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Jun 30, 2022

Transatlantic Sanctions Policy and the Rise of Middle Powers

By countering Russia’s war against Ukraine through trade and finance, the United States and Europe are increasing the leverage of the likes of India and Turkey which seize on market disruptions to advance domestic or regional priorities. Economic policy-making must adapt to a diversified set of powerbrokers.

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General view of Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia May 21, 2018. Picture taken May 21, 2018.
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The limitations on the United States, the European Union, and NATO intervening in Russia’s war against Ukraine were there from the start, baked into the calculus of the Kremlin and all advocates of traditional deterrence—there would be no hot war between nuclear powers.

While the nuclear threat arguably gives the upper hand to an autocracy without scruples to break internationally recognized norms—the West responded to Russia’s war of choice with its own version of asymmetric power: financial sanctions, export controls, and trade restrictions. Thus, paradoxically, the existential threat was removed from the active playing field. The decisive factors lie in the intertwined world of global commerce and flows of capital that have become the terms of engagement.

From a game theory perspective alone, the number of outcomes from a financial and trade war against a country the size of Russia is perhaps incalculable, particularly as Moscow responds by throttling gas taps and blockading the export of grain. From supply chain disruptions to sovereign debt markets, we simply do not know what may happen, and who may gain the upper hand.

If this conflict had occurred a century ago, the West’s economic suasion would have extended throughout its colonial holdings. A trade embargo implemented by the US and European empires would have encompassed an overwhelming majority of global GDP and population. The West’s predominance still exists in the financial world due to the role of the dollar, the euro, and the British pound for capital markets, reserves, and global settlements—hence the potency of sanctions. But in trade, in energy and major commodities, in critical materials, and in components of high-end technologies, there are many players on the field. In the end, the conflict is not about great power competition: the choice for economic warfare will accelerate—and accentuate—the role of middle powers.

Shifts in Economic Power

Key states have avoided economic restrictions on Russia even if their votes at the United Nations record political concern. For some low or middle-income economies, sanctions are unsustainable. Others calculate that Russia’s dislocation from the West is shifting political leverage and see an opportunity for economic benefit or to increase their regional or even global sway.

The relative weight of traveling to Washington for an Oval Office meeting to finalize an economic partnership may be decreasing—Western leaders are now the ones traveling. The American president travels to Saudi Arabia. The German economics minister travels to Qatar. British, EU and US officials travel to India, all on separate trade initiatives. The Gulf region, Turkey, and India are three examples of the bifurcations in economic decision-making that are underway.

Tight oil markets, rising prices, and reductions in European gas imports from Russia have turned the Gulf into the most decisive region for global stability, at least in the short-term. The willingness and ability for the United Arab Emirates and Saudi Arabia to produce and sell higher volumes of petroleum or for Qatar to exploit its liquified natural gas reserves and bring them to market gives the region negotiating leverage that far outstrips its relative weight in gross domestic product.

But even as it serves as a center for global oil trading, the UAE has also done little to hide its willingness to absorb Russian financial flows or host oligarch yachts in it ports. To help tame global energy prices, including at home, Western leaders must effectively turn a blind eye on the activities of the financial sector that are undermining their own policy. The UAE’s critical role in global oil markets shields it from US claims that it will target third parties that “backfill,” or move into markets left by sanctions.

Similarly, Saudi Arabian and Qatari human rights abuses are “compartmentalized.” The economic intervention of removing Russian fossil fuels from European markets has elevated the role of the Gulf countries, given the role of fossil fuels in determining global price stability and efficiency of international trade.

Turkey and India Carve out Special Roles

Despite Ankara’s notable sale of drones to the Ukrainian government, Turkish interlocutors argue that their country’s difficult geography make trade and financial links with Russia impossible to sever. Russian crude remains a much more appealing option that importing oil from the unstable countries to the immediate south. Turkey depends on tourist revenues from Russia and is perpetually rollicked by domestic economic drama that threatens to envelop its banks. Absorbing Russian business is a practical decision, now that the Black Sea is a war zone and the Ukrainian coast subjected to Russia’s naval blockade.

