Anatole Kaletsky — Ukraine’s frozen war brings dramatic changes to world economy

Whether or not the sanctions are lifted, Russia is already undergoing an economic transformation. 

With oil prices and the ruble collapsing, Russia’s political and business leaders are realizing that the post-Soviet economic model of full-scale financial liberalization and integration with the global economy has condemned them to overdependence on energy exports and industrial imports from Western Europe. Partly as a result, Russia has succumbed to the classic symptoms of the “natural resource curse”: an overvalued currency, deindustrialization, conspicuous consumption, excessive government spending, weak domestic tax collection and extreme vulnerability to international capital flows. 

In response, Russia is starting to restructure its economy. It is moving away from the classical free-trade model that it adopted in the 1990s, which encouraged Moscow to export raw materials and import industrial goods because that was implied by the Ricardian law of comparative advantage. The alternative development model, which Russia will now favor, is the one followed by other big emerging economies, including China, India and Brazil, and before them, South Korea and Japan. 

This Asian model will mean more protection for domestic industries, more control over international capital flows and less reliance on imports — even if that means lower quality and higher prices for Russian consumers. 

To the extent that Russia remains a major resource exporter, its trading and financial strategies, as well as its geopolitical alliances, will be redirected toward China and Asia. This strategic realignment will, over time, increase China’s economic dominance in Asia. It may also strengthen the influence of China’s authoritarian Confucian politics as a counterweight to the liberal democratic model promoted by the United States and the European Union, a philosophical shift that Putin would welcome.

Russia abandoning neoliberalism undertaken disastrously under Yeltsin on Western advice and replacing it with a more structurally balanced managed economy that is likely to look more like  a cross among the European social democratic model, the market socialism of China, and the Asian model than the economic liberalism encouraged by the US. The objective will be "liberalism with Russian characteristics." The US will take this as being confrontational to its hegemony, which it is, and use both economic power and clandestine operations to undermine it and bring about regime change in Russia to restore the Yeltsin neoliberal model of oligarchic "democracy."

Kaletsky may be too sanguine about a "frozen war" in the Ukraine. More likely is that the US will perceive it in its interest to pursue a proxy war with Russia in order to ensure that Russia is permanently separated from Europe, especially Germany, which it the greatest geopolitical concern that is worth risking driving Russia to a strategic alliance with China. The US calculates that it can contain this threat by surrounding a Russia-China alliance with NATO in the West and the "Asian pivot" in the East.

Reuters

Ukraine’s frozen war brings dramatic changes to world economy
Anatole Kaletsky