Why Russia’s Integration into the World Economy Hasn’t Made It More Peaceful

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About the Author: Christopher Smart is Chief Global Strategist and Director of the Barings Investment Institute.

It’s humbling when the assumptions of a lifetime crumble, but there are lessons amidst the debris. At least that’s my hope as I prepare for the horrific next phase of the Ukrainian war and watch the world’s 11th largest economy shrink before my eyes. Most markets may be back to where they were before the war started, but the world certainly isn’t. It is important to understand why.

I studied Russian in college because I thought it was important to understand America’s main Cold War adversary. When the Soviet Union collapsed, I traveled to Moscow to help advise a group of harassed reformers on how best to conduct market transition. Later, as a portfolio manager, the underlying assumption was that investing in Russia yields good returns and also reinforces progress in political reform and economic integration.

Strengthening the country’s participation in the global economy, simple logic went, increased the chances of political cooperation and peace. It’s a premise of much Western diplomacy that now deserves another look.

I wasn’t naïve enough to believe that an “end of story” signaled a new era of interstate comity, but the idea that economic engagement encourages good behavior made sense. As an emerging Russian middle class saw the benefits of German capital equipment, vacations in Turkey, and steadily rising living standards, they would want to encourage their country’s deeper involvement with the outside world. Of course, we would continue to harass each other about NATO enlargement or Middle East conflicts, but the fundamental alignment of economic interests would keep the relationship on track.

This is a controversial idea in academia. The “realists” insist that international relations are best understood as strong states imposing their will on the weak. Indeed, this school claims justification in the tragic scenes unfolding in Ukraine. There is an appealing simplicity to the logic that, following the Soviet collapse, the West went too far and failed to win Moscow’s trust.

But the idea that free-market democracies don’t go to war goes back to philosophers like Immanuel Kant and Joseph Schumpeter. This was essentially the heart of Western policy toward post-Soviet Russia. There was a scramble for Boris Yeltsin to be invited to the prestigious G7 meetings in the 1990s, even though he had little to say about exchange rates. There were legions of foreign advisers like me whose governments were funding projects to help privatize state assets, write new corporate laws, and launch retail mutual funds. One of the key elements of the strategy was to secure Russia’s membership of the World Trade Organization in 2012. Trade figures confirm that Russia’s dependence on global trade has grown rapidly after the collapse of the Soviet Union.

During this period, the sticking points (Serbia, Syria, Iraq, Snowden, Magnitsky, Navalny and cyberattacks) quickly overwhelmed all the fragile grounds for cooperation (timid foreign investments, Afghanistan and space).

In 2015, after Russia seized Donbass and Crimea, I worked in the National Security Council as part of a team that began deliberately dismantling the economic relationship, imposing sanctions, discouraging business investment and cutting areas of cooperation. The current wave of breathtaking sanctions has dealt the final blow to this very frayed economic relationship.

If that sounds like a dramatic setback for a grand experiment, perhaps it can kick-start an overhaul of modern economic diplomacy.

First, it is important to analyze why we failed. Realists might be right that national security concerns were always going to dominate. Or maybe Russia is just the exception that proves the rule. Free-market democracies may actually be more peaceful, but neither is Putin’s regime. If we had done more to invest in political and economic transition, would the world be where it is today?

Second, we may need to reevaluate how we balance economic engagement with political or security concerns. Trade and financial flows are at the heart of the success of the European Union. But we applied a similar “integration” strategy to China, only to see that relationship deteriorate. India is a free market and a democracy, but it remains one of the United States’ toughest partners on key foreign policy issues, including the current sanctions against Russia.

Third, at least as far as Russia is concerned, we are in a new phase of our economic diplomacy, which now depends on the stick to achieve results where carrots have failed. The extreme sanctions have yet to produce results in Iran, but they have ultimately contributed to the democratization and international integration of post-apartheid South Africa. The punishment inflicted will tip Russia’s economy into depression, sending it back into the isolation of the 1970s. Some measures may be eased amid negotiations for a ceasefire in Ukraine, but the real logic at this point is to create enough suffering to encourage regime change. It may happen quickly or never.

As historians explore these and other questions, perhaps the immediate lesson is simply that positive economic engagement is necessary to secure cooperative behavior from another country, but it is barely enough. It may not seem like much, but beginning to reframe a central premise of Western politics is perhaps the best we can do right now, as we pick up the pieces of our earlier assumptions about Russia.

Guest comments like this are written by writers outside of Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit comment proposals and other feedback to [email protected]

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