Macroeconomic & Geopolitical

The Importance of "Kicking the Can"

December 2021 – 3 min read
Averting a fresh Ukraine crisis that would derail the global recovery means steering clear of both economic and military lanes.

There are few strategies more effective in resolving a crisis than kicking the can down the road, and that’s exactly what the presidents of Russia and the United States did last week. For now, the global recovery won’t be derailed by rising tensions in Ukraine and a potential disruption to global energy markets.

Open hostilities still claim lives most months in the Donbass, and the path ahead for Kiev to restore order looks as difficult as ever. But the differences between Moscow and Washington are more political than economic or military, leaving ample room for diplomatic delay and compromise—as long as neither side loses sight of the risks.

Russia’s abiding interest in Ukraine rests on three main concerns: an emotional and historical attachment that still makes it hard to see its southwestern neighbor as an independent country; a concrete anxiety about fighting in the mostly Russian-speaking border regions; and a vague worry about a diminished NATO alliance expanding farther east.

For Vladimir Putin, a Ukraine that remains weak, unstable, and nervous seems like a good outcome as long as the violence on the ground is contained. But actually sending troops to capture territory larger than France represents a horrifying prospect. It’s not so much the likely global political opprobrium or financial sanctions that deter him. He doesn’t want to own messy fighting against Ukrainian forces that won’t surrender easily and then attempt to govern a population that has turned remarkably anti-Russian in the recent standoff.

Ukraine’s fate will never be as important to Joe Biden as it is to Putin. Indeed, with China and climate change looming large on the U.S. administration’s crowded list of priorities, a frozen conflict in Eastern Europe looks like more a nuisance than a strategic interest. Still, Biden has long backed Ukraine’s independence, and the last thing he wants is fodder for the narrative that Washington doesn’t stick with its friends following the disastrous withdrawal from Afghanistan.

If Russian military action carries sharply rising costs for Moscow, significantly ratcheting up Western economic sanctions beyond current levels carries rising costs for everyone. Excluding Russia from the SWIFT payments system may sound like sharp and focused punishment, but it would effectively interrupt all purchases from the world’s second-largest oil exporter (to say nothing of Europe’s dominant natural gas supplier). Blocking all ownership of Russian debt would be less dramatic, but such a move would surely roil global markets just as it absorbs more pandemic uncertainty.

"Of course, just because Washington and Moscow decided to contain the conflict for now doesn’t mean there aren’t risks from elsewhere."

Washington’s limited options may explain the unusual intelligence leaks to spotlight the buildup of Russian troops together with an “assessment” they could invade next year. Meanwhile, European leaders have not ruled out the possibility of halting the Nord Stream 2 gas pipeline in case of invasion, potentially blocking a major new source of Russian revenues. 

Biden’s critics widely derided the decision to order up more diplomatic engagement, but it’s hardly a concession to talk. There’s also plenty of room for a compromise short of Putin’s demand for legal guarantees that Ukraine not join NATO. Ultimately, only Ukrainians can make that decision, but realistically it will be a long time before the country is stable enough to be a viable candidate. 

Meanwhile, there is plenty of room to update the Conventional Armed Forces in Europe Treaty that Russia suspended in 2007. There could also be narrower arrangements for more military transparency on both sides of the border, commitments to notify of troop movements and, indeed, fresh efforts to settle the Donbass conflict.

Of course, just because Washington and Moscow decided to contain the conflict for now doesn’t mean there aren’t risks from elsewhere. Ukraine’s recent decision to use Turkish-supplied drones triggered a sharp reaction from Moscow. And the American president is hardly in control of any Congressional legislation that might require extreme financial sanctions. 

Meanwhile, there is plenty of mischief that Putin can cause in Ukraine without sending a single tank across the border. There have already been cyberattacks and supplies to the local Russian militias. But there could be more soldiers without uniforms (like the so-called “little green men” who reclaimed Crimea in 2014) or “humanitarian” convoys that confuse the debate about how much punishment is deserved.

So the “can” marked “Ukraine” will surely reappear farther down the road. Tensions will rise, threats will ring out, and global financial markets will sag. There is still enough room for a military miscalculation that leads to a humanitarian tragedy or an economic escalation that delivers an oil shock to the current recovery. As long as all sides leave themselves a path for some sort of political engagement, however, they will likely manage another successful kick.

Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

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