The World Is Fragmenting, Making Us More Poor and Isolated

The sanctions that punish Russia are shattering the global economy.

The idea that Vladimir Putin's invasion of Ukraine has pitted Russia against the world enjoys wide popularity, hampered only by the fact that it's not entirely true. While much of the world's population is horrified by the revival of wars of conquest, the united front of western governments and businesses (though with some arm-twisting behind the scenes) and the weaponization of trade and finance against Moscow have chilled even those unsympathetic to international predators. By demonstrating the ability to turn supposedly neutral institutions against those who anger powerful elites, the West prompted the world to seek out alternative channels, if only out of self-preservation. That may guarantee the end of relatively free global exchange and the return of competing economic blocs.

"The suggestion that Putin is isolated may still be something of a Western bias — an assumption based on a definition of the 'world' as places of privilege, largely the United States, Europe, Canada, Australia and Japan," Anthony Faiola and Lesley Wroughton noted earlier this month for The Washington Post. Even among those unsympathetic to Putin's aggression, there's a tendency to see just another "Machiavellian tug of war between Washington and Moscow," they added.

Why the lack of enthusiasm for what strikes many people as a classic struggle of good vs. evil in the invasion of relatively free and democratic Ukraine by its authoritarian neighbor?

"While enthusiastic Western liberals hail the imposition of sanctions on Russia, the increased willingness of the Western powers to weaponize the global economic system horrifies leaders in many countries who think the West is too powerful already," warned Bard College's Walter Russell Mead in The Wall Street Journal.

Russian shock at the extent of such sanctions was on display when Putin seethed, "Now everybody knows that any assets could be basically stolen," in a March 16 speech in response to the seizure of foreign reserves held overseas. But it's easy to see how other countries, whole industries, and individual enterprises could worry about becoming future targets if they get crosswise with western political and business elites who seem to work in lockstep and are willing to use their clout to compel compliance. Financial titans boasting about the impact of such clout doesn't help to soothe concerns.

"The invasion has catalyzed nations and governments to come together to sever financial and business ties with Russia," Larry Fink, the CEO of BlackRock, the giant international investment fund, exulted in a letter to shareholders published yesterday. "United in their steadfast commitment to support the Ukrainian people, they launched an 'economic war' against Russia. Governments across the world almost unanimously imposed sanctions, including taking the unprecedented step of barring the Russian central bank from deploying its hard currency reserves."

"Capital markets, financial institutions and companies have gone even further beyond government-imposed sanctions," he went on. "As I wrote in my letter to CEOs earlier this year, access to capital markets is a privilege, not a right. And following Russia's invasion, we saw how the private sector quickly terminated longstanding business and investment relationships."

BlackRock is a punching bag in certain circles for blending trendy environmental, social, and corporate governance (ESG) concerns into its business strategy. The company discourages investment in fossil fuels and firearms, and promotes the diversity, equity, and inclusion movement. Fink doing a victory dance about the effectiveness of "economic war" can only excite concerns around the globe about stumbling across ideological tripwires and ending up in financial purgatory.

"The Trump administration's unilateral imposition of tough sanctions against Iran heightened international awareness of how much power the global economic system gives the U.S.," Walter Russell Mead observed. "But woke Democrats using economic sanctions to impose their views on climate, gender and other issues are even less welcome in many countries than Trumpian populists."

So, it's jarring, but unsurprising, that representatives of Brazil, Russia, India, China, and South Africa (the BRICS countries) met in Moscow this week as if nothing special were happening in the world. Among those countries, Brazil (along with Argentina) and South Africa lean in Russia's favor over economic ties and resentment of U.S. clout. India is pursuing new arrangements "which would let Indian exporters continue their business with Russia even after Western sanctions restricted international payment mechanisms," according to Asia-Pacific News. China sees opportunity to cultivate a fellow authoritarian regime while offering safe haven (if you choose to believe Beijing's assurances) to developing countries concerned about weaponized financial institutions.

Outside of the BRICS group, Saudi Arabia may accept China's yuan as payment for oil in place of the long-established dollar. "The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit," notes The Wall Street Journal.

"It now seems likely that the world economy really will split into blocs—one oriented around China and one around the United States, with the European Union mostly but not wholly in the latter camp—each attempting to insulate itself from and then diminish the influence of the other," commented economist Adam Posen, who supports economic sanctions but foresees long-term consequences.

"With less economic interconnectedness, the world will see lower trend growth and less innovation. Domestic incumbent companies and industries will have more power to demand special protections. Altogether, the real returns on investments made by households and corporations will go down," he added.

"The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades," agrees BlackRock's Fink, despite his enthusiasm for weaponizing finance in ways that promote such fragmentation. He predicts that "a large-scale reorientation of supply chains will inherently be inflationary."

Interestingly, both men see cryptocurrencies as holding potential for breaching the world's rising economic and financial barriers unless governments bring them under control.

So, the "unified" world opposing Russia's invasion of Ukraine may largely share horror over the invasion of one country by the armies of another, but much of the same world is also nervous about the economic penalties imposed in response to that invasion. Governments and businesses will establish new barriers and alliances to insulate themselves from future weaponization of trade and finance. And in that fragmented world to come, we'll all end up a little more isolated, and poorer.