Putin’s war is also against the dollar - Taiwan SPA Light Co.,Ltd

To defeat Putin, the West must protect the dollar-led economic order, says the author of a new book on Russia’s war

Russia’s war on Ukraine has destroyed huge swathes of the country and attacked the international order, but, as a new book by political risk analyst Maximilian Hess argues, it’s also a challenge to the US-led dollar system.

‘Economic War: Ukraine and the Global Conflict Between East and West’ tracks the recent relationship between Russia and the West. Hess explains how the growing tension after Russia’s annexation of Crimea in 2014 was permeated by economic sanctions, trade disputes and other financial concerns, and how it grew into an all-out “economic war” following the full-scale invasion of Ukraine last year.

Hess argues that the Kremlin has bundled these discrete areas into a wider challenge against the Western economic order and, specifically, the US dollar. Once Russia is defeated, he says, there will be a chance to address some of the inequalities the dollar system has engendered – and that it’s inevitable Russia will have to be reincorporated into the international financial system. That is, if Russia respects its neighbouring states’ sovereignty.

Here, openDemocracy presents an extract from Hess’s new book, which is published by C Hurst & Co on 3 August.

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Ukraine has been beset by war since February 2014, when Russian President Vladimir Putin ordered his forces to seize Crimea. He subsequently fomented a conflict in Ukraine’s eastern Donbas region. After eight years of conflict in Ukraine and growing tensions, Russia launched an all-out invasion on 24 February 2022, not only sparking the largest war in Europe since 1945 but also transforming Russian and Western tensions into an economic war – the impacts of which would be felt around the globe.

Russia’s initial invasion was prompted by Ukraine’s 2014 Euromaidan Revolution, which forced the then Ukrainian President Viktor Yanukovych to flee the country. The revolution undoubtedly had an economic component, the first protests having been ignited by Yanukovych’s decision to reject a trade agreement with the European Union.

But its underlying cause was the Yanukovych government’s deep corruption, which many protesters saw as intertwined with his pro-Russian agenda. Ahead of the revolution, Putin argued that closer links between Ukraine and the West, as envisaged in the association agreement, would threaten his own economic agenda and his vision for the future of Eurasia.

Russia’s annexation of Crimea shaped relations between Russia and the West in the ensuing years. Western sanctions dented Moscow’s ability to seek financing in the West and made Putin’s inner circle personae non gratae.

Although most of Russia’s biggest businesses and their economic linkages to the West were largely unaffected, the sanctions nonetheless prompted a visceral response from the Kremlin, which asserted firmer control over Russia’s economy and increasingly sought to undermine the West’s influence both at home and abroad. Russia also became increasingly active in seeking to foment the West’s internal tensions, perhaps the most infamous example of which is the debate around Russia’s role in Donald Trump’s 2016 election as US president.

As of the time of publication, the economic war between Russia and the West is not over. It is unlikely to end while Putin remains in the Kremlin. Its outcome will be a decisive factor in determining Ukraine’s future.

Kyiv may be able to beat back Putin’s onslaught, but, if Russia has the economic wherewithal to regroup and attack again, it will. The outcome of the economic war will also shape Russia’s own future. Even when it does end, the Western-held debts and shares that have been frozen will be far more significant factors in determining the world’s relationship to a post-Putin Russia than they were in shaping its relationship to the post-Soviet one. And while Putin has failed in his attempts to collapse the global economic order, he has wrecked his own economy, sowing seeds of destruction that will continue to sprout even after he is gone.

Putin has used economic levers over other states ever since he assumed the presidency. Since staking his rule on an existential war of destruction against supposedly fraternal Ukraine, he has bet the house of Russia’s economy. He shows no signs of folding. Russia’s aggression has only hardened the West’s resolve in sanctioning and weakening the Russian economy; even non-aligned countries have increasingly shied away from Putin’s genocidal and self-destructive mania.

Although the economic war consists of a large coalition, it is powered largely by the United States.

Whereas the world once depended on gold to regulate international finance and commerce, today it depends on dollars. This grants the United States a form of economic power known as ‘exorbitant privilege’.

While the United States is not alone in its ability to bail out its banks and businesses in times of crisis – other countries with internationally traded currencies can also do so, as can some with closed markets, such as China – the difference is that the United States can shrug off concerns over the impact of such actions on its government balance sheet.

