July 1, 2022

Finance & Economy

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Opinion | Can the West Stop Russia by Strangling Its Economy?

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ezra klein

I’m Ezra Klein, and this is “The Ezra Klein Show.”


The world has been transfixed for the last week by Russia’s invasion of Ukraine and Ukraine’s remarkable, heroic resistance to the same. You can see these amazing, chilling images on social media, on traditional television. And so it’s easy to follow that side of the war, but that is not the only theater of this war. There’s this other battle playing out in the financial markets, and that war — that war is harder to see. But in the past few days, it has escalated from a limited counterstrike into a ferocious counterattack.

It is a war that might decide what happens, ultimately, in Ukraine, and it’s a war whose effects are not going to be limited to what happens in Ukraine. We may well be watching the end of one global economic order and the birth of another. The U.S. and Europe were clear from the beginning. They did not intend to get into a shooting war with Russia, not over Ukraine. But they did intend to use their financial might to punish Russia if it invaded Ukraine. They meant to sanction Russia, to cause financial pain to the country, and particularly to its ruling class.

But not to crack its economy, not to cause undue harm to their own economies, which are now interwoven with Russia. And so in this way, it looked like the logic of globalization had become inverted. Rather than trade and interdependence restraining Russia from doing something like invading Ukraine, it appeared to be restraining the West’s ability to respond to Russia invading Ukraine. And that was where things stood on Friday.

But then social media, television, it filled with images and videos of the remarkable courage of Ukraine’s defenders, the indelible leadership of President Zelensky, the knowledge that Russia was not just storming to the capital, that this was going to be much harder for them than people had thought. And all that together, it shamed Western leaders; it changed the politics of the West. And so by Monday, a limited economic punishment had become something else entirely — a full out financial war.

Russia now stands on the precipice of economic collapse. And Putin— Putin knows it. He’s treating this not as an annoyance, but as a mortal threat. In response, he raised Russia’s nuclear threat level. He’s responding to financial war with the threat of nuclear war, implying that if the West broke his economy, he might break the world — which is all to say, you cannot understand the war happening in Ukraine without understanding the war happening around Russia’s economy.

And so I wanted to have Adam Tooze on the show to explain it. Tooze is director of the European Institute at Columbia University. He’s an absolutely brilliant economic historian. And he’s the author of the invaluable newsletter, Chartbook, which I subscribe to, and all of you should, too. Not all newsletters are worth it, this one actually is. And he’s been closely tracking the economic dimensions of the conflict here, and so I asked him to join me to analyze them.

But this is a bit of an unusual show. We spoke on Friday, February 25th. But by Monday — by Monday, the situation had changed, in ways it demanded the analysis change too. But thinking about this and reading the conversation, I didn’t want to edit it into a false omniscience. The rapid, unpredictable way the conflict evolved — that’s really the point. That’s not some mistake. So what you’re going to hear here are two conversations.

First, our Friday discussion, which I think is really important, because Tooze lays out the economics of the conflict as it was understood by both sides at the beginning of the war. You cannot understand how we got here without understanding what both sides predicted, what they thought to be true. But then, on Monday, we talked again to discuss how it had changed so dramatically in just a few short days, what that revealed about the false assumptions of the players, and the way that events are driving a rapid escalation neither side expected and neither side planned for.

And I think when you sit with that, when you see how quickly this is changing, then you realize actually what dangerous territory we’re really in. As always, my email, [email protected]


Adam Tooze, welcome back to the show.

adam tooze

Good to be here.

ezra klein

Sorry it’s under these circumstances, of course. There’s something you wrote a little while ago now that’s been in my head watching this play out, which is, quote, “The first to expose the fact that global growth might produce not harmony and convergence, but conflict and contradiction, was Putin in 2007 and 2008.” Tell me about that.

adam tooze

Yeah, I mean, the comment is framed now very much against our knowledge that — with the clash with China, that has become a much — even bigger question. But I do think that it originates in that moment in 2007, ‘08, between Putin’s now famous speech to the Munich Security Conference in February and then the clash over Georgia.

And I think that’s the moment when it becomes clear that not only do — as it were — the old antagonists of the Cold War have resentful legacies, but those will take on a new significance precisely as a result of the success of what was generally thought to be of the antithesis of that old era of division, namely globalization, because globalization was supercharging the development of Russia by way of the huge demand for raw materials, unleashed by China’s growth, from the 1990s onwards.

And so Putin, by 2006, ‘07, is presiding over the restoration of a Russian state which has emerged from the disastrous crisis of 1998. By that point, it’s — I think — the third largest holder of foreign exchange reserves, one of the largest owners of American sovereign debt, and he’s paid back the IMF loans and all the financial humiliations in the ‘90s. And precisely on the basis, if you like, of Russia’s raw material strength, is now in a position to actually state — you know, his red lines— which are essentially the same as the ones that he’s prosecuting now — that he doesn’t accept, as it were, the order that emerged from the 1990s. But he was able to do it on the basis of economic strength. And that economic strength is itself the result of our demand, the West’s demand, or the collective global economy’s demand for the raw materials with which Russia is so richly endowed. And that is a huge problem. I mean, that’s a huge wrinkle in the underlying conception of globalization from the 1990s, which was much more Panglossian, much more pollyanna-ish.

Right, that fundamentally believed that everything was good in the world, and that more economic growth would produce convergence or harmony, and— do commerce, right, this idea that through exchange, we would grow closer together. I think that was the moment where we really began to get a flavor for the fact, and a sense of the fact, that that might not be the case.

ezra klein

Give me a moment of the Panglossian view. Give me a taste of the argument that, as we grow, as we integrate, as our economies intertwine — this is sounding vaguely romantic, I realize— that the economic logic of globalization, that there are gains to trade, we’ll get cheaper things, our economies will grow, also has a geopolitical logic, also has a geostrategic logic. Why did people think these were tastes that went together?

adam tooze

Well, I mean I think there is a kind of romantic feel to it. There is wanting to have your cake and eat it kind of liberal logic here, which one shouldn’t deny. I mean, you know, wouldn’t it be good if it were true? And within the legally settled spaces of nation states, this — liberalism is very heavily committed to this idea. And it is analogously leery of any reference to class war. It doesn’t like that either. It doesn’t like the idea that economic growth could generate massive inequality, and not just inequality, but sharp, polarized division at home, either.

So it’s a kind of double blind spot. And the idea at the international level is that — yes, in a sense, nation states were kind of excrescence. Right, they shouldn’t be there. Really, fundamentally, humanity is tied together by certain common interests, which are satisfied in this view, and optimally satisfied by peaceful and free exchange, and the common pursuit of innovation and prosperity. And furthermore, when you have a structure like that in place, you would expect it to cement powerful interests on all sides that would then resist war.

It’s what Palardy called the peace interest. So powerful, heavy hitting groups — not just, as it were, sentimental attitudes — resist the onset of conflict because it ruptures those trade relations. It has a romantic side, but there is also a kind of realist version of this, which says, well, if in the end, money talks, you’d expect money to talk peace quite a lot of the time. And that, I think, is the idea. And there are moments in the ‘90s, there are moments beyond the ‘90s, when this doesn’t seem like an implausible idea.

In fact, all the way down to the present day, one has to really pinch oneself to believe this is happening, given the losses that are being inflicted on, no doubt, powerful and influential people in Russia at this moment. I mean, the oligarchs are not doing well out of this. And if you think about analogous conflicts around Taiwan or something like that, the global semiconductor industry isn’t just the supply chain. It’s one of humanity’s great technological scientific achievements. Our ability to do this stuff at nanoscale is us up against the face of God in a sense. And it happens to be in Taiwan, and are we seriously going to talk about D-Day style amphibious operations — you know, and dig trenches, and attach explosive devices to fabs, which are the human spirit incarnate. Like, there’s something totally incongruous about this, right? They are also capitalism, and they also have geopolitical consequences. That’s the fly in the ointment.

But anyway, if you wanted to tie down that liberal vision and give it meat, I don’t think we should deny it and cast it off as, you know, childish stuff. There’s a profound rationality there. And historically, there are moments when it’s clearly vindicated. And in the right space, with the right framing, it can be very generative. And indeed, these logics work themselves out. And the Europeans, of course, insist that they are the very paradigm of that logic.

ezra klein

So Russia, for the past decade, maybe more, has been inflicting, exposing, the problems of this logic on the world. But before that, the problems of the logic are inflicted upon Russia. And I want to go back to that history for a couple of minutes here, because I think it’s important that the Soviet Union falls. American investors and economists and advisors flood into the country as it opens up.

There’s this idea that Russia will become this economic miracle — this shock therapy. It will become this economic miracle, as all these Western economic ideas meet all this productive might and untapped genius and potential. And then it doesn’t. So what happens? What goes wrong in the immediate post-Soviet Union effort to turn the Russian economy into a westernized success story?

adam tooze

Well, I think the first thing to say is that it was always a gamble at, like, extremely long odds, right? I think you have to go back to the late Soviet period to see just how blocked the political economy of Russia, of the Soviet Union, had become, how the Communist Party— unlike in China— had essentially become a kind of bracket around a pre-oligarchic configuration of interest groups in agriculture, in heavy industry, and the military industrial complex.

