State actors are starting to behave like aggressive investors in a more de-globalized environment.
It’s no secret that central banks and governments the world over are dealing with rising inflation and economic uncertainty, both of which need to be addressed head-on if they want to maintain internal stability. To do so, they are starting to consider measures outside the usual monetary toolkit and that address geopolitical events by stimulating national investment more creatively.
The British government, for example, proposed a deficit-financed expansionary fiscal policy while the Bank of England raised interest rates and reduced its balance sheet to fight high inflation. The same week, Japan’s Ministry of Finance spent 2.84 trillion yen ($19.5 billion) to slow the slide in the currency – the first such intervention since 1998.
The two countries are the world’s third- and fifth-largest economies, as well as key U.S. allies in their respective regions. Such news frames the next phase for the global economy, giving several hints to understand how different countries will seek to restructure their economies, a trend that we have written about since 2021.
In other words, state actors start behaving more like (aggressive) investors in financial markets as they defend their interests. This was common enough in the 1990s, before globalization tightly bound national economies to one another. But times have changed. World economies are less globalized than they once were, a trend accelerated but not started by the COVID-19 pandemic and made all the more apparent with the fallout over Russia’s invasion of Ukraine.
Even so, existing trade and technological dependencies limit the extent to which central governments can defend their interests, and all measures they take will affect others faster than they would have before.
There are several systemic challenges the world is facing at once. The first and most consequential is the weaponization of economic ties. Global economic warfare continues, and the current energy crisis is just one of its major theaters. When Russia invaded Ukraine, few anticipated a long-term war, so few believed the global economic war would continue into the winter of 2022.
The sanctions imposed on Russia by the West were supposed to force Moscow into submission. Instead, they have balkanized the global economy. Before the imposition of sanctions, foreign-exchange reserves were thought to be untouchable. At the same time, the U.S. dollar, the world’s reserve currency, was thought to be a sort of public good – as was SWIFT, the globally accepted mechanism for international financial exchanges.
Curbing Russia’s access to both was, in a sense, unprecedented – the West has done this before (to countries like Iran and Venezuela) but not to such an important economy as Russia’s. For the sanctions to succeed, Russia had to be caught off guard. It wasn’t. The ruble initially collapsed, inflation skyrocketed, interest rates soared and output dwindled. But six months later, Russia’s economy, though bad, seems to be performing better than expected.
Russia had prepared itself for measures like these since 2014, when it invaded Crimea and was thus subject to the first wave of Western sanctions. Since then, the Kremlin invested heavily in supporting national industry and campaigned internally for the need to increase Russian entrepreneurship and for Russian-made products. Russia’s energy strategy toward Europe since the early 2000s, meanwhile, insulated it from punishment.
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