Scorched Earth

War precipitates change – and major war precipitates major change. It is rare that war shifts historical developments onto a different track; rather, it tends to accelerate trends that are already underway. War brings out the weaknesses in economic and geopolitical relationships – collapsing structures that were already shaky. War also accentuates strengths, giving emerging powers a
chance to test their mettle against the incumbents.

In 1919 the British economist John Maynard Keynes published his book The Economic Consequences of the Peace. The book was based on his experience as a delegate of the British Treasury during the Paris Peace Conference of 1919. Keynes believed that the terms on which the Treaty of Versailles were established were unduly punitive to the Germans and their allies.

Crucially, however, Keynes was not making this judgement from a moral point-of-view, rather he made the case from the point-of-view of European stability. Keynes recognised that there is no clear demarcation between economics, politics, and war. He thought that imposing such harsh terms on Germany would lead to economic ruination which would spread across Europe, and he predicted that this could result in destabilisation later. He wrote:

Economic privation proceeds by easy stages, and so long as men suffer it patiently the
outside world cares very little. Physical efficiency and resistance to disease slowly diminish,
but life proceeds somehow, until the limit of human endurance is reached at last and
counsels of despair and madness stir the sufferers from the lethargy which precedes the
crisis. The man shakes himself, and the bonds of custom are loosed. The power of ideas is
sovereign, and he listens to whatever instruction of hope, illusion, or revenge is carried to
them in the air.

In the winter of 1919, as the book hit the shelves in Britain and the United States, acute fuel shortages occurred in Germany and Austria. Photographs of the Viennese poor collecting firewood in the Vienna Woods and then waiting for trams to return home were published. Fourteen years later, after experiencing hyperinflation and then depression, the German people elected Adolf Hitler as
chancellor. Six years after this, Hitler invades Poland and so began the Second World War.

The rouble has increased in value by 23% against the US dollar while the Russian economy looks set to contract by a meagre 3-4%.

Since 1919, our societies have become more commercial, not less. More of our lives are intertwined with commercial transactions and so our lifestyles rely more on economic activity than they were in the past. This means that the demarcation between the economy and politics and war are even less
clear cut than they were in the past. We see this in the notion of hybrid or economic-based war today. When Russia invaded Ukraine in February 2022 the first response of the Western nations was to declare what amounted to full-scale economic war against Russia.

But as with the sanctions imposed on Germany and her allies after the First World War, economic warfare against Russia has not produced the results that many thought it would. After the sanctions were put in place President Biden claimed that they would “reduce the rouble to rubble” and that Russia would go from being the eleventh largest economy in the world to falling outside the top
twenty – this implied a decline in Russian GDP of around 55%. Needless to say, that is not how things have played out. At the time of writing in September the rouble has increased in value by 23% against the US dollar while the Russian economy looks set to contract by a meagre 3-4%.

Meanwhile, the economic consequences for the Western-aligned countries have been profound. Europe as a whole, including the United Kingdom, face a dismal winter of energy shortages and crippling inflation. This has become obvious recently but the worldwide consequences of the economic warfare undertaken this year will reverberate for years to come.

Britain’s manufacturing sector is now so small the country may take decades to recover these lost living standards and may have to settle for living standards like some Eastern European countries.

The United Kingdom has long been in a precarious situation economically. Up until the 1970s, the British manufacturing sector was large, stable, and robust, clocking in at around 25% of GDP. Today Britain’s manufacturing sector is extremely small, being less than 10% of GDP. Since Britain make less stuff domestically, they must import it from abroad. This has given rise to a large trade deficit in the UK. At the beginning of 2022 the current account deficit hit record levels of 7.1% of GDP. Britons are allowed to live beyond their means because foreigners are willing to loan them money. But with the sanctions and their consequences that may be changing. The sanctions and counter-sanctions have resulted in soaring inflation in Britain and energy shortages. Some analysts are predicting that the current account deficit may rise to around 10% a year. This is a level typically associated with severely dysfunctional economies in the developing world. There are already hints that financial markets may soon start to dump sterling en masse. This would result in a collapse in the currency and a massive decline in British living standards. Since Britain’s manufacturing sector is now so small the country may take decades to recover these lost living standards and may have to settle for living standards like some Eastern European countries. In such a situation, Britain’s military budget will likely contract significantly, and Britain will wane as a serious military power.