And that’s essentially what, as it were, creates the impasse which produces then a very serious — what will be a hyperinflationary problem in the end, to which anyone in charge of Russia at that moment would probably have had to have responded with the shock therapy element, which is the price of liberalization, because there’s really not a whole hell of a lot of other options there. The bad politics really begins — and it’s largely outside the influence of foreign experts — at the moment of privatization.

And it’s the extraordinarily corrupt process through which the assets of the Soviet Union were disposed in the mid ‘90s, really, that produces the move in the wrong — what I think many people would regard as the move in the wrong direction. I mean, Russia is not after all an economic basket case. This is another important point to make. The story now ends with disappointment rather than disaster, but the possibility of a kind of a liberal, democratic model was probably obviated at that time.

And furthermore, of course, the West has a limited degree of influence over this, but we back, after all, Yeltsin, who presides over this, who navigates his way through this oligarchic division, including in his violent stand off with his opponents in the Russian parliament, including in the manipulation of the ‘96 election that he wins, but it’s quite clearly a manipulated outcome. And then nothing we do from the outside, none of the aid we provide, can stave off the disaster into which Russia slides in 1998, which is crippling.

And this is a moment where a nuclear armed ex superpower is — basically, most of its economy as dollarized. People are paying their taxes in dollars. It’s really showing all of the signs of a disintegrating, dysfunctional, failed state by that point. And the story of Putin is not understandable, except against that backdrop. I mean, the basic claim to legitimacy on his part, and it’s not easy to just sort of wipe away, is that he has rescued Russia from that.

Now obviously, a critical political analysis would say— yeah, there are a variety of contributing factors beyond Putin’s iron determination. But that backdrop is critical.

ezra klein

But how does he — or the variety of contributing factors — rescue Russia from that? What is the capsule story of the foundation upon which the Russian economy is rebuilt from disaster into disappointment?

adam tooze

The fundamental distinction, I think — even, like, supporters of Putin would make — is that it went from being a kleptocratic, crony capitalist regime to being a state capitalist regime. And the fundamental story here is the reconstruction of the apparatus of the Russian state. It’s very complex, and the criminologists of the modern day have five, six, seven, eight different groups now that they see operating around Putin.

But the trend is, take advantage as best you can of the resources, the oil and gas and other metallurgical exports — and also now, increasing the ag exports for delivering to you — but don’t be the failed petrostate of the 1990s. Be a high functioning, authoritarian regime, more like, I don’t know, one of the Gulf States or an authoritarian version of Norway, if you’d like to put it really provocatively, with a fairly considerable welfare state by emerging market standards, and a huge foreign exchange reserve.

So one of the indices of this restoration of the state is the fiscal balance. And Russia — one of the reasons why Russian sovereign debt was beloved of foreign investors until last week is that Russia runs a very tight ship, fiscally. One of their commitments is not to allow runaway inflation anymore. And they set their budget target — I think the latest round was set at — they index it on the dollar price of oil. And I think they had set the budget to balance at an oil price of $45 a barrel, which by the standard of petrostates is really austere, right? I mean, the Gulf States set their budgets to balance at 70, 80, 90. So all of these are indicators of this consolidation of state power.

ezra klein

But so, crucially there, I want to draw something out that you said, which is Russia becomes a major, export driven economy.

adam tooze


ezra klein

And it’s exporting commodities, exporting energy, agriculture, but to the point that we’re beginning to draw on here, on globalization, what is happening is that Russia rebuilds by selling things it mines, it grows, and that to some degree, it produces to the rest of the world, and very particularly to Europe. I was looking at a breakdown of Russian exports, and I think we’re something like 3.5 percent of them. America is actually not huge in this.

But I mean, Europe is a lot of Russia. And of course, China has become much, much bigger too. And so, I mean, Russia really does participate in the globalized economy and begin early and selling what it can pull out of its own ground to the rest of the world.

adam tooze

Yeah, always has. I mean, this is a long, long tradition. Russia has always been — I mean, companies like Royal Dutch Shell, a large part of that business was originally the Rothschild Caucasus oil interest that was incorporated. It’s always been a bread basket. It’s always been a metallurgical sector for certain key metals. So yeah, it’s a Eurasian powerhouse of raw material supply.

And that’s the knock on Putin, right? I mean, any half decent administration with this pile of raw materials, given Chinese demand, should have delivered 7, 8, 9 percent growth. That’s the liberal knock, and that’s where the disappointment comes in, which is — it’s all very well to crow about this huge resurrection of the Russian state, but you’re setting a relatively low bar here. You know, a well administered rule of law regime could conceivably have attracted even more foreign capital than Russia did, and it attracted considerable amounts, and could have produced even more welfare.

Ukraine is caught between the powerhouse state type model of Russia and the powerhouse, E.U. driven, market driven assimilation model on the other hand in the West. And unsurprisingly, this creates a kind of — given Ukraine’s lamentable economic performance, it creates this kind of — not schizophrenic exactly, but this hugely oscillating self positioning of Ukraine. I mean, do they associate themselves with the more oligarchic Russian model, or do they — unsurprisingly, many of their citizens would prefer to align themselves with the Polish experience.

But those are the benchmarks against which this is the kind of triangle of different experiences that help to locate what’s going on here.

ezra klein

So Russia’s buildup of a large foreign exchange reserve has come up glancingly a couple of times. You write, “If you want a single variable that sums up Russia’s position as a strategic petrostate, it is Russia’s foreign exchange reserve.” You go on to say, “This is what gives Putin his freedom of strategic maneuver.” So tell me two things here. One is that foreign exchange reserve may not be the most familiar term to people, so what is it? And then why is it the core of Putin’s ability to invade Ukraine, to survive this, to strategically maneuver on the world stage?

adam tooze

Yeah, I mean, a foreign exchange reserve on the scale the Russians have it is — if you start from the premises of a liberal, private sector based economy, a kind of anomalous thing, because what it is is a hoarding by some public agency. It could be the central bank, it could be the treasury, it could be a sovereign wealth fund, of the foreign currency proceeds of an export surplus. It’s difficult to accumulate one of these if you’re not running a trade surplus.

But the trade surplus is, in a private sector economy, generally earned by private firms. It’s been a long time since America’s run one, so it’s hard to kind of invoke examples. But say— Germany does, right? And Germany doesn’t have a giant trade foreign exchange reserve, because the companies that earn the foreign exchange are Porsche and BMW, whatever. They don’t have any direct relationship, although VW is actually state owned. But it doesn’t feed into a state coffer.

Whereas in states like Russia or China, there is, as it were, a systematic process of accumulating foreign claims, claims on foreign economies, in public hands. That requires abstention on the part of the state, right, you have to it commit to not spending this, because you could be spending this on goodies. You could be importing from abroad, but you’re not. You’re deliberately using — it’s like a blend of trade policy and fiscal policy — to constitute a cash reserve.

Why would you do that? Because you want to be invulnerable against shocks from the outside. You don’t want to be in a position where your currency is devaluing in an uncontrollable way, your import bill, because that’s denominated in foreign currency, is surging, making the cost of living go crazy for ordinary folks who have to buy the foreign goods. You don’t want your debtors who’ve borrowed money in foreign currencies to suddenly be made bankrupt by the fact that their debts are now worth vastly more in local currency than they used to be, because your currency is devalued.

All of this is what happened to Russia in 1998. And if you’ve got half a trillion dollars in foreign exchange reserve, you can do a whole variety of things in that kind of situation. You don’t need to worry about being able to import stuff, because you can cover your import bill for years, in the Russian case. You can, if necessary, sell those dollars into the market for rubles, which helps you prop up the value of the ruble. And that will then allow your debtors to buy time to pay off their debts, settle their debts, by hook or by crook, so that by some point then they can survive the devaluation which may in due course be inevitable.

And what Russia has not just done — it’s not just run up this public foreign exchange fund. It has also, since 2013, ‘14 — the last Ukraine crisis — systematically squeezed down on the counter part of that, which often shows up in national balance sheets, which is private debts in foreign currency. So that’s, as it were, that’s the next level element of their hardening of the Russian economy. It’s not just first step, build up a big dollar reserve. But the second step is, look around every other aspect of Russian society and economy and shrink any outstanding liabilities in dollars.

And they’ve done both bits. And that means that they are not exactly sanctions proof, but they are not going to panic when, as we saw, in the last couple of days, the ruble plunges, foreign debtors will no longer run — basically, the Russian government can’t borrow from creditors anymore, certainly not in the last week. So it doesn’t need to. So that’s the resilience that you get there.

ezra klein

So I really want to hold on this for a minute, because it’s probably some unfamiliar territory. But I think this is so important for understanding the logic of the situation. We are so used to thinking of wars in terms of, how many troops do you have? How many missiles? What kinds of technologies do you have? And what you’re saying here is that Russia has spent years building up, on the one hand, a storehouse, of dollars— to some degree, euros — such that if they get cut off from being able to get lots of dollars and euros, it doesn’t really matter. They can survive that.

