In the early post-Cold War era, it was widely believed that ‒as a result of the rise of globalisation‒ traditional geopolitical rivalries would be replaced with peaceful and harmonious economic competition. Such an assumption, anchored to the worldview of classical liberalism and its successive intellectual iterations, contented that the end of the 20th century would give birth to an era of unprecedented prosperity, everlasting peace and institutionalised collaborative ties. According to this reasoning, conflict would no longer make sense in a world in which everybody could profit on a mutually beneficial basis. The rewards of trade would perpetually discourage the scourge of war. In a world of thriving global markets, bullets would become little more than an outdated anachronism. The anthropologically optimistic promise of ‘Whig historiography’ about an inevitable march towards ‘progress’ would finally be fulfilled.

However, such perspective ‒ usually championed by orthodox neoclassical economists, technocratic policymakers, idealistic scholars and some business interests ‒ overlooks the weight of history, the propensity for confrontation as an unavoidable feature of human nature, the recurrence of irreconcilable interests and the structure of the international system as an anarchic arena in which danger and uncertainty are commonplace. One can ignore these underlying realities for ideological preferences, but one cannot ignore their consequences. States cannot neglect the possibility that hostile forces might attack them. Considering such threatening prospects, even if sounds unpleasant, is a must in terms of national security, foreign policy and grand strategy. After all, the quintessential concept of the political entails the distinction between friends and enemies made by polities in a ruthless metaphorical jungle where struggles can potentially turn vicious and nasty. In other words, thinking permanently about conflict and preparing accordingly is a matter of life and death.

However, conflict is a kaleidoscopic phenomenon whose permutations are constantly evolving, like ancient and contemporary theorists of war have explained. In this respect, the ascent of complex interdependence has not annulled the logic of conflict, but it has not been inconsequential either. Specifically, it has increased the sophistication of warfare and reshuffled its grammar in the unconventional chessboards in which new expressions of strategic competition are flourishing. In this respect, in an environment of interconnectedness, exchanges, links and interactional conduits can be weaponised. Hence, the economic sphere of markets, commerce, industry, finance and money has become a fierce battlespace in which threats of disruption, manipulation, conquest and subordination are present. Hence, hybrid neo-mercantilist paradigms ‒ which combine strategic, political and economic contents ‒ like geoeconomics, economic statecraft and mercantile realism have been put forward to approach these phenomena.

In this regard, the 2022 ongoing Russian invasion of Ukraine dissipated remaining doubts about the extinction of inter-state war as a forceful way to settle unresolved geopolitical disputes in the 21st century. Although other precedents pointed in the same direction, the large scale of this conflict and the tectonic impact of its shockwaves demonstrate that hard power is an instrumental tool that states can resort to in order to advance their interests, even if that entails the fateful decision to open Pandora’s box. In this dramatic episode, escalation is pushing some Western elites to brandish the idea of a no-fly zone enforced by NATO and Russia to perform acts of nuclear sabre-rattling. Nevertheless, this conflict is not just being fought through purely military means. In fact, this confrontation is also reflected in the domains of cyberspace, the clash of contrasting civilisational worldviews, and the flow of propaganda and psychological manipulation throughout the info-sphere. Plus, the belligerents are also engaging each other in the geoeconomic operational theatre, and Ukraine itself is worth fighting for from a geoeconomic viewpoint.

 

Ukraine’s Geoeconomic Significance

Ukraine’s relevance goes beyond its role as a contentious flashpoint, borderland, buffer state and geopolitical pivot that great powers seek to control for their own imperial pursuits. This Eastern European state is relevant from a geoeconomic perspective. It contains infrastructure that connects Russia with the European peninsula, including networks of natural gas pipelines and motorways. Therefore, it can operate as a corridor of trade and energy flows. Additionally, the Dnieper River ‒ a navigable waterway ‒ and Ukraine’s access to the Black Sea through the port of Odessa means that Ukraine’s geography offers an optimal gateway to participate in international trade and harness its benefits for fostering development and prosperity.