Not only will Europe’s economy likely collapse due to the war but plans to rearm the continent seem unlikely to work.

The aftermath of the sanctions has shown just how dependent the European economy is on Russia. When the sanctions were being imposed there was much talk about Russia having an economy the size of Italy. This has proved enormously misleading. First of all, when measured properly – using a
price-adjusted PPP GDP metric – the Russian economy is closer to the size of Germany’s economy than to Italy’s. Secondly, and more importantly, Russia disproportionately produces the raw material that the European economy requires. The most obvious of these is energy: Russia provides
around 40% of Europe’s gas and around 30% of their oil. But Europe also relies on Russia for products such as fertiliser, with Russian imports accounting for around 34% of European nitrogenous fertiliser. These products are key to economic growth. Without adequate fertiliser, for example, there will not
be adequate food – and without adequate foods there will be political instability and turmoil. Without adequate energy, everything shuts down. The products that Russia exports to Europe are not easily substitutable knick-knacks that play no role in the broader economy. Rather they are some of the inputs that form the very heart of a modern industrial economy. Nor can Europe simply
import them from elsewhere. Substitutes for piped natural gas such as LNG, for example, are expensive, difficult to transport and in limited supply. Not only will Europe’s economy likely collapse due to the war but plans to rearm the continent seem unlikely to work. With energy lacking, many primary metals producers are having to shut their doors. With raging inflation, collapsing trade balances, energy shortages and metals factories going offline, it seems far-fetched to think that Europe can engage in adequate arms production to fully rearm. In fact, the most likely outcome is precisely the opposite: now that Europe has sent much of their stockpiled armaments to Ukraine, it is likely that the continent will emerge from the war and the economic sanctions disarmed and impoverished.

American hegemony… is beginning to decline.

Unlike Europe and the United Kingdom, the immediate impact of the sanctions on the United States have not been catastrophic. Certainly, there has been an impact on prices – especially fuel prices – but in contrast to the other Western NATO countries the United States is not faced with any immediate crisis scenario. Yet the long-term damage to American hegemony is now clear. Firstly, the seizing of Russia’s foreign exchange reserves has likely precipitated the long-term declin of the status of the US dollar as the world’s reserve currency. The seizure has signalled to other countries that their US dollar reserve holdings can be seized if the United States strongly opposes their foreign countries. For most countries, this means that they will not be able to hold most of their reserves in US dollars in the future. This opportunity is being seized by Russia and China who are floating plans to launch a commodity-backed BRICS – Brazil, Russia, India, China and South Africa – reserve currency in the near future. China is the world’s major manufacturing nation, and the other BRICS are key commodity suppliers, so there will almost certainly be ample demand for this new currency. Relatedly, American hegemony over the global payments system through SWIFT is beginning to decline. After the United States banned Russia from SWIFT settlements, various countries started to form bilateral payments relationships utilising their own clone systems. Bilateral payments settlements are likely the way of the future. Secondly, and related to the decline of the US dollar as the world’s reserve currency, the BRICS trade
alliance looks set to expand massively. Reports suggest that the following countries may soon be applying for membership: Argentina, Egypt, Indonesia, Kazakhstan, Saudi Arabia, United Arab Emirates, Nigeria, Senegal, and Thailand. If even half of these countries get on board this would represent a serious rival trade bloc that controls much of the world’s natural resources. Particularly notable on the list is Saudi Arabia. Not only is Saudi Arabia one of the key oil producers in the world, it has also been a reliable Western ally for nearly 40 years. Saudi’s defection to the new BRICS+ signals a serious shift in how the rest of the world views America’s continued claims to hegemony.
Thirdly, there is a good chance that the Western alliance itself will now collapse. Europe will not allow its economy to be destroyed in perpetuity. Just as Germany rose from the ashes in the 1930s, Europe will elect new leaders that will move them away from the NATO-led sanctions regime. It seems likely that these new leaders will be right and left-wing populists who are opposed to both
NATO and the European Union. The most probable trajectory for the collapse of these organisations is that a few countries with relatively early elections (like Italy) elect populist politicians with a mandate to remove the sanctions. These politicians then run into conflict with NATO and the EU over the lifting of the sanctions and are eventually forced to leave one or both organisations.

As Keynes presciently noted in 1919: When a population is faced with a massive decline in their living standards and grinding poverty they will “listen to whatever instruction of hope, illusion, or revenge is carried to them in the air”.

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