And then on the other hand, bringing down the debts and thus leverage that their private sector players absorb, such that Western actors would have leverage over them. And so they have actually spent years using the tools of globalization to harden their economy against the weaponry of globalization. That if you think of one of the ideas in — globalization will create a kind of economic harmony. If you think of the stick next to that carrot, it’s — well, if you’re deeply entangled in the global economy and you become a bad actor, then you can be cut off.

And if you’re cut off from that trade, if you’re cut off from that ability to participate in the financial system, if you’re cut off from the ability to get the currencies in which a lot of your transactions are denominated, then your suffering will be immense. But what they’ve kind of been doing is playing one side but not the other. They’ve been participating the global economy and building up their reserves and hardening in that way, but at the same time, purposefully reducing their vulnerability to the sticks of sanctions, and so on, which we’re about to talk about in detail.

adam tooze

Yeah, I mean, the buzzword here is weaponized interdependence, and there’s a whole bunch of scholars, colleagues have been working on that issue. And I think it’s important to recognize — I mean, and in the first instance this was not part, I think, of an expansive, revisionist, geopolitical vision. I think in the first instance, it was a recovery from the 1998 trauma, which was severe. And I think it’s difficult for us, sitting in comfortable and affluent, or relatively stable societies, to really understand quite how severe that shock was.

I mean, Russia in ‘98 at one point I think appeals for food aid. I mean, like, we’re really talking about an existential crisis. But yes, undoubtedly, this is true that Russia — you know, it’s a typical medium strategy, medium power strategy, or an insurgent type strategy. It has to take a comprehensive view of the exercise of power globally because it doesn’t have the privilege of economic dominance. So it knows that it’s vulnerable. It knows if it wants to have autonomy. And with that, if he wants to realize what sovereignty actually means, in other words, your ability to take action on your own terms, not indefinitely without any constraint, but buy yourself a degree of room for maneuver, then you need to think across the bandwidth of options.

And you can’t treat economics as separate from the other dimensions of power, which is the conceit of liberalism. But I think they understand that it’s also the hypocrisy of liberalism because they don’t think that we, the Americans, or the West really do either. It’s just that the game has gone so far away that we can proclaim the endless future of economic prosperity, a joint economic prosperity. And what that really just means is an endless future of ally power and our dominance.

And if you’re coming at it from their angle, they do indeed always need to see the other side. And we cannot ignore the history of the ‘90s and the early 2000s without getting into kind of moral equivalence and whataboutism and just causally to understand what the Russians are doing. You have to see the way in which they make sense of Iran, Iraq, Kosovo, that entire realm of essentially discretionary action by major Western powers on their own terms. And Russia has indeed been preparing for that.

ezra klein

So during the Cold War, one of the definitional features of the Cold War is a willingness on the part of the West to commit or at least threaten force. We commit force in Vietnam. There’s the standoff in Cuba. And the fear is this will go all the way up to nuclear war. Over the past months, the Biden administration, to their credit, has been saying Russia is going to invade Ukraine. They have been raising the alarm. They have been called alarmist for it. A lot of people doubted the intelligence. They were right.

But they have also made perfectly clear that if Russia invades Ukraine, they are not going to commit troops. For all that we knew this was coming or the administration knew it was coming, there was not a decision made to say line up American or NATO troops on the Ukrainian border. And the signal is if Russia does this, they will be punished economically with sanctions.

So before we get into specifically what the sanctions are, what are sanctions? What is the intention of this kind of weapon? What do they do? And what do they not do?

adam tooze

Well, I mean, it’s a hugely contested field. And there’s a brilliant new book out by Nick Mulder on the economic weapon that addresses the history of sanctions. And they have a really kind of complex and twisted history, as he shows, that they’re kind of liberalism’s favorite weapon. I mean, they’re on a spectrum, which is an ugly spectrum that starts with blockades, huge warfare, economic sanctions, and then goes to things like strategic bombing and ultimately, various types of deterrent strategy.

And they’re all forms of the exercise of power and indeed coercion and violence— I think we should be clear— short of the classic battlefield entanglement or naval warfare or aerial combat. They may, in fact, entail— certainly, regularly, do entail naval combat and/or at least naval interdiction and/or aerial interdiction. But they fit in that kind of space. I mean, the sanctions that we think about now are peculiarly legalized product of a century of experimentation, which all starts really in its modern form with the League of Nations, or you could say it starts with the British, French, and ultimately American blockade of Germany in World War I and then is adopted by the League of Nations in the 1920s, the forerunner to the U.N., as the world community’s ultimate weapon nonviolent, quote, unquote, “against somebody who transgress the laws of peace.”

And so rather than yourself having to go to war against an aggressor, what you do is impose economic sanctions, which are either supposed to be a deterrent to prevent action. And that will work best against small actors for whom the prospect of sanctions is crushing. Or it could be a form of siege. In other words, you punish the bad actor and hope that attritionly, this will affect their choices. It could be as a result of a domestic uprising or it could be as a result of elites simply saying, look, boss, we’ve got to change course, this isn’t going well. Or it could be functional. And it was, they just can’t carry on. That’s the risk which any potential challenger in the global system now knows that they could face, I mean, after the experience of Iran or Venezuela or North Korea, whatever.


ezra klein

So Joe Biden, when he lays down the second and harsher tranche of sanctions here, he says, quote, “No one expected the sanctions to prevent anything from happening.” So explicitly he says, these are not deterrents, which is to say, in the typology you just offered, their siege. But you’ve looked at these pretty closely. What did we do in the sanctions? And what didn’t we do?

adam tooze

Yeah. I mean, the president was actually— I mean, given his delivery, it’s always quite difficult to discern what his main point is. And this isn’t to say he isn’t coherent. It’s just something about his delivery that is strangely unfocused. But he was, in fact, quite frank about what the sanctions are doing.

And what I think the model here is on both the European and the American part is that they are going to surgically strike at the bits that hurt inside Putin’s regime. I mean, he’s literally said it. He kind of mumbled it out, but it’s right there in what Biden said. These sanctions are carefully calibrated not to interrupt payment for energy deliveries.

Now, at that point, really the game should stop because if we’re not interrupting the payment for energy deliveries, we are not hitting the bit of the Russian economy, which generates the juice, which sustains Putin’s regime. Now, they could then say, well, that isn’t the point. Our point is this targeted attack on the political elite and the targeted attack on key financial institutions, they are being cut out of the entire dollar correspondence system, which means it really won’t be able to do international banking very easily.

And I think the idea must be, if you strike at those two elements, the financial infrastructure and the elites, that you’re going to produce an effect. And I think reporting suggests from inside that there was a somewhat, I mean, understandably multi-sided debate in the Biden administration about whether or not this would work as a deterrent. You can’t but hope that it will.

But now, I think given the worst has happened, clearly, they’ll say, no, that was never the plan. And in fact, always this is about this kind of change. But having exempted the energy sector, they are not— and again, they’re very clear about the motives for that because, I mean, they’ll hurt the Europeans and it’ll hurt American consumers too badly. I mean, in the American consumer case, it’s, I think, a more— I mean, it’s a more of a stretch. But in any case, that’s the logic, it’s quite explicit.

And so they’re trying this more targeted smarter sanctions kind of model.

ezra klein

I want to get it something important there because we are talking— we’re speaking, we’re in America, despite your lovely accent. And we are talking about the Biden administration as the actor. But the sanctions are not simply a Biden administration operation. They’re in consultation with Europe. And talking about Biden’s lines and the places where he’s a little bit unexpectedly honest, two things here.

One is we understand— this has been said pretty clearly. It has been reported quite clearly, actually, going back months now— that Germany has lobbied and pushed for the sanction exemption on energy. And we can talk about more of the specifics there, but there’s a real European fear about cutting off Russian, particularly natural gas is my understanding.

And then secondarily, there was a possibility being floated to cut Russia out of the SWIFT system, which is international financial machinery that I will let you explain its function. They did not do that at least yet. And it’s possible that they will in the coming days. They did not do that yet. And Biden, somewhat to my surprise, says in his comments, that that is because the Europeans would not agree to do it.

So can you talk a bit here about these decisions and the role that Europe’s integration with Russia is playing? Because it’s funny, it really inverts the logic of globalization creating harmony. You’re seeing here that it also creates leverage of the bad actor on those who would like to maintain harmony.

adam tooze

No, absolutely. I mean, there are three separate issues. So one is whether or not it’s illegal to conduct transactions with Russian actors through the right kind of intermediary around things like energy. And the Europeans and the Americans seem determined to green light that.

Then, there are the sanctions which Biden did announce, which as he insisted — and I think quite rightly and expert opinion seems to concur — are really massive, which are to block the assets of Russian banks in the United States for some of them, and for others, just excise them from the dollar-based interbank relationships. So this is this correspondence banking which Biden announced.

He was then asked by journalists, Mr. President, what about SWIFT? And SWIFT is the thing that everyone’s been talking about, and it’s become this sort of standard of whether you are hardcore on sanctions is, do you favor cutting the Russians out of SWIFT? And I think the smart money says, well, actually, the correspondence banking thing does that to a considerable extent. And in any case, the real issue is energy. And if you’re exempting that, it doesn’t matter what you do.

