In a matter of days, the United States, Europe, and others have excommunicated Russia from the world stage, isolating the 11th-largest economy financially, commercially, and culturally. The U.S. and Europe have frozen foreign assets held by Russia’s central bank, hurting its ability to stabilize its currency. Private companies, including Apple, Netflix, Adidas, and BP, have cut off the Russian market, and the U.S. has moved to ban Russian oil imports. Sports leagues, film festivals, and other cultural institutions have banished Russian competitors. McDonald’s is closing its Russian franchises. Many of these measures are unprecedented for a country of Russia’s stature. Collectively, they amount to a radical worldwide experiment in moral retribution. If Vladimir Putin sought to expand the Russian empire by hard power, he has achieved the very opposite: the diminishment of Russia through an unprecedented display of global soft power.
The immediate consequences are already breathtaking. On both sides of this new iron curtain, commodity prices are skyrocketing and economic indicators are falling. Oil is at all-time highs, and the Nasdaq is in bear territory. Nickel prices went vertical, and the ruble crashed by 50 percent. Wholesale energy prices in Europe have blown past historic records, and a European recession looks almost certain. Yesterday, the economist Mark Zandi put the odds of a U.S. recession this year at “one-in-three.”
This is just the beginning. Like all novel experiments, the group punishment of Russia is a leap into the unknown. We shouldn’t be confident about how long these measures will last, or what kind of unintended consequences they could create. But after I did some reading and spoke with experts, some significant, long-term effects have clicked into focus for me. Here are three ways that Russia’s economic blackout could change the world.
1) The Green-Energy Revolution Goes Into Warp Speed
Tech revolutions in the 21st century tend to be very fast. It took about a decade for the share of Americans with a smartphone to go from zero to 80 percent. But energy revolutions are lazier affairs, and the green-energy transition in particular has been torpid in the U.S. and Europe, which is perhaps surprising given the declining price of solar energy. The West has simply refused to build green-energy projects fast enough to decarbonize the grid.
Russia’s war could accelerate the green revolution in two big ways. First, it will increase political pressure on the U.S. and European governments to reduce reliance on Russian oil and gas. (The U.S. has already said it will stop importing Russian energy, and Europe is considering a similar ban.) In the short term, countries will lean harder on spare oil and gas sources to keep prices down. But over time, the boycott of Russian energy could raise the price of thermal energy enough that it compels countries to deploy significantly more wind and solar projects. For years, anti-growth fears, antinuclear sentiment, and vague NIMBYism have stood in the way of green-energy construction. The urgency of an external threat could melt away some of those anxieties. “We can not talk about renewables revolution if getting a permit to build a wind park takes seven years,” said Kadri Simson, the European commissioner for energy. “It is time to treat these projects as being in the overriding public interest, because they are.”
Second, rising energy prices will change consumer preferences, nudging more consumers away from gas-powered cars. Today less than 5 percent of the U.S. car market is fully electric. But the industry is pushing electric vehicles hard; nearly every automotive ad in the Super Bowl was for an EV. This marketing shift could combine with a painful spike in gas prices in a way that gets more Americans to buy EVs, which will encourage more automotive companies to invest in EV production, which could bring down the cost of EVs, which will increase demand.
This possible shift from energy pain to energy progress has a historical precedent. In 1973, OPEC cut off the U.S. and other countries from access to its oil, raising gas prices. Although most Americans associate that period with economic stagnation, the crisis also led American car manufacturers to become more energy efficient. Actual fuel economy as measured in miles per gallon took off in 1973. Fifty years later, we could see the same dynamic play out: the shock of energy pain leading to decades of progress.
2) A New Chinese Empire
The commercial excommunication of Russia has left it heavily dependent on China, which has alternated between blaming the West for the conflict, distancing itself from Russia, refusing to call the invasion an invasion, and expressing grief over civilian casualties while calling for peace. Rhetorical waffling aside, China continues to trade with Russia, and Beijing is strongly considering taking a stake in Russian energy giants left in the cold by Western corporations.
Russia and China were getting closer even before the Ukraine crisis. Since Russia’s invasion of Crimea in 2014, Russian-Chinese trade has risen by 50 percent, according to Michael Cembalest, the chair of market and investment strategy at J.P. Morgan Asset Management. “Russia is now Beijing’s largest recipient of state sector financing,” Cembalest writes, pointing out that China and Russia began using their own currencies to settle bilateral trade in 2010 and “opened a currency swap line in 2014, sharply reducing reliance” on the U.S. dollar.
Add it all up, and it looks like China could become the counterpart of last resort for Russia. This would make Russia something like a giant North Korea. Since 2010, that rogue nation has relied on China for roughly 90 percent of its total trade. One plausible scenario, then, is that Putin’s failed attempt to expand the Russian empire grows the Chinese empire, as Russia clings to China to avoid economic ruin.
3) A Global Food Fight
Ukraine and Russia feed the world. They account for about 30 percent of global wheat exports, along with 20 percent of global corn and 80 percent of global sunflower-oil exports. Several countries, including Egypt, Turkey, Bangladesh, Sudan, and Pakistan, receive half or more of their wheat from Russia or Ukraine. Altogether, one out of every eight calories traded between countries comes from Ukraine and Russia, according to NPR. And now they’re at war. Russia and Belarus are also major fertilizer exporters. Rising fertilizer prices could disrupt crop farming on top of the spiraling cost of bread.
As my colleague David Frum has explained, a global food fight won’t be bad news for all the world’s poor. About two-thirds of sub-Saharan Africans farm for a living, and as food prices rise, they can earn more and experiment with new innovations to produce more. Many of the countries most reliant on Russia and Ukraine for imports have anticipated the potential for trade disruption and stockpiled enough wheat and corn to get them through several months.
But the long-term risk of political instability can’t be overlooked. Several analyses of the 2011 popular uprisings that toppled the governments of Tunisia and Egypt during the so-called Arab Spring traced their origin to a spike in food prices, especially grains. War between two great breadbasket nations will be even more disruptive to prices. If 2011 is any indication, we could be in for not an Arab Spring but a World Spring—a wave of global political instability. The past few weeks have already demonstrated the force of social cascades—where what began as a financial sanction against Russia has become a worldwide boycott of it. Imagine a social cascade powered not only by moral righteousness but also by hunger.