Likewise, Ukraine was one of the most developed republics of the USSR and its GDP is the third largest in the post-Soviet space, after the Russian Federation and Kazakhstan. Furthermore, despite prolonged economic hardship, Ukraine retains important industrial capabilities in the fields of steelmaking, aerospace, shipbuilding, chemicals and the manufacture of military hardware. Moreover, thanks to a well-educated human capital and the arrival of foreign investments, Ukraine has created a dynamic high-tech sector with comparative advantages in the production of software, IT services and research and development activities. Thus, as an emerging economy with a great deal of potential, Ukraine is far from being a peripheral backwater.

Finally, concerning natural resources, Ukraine contains deposits of both coal and metallic minerals such as iron, titanium, manganese and uranium, all of which are needed for various industrial applications. This country is also an important source of neon, a gaseous chemical element that is crucial for the production of chips and lasers. Another relevant aspect is that Ukraine possesses fertile land (known as chernozem or ‘black soil’) that is suitable for growing cereals ‒ such as wheat, corn and barley ‒ as well as cash crops like potatoes, sugar beets, sunflowers and pumpkins. Tellingly, Ukraine’s role as a formidable breadbasket is even depicted in the colours of its flag: it represents a landscape of a bright yellow wheat field below a blue sky. Notably, the profits earned through exports of Ukrainian grains funded Stalin’s ambitious plans to hasten Soviet industrialisation. Plus, one of the reasons why the Third Reich’s strategists were so interested in conquering Ukraine was because Nazi Germany was not self-sufficient in the production of food. Hitler himself estimated that, without Ukraine, the German war effort would crumble due to poor food security.

Therefore, considering its geoeconomic profile, Ukraine is a highly desirable prize. As such, great powers are willing to go to great lengths to determine its orientation. For Russia, the successful completion of the Eurasian Economic Union ‒ a geoeconomic bloc under Moscow’s leadership ‒ requires the integration of Ukraine into said framework. This project, conceived to encourage reintegration in the post-Soviet space through the conformation of a single economic space, contemplates the removal of trade restrictions, the establishment of transnational industrial structures, the circulation of investments, the generation of synergic complementariness and even monetary and financial unification in the long run. Thus, Ukraine would be the crown jewel of this Russian project, as well as a bridge to deepen ties to the rest of Europe. Nevertheless, as a result of the 2004 Orange Revolution and the Euromaidan protests that broke out a decade later, Kiev has assumed a pro-Western orientation instead. This realignment is reflected in the quest for membership in the European Union, the bloc headed by Germany. For the EU, Ukraine could be a convenient junior partner as a source of both cheap labour and raw materials, a magnet for profitable investments and as an attractive consumer market that could absorb exports from EU countries. In turn, Kiev would prefer to directly attach itself to Brussels’ geoeconomic orbit for both business and political reasons.

However, formal membership is doubtful for several reasons, despite the Europhile views held by many Ukrainians. The country has a fairly large population (more than 40 million people) and its GDP per capita is substantially below the average EU members, let alone the wealthiest. Moreover, a hard currency like the euro would hardly operate in a functional manner in Ukraine. Addressing these imbalances would be challenging in a context in which the EU is already struggling with its own internal problems, disagreements and shortcomings. Furthermore, Ukraine’s political conditions are even more chaotic due to factors like its compromised territorial integrity, geopolitical volatility derived from its condition as a perpetual battleground and bitter internal rivalries, not to mention the presence of Russian troops. Hence, Ukraine would be exceedingly hard to absorb based on these considerations alone. Plus, Ukraine’s score in the corruption perception index is below Thailand, El Salvador and Egypt. Finally, as even staunchly Atlanticist think tanks like Freedom House admit, Ukraine’s regime still cannot be classified as a full-fledged democracy, a nominal obstacle to join the EU. Thus, Brussels would have to lower its demanding standards. As a response to the recent invasion launched by the Kremlin and as an act of solidarity, Poland has proposed that Ukraine be admitted to the EU but good will alone will not suffice to overcome these issues or cover reconstruction costs once the ongoing war is over (assuming Russian troops are indeed kicked out). Much more than benevolence and friendship would be needed to make it happen in a foreseeable future.