But SWIFT is, it’s kind of like, as far as I understand it, it’s like an email system for banks. It’s a form of secure, rapid, efficient digital communication between international banks. It’s not government to government. Those central banks may have SWIFT numbers. It’s a club essentially, and it’s not based in America. It’s based in Brussels. And it’s a private entity.

And the idea is that as it were if America threatens actors on the Russian side, then people who do business with them through SWIFT will become liable. SWIFT itself could become liable for one of those really nasty American lawsuits with which they have hounded both European and Asian bankers and business people.

And so SWIFT will then, as it were, just choose to exclude Russian members from its system, and that would hamper their ability to do conventional international banking. I think the consensus now is that if you push the correspondence banking measures which Biden imposed yesterday or announced the imposition of, then that actually does the work.

But yes, both with regards to the energy carve-out and with regard to SWIFT and forceful action on SWIFT, which would be stigmatizing because the previous countries that have been cut out are Iran, Venezuela. So it would put Russia in that box. Europe pushed back and pushed back quite hard, and they pushed back for existential reasons, right, because 50 percent of the natural gas on which a large part of German power generation, domestic heating and cooking fuel, and industrial feedstock depends would be cut off. And the German government doesn’t want to contemplate that any more than Biden in a midterm election year wants to contemplate a dramatic spike in gas prices.

ezra klein

So we’re going to get at this explicitly later, but I just want to note as we go through this part of the conversation that if China is in your head here, I don’t think you’re wrong to have that as subtext. And I say that in part for this question, which is, I think we’re seeing that on energy almost no matter what they do because a direct invasion of Ukraine is about the single largest violation of international law norm you can possibly imagine. It just doesn’t get bigger.

Russia is just too big to fail. They are too big to sanction. They have just attained a centrality to the global market where no matter what they do within imagination, Germany and the UK and so on are just going to say, well, that was bad but not so bad that we are going to absorb the cost of cutting you out.

adam tooze

I, broadly speaking, agree. That’s exactly. But it depends a little bit on the conjuncture in the sense that the oil and gas markets at this particular moment are as tight as they’ve been in living memory, right? So that makes things even worse. And it’s just not obvious, for instance, that if you take three million barrels of Russian oil exports a day out of the market that Saudi Arabia can step up to match that missing supply. I think, in fact, we know for a fact, they can’t.

ezra klein

Oh, they probably cannot.

adam tooze

They absolutely can’t. And likewise, gas is even more complicated because it requires either pipelines or liquefaction, LNG terminals. And that’s a 5 to 10-year time horizon, massive investment, and we just don’t have the capacity for that. So it’s those particular constraints. I mean, people talk about this as a completely irrational move on Russia’s part. They’ve been timing this. This was certainly the year to do it and not 2020 when oil prices went negative briefly.

So they are indeed really hard to sanction at this particular moment. And in the grain market, they’re an even bigger deal, right? So between them, Ukraine and Russia supply 23 percent of the global stock of wheat exports, global flow of wheat exports. So they’re staggeringly large in that space.

ezra klein

And if I’m not wrong, though, agricultural, and in fact, commodity and ag experts in general are also exempted under the sanctions.

adam tooze

Surprise, surprise, they are. Yeah, under a rubric which also includes medicines and — but yes, they are. Yes, that’s General License 6 maybe. The energy one is General License 8. And so apparently, there was panic buying. And we aren’t the first people to learn this. There was a panic buying of loaves of bread across the Middle East, which are heavily dependent on Ukraine and Russian grain until somebody informed the bakery shops in Lebanon that, in fact, General License 6 applied.

And they literally put up posters in their store window saying, no, American sanctions will not apply to agricultural goods. So where people are actually sensitively dependent on this rather than it just being a kind of abstract discussion like the one that we’re having, the knowledge of the limits of these sanctions is fairly widespread.

ezra klein

Although I’m still quite worried about this piece of it. I mean, we’ve been talking really about Russia here, but Ukraine itself is a massive wheat provider. Lebanon imports 50 percent of its wheat from Ukraine, Libya 43 percent, Yemen 22 percent — I mean, Yemen is in a disastrous state right now — Bangladesh 21 percent.

So you can exempt Russian wheat production, which will presumably continue relatively unchanged, but Ukraine is being invaded by Russia. Their wheat production is probably not going to continue unchanged. And it does seem that the downstream consequences for fragile countries and their food supply could be severe.

adam tooze

Especially against the backdrop, again, in food markets as well of very elevated prices. It’s one of the untold neglected stories of the inflation surge is that food price spike, which hits low-income countries hardest. So I mean, global stocks are quite large. So I think there shouldn’t be absolute shortages, but the price squeeze, especially for lower-income countries, could be very severe. And Ukraine is a low-cost — it’s a kind of bargain basement wheat provider. So its clients do tend to be lower income.

ezra klein

So we’ve been — as you said, there’s a strategic economic logic here. We’ve been trying to lay out what Russia’s is. I think the way that the American and European sanction exemptions has been reported, has been discussed is as a kind of moral failure, an absence of the kind of backbone and commitment Putin himself is showing here.

I think that you can read it the opposite way, too, given the history of very large countries invading smaller countries that do not want to be invaded, which is, if you really loathe Russia, you can say Putin is doing something probably completely disastrous for the Russian economy here, probably disastrous for Russia. The financial system is about to get somewhat strangled. They are about to be putting a tremendous amount of treasure and blood into trying to conquer and then pacify and then maintain Ukraine.

America has had its own misadventures of this kind over the past few decades. We’re a richer country. We’re a bigger country. We have more allies in those ventures. And they have been, I would say, disastrous for America. Again, from the realpolitik approach, could you look at this and say, Vladimir Putin has made an insane calculation here, and the West’s interest is in letting him destroy his power on the shoals of this imperialist nostalgic fantasy?

adam tooze

That’s definitely, as it were, the big liberal counter. In other words, that liberal harmony vision of economic growth as a compelling historical force will in the end come back to bite you. And it’ll bite you this way if it doesn’t get you the other. I mean, if that is correct, then, of course, you have to reckon with the fact that Putin already made his choice.

I mean, he made his choice in ‘14 with the annexation of Crimea and with the backing of the separatists in Donbas. The Russians have been living under sanctions of various types since then. And the regime has shown a considerable ability to harden itself. And I think probably Putin would shrug and say, well, that’s a small price to pay for the crowning of my legacy.

Putin made a strategic move people reckon, I think, around 2013, ‘14 to rebase the legitimacy of his regime from the economic growth, the more conventional economic growth welfare model that had prevailed from the late ‘90s through to that moment, 2013, ‘14, to one that was emphatically based on nationalism and appeals to history and to grandeur and so on. So I don’t think — we may want to characterize it as mad, but it has its own logic. And the economic costs have been considerable but tolerable from the point of view of the Russian regime so far and indeed of Russian society so far.

That isn’t to say — so when you talk to Russian liberals who are highly critical of this direction, some of them closely associated with the previous regime, the regime that prevailed up to 2013, ‘14, their scenarios for Russia admittedly before the current crisis were dismal over the 20 to 30-year time horizon. It has bad demographics. Productivity growth is lame. Becoming the privileged raw material supplier to China is no one’s idea necessarily in Russia of a high road to national prosperity and success. But they’re not of immediate collapse, and I think that’s what’s going to be tested in the next months and two years to three years.

But the regime has already made that choice. It made that choice back in 2013, ‘14. And what it discovers, of course, is that when the dust settles, the customers come back. Germany’s dependence, Europe’s dependence on Russian gas has risen since the first Ukrainian crisis up to this week. It rose quite considerably. So that, I think, is something they also know. In other words, they have something other people want, and given time, those customers and those clients will come back.

ezra klein

Could Russia do this without Chinese support?

adam tooze

China is now Russia’s major trading partner. And so if it didn’t have China there, that would cause considerable problems. It doesn’t currently sell a huge amount of gas to China. It does sell a lot of oil. It certainly helps. If China was vigorously opposed and aligned with the United States in opposing this, I think the calculus would look very different from Russia’s point of view.

But China isn’t India. It’s kind of ambiguous as well. It’s very much the outlines, if you like, of the coalitions of 2003. Again, not to bring up old history, but if you want to see a map of our current situation, look at the way opinion was divided in the United Nations in 2003. And I think many of those states essentially share Russia’s perspective that the existing order, as we like to describe it, is fundamentally illegitimate and inconsistent and hypocritical.

And so if any one of them has a beef sufficiently large that they want to pursue it, and America is — as indicating as clearly as it is that it is — not going to escalate this beyond sanctions of a limited type, then they weigh the cost of distancing themselves and aligning themselves. I don’t think Beijing necessarily wanted this problem here right now, but if this is what Putin wants to do, they’re not going to — so this then alliance, I think, is quite conditional, quite pragmatic, but it is rooted in a fundamental alignment on this issue of the legitimacy of the existing order.

ezra klein

If you’re Beijing, you’re watching the European response. You’re watching the American response. What are you learning?

adam tooze

I think what you already knew. I mean, I think they’re very smart, and there’s nothing very surprising about what we’re seeing. You’re learning that America is refocusing. I would have thought from Beijing’s point of view there’s very little comfort in this because America is not taking the bait, right? I mean, America is not deeply engaging on this issue. They’re drawing lines.

