Russia’s invasion of Ukraine has upended the world order—and with it the energy, production, distribution and finance systems.
The war in Ukraine is part of the struggle for a new world order. Russia and China are openly challenging the Pax Americana. But what the next world order will look like remains an open question.
In Moscow and Beijing, but also in Washington, the model of a multipolar concert of the great powers, with exclusive zones of influence, is finding support. Despite a growing unwillingness to play the role of world policeman, however, the majority of Americans have not yet abandoned the unipolar, American, liberal world order. And there is still support, not only in China, for the Westphalian model with its emphasis on nation-state sovereignty and its condemnation of post-colonial meddling in internal affairs.
These three models envisage very different ground rules. Who is authorised to use force—all states, only the strongest or only the hegemonic power? Does the law of the strongest apply or the strength of the law? Is there a historical ideal (such as liberal democracy and a market economy) towards which all states will (or should) develop, or are there multiple modernities with competing political systems and cultural civilisations which can coexist more or less peacefully? Will there be a global showdown between an alliance of democracies and the ‘axis of autocrats’? Or is the price of peace giving up on implementing universal human rights?
Which of these models will prevail—or from what precise mixture of old and new elements the new world order will emerge—will determine not only war and peace but also what the global energy, production, distribution and finance systems of the future look like.
In the German debate, under the immediate impact of the war, the focus has mostly been on how to deny Russia the revenue from its oil and gas exports without asking too much of consumers who are dependent on Russian energy supplies. In the long term, this dependence is to be reduced by accelerating the energy transition away from fossil fuels.
Less attention is paid to the efforts of China and India to avail themselves of the cheapest possible supplies on the Russian energy market without being hit by western sanctions. And far too little is being paid to the efforts of important suppliers and their customers to ‘de-dollarise’ the international energy trade.
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It takes little imagination to foresee the biggest shake-up in global energy trading since the oil-price shocks of the 1970s. What is less clear is the direction in which the energy system will move.
Given the continuing geopolitical confrontation, the imperatives of climate protection and energy security are pointing in the same direction. On the one hand, this is likely to accelerate further the exodus of global capital from fossil industries. On the other hand, the industrialised countries are technologically still not in a position to free themselves from their addiction to fossil fuels. And it is precisely the bridging technology of natural gas which has hit a geopolitical dead-end.
In the short term, Germany will hardly be able to close the looming supply gap without committing climate-policy sins involving coal and nuclear power. In the long term, alongside renewable energies, the international supply chains for hydrogen need to be developed at pace.
In the medium term, however, this means having to satisfy the demand for gas by diversifying suppliers. Surprising shifts of alliances, involving old enemies (such as the United States and Venezuela) and old friends (such as the west and the Arab monarchies, Russia and Kazakhstan), cannot be ruled out. How quickly, in this competitive world, the need to secure national energy supplies can collide with the principles of value-based foreign policy was something the new German government had to discover in its very first days in office.
Since the 2008 financial crisis, global trade and cross-border investments have not really picked up again. The Covid-19 crisis has made people more aware of the vulnerability of global supply chains. The failure of China’s zero-Covid strategy and the drastic lockdowns in Shenzhen and Shanghai indicate that, two years after the outbreak of the pandemic, the risk of disruption to global supply chains has still not been eliminated. If parts from the far east are missing, assembly lines in Europe come to a standstill. The paradigm shift away from efficiency (‘just in time’) to greater resilience (‘just in case’) is accelerating the hidden trend towards deglobalisation under way for some time.
Geo-economic as well as geopolitical motives favour the shortening and unbundling of supply chains, and are now driving the separation and isolation of markets. The US is trying to slow down the economic rise of its rival China. Behind the scenes, pressure from both is mounting on their allies and on third countries to choose sides.
Europeans and Asians are still resisting being drawn into this new cold war. But the disputes over gas pipelines, chip manufacturers, and the 5G communications infrastructure show how quickly companies and entire states can get caught between opposing fronts. The ultimate outcome of this development could quite possibly be rival blocs which make it difficult or impossible for unwanted competitors to gain access to their markets.