 

Western Punitive Sanctions

The Russian invasion of Ukraine sparked outrage and heightened strategic anxieties in Washington and Brussels. However, a direct military intervention by NATO was not conceivable. Such course of action could rapidly escalate to dangerous proportions, especially considering that both sides have nukes. Therefore, along with support for Ukrainian forces, the West resorted to coercive financial sanctions ‒ by now a staple of economic statecraft ‒ in order to punish Russia. Needless to say, this measure was chosen because it is a lot less risky than a direct kinetic engagement. This is a powerful reminder that the role of the American dollar as the world’s dominant reserve currency and Western control over the nerve centres of international financial circuits confer strategic advantages that can be readily weaponised. Plus, as some American statesmen have admitted, there is a close connection between the SWIFT network ‒ a private cooperative ‒ and the US intelligence community.

The first sanctions announced by the Biden administration were little more than symbolic and they only targeted Russian elites. However, after a transatlantic consensus was forged (not without the initial reluctance of several European states), much stronger sanctions were implemented. In fact, the decision to exclude multiple Russian banking entities from the SWIFT network ‒ an option that has been referred to as ‘the financial equivalent of a nuclear strike’ ‒ represents a heavy blow because it restricts the ability of the Russian economy to engage in international transactions. Nevertheless, this strategy sought to minimise the impact for some of Russia’s European trade partners. Hence, exceptions were made for the supply of Russian energy resources to European consumer markets, the purchase of Russian diamonds by jewelleries headquartered in Antwerp and the exports of Italian luxury items. A key consideration was that a significant disruption in the flow of fossil fuels would make prices skyrocket all over the world and paralyse several European economies, something that could deepen the global economic downturn ushered in by the COVID-19 pandemic.

Moreover, in order to increase the projection of Western economic firepower, the holdings of Russia’s Central Bank were also targeted. Specifically, the US, the UK and the EU decided to freeze its assets held overseas in North America and Europe, which constitute the majority of Russia’s reserves of 630 billion USD. Although seizing an enemy’s wealth is not uncommon in war, the purpose of this move is to bring down the exchange rate of the Russian rouble (so far, its depreciation was fallen beneath the unprecedented mark of more 100 roubles per dollar) and to undermine Moscow’s ability to implement a monetary policy that operates as an effective anchor of macroeconomic stability. The expectation is to unleash a destruction of wealth through bank runs, hyperinflation, the bankruptcy of Russian businesses, a massive credit crunch, the evaporation of savings, the rapid depletion of remaining foreign currency reserves and perhaps even the implosion of the entire Russian financial system. Needless to say, these effects would be detrimental for Russia’s war effort and for many components of national power. As French Finance Minister Bruno Le Maire explained, the West is “waging a total economic and financial war against Russia.”

In addition, the White House implemented restrictions to the exports of high-tech items and semiconductors to Russia. The point is to hamper the strategic modernisation of Russia’s military-industrial complex and the upgrade of Russian aerospace and robotics capabilities. Without such components, it will be difficult for Russia to develop comparative advantages which could harness the promising potential derived from the wave of innovation known as the “Fourth Industrial Revolution.” In turn, Germany froze the process to greenlight the Nord Stream 2 natural gas pipeline. In a truly unprecedented move that signals a ground-breaking departure from its position of strategic neutrality, Switzerland has agreed to adopt the full package of EU sanctions. Even Western private companies joined this campaign. For example, Google has demonetised the contents distributed by Russian media outlets, the oil and gas firm Royal Dutch Shell has dropped its ventures in Russia, and heavyweight rating agencies have downgraded Russian credit to the speculative status of ‘junk’, which means that Moscow’s ability to borrow money in international markets has been substantially diminished.

From a comprehensive perspective, this combined counteroffensive of economic Blitzkrieg demonstrates the cohesiveness of the Western bloc and a strong resolve to counter a rival great power seen as increasingly aggressive and unpredictable. Nevertheless, the reach of this campaign could go much further than simply trying to eject Russian forces from Ukrainian soil. In fact, since it would inflict a considerable damage, its objective is to trigger the outright collapse of the Russian economy as a whole, a development that could trigger civil unrest, widespread turmoil, a destabilising power struggle in Moscow or even regime change as a result of either a ‘colour revolution’ or a coup d’état launched by the siloviki clan or senior military commanders that are not satisfied with the results of Vladimir Putin’s dangerous strategic gamble. Indeed, Germany’s Foreign Minister Annalena Baerbock ‒ one of the most outspoken advocates of a hard-line Atlanticist approach ‒ openly acknowledges that the endgame is to “ruin Russia.” Similarly, the Canadian Foreign Minister Melanie Joly has confirmed that the ultimate goal of the transatlantic bloc is “to suffocate the Russian regime”.

