By Eric Vandenbroeck and co-workers

Russia and the First Economic World War

The Kremlin has prepared to confront the West and its socio-economic model for decades.

The Putin Era to the Pandemic

Russia’s strategic interests in Ukraine are well-known. The geography and history of Russia compel its leaders to create and preserve a buffer between Moscow and the major powers in Western Europe, and to ensure access to the Black Sea. Ukraine is crucial to both goals. But beyond Ukraine, the Kremlin perceives the eastward expansion of Western influence, including into Russia, to be a modern invasion by stealth that threatens the Russian regime.

It is not Western organizations like NATO and the European Union challenge the Kremlin, but the socio-economic model that enabled the West to win the Cold War, and that enticed Eastern Europeans to want to join the West.

When he became president of Russia in 2000, in the wake of the Soviet Union’s collapse and the economic crisis of the

In the 1990s, Vladimir Putin inherited a broken country. Many Russians contemplated joining the European Union, hoping that alignment with the West would bring a better life.

The priority for the Russian establishment was to stabilize and rebuild the country. Putin just wanted to survive politically. Following the example of past successful Russian leaders, he centralized power. Knowing he needed stability and growth to slow the emigration rate and address Russia’s poor demographics, he sought to make Europe economically dependent on Moscow. And looking back at history and the current power balance, he identified Germany as the lynchpin of his strategy of dependence.

Russian ties to Germany were vital in establishing connections to the European Union more broadly, but this was only the beginning of Russia’s European strategy. Russia opened up its economy to Western investment found links throughout the Continent and tried to understand the inner workings of EU bureaucracy. It established close business ties with Italy, France, and later Hungary and built a political network that would help expand its influence in Europe. For Moscow, learning about European vulnerabilities was just as important as building up its economy and growing Russia into a stable economic power.

The Kremlin also campaigned to join the World Trade Organization to establish deeper relationships with the world’s biggest economic players. In the process, it benefited from foreign investments in Russia and learned how the global economy works, building partnerships with not just Western economies but also other economic powers. The the only problem was that China is major ally against the West was not seeing the accelerated growth it hoped for and was still very much dependent on the U.S. market, giving Beijing limited ability to counter U.S. interests in the world and forcing Russia to keep its focus on Europe.

Average Russians saw improvements in their standard of living under Putin. In major Russian cities, life was similar to that in the West. However, when it became a significant player in the energy market, Russia also increased its exposure to global economic cycles. The European economic crisis of the 2010s sent shivers through Moscow. Russia’s the economy remained fragile overall, and the gap between urban and rural areas remained dangerously high, potentially threatening Putin’s control.

At the same time, the West offered an attractive model to rival Russia’s. It wasn’t so much the growing Western influence in Russia’s buffer zone that bothered the Kremlin, but the fact that ordinary Russians might look at Eastern Europe and see a better model for political organization and economic growth.

Then the pandemic hit. The Russian president feared that the economic insecurity wrought by COVID-19 could threaten his country’s financial security and stability. As the worst socio-economic effects of the pandemic faded, action against the West became urgent. From the Kremlin’s point of view, this was a unique moment. The U.S. has been trying to reduce its presence in Europe and instead focus on the Indo-Pacific and domestic problems. In other words, the trans-Atlantic alliance and the European Union appear weak to the Kremlin. Most importantly, Russia’s leaders believe they have gained sufficient knowledge of how the West works and can fight it effectively.

 

Preparing for War

Russia has been preparing to confront the West since at least the early 2000s. Besides stockpiling foreign reserves, Moscow constructed trade blocs and deepened relations with projects like the Eurasian Economic Union. In Europe, it enticed Germany to become dependent on Russian natural gas, which is clear today made it extremely difficult for Europe to cut off Russian energy imports. Shifting from gas would require Europe to build new infrastructure – a costly, time-consuming process.

