The current model for globalization, based on core principles favorable to the United States and its Western trading partners, could face a shake-up if Russia decides to side with China and pursue an alternative tack for globalization.


President Barack Obama walks into Konstantin Palace in St. Petersburg on September 5, 2013, after being greeted by Russian President Vladimir Putin, right, during arrivals for the G20 summit in St. Petersburg, Russia. Photo: AP

The current crisis in Ukraine has highlighted one of the problems of globalization: It is no longer possible to punish key trading partners as an instrument of foreign policy without calling into question the fundamental principles that created the current global economic system. As Western nations began to impose sanctions against Russia, they not only punished Russia for its actions in relation to Ukraine, but also punished themselves. As a result of globalization, economies are too tightly linked to make economic sanctions viable – a fact that Western leaders are just now beginning to realize.

Recently, in an interview with The Economist, U.S. President Barack Obama said that Russia is only a regional power that does not produce anything. In fact, he said, people are not flocking to Russia for a chance at a better life. While the second part of his comment is not true - there are many from the post-Soviet states flocking to Russia for a chance at a better life - the fact remains that Russia lags in production compared to Western European states. This is a holdover from the Soviet era, when the state focused on military rather than consumer production. From that perspective, U.S. policymakers conjectured that economic sanctions would have a far bigger impact on Russia than on Western Europe.

And, yet, over the past 25 years, Russia has increasingly integrated into the global economic order. During the perestroika years, a new class of Russian small business entrepreneurs developed. These so-called “shuttle traders” would go to Turkey and other countries and then return to Russia to sell consumer goods in bazaars and other places. As Russia's economy gradually caught up to the West, Russia began to import consumer goods from Western Europe. German electronics, automobiles, and other products became status symbols for Russians, as they strove to improve their quality of life.

What was not available during Soviet times became widely available to Russians – providing, of course, that they had the money to pay for such luxuries. In fact, these items were not only available Moscow and St. Petersburg, but also became widely available throughout Russia. For example, even in the provinces, it was possible to purchase European luxury items such as BMW automobiles. 

Russia not only imported luxury goods. People could now purchase agricultural products such as real Parmesan cheese and Chilean and French wines. The problem was that, by relying on these imports, Russians stopped producing their own consumer goods. Russians seemed to prefer imported goods to their own manufactured goods, and it became more and more difficult to find Russian manufactured goods. In short, it became much more efficient to rely on imported goods than to foster the creation of the nation’s domestic producers.

Russia produced natural resources and became a major player in energy, while it also became a major importer of luxury products and manufactured goods. In short, Russia became a typical member of the globalized world economy, in which states specialize in industries and sectors where they have a natural competitive advantage.

The EU member states greatly benefited from trade with Russia. For example, France benefited from its relationship with Russia to sell Mistral-class amphibious assault ships to Russia's armed forces. However, under pressure from the United States, the French cancelled their agreement with Russia, and refused to deliver the ships. 

It should be noted that France was not the only country that benefitted from trading with Russia.  The EU relies on Russian energy exports, and the EU exports a large amount of agricultural goods to Russia. In short, both Russia and the EU depend on mutually beneficial trade, and sanctions would negatively affect both the EU and Russia. However, despite the fact that both the EU and Russia would be negatively impacted by sanctions, the United States and the EU have leveled multiple rounds of sanctions against Russia since March 2014.

The Russian response to the sanctions imposed by the EU was twofold. First, it leveled targeted sanctions against individuals in the United States. After the second round of sanctions, Russia leveled its own sanctions against agricultural imports from the EU and the United States. These sanctions were far more significant than the initial Russian response to sanctions. 

Unfortunately, the sanctions imposed by the West and the counter-sanctions applied by Russia end up hurting everyone. This is a result of globalization. For example, Russian imports of European agricultural products have been cheap enough for consumers and the growing middle class in Russia that Russian agricultural producers are no longer able to fill the void left by the sanctions. While Russian policy makers have argued that these sanctions will boost domestic agricultural production in the long term, in the short te, there are deficits of certain goods and prices have risen for agricultural goods in Russia.

In June 2014, Russia filed a complaint with the World Trade Organization (WTO) about the sanctions. It argued that sanctions have violated WTO rules. In contrast, the EU has filed many complaints against Russia with the WTO, arguing that Russia levies unfair tariffs on European exports to Russia. The most recent complaint was filed on Aug. 31, 2014.

The WTO finds itself in the unique position of determining the fate of globalization. If it rules in favor of the EU over Russia, then Russia may withdraw from the WTO and accelerate the trend towards what Dmitri Trenin has recently referred to as “bipolar globalization.” In other words, if the WTO rules in favor of the EU, Russia will have even more incentive to cooperate with China and to challenge the system that the United States and the EU support. If the WTO rules in favor of the Russian complaint against sanctions, then Russia would not leave the WTO, but would be left with uncooperative trading partners in Europe and the United States.

While the Ukrainian crisis started out as a regional conflict between Ukraine and Russia over Crimea and the status of the Black Sea Fleet, it has continued to spiral out of control and has taken on global significance in the challenge to the way that the United States views trade liberalization, economic growth and globalization.

China's President Xi Jinping, left, shakes hands with Russia's President Vladimir Putin during a bilateral meeting at the Group of 20 summit in St. Petersburg in 2013. Photo: AP

While Russia does not have the power to directly challenge U.S. hegemony, the current crisis has placed Russia in the unique position of presenting an alternate ideology for global trade and governance and emboldening China to challenge U.S. hegemony with Russian assistance. So while the United States and Russia continue to move toward another Cold War, the ultimate winner in this conflict could be China, who will stand to benefit from a weakened United States and Russia.

It is not yet clear how the Ukrainian crisis will be resolved. It is in the interests of both Russia and the United States to see the crisis resolved and relations improved to the point that cooperation can resume even if relations continue to be cool between them. However, if the current crisis continues, both sides will only end up hurting each other economically, and there may end up being a crisis to the current world order.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.