And I think the flip side of that is that America is serious about 10 years on from the Obama pivot now really actually performing that shift. That will be my read. I mean, you could read it just simply as weakness, but I don’t think that’s terribly convincing to be honest. And you already knew that the Europeans don’t have an independent military capacity and are hugely exposed to Russia for a crucial input.

China’s not in that same position with regard to the Europeans. I mean, Europe is a huge market. It’s a larger market for Chinese exports than the United States, even. So there the exposure is more the other way around. But I don’t think that Beijing will be suddenly changing the parameters of its calculus in any significant way.

ezra klein

If you’re Taiwan right now, what are you learning from this situation?

adam tooze

I mean, exactly. I think the Japanese also are looking at this very hard and thinking thoughts. I mean, and you do have to wonder, don’t you, because one way— I mean, I’m going to talk about Europe just a second more because it’s where I’m more comfortable.

But clearly in Europe, already the conversation has started about— in Germany, amongst serious people, I mean, we really actually do have to have some military capacity. It’s an extraordinary moment for a German historian of seeing the head of the German Army on LinkedIn, of all places, announcing his profound professional and personal humiliation of the fact that as a German soldier, he has nothing, quote, “nothing to contribute to this situation.”

So if you’re Japanese or your Taiwanese at this moment and you’re watching this, you must be wondering as to whether or not you do not need to stand by for a big surge in defense spending to consolidate as it were themselves as harder nuts. And certainly, the Japanese in that case, we’ve seen a tendency that’s very strongly in that direction.

And it’s not been disapproved of in any way by the — well, the Biden administration is complicated as we know, but there’s certainly one group around Kurt Campbell and folks like that that clearly have no problem with seeing a more militarized, more robust, local deterrent capacity on Japan’s part. Whether that goes to the level of nuclearization, which might ultimately be the final last-ditch defensive mechanism, I don’t know to be honest.

Taiwan’s options are just so much more difficult. I mean, it’s difficult as a historian, and you step back and you go to kind of aestheticizing modes, right? But it’s difficult not to think of it as a somewhat tragic situation fundamentally because I don’t think there’s anything here that — my read is the one that we’ve been offering here after all — shouldn’t cause them to panic.

I think they might be checking with Washington is like, is this read the appropriate one? Is the read here that Washington is doubling down, committing as hard as it possibly can to the Eurasian arena? If I was on their side, that would be the question I would be insistently posing. And I would imagine the Biden people would be reassuring them on that score.

ezra klein

I want to ask then about how this reshapes also the economic world order. And there’s a paragraph from an Economist piece that I’ve been thinking about a lot, and I’m going to take a moment here and read it: “The longer-term impact will be to accelerate the division of the world into economic blocks. Russia will be forced to tilt East, relying more on trade and financial links with China. In the West, more politicians and firms will ask if the key tenet of globalization, that you should trade with everyone, not just your geopolitical allies, is still valid, not just for Russia but other autocracies. China will look at Western sanctions on Russia and conclude that it needs to intensify its campaign of self-sufficiency. The invasion of Ukraine might not cause a global economic crisis today, but it will change how the world economy operates for decades to come.” What do you think of that?

adam tooze

I mean, broadly speaking, it seems like a plausible interpretation. I would wonder perhaps about, as it were, the core attributing this to Ukraine, per se. I think Ukraine probably intensifies pre-existing trends. The history here is interesting in the sense that the WTO round, the Doha Round, which was, as it were, the first to really embrace global development, collapsed between 2008 and 2009. So that emerges in retrospect, I think, as really quite a pivotal moment because since then it’s become clear that that’s really the direction that we’re traveling in anyway, right?

So all of the big trade deals of the last decade or so have been regional blocks of different types. It gets interesting when you ask whether or not those regional blocks, which have been the logic of trade policy like NAFTA, like the EU in its extension, like TPP as was and now RCEP in Asia, now do they align with geopolitical divisions? And that I think is the less obvious questions to answer.

And all of the information coming out of Asia as I understand it that the Biden administration is receiving is that none of America’s significant security strategy partners in Asia want an economic relationship with the United States that is exclusive with China. So in a sense, they want to mesh relationships like those which are now proving so complex for the E.U. with Russia.

And they can’t go any other way because the dynamic. China is not Russia, right? China has been the main driver of economic growth for the last two decades. And we’re not just talking any old economic growth. We’re talking epic, historically transformative, world historic shift.

And America is saying, well, opt out of that or opt against it or position yourself in a way which could be taken that way by Beijing, which is enough right now to cause almost incredible problems. And all of them say, no, even the Thailands of this world and the states which are most closely associated with the U.S. in security policy terms, South Korea.

So that I think is a really fundamental problem going forward for American policy because it can commit credibly on the security policy side, but we know it is completely hamstrung not to say paralyzed on trade policy. So much so that I gather the American diplomats have very clear marching instructions when they’re in Asia whenever trade comes up. Market deepening or market opening is not up for discussion.

Don’t misunderstand what I’m saying to you just so we’re clear because the domestic politics of it are so toxic in the U.S. So then you end up in a very lopsided world. So the economist vision rings true up to a point, but it’s not clear that the blocks will line up in a way that’s terribly favorable to the U.S., ultimately, I think, in Asia in particular.

ezra klein

That seems right to me. But the thing I would add that I find interesting in that vision and that to your point feels to me like Ukraine crystallizing a pre-existing trend is a move toward supply chain self-sufficiency. I think Covid was a big part of this move as countries realized they didn’t have the mask capacity, the rapid testing production capacity, the vaccine production capacity, and then out of Covid, the economic disruptions. People want semiconductor capacity. That’s true for both America and China currently. They both want to be independent on semiconductors.

It had felt to me already just watching what Congress was doing with the COMPETES Act and the other versions of that bill that they were trying to develop an almost supply chain self-sufficiency on the technologies they understood to be critical.

I think now you look at what’s happening with Russia and whatever decisions people have to make today because they’re that dependent on them for energy or whatever it might be, they probably don’t love making that decision. For instance, I think that it is hard to imagine Germany signing the kind of natural gas pipeline deal with Russia in the next 10 years that they signed and now have frozen going backwards.

And so the idea that we may be moving towards a period of time where there is much more national interest, pressure on the supply chain where the economic logic of globalization and the national interest logic of self-sufficiency diverge and people stop pretending that or believing that they’re twinned, that feels like a very big change that is, as you say, has multiple contributors but that Ukraine is really going to put a fine point on.

adam tooze

I think when we come to supply chains, the term itself is so anodyne and so baggy, and it encompasses everything from face masks to microchips. And I don’t mean that in a trivial sense. It’s more complicated. It just doesn’t capture the existential significance of some rather than others, and energy is one of them.

And I agree that the energy nexus between the West and its major suppliers will be once again put in question. And the answer after all is now very evident. In other words, we need to do a renewal, but we need to do an energy transition anyway. And one hopes that that logic now takes on a really dramatic dynamic in Europe. And that’s where the logic of that energy transition has already prevailed.

Unfortunately, in the U.S., if you’ve been following Bloomberg or something, the frackers have just been having a fantastic 48 hours. It’s all about unleashing the fossil fuel regime. And we’re canceling Nord Stream and canceling Keystone. This is crazy. I mean, it’s a really toxic alliance.

I think microchips are sui generis. I really think they’re in this special category all of their own like oil and gas. And because they are not just— I mean, they are the future, right? They are the — it’s not just iconic. It’s not a matter of symbolism. They’re literally the raw material out of which the new generations of technology have to be made.

And the technologies required to do them in their current levels are so extreme that America doesn’t have a complete command of the whole set that telling in and of its own, in its own right. America doesn’t have the big fabs for the very latest chips. And that is a historic product.

There’s a weird coincidence between, as it were, the liberal vision of globalization and this breakthrough in technology, which meant that this hugely strategic technology was inextricable it seems, interwoven with an East Asian post-Cold War myth, it turns out. And untangling that is a hugely complex problem.

And what’s really remarkable in the current moment is that what we’ve seen is this unadulterated, straightforward, in-your-face hooking of the Industrial policy microchip logic to the national security logic. And it began under Obama but really took on an incredible momentum in the Trump administration in 2019 and 2020. And targeting Huawei was the beginning of that. But the Biden administration right now, I believe, is weighing the option of more intense sanctions on SMIC, China’s designated microchip champion. And that’s where we’re really going to see how serious this gets.

But I think it’s sui generis but absolutely crucial. You’re completely right. And the scale of spending globally on national industrial policies in Europe as well, which has normally really drunk the neoliberal Kool-Aid and does not do that kind of thing, has been remarkable. I mean, it’s produced a huge row within European institutions about whether they’re really just going to toss out all of their competition regulations, incredibly restrictive rules on state aid. So yeah, it’s a turning point, absolutely.

And that’s fascinating because not only does it bust, as it were, the general presumption that trade leads to peace. It kind of busts the general presumption that trade is just trade. It turns out that trade in different things, the economic categories, the economic statistics convey a false sense of homogeneity whereas what we’re really dealing with are the sinews of power, like the essentials, the material ingredients of life and power.

And that’s even more corrosive of economics in a sense because then all our conventional calculuses just start going out the window. And that’s part of the reason why this has become so unfettered because in the name of microchips and sovereignty and independence, there’s virtually no amount of money you can’t justify spending.

ezra klein

If we are entering what we feel to me to be entering, which is a renewed era of great power conflict, and whether or not you actually include Russia as one of the great powers is, I think, interesting, but you could call it a bloc with China as a great power, one of the really scary things about that is that climate change and decarbonization certainly strike me as things where you need very high levels of international cooperation or at least where it would be speeded along with fairly high levels of international cooperation. And I think a lot of the thinking has remained around pretty liquid energy markets, pretty easy cross-border shipments. The hotter conflict gets, the harder cooperation gets.

And so one of the first casualties, it looks to me, from more great power conflict is less climate cooperation. And in terms of the way I think we all immediately move to, well, what if we have a nuclear war, and that’s terrifying. But also, one of the ways it seems very, very worrying for humanity as a whole is, what if our already quite fragile levels of international cooperation on this continue to deteriorate because it becomes issue 7 on agenda where issues 1 to 4 are more pressing to people?

adam tooze

That, I think, is the crucial issue. I’m not sure I actually agree that right now the climate problem presents itself pre-eminently as a problem of global cooperation. There are certain aspects of the climate problem which do have that feature. But if you take the climate problem as seriously as I think we have to at this point and as seriously as I think big parts of the leadership in China increasingly are, it’s a national interest issue. You do it because you’ve got to do it.

And furthermore, they increasingly see it as a zone of industrial policy competition. So you do it because you want to profit from the energy transition. I understand that’s a construction of this problem. That is the construction that I think is an optimistic construction of the problem in some respects, because it minimizes the amount of cooperation that’s actually necessary.

There are certain domains within the climate space where cooperation, say, notably around development spending, development investment and in certain key technologies could be helpful. But we could be in a space now where it gets productively incorporated into competition between great powers in a way that it will be novel. We shouldn’t rule that out as an option.

But I do absolutely agree, and it’s been very striking that, as it were, since now the climate problem is really a matter of urgency. We need to achieve major steps this year. We need to reduce emissions by 7 percent in 2022. And we are not focused on that problem right now. We’ve got other things on our mind.

And furthermore, with this opening up and energy prices going berserk and this question of sufficiency being posed, as it were, it opens the door for the creeping influence of the rear-guard action of fossil fuel. It not just opens. It bursts it wide open and gives them the stage. And even though their logics are all terrible and even though their arguments are all bad and they should really be rejected, it becomes really difficult to fight them.

And furthermore, in these moments where the President of the United States at a moment of crisis goes onto the rostrum and says, yes, American citizens, I promise to defend your right to cheap gasoline at all costs, including sacrificing this thing you might think is important, that doesn’t send a good signal either. And the Biden administration has been caught in that cleft stick really since the fall of last year when prices began to surge.

And there’s a whole new space opening up for us right now of, as it were, as and when we get serious about the climate adjustment of how you maintain focus. I mean that, in and of itself, is going to be a hugely difficult issue. How do you articulate other things around climate rather than treating climate as number seven on the list of six other more important stuff?

And in that respect, this is devastating. In a sense, Covid showed us another example where I think the logic worked the other way around where Covid in a sense supercharged an immediate crisis, mugged by reality kind of a crisis, in fact, drove the climate agenda in interesting ways. It’ll be interesting to see how this plays out.

But the politics of climate no longer can be thought of a single issue. They clearly have to be articulated with everything else if they’re going to have any kind of chance of gaining the momentum that we need, which is I think, fingers crossed, is going to happen in Europe this coming year. If they go any other way, they really have — why don’t you give up hope? But there’s no reason why you shouldn’t read this crisis as a huge invitation to just go big on renewables and flexible reserve capacity.


ezra klein

So here I’m jumping in to take a moment to say that was where we left part one on Friday. Then, over the weekend, Adam emailed me and said the new sanctions were a difference in kind, not just degree. We were now seeing a financial war against Russia that was beyond what anyone had expected and what anyone had forecast. And so we spoke again on Monday morning to talk about what had changed and why and what it meant. So here’s part two of our conversation.

Adam Tooze, welcome right back to the show.

adam tooze

Good to be here.

ezra klein

OK, so we taped the first part of this episode Friday that was meant to just be the episode. It’s now Monday. What changed over the weekend?

adam tooze

Well, first and foremost, I think most people’s expectations about how the war was going to go and the heroic resistance being mounted by the Ukrainians and the apparent incompetence and decisiveness of the Russian military have created this extraordinary drama.

And into that then has come the escalation of financial sanctions from a kind of dim outline of what was going to happen last week to, by Saturday afternoon East Coast time, this dramatic declaration by the Europeans and the Americans together of all of the redlines crossing. I mean, they blew the Overton window right open, and I think did so very deliberately. They said, SWIFT, the payment system, this notorious interbank communication system, is on the agenda. We’re going to cut strategic Russian banks out of that system, and the Central Bank is not untouchable either.

And then as the days have gone on and as the escalation has ramped up with Putin’s nuclear threats, by Sunday afternoon, we really had the concretization of this with the Europeans and now this morning the U.S. Treasury basically making it clear that they intend to freeze the assets of the Russian Central Bank. And that now has come to dominate everything else because that has unleashed a full-on financial crisis in Russia on Monday as the markets opened — or rather didn’t open because they couldn’t open them safely. So the Ruble has collapsed.

And we’re moving into a situation tantamount to economic and financial warfare while the war is actually continuing. So sanctions that I think were originally designed as ex-post punitive of Russia’s behavior and abuse of international law are now becoming entangled with an actual ongoing conflict in which we are essentially in the position, say, of Roosevelt with the British in 1941, and it’s all measures short of war essentially, including the delivery of lethal weapons into an ongoing conflict.

ezra klein

When I look back on our conversation on Friday, we talked a fair amount about SWIFT, which they’re doing at least a partial cutting out of some of these Russian banks from SWIFT. We did not talk about Central Bank sanctions. That was not understood to be on the agenda.

But then you emailed over the weekend when that began moving up, and you said this would change everything in the response here. So why do the Central Bank sanctions matter so much? What does it mean to sanction a central bank, and how does it change the economic situation Russia is now facing?

adam tooze

It totally changes the game because one of the things it totally changes is the status of those national foreign exchange reserves that we spoke about on Friday. And by any conventional metric are if you’re talking about financial crises or targeted sanctions of the type that Russia saw in the Ukraine — over the Ukraine and Crimea — after 2014, they are your bulwark.

But that presumes that you can access them. And if the other parties in the state system of the world are willing to go as far as to declare your central bank — I’m not even sure whether to call it outlaw so much as criminal really, to declare it, as it were, ineligible for any kind of transactions, then those currency reserves that you’ve got are no longer really accessible to you. And now there’s an absolutely explicit mandate on the part of the Europeans in particular to stop any transactions. And the Americans have declared it prohibited for any American national.

So at that point, the calculus tips, and it, for me, exposes, yet again, the way in which this conflict is really ripping up the playbook, changing the parameters because it made perfect sense to describe them as a source of stability before we went to this place because they had been.

In ‘08 and ‘14, ‘15, they manifestly were. They were a way in which Russia could stabilize its exchange rate and just like other emerging markets have. And they do it certainly not assuming that the world is, as it were, friendly to them. They are supposed to be defensive potentially even against various degrees of aggression.

But what the current moment exposes is that in an all-out war situation, essentially, this property of the state becomes forfeit insofar as it remains within the control. So Russia moves to the position of an Iran or an Afghanistan. After all, Afghanistan’s exchange reserves have been impounded, and half of them are going to be apparently given over to providing compensation to 9/11 victims.

So that’s the kind of terrain that we could be in here. And this has never ever happened on this scale. I mean, the minimum estimate of how many reserves are within the Western orbit is in the order of $300 billion. So this is serious money with serious ramifications for the Russian financial system.

Concretely, what it immediately means is they don’t have any firepower to stabilize their currency with. So they’ve been doing things like drafting the foreign exchange earnings of private corporations in Russia and banning foreign companies like BP that suddenly wants to sell its stake in Rosneft from doing so. So they’re freezing Western money in Russia, and if you like, drafting the foreign exchange reserves of Russian businesses. So this really is a foreign exchange regime. It’s the sort of thing you do in extremist or under war circumstances.

ezra klein

If this is such a potent weapon, why was this not discussed, threatened, shown beforehand? Why was this not used as a deterrent possibility so Russia knew this would come? Why was it not imposed right after they invaded Ukraine? Why does this begin coming up Sunday, Monday after they invade, as opposed to weeks before so it can be in their calculus or immediately so it’s part of the punishment?

adam tooze

I think this is a good question. I asked myself that question because it should have been obvious that this could be a move that they make. But it simply wasn’t. I mean, no one was discussing this as an option seriously. And I hate to use the analogy — because it’s become explosive — is that this is the nuclear option. So you don’t go there. Like, it’s the question you don’t pose. It’s the bad thought that everyone might be having somewhere buried deep down, but it’s a hugely dangerous thought.

