The new world order

The West is now at economic war with Russia and the consequences may well shape our lives for decades to come. Cormac Lucey explains why

Enormous change sometimes occurs without us even noticing. The appointment of Paul Volcker in 1979 to head up the US Federal Reserve ushered in a decade of transformation. 

Margaret Thatcher and Ronald Reagan took the top political jobs in the UK and US, unleashing four decades of falling interest rates, lower inflation, and rising financial asset prices. 

The Berlin Wall came down, China pushed for greater trade with the West, and economic globalisation accelerated. Back in 1979, few could have foreseen the immense change that lay ahead. 

By contrast, the Russian invasion of Ukraine last year was impossible to ignore. Vladimir Putin may have expected little resistance to his “special operation”, but the Ukrainian response has been intense and courageous.

And the West has shown surprising unity in agreeing a two-pronged strategy: providing advanced weapons systems to Ukraine while also imposing unprecedented economic sanctions on Russia. 

In addition to targeting key individuals associated with the Putin regime, western nations are trying to limit Russia’s access to money. Major Russian banks have been removed from Swift, the international financial messaging system. 

Russia has been barred from making debt payments using foreign currency held in US banks. And western Europe has frozen the assets of all Russian banks, blocked Russian firms from borrowing money, and placed limits on Russians deposits in European banks. 

The EU has banned imports of Russian coal, refined oil products and oil by sea. It is unprecedented for a large power (and permanent member of the UN Security Council) to be subject to such sanctions. 

The closest we’ve come in recent history was perhaps US President Franklin D Roosevelt’s attempts 80-odd years ago to curtail an expansionist Japanese Empire. 

In 1940, Roosevelt closed the Panama Canal to Japanese shipping. Responding to Japanese occupation of key airfields in Indochina, the US froze Japanese assets the following year and established an embargo on oil and gasoline exports to Japan. 

By December 1941, Japan had attacked Pearl Harbour and triggered war with the US. 
Today, the West is waging economic war on Russia and the consequences—less evident than the immediate conflict—may well shape our lives for decades to come. 

Unlike Japan in 1940, Russia today is a plentiful supplier of commodities and not easily besieged. 

It has powerful neighbours in China and India, both of which are quite content to continue trading with Russia, despite the West’s sanctions.

But China has its own unsatisfied territorial claim over Taiwan, which could provoke similar sanctions from the West. This has resulted in China seeking to reduce its economic dependence on the West, just as the West scales back its reliance on China. 

The result is a new era of deglobalisation, ‘reshoring’ and ‘friendshoring’. Taiwan Semiconductor Manufacturing Company (TSMC)—the world’s leading manufacturer of microchips—is at the epicentre of the resulting tensions. 

In a recent speech, TSMC founder Morris Chang observed: “Globalisation is almost dead. Free trade is almost dead. And a lot of people still wish they would come back, but I really don’t think they will be back for a while”. 

This is evident in TSMC’s decision to locate its newest fabrication plant in Arizona in the US—a location it would hardly have chosen prior to the Ukraine War. 

Has the world of peace, uninterrupted trade and economic globalisation been replaced by one of large trading blocs operating in parallel, but separate from each other? It looks like it. Unfortunately, we will all probably lose out as a consequence.

Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland