices affected households in India, the biggest importer of edible oils necessary for frying, baking, and other forms of cooking.
Fertiliser prices were already rising before the invasion. They shot up sharply after it because of the soaring price of natural gas, a key input in producing nitrogen fertilisers. The ripple effects were felt as far away as Brazil, the world’s largest importer of fertiliser. The one crop holding back a global food crisis was rice, the staple diet for half the world’s population. Asian governments had learnt the lesson of the 2007–08 rice shortage and invested heavily in supporting domestic rice cultivation. Major rice exporters, including India and Vietnam, were not compelled to restrict rice exports this year, and it remained affordable.
The invasion had consequences beyond food. Supply chains, already fragile, have come under severe stress. Steel is one of the central components of the modern world economy. It is present in washing machines, cars, railways, buildings, and much more. The steel manufacturing complex at Mariupol was one of the world’s largest. The damage to it has affected the availability of steel worldwide. About 60 per cent of the weight of the average car, for example, comes from steel. The cost of that steel tripled in the wake of the invasion. The availability of rebar steel, used to reinforce concrete in most construction projects, is likely to be curtailed for the next few years. Ukraine was the eighth largest steel exporter in the world. Russia remains its third largest exporter after China and Japan. There are other ways to produce steel than the huge blast furnaces at Mariupol; electric-arc furnaces supply 40 per cent of Europe’s steel. But these furnaces use large amounts of electricity to melt scrap iron into fresh steel, and electricity prices soared tenfold as a result of the invasion. Many of these smaller furnaces had to shut down or reduce output.
Russia also happens to be the largest producer of electricity-intensive aluminium after China, resulting in critical shortages in solar panels, turbines, and the grids they connect with, all of which require aluminium. The effect on the renewable energy transition is obvious. Russia also dominates the world’s supply of palladium, used in more than two thirds of light duty vehicles. It is a key material used to reduce emission levels and help make cars cleaner. A shortage of palladium could affect carbon emission targets for several years. The cost of lithium, required in the batteries of electric vehicles, is now almost 500 per cent higher than it was a year ago.
The shocks to global supply chains have occurred at a time of great financial sickness in the global economy. The power of globally connected financial capital markets has been a central feature of the neoliberal project of the past 40 years. This project replaced the era of regimented capitalism established at Bretton Woods in 1944. That era in turn had sought to deliver full employment and income growth and to make finance the servant of capitalism, not its master. Henry Morgenthau, Roosevelt’s Treasury Secretary, said that the job of Bretton Woods was to drive ‘the usurious money lenders from the temple of international finance’.i But under neoliberalism, finance once again became the master. The barriers separating commercial and investment banking were torn down. New, risky financial products were permitted. Banks were allowed to measure their own risk exposures.
The result was uncontrolled cross-border flows of hot money, great wealth for those involved in the financial sector, and volatility and risk at levels unprecedented in human history. According to a calculation by Vijay Prashad based on data from the International Monetary Fund and the International Labor Organization, between 1970 and the Global Financial Crisis of 2008, there were 124 systematic banking crises, 208 currency crises, 63 sovereign debt crises, 42 twin crises, 10 triple crises, a global economic downturn every decade, and several price shocks bookended by the two oil shocks of the 1970s and the food and energy price shock of 2008. Monetary policy became the main tool of economic management even as it further damaged an already sick economy. As Christopher Leonard has shown, the US Federal Reserve increased the money supply by less than a trillion US dollars in the first century of its existence (1913–2008). But it printed US$1.2 trillion between late 2008 and early 2010—one hundred years’ worth of money in little over a year. The amount of excess money ‘swelled from $200 billion in 2008 to $1.2 trillion in 2010, an increase of 600 percent’. When the pandemic hit in March 2020, the Federal Reserve pumped another US$2 trillion into the system at first, and kept pumping until its balance sheet increased from US$2.3 trillion to US$8.2 trillion and rising in mid-2021.
Russia’s invasion comes amid this global financial weakness.
Greater Germany unravelling
The industrial heartland of Europe is what might be called Greater Germany—a single economic system of almost 200 million people within a set of interdependent economies. Germany is the centre of the system. Its western flank is Austria, Switzerland, Belgium, and the Netherlands. Its eastern flank is the Czech Republic, the Slovak Republic, Hungary, Poland, and Slovenia. Germany trades more with the Netherlands than with France, and more with Poland than with Italy. As Marco d’Eramo notes, the aim of this interdependence was ‘to integrate states, bringing together logistical, productive and energy exporting zones (Russia, Ukraine, Kazakhstan) and imports of industrial goods both from China and Germany’. The ‘ultimate objective of the German bloc’ was ‘the creation of a Eurasian continental front with Germany and China as its two extremities, and Russia as an indispensable connector’.
In the 2018–21 period, four German companies—Mercedes-Benz, Volkswagen, BMW, and BASF—were responsible for a third of all European investment in China. Mercedes-Benz sells three times as many cars in China as it does in the United States and counts two Chinese entities as its biggest shareholders. Russia’s invasion of Ukraine has effectively put an end to the dream of a common Eurasian space because it forces Germany to weaken its ties with China and closes the Russian channel of communication between them. As d’Eramo points out, it also bars Germany’s use of Russia as a resource-rich backwater’. The status of BASF in particular is of serious concern. It is the largest single chemical plant in the world, spread out over more than ten square kilometres. It is the engine of Germany’s chemical sector and is reliant on gas, the supply of which is now being curtailed. Its health affects almost every supply chain in Europe. The economies of Poland, the Czech and Slovak Republics and Slovenia have the highest employment shares in vulnerable gas-intensive sectors.
If this state of affairs persists for the rest of the decade, Germany’s current geoeconomic strategy will be defeated.
Neither their war nor their peace
Few countries in the Global South have joined the campaign of economic sanctions against Russia. Many of the world’s most populous countries, such as China, India, Brazil, Bangladesh, Pakistan, Indonesia and Turkey—a NATO member—have refused to. Indonesia’s foreign ministry stated, ‘We will not blindly follow the steps taken by another country’. Mexico’s president said, ‘We do not consider that [this war] concerns us … We are not going to take any sort of economic reprisal because we want to have good relations with all governments’. Argentina voted to condemn Russia’s actions at the UN but also stayed away from sanctions. Much the same has occurred in Africa.
A commentator who spoke with diplomats and analysts from across Africa, Asia, the Middle East and Latin America reported that ‘these countries largely sympathize with the plight of the Ukrainian people and view Russia as the aggressor’ but that ‘Western demands that they make costly sacrifices … to uphold a “rules-based order” have begotten an allergic reaction’. As they see it, ‘no other country or bloc has undermined international law, norms or the rules-based order more than the US and the West’. Invasions, war crimes, coups, sanctions and other acts have usually been directed against the Global South. To demand that they make massive and costly sacrifices to uphold ‘an order in which the US can continue to act outside international law is equivalent to asking the Global South to make unbearable sacrifices to uphold American exceptionalism’.
It appears that much of the world might want neither war nor an unjust peace; neutrality is becoming a serious option. Once known as non-alignment, a version of it is likely to resurface in calls for a multipolar world. This world has been a decade in the making. The concept of a democratic, equitable international order that would be an alternative to an imperial order, whether led by the United States or by a China-based alliance, has been discussed at the United Nations every year since 2011 but has never been discussed or reported seriously in the Australian media. Meanwhile, China continues its outreach to the developing world while the United States faces a deeply polarised political landscape and the prospect of democratic erosion.
i Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, Princeton University Press, 2013, p. 125.