Turkey’s hesitance to confront Moscow directly is understandable to its partners, but Erdogan has successfully moved geopolitical leverage in his direction, most notably by holding out his approval of Finnish and Swedish accession to NATO. Europe’s economic and security response to the war has shifted power of decision-making to Turkey. 

India has also positioned itself as an economic key state in the campaign to isolate Russia. The country’s moniker as the “world’s largest democracy” does not fit into the expectations defined by Washington that the democracies of the world should take a stand against autocracies, and now in particular the tyranny of Russia. Much ink has been spilled over whether the US would be prepared to sanction India for profiting off Western sanctions and welcoming the import of Russia oil at rock-bottom prices.

New Delhi’s strong links to Moscow, and particularly military links, date back to Soviet times, but as tensions mount between Western powers and both China and Russia, Narendra Modi has seized the moment to become the deciding party in trade flows, digital commerce, and supply chains. Intensive outreach from the EU, the United Kingdom and the US as well as welcoming the country as an invited guest at the recent G7 summit in Germany demonstrates both the role these countries perceive India plays or is well placed to play in the global economy. Like Turkey, India is defining and acting upon sovereign economic interests that do not align with other regional or global powerbrokers.

Transatlantic Cooperation Needs Definition

Implementing strong sanctions on Russia has been both a moral obligation and a strong strategic choice. There are, however, by definition, financial and trade distortions that add fuel to global inflationary pressures, COVID-related dislocations, and China’s economic slowdown. Disappointingly, the debate in Europe over the use of economic statecraft has focused primarily on crippling Russia’s ability to maintain its military attack on Ukraine, and how to limit economic repercussions at home. There is too much focus on the West’s estimation of its own resolve than an analysis of how the rest of the world perceives and reacts to the behavior of the world’s developed democracies. And there is too little public debate about longer term repercussions of empowering—intentionally or otherwise—the priorities of smaller powers.

For systemic competition with China, this development is arguably a positive one—just look at how both the US and the EU have both attempted to boost the role of Vietnam as a counterweight to China’s manufacturing behemoth. But more broadly, from a trade management, supply chain security, and regulatory perspective, the more complicated the web of well-leveraged global actors, the harder it is to establish and defend global norms—from WTO reform to data protection to price setting of commodities. Setting the agenda within the G20 will become even more challenging. Maintaining export-driven growth, the powerhouse of major European economies, will be subject to complicated international negotiation and navigating the legitimate interests of regional stakeholders.

The sustainability of Western economic models will depend on the ability to align norms and standards in this period of global economic disruption and ambiguity. The response to Russia’s war against Ukraine could be seen as a prime example of Western alignment. However, the use of economic tools to disrupt a war perpetrated by the world’s eleventh largest economy has hit the accelerator in shifts in economic power that counteract—or at least significantly complicate—Western interests.

The US and Europe have not yet clearly defined how they should employ economic tools and regulation in this rapidly changing global environment, and to what extent governments should, or have the right, to intervene in free enterprise to defend national interests as defined by those governments. Exactly what these interests are subject to fierce debate and strategy writing on both sides of the Atlantic.

Uncertainty and Adjustment

Defining interests is a clear prerequisite to understanding how to defend them. But there are grounds for optimism. The US-EU Trade and Technology Council (TTC) is helping to craft what modern trade policy means beyond the framework of the WTO and how to use sanctions and export controls without disturbing the interests of close partners. June’s G7 leaders’ summit has demonstrated alignment on crafting both industrial subsidies and expanding foreign direct investment to emerging and developing economies. Transatlantic investment and data flows have increased rapidly, enshrining public sector rhetoric in private sector commitment.

Russia’s war of choice in Ukraine has exposed the dynamics of a new era of international competition and conflict—playing out through economic and financial means—that has no rulebook. It has elevated the role of middle powers, each using the fallout to advance their specific interests, so far with considerable success. Western governments should be clear-eyed about global distortions caused by the fallout exacerbated by the war. They should prepare public opinion and industry for a period of uncertainly and adjustment.

Julia Friedlander is Chief Executive Officer of Atlantik-Brücke e.V. in Berlin.