Hardly had they escaped the sanctions applied by the US administration under Donald Trump before German companies found themselves facing headwinds on the Chinese market. Nevertheless, the majority are resisting the pressure to decouple from China, while some double down on the Chinese market despite ever-worsening conditions. Given the importance of that market, the call in the US government’s Indo-Pacific strategy paper, published in February, to reduce through diversification one-sided dependencies therefore often goes unheard.
But the Russian war of aggression against Ukraine might alter this calculus. Hardly anyone would have thought it possible that the west would react so quickly, so strongly and with such unity to Russian aggression. Russia’s expulsion from the SWIFT financial-transfers system and the sanctions against the Russian central bank, as also the voluntary withdrawal of western companies from the Russian market, have made their mark—not least in China.
Even some in Germany were surprised at how quickly supposedly sacred cows such as the Nord Stream 2 gas pipeline were slaughtered. This experience of enormous public and political pressure is likely to lead many German companies to reassess their strategies vis-à-vis other ‘problematic markets’. Should the sales opportunities for German business in global markets be closed off in the medium term, Germany will have to rethink what it is willing to do to lead the vital European home market out of its protracted crisis.
The realignment of the global economy according to geopolitical interests is putting key industries such as German vehicles under pressure. If the engine of growth falters, distributional conflicts within and between societies intensify. Fear of social decline is increasing even among the middle classes. This fear of decline is the sounding-board populists use for their agitation against the preconditions of the success of the export model: free flows of goods, capital, people and ideas.
The global trend towards protectionism is thus driven not only by external factors but also by internal pressures. In such a world, there can no longer be any world champions in exporting. Germany above all will therefore have to rethink its export-oriented economic model.
When western critics discuss the Chinese silk-road project, their focus is usually on debt traps or the creation of political dependencies. There is a justified suspicion that the mammoth project represents a Chinese push to become a dominant power in Asia and the world. Less well known, however, is the geostrategic motivation behind the Belt and Road Initiative (BRI).
Since the end of World War II, the US has established bases on a chain of islands running from Japan in the north to Indonesia in the south. And since the administration of Barack Obama announced the ‘pivot to Asia’, it has been concentrating its forces there. Between the straits of Malacca and Hormuz—the Americans call these ‘choke points’—the US and its allies can block Chinese trade and supply routes at any time. China feels encircled and reacts in an aggressively defensive manner.
The aim of its arms build-up in the east and south China seas is to break through the ‘first island chain’, and to drive the US out of Chinese coastal waters. Chinese hawks go one step further, wanting to force the reunification of the ‘unsinkable American aircraft carrier’ Taiwan with the motherland. As Chinese bombers fly over Taipei, Chinese propaganda accuses the US of challenging the status quo by questioning the ‘one China’ policy and thus provoking conflict.
This is a highly dangerous poker game, not only because Taiwan produces indispensable semiconductor chips but also because from the perspective of the Americans, traumatised by Pearl Harbor, the defence of their homeland begins at the first island chain. So in the Taiwan strait lies a fuse which could set off World War Three.
By means of the BRI, China is therefore trying to break out of the American stranglehold towards the west. The immediate goal of the numerous ports, corridors and railway lines is to prevent the disruption of Chinese supply routes. The initial enthusiasm of the landlocked states of central Asia shows the high hopes held by its partners that the strategy for connectivity along the ancient silk road will lead to prosperity gains for all.
The real prize, though, lies at the other end of Eurasia—the European market, which is supposed to guarantee sales opportunities for Chinese products in the long run. If Beijing succeeds in tying Europe closer, China and Russia will have taken a big step towards their goal of neutralising US influence in Eurasia.
With the start of a new cold war, however, a new ‘iron curtain’ threatens to cut through the silk-road project. From China’s point of view, that would be a geostrategic catastrophe. This is one reason why China, despite the only recently proclaimed ‘limitless friendship’ with Russia, does not really provide substantive assistance to its junior partner. (The second is the Russian recognition of two breakaway provinces, Donetsk and Luhansk, of a sovereign state, Ukraine—looking at Taiwan, this is a Chinese horror scenario.)
Beijing thus has a vested interest in a quick end to the Ukraine war, while reluctant to take on the responsibility of a mediator. If this does not happen, China is likely to push forward with the expansion of the maritime silk roads.