And you can see this in the analogies, right, because out there in the world, all of a sudden when this came on the radar, people started saying it’s the Iran option. But the problem with that analogy is that it’s far too close for comfort because the Iran sanctions obviously targeted Iran to prevent it from getting nuclear weapons.

But we are now applying Iran-style treatment to not just a nuclear power, the number two nuclear power in the world, the old Cold War antagonist, in the middle of an active shooting war in which we are taking sides in which they are not making the progress they expect. And we are threatening by this means to deliver a devastating blow to their home front. I mean, panic in the streets, total disruption of the ordinary lives of tens of millions of Russians.

So it’s a huge step. That’s, I think, why if we had of had it in our conscious minds, there would have been a no-no about talking about it. But the honest truth is it just wasn’t on people’s radar because we hadn’t placed Russia in the Iran, Venezuela, North Korea box.

ezra klein

One oddity of all of it is that energy is still exempted from everything we’re talking about. Energy is exempted from the SWIFT cutoff. Energy is exempted as I understand it from the central bank sanctions. Energy as we discussed on Friday is the big Russian export where they get a lot of their money.

They could presumably do some amount of currency stabilization hidden in their energy flows. It is strange to hear people talk about this as the nuclear option, and meanwhile have Russia begin to talk about literal nuclear options. And in the background, everybody is saying, but of course, we’re still going to do a lot of trade in liquid natural gas.

adam tooze

Literally today, the gas pipelines are fully full apparently. Today, they’re fully absolutely Gazprom and the Ukrainian pipeline are thought to report they’re at full capacity. Nord Stream 1, as far as I know, is also fully operative. It’s happening right now, and money is flowing the other way.

By hook or by crook, what people are reporting is that there’s difficulty transaction in some of those. Financial firms are much less willing to get involved with those deals. But it is extraordinary. So to that extent — but this was also — it’s horrible to stick with this analogy, but it’s kind of like a tactical use of nuclear weapons or medium-range missiles rather than a full-on U.S.-Soviet exchange, world-ending though it may feel pretty apocalyptic to people in Russia right now.

They have a hardened fiscal military apparatus in Russia. They’ll be fine. They will find ways to cope, but it’s very dramatic. I mean, the energy is going on because the biggest revenue flow for Russia is all about oil. And the Biden administration has flat out said — again, it doubled down on this on Friday last week — that it was not going to touch the oil markets. Whether they can really stick to that, the press secretary I think in conversations in the last 24 hours has begun to pull back from that.

And I think the Europeans are now concertedly looking for alternatives, mapping out the options. Everyone realizes now this is going to be a more prolonged confrontation than anyone imagined. The shift in German opinion has been staggering and clearly is reciprocal. In other words, the liberals, the more right-wing members of the coalition government, have declared renewable energy is freedom energy. It’s kind of an ironic echo of the free to famous freedom molecules quote about American gas.

And on the other hand, demonstratively, Green Economics Minister Harbeck has gone on television to say that they’re seriously weighing out the possibility of extending the lives of the nuclear reactors, though evidence seems to suggest it’s not actually a viable option and won’t make much difference in the critical period. But these are solidaristic moves on both sides to show that everyone is rethinking their parameters. Meanwhile, Schultz has gone to the Bundestag and asked for a staggering increase in German military expenditure. So there is a huge rearrangement going on.

ezra klein

I want to hold on that piece for a minute because it seems profound to me. When you look at how this entire conflict was being framed even just a couple of days ago, it was Russia is considering invading Ukraine, and the West is going to treat this as an economic war. They’re not going to get involved in a shooting war in Ukraine. They’re not doing that much to — they were doing a little bit to give Ukraine defensive capabilities but not at any level that people thought would really make a difference.

And now that feels like it is changing. The E.U. announced $500 million in direct military aid to Ukraine. It’s the first time the E.U. is giving direct provision of weaponry to a country under attack. Germany is proposing this $110 billion investment in the military. That is almost twice the country’s entire defense budget last year. That is wild.

This is being talked about as a watershed moment in Europe’s defense posture. It is moving from an economic war to something that is being treated as a new paradigm for the E.U.‘s capability to get into and defend itself in shooting wars. How do you understand those changes? Is that overstating them, or is this something really new?

adam tooze

Small as it is, the 500 million directly from the EU for weapons is really, that’s, as it were, a big taboo break. Sweden, neutral Sweden delivering lethal weapons? I mean, it’s staggering stuff, and it’s very, I think, on the one hand dramatic, and I’m die in the world to my dying death E.U.-adherent.

And at that level, you celebrate these kind of moves as the way in which Europe makes itself through crisis. And the steps are in the right direction. And the promise from Germany is overdue. And I mean, as a historian, amongst other things German military history, it is staggering to have the chief of the German army declaring his embarrassment on LinkedIn of his inability to react. And these are amazing moments.

But the alarming thing about this is, as it were, the shift, which is exactly as you said, from a position which was really ex-post — in other words, the invasion of Ukraine was not thought in itself to be historically meaningful because it was going to be so swift, and it was going to be annihilatory, and then the embarrassment of Ukrainian politics and Ukrainian sovereignty would go away, and we could move on — to a position where the heroism of the Ukrainians has made that impossible.

And so we’re now in these incredibly fraught exchanges between Zelensky, who is acting out of his skin and really demonstrating an extraordinary capacity to do the Jupiterian thing essentially for real, I mean, under the threat of combat. And he’s basically pointing the finger at the E.U. and saying, here is the question. Will you have us or not?

And that is extraordinary, because if one of Russia’s red lines is NATO, the other Russian red line, spoken or unspoken, is Ukrainian E.U. membership because that in some senses is a more profound challenge to Russia’s own model and its control over Eastern Europe and its hegemony.

And that this is being opened up in the midst of combat, in the midst of an existential struggle where we may see these people killed more or less live on television as they refuse to surrender in Kyiv, and it has roused European public opinion to an astonishing extent, giant demonstrations in Berlin. So it’s very dynamic.

I mean, I spend a lot of time thinking about Clausewitz, and this is the Clausewitzian triangle of battlefield military, grand diplomacy, and popular passion acting out in an extraordinarily dynamic way before our eyes with very, I think, unpredictable consequences and with huge potential for disaster on the part of the Ukrainians.

ezra klein

Well, this to me is, it’s so important to understanding. The reason I wanted to do the show this way adding this on is because I think it’s important to watch the equilibrium here change. You’re watching war change the underlying structure of the conflict in real time. You mentioned Zelensky. I don’t think I’ve ever seen a more remarkable performance of a wartime leader, certainly in my lifetime. What he is doing in a completely new media environment, I mean, it is built, what he is doing, in many ways for social media. It is extraordinary.

And if you go back even a couple of days and think about that triangle, I think that there was a calculation, a solving for the equilibrium where people were looking at Russia’s military or presumed military superiority over Ukraine. Then we were looking at the economic consequences both for Russia and for the West on various levels of sanctions. And we were solving for what looked like a stable output there.

And into the middle of that comes Zelensky and this remarkably fierce and effective actually Ukrainian resistance. And social media, it blasts it into everybody’s home. You are watching this happen in real time. Zelensky is calling in with other ministers and saying, this may be the last time you hear me alive.

Tell me a bit about how that changed the situation because on some level, the calculations around sanctions were calculations of domestic public opinion. They were calculations about what level of disruption European and American and U.K. citizens would absorb for Ukraine, which, in theory, they didn’t care that much about.

But then, it happens. Then this immediacy of Zelensky, the images emerges, and the amount of caring, the passion on the part of a lot of these publics and even a lot of the elites in these governments changes. And the sanctions begin to change, and the conflict begins to change. So as a historian, can you talk a bit about the passion dimension of this because that’s what people were not predicting well?

adam tooze

Well, they’re two things, right? And it’s exactly as you say the interaction between the dogged, ferocious, apparently successful resistance. I think we have to reserve judgment on the battlefield. I’m convinced that this is not done yet in two different dimensions, A, the siege of Kyiv and the big cities, and on the other hand, which could be apocalyptic and Syrian-like, and on the other hand, the pincer that is closing from the south that may in a sense destroy Ukraine’s ability to resist in the Donbas and will deliver to Russia one of their strategic goals, which is to secure the full territory of the Donbas.

