Doug Saunders on Trade, Peace, and the Crimea

16 03 2014

Doug Saunders of the Globe and Mail appears to be channelling Norman Angell. Saunders has just published an article in which he assures us that the diplomatic standoff between the West and Russia over Crimea will not escalate into a serious military confrontation because the economies of Russia and the EU are so interdependent nowadays.

As loyal readers of this blog will know, Norman Angell argued in 1909 that a general European war would be virtually impossible because the economies of the Great Powers were so interconnected. He reasoned that since Germany and the UK were each other’s best trading partners, war between them would be economic suicide. After reviewing the aggregate trade data, Angell concluded that since the Great Powers were led by rational individuals who cared about the economic wellbeing of their subjects, they would refrain from fighting wars with each other.

In his discussion of the Crimea, Saunders writes:

..this is nothing like a Cold War.

The USSR was a closed economy: At its 1985 peak, foreign exports and imports accounted for just 4 per cent of the Soviet economy, almost all of it with satellite states and de facto colonies. This attempt at state-run self-sufficiency failed, and led to the out-of-control foreign borrowing that contributed to the collapse of communism. But it meant that Moscow’s pre-1991 leaders saw the non-communist world only as an ideological rival and a territorial threat.

Mr. Putin may see the outside world this way, but he also has to see it as something much larger: a client and a partner, and the sole source of his regime’s sustenance.

 This is not the dark days of the 20th century, and countries such as Ukraine have no reason to be caught in a zero-sum game between powers. This crisis can be resolved, using economic and diplomatic persuasion, if we can all stop living in the past.

I’m inclined to believe in the theory of the commercial peace. (In fact, this theory informs my historical research in Canadian-American peace in the 1860s and HSBC’s relationship with German companies during the First World War). I’m also inclined to think that the dispute over Crimea will be solved with minimal bloodshed. However, I think that Saunders’s reassurance that Russia won’t fight the West because it has McDonald’s nowadays would be more convincing if he demonstrated that the similar arguments were used in the past and were then falsified by the course of events.

Norman Angell’s theory lacked predictive accuracy because he overlooked the fact that peace-or-war decisions in early twentieth century Europe were in the hands of privileged individuals, generally landed aristocrats and monarchs, who didn’t have to worry too much about grocery bills. I have no doubt that the leaders of the Western democracies care about the economic wellbeing of their citizens, since they are all seeking re-election. Their concern with preserving affluence doubtless makes them more reluctant to escalate the situation. Whether or not Putin really cares that much about the living standards of his people is a very different matter forever. A dictator like Putin may well decide to sacrifice the economic welfare of his population.

I read in the Weekend version of the Financial Times that Russian companies are pulling billions out of Western banks in anticipation of sanctions. What the impact of these withdrawals on the banks remains to be seen.

Data released by the New York Federal Reserve suggests that the Russian government also appears to be selling much of the $138.6 billion in US government debt it held just a few weeks ago. In the week ended 12 March, an astonishing $104.5 billion of Treasurys were dumped.