The close German-Russian partnership also benefited the Kremlin’s Europe strategy in other ways. To give a practical example, the EU had plans to make the Danube fully navigable through the establishment of additional canals, increasing Central Europe’s connection with the Black Sea. This would have given Europe more leverage against Russia at the moment, when the war in Ukraine has forced the rerouting of commercial flows from the Black Sea to much more expensive land routes. Instead, positive relations with Moscow did the project seem unnecessary, and it faded away.

It is no coincidence that after 2012, the first full year that Nord Stream 1 was operational, Europe became much more reluctant to adopt policies that could be seen as anti-Russian. There was simply no interest in Germany to carry them out. It is also no coincidence that relations between the U.S. and Germany have cooled. The U.S. needed Germany to lead Europe or maintain neutrality to prevent Russia from expanding its influence in Europe as the U.S. drew back. The fact that Russia joined the World Trade Organization in 2012 gave it even more leverage in the world economy.

It is also worth noting that the Kremlin used personal relationships to shore up its influence. Former German Chancellor Gerhard Schroeder was tapped to lead Nord Stream 1. Nord Stream AG also hired former Finnish Prime Minister Paavo Lipponen as a consultant to speed up the permit process in Finland.

Former Italian Prime Minister Matteo Renzi served on the board of Delimobil, a Russian car-sharing service. Former Finnish Prime Minister Esko Aho was on the board of Russia’s largest bank, Sberbank. Former Austrian Chancellor Christian Kern resigned from the board of Russia’s state-owned railway company in the early days of the war in Ukraine, while another ex-chancellor, Wolfgang Schussel remained on the board of Russia’s Lukoil. This is just a short list of top politicians, all of whom had at least some influence over their country’s foreign policy discussions. They have certainly been helpful to the Russian economic growth and the advance of Russia’s economic strategy in Europe.

Working closely with Europeans for the past two decades have enabled Russia to learn what is essential for the stability of their countries. It has also helped the Kremlin better understand their political agendas and support causes that work to its advantage. For example, Russia enthusiastically supported many green policies, like Germany’s decision to give up nuclear power – which translated into greater reliance on Russian gas.

And Russia has openly supported populist parties throughout Europe and effectively used information warfare, all in an attempt to destabilize and ultimately divide Europe.

Globally, Russia has maintained close relations with traditional enemies and competitors of the West. Joining the WTO gave it a stronger position on the global stage, which is used to advance the influence and interests of emerging international players, including the BRICS countries, which also include Brazil, India, China, and South Africa. Though the results were modest; Russia promoted the group as an alternative to the West and continued to focus on building ties to China and India, establishing links that it hoped would withstand a potential confrontation with the West, which we’re seeing it play out today.

To counter the current sanctions, it has looked to China for help. The Eurasian Economic Union gives it proxies for continuing to do business with the world. At the same time, Russia’s presence in the Middle East and parts of Africa help it keep the price of oil high – high enough that it can keep paying its bills. Influence in the Middle East and the Sahel, two highly unstable but resource-rich areas also give Russia more leverage over the world economy.

In building its network, Russia has tried to focus on economics and enhancing Russia and the First Economic World War weaknesses in the global network. It expanded its influence abroad, making sure the dependencies it was encouraging were strong enough to give it leverage but loose enough to allow its I think you should withdraw when necessary. Russian the strategy certainly has its weaknesses, but Russia has options in countering the West during the current global economic war. Supporting EU fragmentation through its economic ties in Europe and using the knowledge of European politics that it’s gained over the years are likely the essential elements of its strategy. The moment European citizens feel the repercussion of Western sanctions are when the bloc becomes more fragile, which will allow Russia to exploit the EU’s weaknesses.

The world is witnessing its first economic world war of the modern era. The rules are undefined, and the global economy is complex, meaning collateral damage is unavoidable and frequently unpredictable. Slowly, we are becoming aware of the repercussions of sanctions on Russia on the global economy.

Less clear are the instruments that Russia can employ against the West. How this will change the world is a mystery. All we can do is look back at what Russia has prepared for – and guess what could come next. This is only the beginning.

 

 

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