But nevertheless, this week in which the Ukrainian resistance has held up has changed the game exactly as you describe it. And another hugely significant thing is that Zelensky is not, as it were, just mobilizing his own population and the Ukrainian resistance. He’s not just mobilizing. But he is then posing the geoeconomic, geopolitical question and saying, and I want to talk about E.U. membership from the middle of this. Like, it’s as though from the middle of the Battle of Britain, Keynes and Churchill had said, we want to do Bretton Woods now. Can we talk about Bretton Woods? We want to talk about the future currency union because we’re going down in flames, and we’re going to dare you to tell us that dollar is going to rule here. I mean, it’s an extraordinary power play, hugely high stakes. And I think it reflects the fact that he knows perfectly well that under any other circumstances, the answer is no, nor do we want to talk about it, and we’ve told you this before. We don’t want to talk about this.

ezra klein

One thing about the way Zelensky has not just mobilized opinion but mobilized the values of the E.U. in this moment — we were talking the other day about the way that Putin perhaps understood the dark side of the globalizing vision, that he understood that economic interdependence and growth maybe don’t create harmony, maybe creates leverage for conflict. Maybe he can do more because it actually will hurt Europe. It will hurt America more to cut Russia off.

At the same time, Zelensky is showing that he understands the bright side of it, the value side of it. He is using this war and saying, well, you promised all of this. You said that if we were democratic, that if we defended ourselves and if you are country worthy of the international order, the international order will be there for you.

And so one thing that really feels like it is changing is that Putin’s cynicism is all of a sudden being matched by Zelensky’s call to international optimism. And I am not — I want to be very careful. I’m not saying that is going to be enough for Ukraine to repel Russia. But it has really changed, it seems to me, the calculus for a lot of Western leaders, because they kind of switched into realpolitik mode with Putin.

And they expected, it again looked to me, that everybody would follow them there. Then, when Zelensky and the Ukrainians didn’t follow, it transformed. And so maybe we underestimated, or maybe the power of this was underestimated going in. He seems to have understood that there was more leverage here than the West actually thought or planned for.

adam tooze

I mean, how much premeditation there is here, I simply don’t know. And I think it’s going to be just, I mean, to speak about it in these terms sounds academic and coldblooded, but it’s going to be fascinating to see what the E.U. does with this, because, sure, clearly, the Ukrainians are demonstrating their resilient refusal to be subordinated by the force of Russian arms.

And it’s extraordinary to see. And they are clearly willing to sacrifice their lives, their families. One is just humbled by it. But at what point is the E.U. going to say something along the lines of, but we also need to know that you’re really down with the rule of law because this patriotic rally is not the same thing as the rule of law.

This is a patriotic rally. It’s absolutely bona fide. We have not seen the likes of this in Europe maybe since Prague ‘68 or Solidarnosc in the 1980s. Those are the examples. But that’s not the same thing as what we are asking for or have asked for and asked of you, and you, Ukraine, have failed to show even any signs of being able to move in that direction. That has been the European position all along, right?

So it’s going to be an extraordinarily almost impossible problem, I think, for the European political class to resolve this issue. I find it hard to imagine at this point that they are not going to put Ukraine on some sort of long-term accession track. And maybe they can sidestep what von der Leyen apparently already said.

Poland is arguing vociferously for them to be given this status. There are ways of fudging that. After all, they put Turkey on an accession track in the early 2000s. And that’s a non-trivial part of the entire story of Erdogan’s frustration, disillusion with the West, and so on because he was supposed to be the driver of that project, and in the end, it came to nothing.

So there are ways in which they might be able to, as it were, fudge this or postpone the decision. But it has absolutely changed the game because the thing that made everyone’s positions cohere was, as it were, the weakness of Ukrainian nation statehood and nationalism would fold in front of the force of Russian arms. And then the problem could be handled as an ex-post problem of punishing Russia and not as a problem of dealing with a vibrant, vigorous Ukrainian sovereignty.

ezra klein

Last time we spoke a lot about the way China would interpret this situation. Do you think that has changed since Friday? If you’re China looking at this, you’re thinking a little bit about Taiwan, what have you learned in the past four or five days?

adam tooze

I think it’s very, very early days, and that story is unfolding, too. I think structurally, they’re coupled together in ways — I mean, over the weekend, I was trying to make sense of this question and started digging back. And when you do that, what you discover is that this alignment of Russia and China against a unipolar American order, of course, is not new, and it’s not a matter of Xi and Putin. It goes back to the 1990s. It was already in view.

In a sense, what happened to them is that in 1997, they made this joint declaration on a multipolar world, which they were going to support. And at that point, perhaps, it seemed plausible or at least something they could assert. And then basically, Kosovo, the late ‘90s interventions of NATO in the former Yugoslavia and then 9/11, and then, of course, the wars of choice of the 2000s intervened. And that, I think that phase between ‘97 and 2007, becomes more and more obvious in its significance. But what that means is we agree this is hard-wired. There’s no way back. But they must, on the other hand, be thinking quite hard about what they’ve let themselves in for here. Matt Klein put it to me the other day kind of usefully in the sense that, is Russia actually North Korea? In other words, an ally you can’t really disown, but on the other hand, also one that’s really quite difficult and dangerous potentially.

And it’s easy, I think, to say, well, the Russians are going to be desperately dependent on the Chinese, which I think is true if these sanctions really begin to bite because they will be able to transact with the Chinese in renminbi, and that will help. But on the other hand, the Chinese must also be feeling that they have attached themselves to a kind of rogue elephant of militarism and blundering, frankly.

And again, I think if the Chinese had seen what most of us expected, which is a short, sharp shop and a rapid overtake of the Ukraine by Russia, that would have been one thing. But I don’t think they thought they were letting themselves in for this mess and this P.R. disaster and this debacle in some senses so far. But maybe by the end of the week, this will look really different.

ezra klein

Let me end on this. We know that the Russian people are hearing about this war differently than we are. We know that Russian state media, which controls the media there, is on a very, very tight leash with what they’re reporting. So Russia is not on Twitter following the war that a lot of us are following at the moment.

What they are feeling is the impact of these sanctions, and that is the place where the reality of this war, whatever the narrative that is attached to it is, is going to come for them. What do these sanctions at this point mean for them? What do you think it is going to be like to be an ordinary Russian citizen for whom things were pretty normal two weeks ago? What is it going to be like to be them over the next weeks, months?

adam tooze

Yeah, this is the parallel that scared me witless at the weekend. So if we recognize that the battlefield has become, as it were, the generator of a huge contingency, huge unpredictable contingency that we didn’t reckon with that’s overturned all our prior expectations, what with these sanctions, which are now massive, we’ve decided to do is to unleash another incredibly unpredictable dynamic force into this equation, which as of Sunday morning includes nuclear threats. And it’s playing out day by day, hour by hour now, and it will affect the vast majority of Russians in one way or another.

I’m not a sufficiently expert in Russian public opinion. They were not prepared for this. Sam Green at the King’s College London made a very good comment about this that he didn’t know whether he should be harmed by the fact that the Russian public was not panicking or alarmed that they weren’t because if they weren’t panicking ahead of what was about to hit them, that meant they were truly naïve and this was going to come as a huge shock, and that would make their reaction even more unpredictable.

What we haven’t seen so far is crowds in the streets celebrating the great victories of our dear leader. That hasn’t happened. We have seen the patriarch of the Russian Orthodox Church come out and denounce the opponents of Russia in Ukraine, which is horrendous, a huge failure of spiritual leadership when we’ve seen the Pope doing the reverse. But I think this is a really — this is a worrying further element in this whole drama, and one that we unleashed, as it were, on the premise that this would be a done deal, grim as that was, into a situation that is so much more dynamic than that.

Again, a bunch of really interesting economic analysis coming up around this question as it happens shows really that there is serious reason to worry about lower middle class Russian households. They’ve been squeezed hard over the last five, six, seven years. Their incomes have not been going up. They’ve been piling up debt. One of the first things that happened today is the interest rates went to 20 percent. So that’s going to immediately bite into your income.

So there is a serious risk here of major economic and social fallout. The regime has ways of responding to this. But if Iran is anything to go by as a model, which is the only country remotely similar to which these kind of sanctions have been applied, you would expect this to be a bit of a slow burn. So you would expect the pain to build up over time and the political consequences to follow potentially. So right now, I think the main thing to emphasize is just the sheer unpredictability of the shock that we’ve delivered and the consequences it will have.

ezra klein

Let’s end there. Always our final question, what are three books you would recommend to the audience?

adam tooze

So I would recommend by Nick Mulder, Yale University Press, “The Economic Weapon,” which is a fascinating pathbreaking history of sanctions and couldn’t really be more urgent in the current moment. It’s a brilliant history of the early history of sanctions. As my second book, I would recommend a really fun polemical read by a combo of authors, “The End of the End of History: Politics in the 21st Century” by Alex Hochuli, George Hoare, and Philip Cunliffe.

And my third is a book I stumbled on when I was trying to make sense of the whole crypto craze boom-bust thing that we’ve been going through. And I found it extraordinarily helpful in understanding the technical issues in the background. And it is Eswar S. Prasad’s “The Future of Money” on the digital future of money in the world, a really great book if you need a guide to understanding a little bit about the crypto in crypto.

ezra klein

Adam Tooze, it’s always unbelievably clarifying to talk to you. Thank you very much.

adam tooze

Great pleasure to be here.


ezra klein

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