Concerning the feasibility of said outcome, finishing off Russia as a functional national state might sound far-fetched, but the idea of provoking its demise is not unconceivable. Actually, the disintegration of the Soviet Union was strongly conditioned by factors such as 1) the inability to sustain a prolonged and costly arms race against a rival great power that was economically and technologically superior, 2) the lethargic stagnancy of the Soviet economy, 3) the depletion of resources as a result of the Soviet military intervention in Afghanistan and the control of Warsaw Pact satellites, increasingly engulfed by socio-political agitation and 4) the intentional fall of oil prices, masterminded by Washington and Riyadh. Moreover, the Russian economy is vulnerable due to its limited re-industrialisation and its overreliance on the exports of raw materials ‒ whose prices in international markets cannot be controlled by Moscow ‒ as a source of hard currency.

Then again, the deliberate infliction of economic hardship can fail to achieve its intended outcome. After all, ‘rogue states’ like Iran, North Korea and Venezuela ‒ much smaller than Russia by all accounts ‒ have been under sanctions for a while and their external aggressiveness and internal stability have not been undermined. Despite their status as pariahs in much of the Western world, the three counties are still ruled by hardliners whose ironclad regimes still behave boldly. In the particular case of Russia, it is pertinent to highlight that historical record shows that great powers are willing to sacrifice economic benefits if they believe that their national security or strategic national interests is at stake. Such states are often willing to endure economic pressure if they believe it is the cost that has to be paid to preserve their survival, sovereignty or to engage in defiant attitudes in the pursuit of victory. Plus, the Russian energy sector remains largely unaffected and Moscow can even reap the profits of higher energy prices.

 

Russian Countermeasures

It is unclear if Russia is strategically prepared to deal with the impact of the retaliatory onslaught that is coming as a result of its attempt to conquer Ukraine through hard power. The Kremlin must have anticipated the imposition of sanctions as a logical Western countermove, but it is unknown if their full extent was envisaged. As an initial reaction to restore short-term stability, the Kremlin has announced monetary restrictions, higher interest rates and the internationalisation of the Financial Message Transfer System (SPFS), a structure launched more than five years ago as a domestic alternative to SWIFT that, with a current membership of nearly 400 entities (mostly Russian banks and a handful of banks from other post-Soviet spaces), has been used mostly to process domestic electronic payments. From now on, the SPFS will be much more open as a conduit for the settlement of international transactions so that foreign partners can continue doing business with Russian counterparts.

Yet, in order to develop a reasonable degree of long-term resilience as a defensive shield that mitigates the damage, Russia would likely have no choice but to implement a wide range of import substitution policies to compensate for the loss of access to Western manufactured goods (the so-called “Fortress Russia economy plan”), enhance the productiveness and sophistication of its own producers of advanced technologies to overcome the so-called ‘tech blockade’ and to deepen ties to China as a trade partner, source of investment and provider of credit. Likewise, Russian control over Ukraine could provide substantial geoeconomic benefits. For example, controlling the Ukrainian network of gas pipelines would render the cancellation of Nord Stream 2 inconsequential. The pursuit of autarky is a no-brainer under the circumstances but there are reasonable doubts about whether Beijing will provide a helpful lifeline for Moscow. From China’s perspective, there are strong reasons to argue both for and against this course of action.