The power of the dollar and its central role in global financial and monetary markets gives it the ability to constrain even Russia’s would-be allies. In the run-up to his invasion of Ukraine on 24 February 2022, Putin’s securing of a ‘friendship without limits’ declaration from Beijing reportedly included a secret protocol with a mutual defence commitment along the lines of those that underpin the North Atlantic Treaty. But there were limits, and the pledge reportedly included conditions that excluded territories recently annexed during war, a proviso Beijing allegedly insisted upon.

Putin’s full-scale invasion of Ukraine and the ensuing economic war should prompt consideration about how to strengthen, not weaken, the United States’ security alliances as well as its economic ones. A serious conversation about the threats to the dollar system is sorely lacking, though not quite as absent as healthy debate about how to strengthen it – a challenge present on both sides of the aisle.

It is ludicrous – and manifestly as against the US interest as withdrawing from NATO – that regulatory agencies in the United States have even considered supporting cryptocurrencies, as have both leading Democratic and Republican politicians. Not only would this help actors such as Russia evade sanctions but, if their proponents’ fantasies of creating a new non-dollar-based financial system are realised, it would weaken US geopolitical power far more than even a drastic cut in the US defence budget.

The irony is that whereas so many in the West are oblivious to the geopolitical significance of the dollar, Russia very much is not. In a pair of 27 October 2022 speeches, Putin referred to the dollar-based international economic order as an “unfair hegemonic system”, while his trusted aide-de-camp Igor Sechin claimed that sanctions imposed on Russia were representative of US efforts to retain its hegemony and that they threaten “to abolish the sovereign rights of countries to [control] their own resources”.

The Kremlin is right about the power of the dollar. Russia’s 2022 invasion of Ukraine and actions in the ensuing economic war aimed to secure its status as a major global power, making it the dominant player in Eurasia and undermining the US-led West’s hegemony.

This has failed. The United States may no longer have the geopolitical hegemony it enjoyed immediately after the Soviet collapse. Even Francis Fukuyama, the oft-misunderstood author of the ‘end of history’ thesis, which posited that the collapse would precede a future in which liberal democracy and free trade would come to be near universal, has acknowledged he may have been wrong. What hegemony does remain is in the international economic order. The West should strive to protect the dollar system and further develop the economic order built upon it, though there is no guarantee it will, in the future, handle that power justly.

There is a risk that politicians in the United States could abuse the power of the dollar for purposes that are not in the core interests of the United States or its allies, or where they risk causing more backlash than they bring benefit. An over-use of sanctions in cases where they are not warranted or the most effective tool risks undermining the dollar system. And there should be no expectation that Washington will always use its economic weapons prudently. It has certainly acted unjustly in the past. There are also many cases of human rights abuses, war crimes, and malign economic statecraft that Washington does not respond to with sanctions, and it is unlikely to in the future. It is true this is not always equitable, and there are legitimate concerns that it perpetuates inequality. Nonetheless, the US-led economic order and the dollar system also have many benefits, least of all serving as the key engine for global economic growth.

The outcome of Russia’s invasion of Ukraine and economic war offers an opportunity to begin addressing some of the criticisms that the dollar system acts to perpetuate inequality and injustices.

Calls for an international package to invest in Ukraine’s reconstruction and to re-assess its debt offer opportunities to have the US-led economic order act in a manner that benefits those so cruelly affected by an unjust war of aggression. So too will responding to whatever kind of Russia succeeds Putin’s, for his failures in the economic war and in invading Ukraine are certain to be the beginning of the end for his regime.

How long that process will take to play out is unclear, but, when the time comes, Russia will inevitably be pulled back into the international economic order. International capital will demand it, given the potential returns on offer. That such integration is necessary for Russia to return to growth and invest in its long-term future means the Russian people will demand it as well.

The West should ensure that Russia’s eventual return to the international economic order is contingent on it honouring its neighbours’ sovereignty, the de-politicisation of commodity supplies, and the return of democracy. If these contingencies are met, all sanctions and trade restrictions should be lifted, even if geopolitical differences between the new Russia and the West remain. Failure to do so would risk repeating the path that led to the economic war in the first place.

Excerpted from Economic War: Ukraine and the Global Conflict between Russia and the West by Maximilian Hess and published by C. Hurst & Co. (Publishers) Ltd. © Maximilian Hess, 2023. Used by permission. All rights reserved. Footnotes have been removed to ease reading.

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