From the point of view of Chinese strategists, following the decline of American industry, the remaining foundation—and thus Achilles’ heel—of US hegemony is the role of the dollar as the reserve currency on the international goods and financial markets. China has therefore been tinkering for some time with an alternative to the SWIFT system (‘CIPS’) and a digital currency (Digital Yuan, e-CNY). Neither of these instruments is yet ready, however, to pose a real threat to the greenback.
Chinese hawks see in the sanctions against Russia an opportunity to attack the supremacy of the US dollar. The freezing of Russian central-bank reserves has put all the world’s central banks on high alert. In order not to be blackmailed themselves, they are likely to shift reserves on a grand scale. If this is at the expense of US investments, it could destabilise the dollar’s position as the global reserve currency.
The role of the US dollar as a transaction currency is also a source of frustration. After all, inflationary pressure emanating from the American money press is passed on around the globe by all those actors who rely on the dollar for conducting their cross-border trades. Russia, China, India and Iran have therefore been trying for some time to ‘de-dollarise’ their economies by using a broader basket of currencies for foreign trade.
It is hence hardly surprising that Russia now wants to settle its oil and gas transactions only in roubles. China’s attempts to de-dollarise its foreign trade also align with Beijing’s strategic goal of upgrading the global status of its currency. But if a US ally like Saudi Arabia is seriously negotiating to settle its oil deals with China in yuan, this shows how widespread is the resentment of the hegemon.
This is not risk-free: after the abandonment of the gold standard in 1971, the dollar was tied to the central commodity of fossil industrial capitalism by the clearing and settlement processes for the global oil trade. If other members of the Organization of Petroleum Exporting Countries were to abandon the petrodollar, the returning greenbacks would in the short term probably further increase inflationary pressures in the US.
In the long run, the Chinese renminbi and blockchain-based cryptocurrencies could mature into stable transaction currencies. Strategists sceptical towards the US believe that if the dollar’s functions as a reserve, investment and transaction currency continue to erode, its position as the global reserve currency could begin to totter.
Even after a decade and a half, however, efforts at ‘de-dollarisation’ have not seriously jeopardised the position of the dollar as the reserve currency. As recently as last year, 90 per cent of all foreign-exchange transactions continued to be settled in dollars and 60 per cent of all central-bank reserves were invested in the currency.
The blockchain cryptocurrencies in particular are a long way from being able to replace the dollar. And whether a Chinese (digital) currency without open Chinese financial markets can actually take over the functions of a reserve currency is doubtful. American experts therefore believe that the dollar’s position is even more entrenched today, because foreign central banks know that in an emergency the Fed will do everything to shore up the dollar-denominated part of the financial system.
Global power relations
What the coming world order will look like will be decided by global power relations. Russia has overestimated its strength. Even if Moscow still succeeds in winning the war in Ukraine militarily, in geopolitical terms it will fall back into the second tier, as China’s junior partner. The new instability on the European continent is however likely to dampen the economic outlook for western Europe as well. Following the Ukrainian reality check, geopolitical dreams of an independent European power pole will therefore certainly be re-evaluated by EU member states.
This leaves only China and the US as powers capable of setting and maintaining order. This explains why Washington and Beijing do not wish to be drawn into this ‘European conflict’: the two superpowers read the conflict above all through the lens of their competition over global hegemony. Accordingly, American hawks want to ‘bleed Russia dry, topple Putin and signal to China to keep its hands off Taiwan’. Although this is not uncontroversial in Washington, a bipartisan coalition for a cold war against the ‘alliance of autocracies’ has already been in place for some time.
In Beijing, on the other hand, there is still disagreement as to whether it is really in China’s interests to disappear behind a new Iron Curtain alongside a weakening Russian pariah, or whether China would not benefit much more in the long run from an open world order. Geopolitically, it would therefore be a fatal mistake to lump the Chinese and the Russians together over-hastily on an autocratic axis.
It would be better instead to examine together what a rules-based, multilateral order might look like—one that provided a framework within which the core interests and security concerns of all the powers could be peaceably negotiated and reconciled. Those who think this unrealistic should remember the last cold war: then, too, co-operation between systemic rivals within the framework of agreed ground rules was successful.