Nevertheless, the Kremlin can also respond with asymmetric geoeconomic countermeasures. In fact, Russian space agency Roskosmos has already interrupted the supply of rocket engines to the US. In a foreseeable future, the Russian state could also nationalise assets of Western companies on Russian soil. Furthermore, considering Russia’s role as a “full-spectrum commodity superpower” (as the British commentator Ambrose Evans-Pritchard put it) which supplies lots of minerals on a global scale, it can restrict the sales of titanium, palladium, neon and uranium to Western consumer markets. These raw materials are essential for applications related to aerospace, chipmaking, lasers, nuclear power, electronics and weaponry. Hence, disrupting their global supply chains would unleash substantial economic mayhem. Another offensive possibility would be for Moscow to launch cyberattacks against geoeconomically significant corporate Western targets such as investment banks, hedge funds, stock exchanges, big tech firms and transnational corporations involved in large-scale business operations related to agriculture, energy, telecom and the production of military hardware. Hubs like Wall Street or the City and offshore financial centres aligned with the West can also find themselves in the crosshairs. Considering that the actions undertaken by Washington and Brussels intend to set in motion a chain of events that could lead to the downfall of the Russian government, the Kremlin could possibly reach the ominous and dangerous conclusion that there is no incentive to show restraint. A cornered Russian bear might conceivably believe that desperate circumstances require desperate measures.

In addition, hastening an increased distribution of Russian gas to China ‒ a rising great power that is seen by several Western states as a strategic competitor ‒ is another response. Indeed, in an effort to avoid a disproportionate reliance on European consumer markets (eager to decouple from Russian hydrocarbons in the near future anyway), the state-owned energy firm Gazprom has just announced an agreement to design the Soyuz-Vostok pipeline, a project that will deliver Russian gas to China via Mongolia. Said deal, described as one of the biggest ever, could carry as much as 50 billion cubic meters of gas per year to the ‘Middle Kingdom.’ This plan would strengthen Beijing’s energy security (potentially at the expense of European nations) and generate a reliable source of cash for Russian coffers.

Finally, Russia could resort to its gold holdings, the borderless structures of decentralised cryptocurrencies ‒ such as Bitcoin, Ethereum and even Dogecoin ‒ clandestine networks of financial intermediaries and the rising financial platforms organically associated with the Chinese yuan ‒ like the Cross-Border International Payments System, operated by Beijing ‒ in an attempt to bypass the arteries controlled by Western states and dollar-denominated transactions. Perhaps this could not compensate the full loss of access to international finance but at least the partial cover of these conduits offers alternatives worth exploring. It must be borne in mind that Russia has been one of the leading instigators of a global crusade that seeks to challenge the supremacy of the US dollar as the world’s top reserve currency, so it makes sense to orchestrate schemes whose purpose is to target the greenback and dimmish the influence of Western financial platforms. After all, this Russian experience can convince other states with revisionist geopolitical aspirations that the financial and monetary strength of the West needs to curtailed and maybe even challenged.  Indeed, some financial analysts believe that the unprecedented use of financial weapons by the Western bloc against a great power might prompt the development of a parallel financial system that Western states cannot directly manipulate.

 

Lessons Learned

The current Ukraine crisis demonstrates that warfare is an increasingly complex phenomenon whose expressions transcend the purely military sphere. Although the war is being fought with bullets and bombs on Ukrainian soil, the projection of its geoeconomic shadow has already reached a transnational scale. This conflict illustrates how the realm of geoeconomics is a confrontational chessboard which offers unconventional ‒ and powerful ‒ weapons and shields. Hence, it has become a key battlespace in the new Cold War. Nevertheless, although less lethal than nuclear weapons, economic warfare is dangerous because it can wreck a lot of havoc, bring unintended consequences, and even exacerbate tensions beyond a critical boiling point.

Predicting with a high level of accuracy the outcome of this chapter is hard, but it is relevant to bear in mind that heavy collateral damage to European economies, an increasingly resentful and ostracised Russian bear, a growing strategic confrontation in the monetary domain and a revanchist urge to abruptly reshuffle the structure of the global financial ecosystem could give birth to an environment that is more uncertain, chaotic and perilous. Under these conditions, the nature of national power, conflict and hegemony are being redefined in accordance with the parameters of geoeconomic criteria. Therefore, the reality of an escalating geoeconomic arms race has game-changing implications for the reassessment of grand strategy, national security, foreign policy, intelligence and statecraft. Paraphrasing the Prussian military philosopher Carl Von Clausewitz, the deadly art of geoeconomics has truly become the continuation of warfare by other means.