For years, one of the strongest arguments for economic interdependence was that countries which trade extensively with one another become less likely to fight. War is expensive when your factories depend on somebody else’s inputs, your consumers depend on their exports and businesses on both sides profit from stability. Economic integration therefore creates constituencies with something to lose from conflict.
Russia’s invasion of Ukraine has not made that argument completely wrong. It has exposed its limit.
Economic interdependence did make this war more expensive. It simply did not make it expensive enough to prevent.
Now the relationships that were supposed to discourage confrontation are becoming part of the confrontation itself.
On Tuesday, President Biden announced that the United States would prohibit imports of Russian oil, liquefied natural gas and coal. Britain announced that it would phase out Russian oil imports by the end of this year. The European Commission has proposed reducing European demand for Russian gas by two-thirds before the end of 2022 and ending dependence on Russian fossil fuels well before 2030.
For the United States, banning Russian energy is comparatively manageable because America imports relatively little Russian oil and possesses enormous domestic energy production. For Europe, the calculation is completely different. Russia supplies a very large share of European natural gas and substantial quantities of oil and coal. Germany, Italy and several Central and Eastern European economies are particularly exposed.
That difference explains why the United States can announce an energy embargo relatively quickly while European governments are much more cautious.
Political unity does not eliminate economic geography.
Countries can agree completely that Russia’s invasion is wrong and still disagree over sanctions because the cost of those sanctions is distributed differently.
A government deciding whether to stop importing Russian gas is therefore making two calculations simultaneously. How much economic pressure will this place on Russia, and how much economic damage will it impose at home?
Those questions are connected because sanctions work partly by being costly.
If stopping trade imposed no cost on the sanctioning country, the trade probably was not particularly important to begin with.
This is why calls to “sanction everything” can avoid the most difficult part of sanctions policy. The strongest sanctions are often precisely the measures that require the sanctioning countries to accept meaningful costs themselves.
Credibility therefore depends partly on willingness to absorb pain.
Europe’s dependence on Russian energy gives Moscow leverage because European households need heating and European industries need energy. But Europe’s role as Russia’s largest energy customer gives Europe leverage too because Russia needs the revenue.
Interdependence creates mutual vulnerability.
The important question is whether the vulnerability is symmetrical.
Usually it isn’t.
One side may be able to replace the other’s product faster. One may possess larger financial reserves. One may be more politically capable of forcing its population to absorb lower living standards. One may have alternative suppliers.
Power inside an interdependent relationship therefore depends not merely on how much two countries trade but on who can afford to stop first.
That is a much more useful way of thinking about economic dependence.
Suppose Country A buys 40% of its gas from Country B, while Country B earns 40% of its export revenue selling that gas to Country A. Both depend on the relationship. But if Country A can build LNG terminals and find alternative suppliers within two years while Country B needs a decade to construct pipelines towards alternative markets, the long-term bargaining power may favour A.
In the short term, however, B may possess greater leverage because households cannot replace a gas pipeline overnight.
Time changes the balance of economic power.
Europe is confronting exactly that problem.
Reducing Russian energy dependence may be strategically desirable. Doing it immediately could produce severe economic disruption. Doing it gradually reduces disruption but continues sending large amounts of money to Russia while the war continues.
There is no version in which the trade-off disappears.
This is one reason energy policy can no longer be treated as separate from security policy.
For years, Germany’s energy relationship with Russia was often defended through the idea of Wandel durch Handel—change through trade. Economic relationships would encourage cooperation, embed Russia within European markets and make confrontation increasingly irrational.
Nord Stream and later Nord Stream 2 existed inside that broader logic, although their supporters also emphasised straightforward commercial arguments.
The assumption was not foolish. European integration itself provides extraordinary evidence that economic interdependence can support peace. France and Germany fought devastating wars repeatedly before constructing institutions that made their economies and political systems increasingly intertwined.
But the European example contained another ingredient: institutions and broadly shared political expectations.
Trade alone did not create European peace.
NATO, the European Community and later EU, democratic institutions, American security guarantees and post-war reconciliation all mattered.
Perhaps Europe generalised too much from its own experience and assumed economic interdependence could produce similar political convergence with Russia without the same institutional foundations.
Markets connect interests.
They do not automatically align political objectives.
A government may rationally accept economic losses if it values another objective more.
That appears to be what Russia has done.
This should make us cautious about describing economic behaviour as though states maximise GDP and nothing else. Governments care about security, territory, ideology, regime survival, prestige and domestic political narratives.
Economic welfare matters enormously.
It is not the only variable in the objective function.
That sounds obvious, but much of post-Cold War globalisation implicitly rested on the expectation that economic incentives would increasingly constrain geopolitical behaviour.
Perhaps they do.
They did not constrain it enough here.
The sanctions response also demonstrates how much power exists inside financial networks that normally appear politically neutral. Western governments have frozen Russian central-bank assets, sanctioned financial institutions, restricted technology exports and targeted wealthy individuals. Visa and Mastercard have suspended operations in Russia. Major companies are leaving or reducing activity.
McDonald’s closing restaurants is not geopolitically important by itself. Hundreds of multinational companies simultaneously reconsidering their presence becomes something different.
Private firms are now participating in economic isolation partly because of sanctions, partly because operating conditions have become difficult and partly because public opinion creates reputational costs for remaining.
This blurs the boundary between government and market.
Companies frequently insist they are commercial rather than political actors. But operating internationally inevitably places them inside political systems.
A company choosing whether to leave Russia is deciding how to weigh profits, employees, contracts, legal restrictions and reputation.
That decision has political consequences even if executives would prefer to describe it as business.
Globalisation therefore creates private actors with foreign-policy influence.
A government can impose sanctions.
A bank can determine whether transactions are processed.
A shipping company can determine whether goods move.
A technology company can restrict services.
An energy trader can decide whether Russian crude is commercially acceptable.
Economic networks distribute coercive capacity beyond the state.
That can make sanctions much more powerful.
It also raises accountability questions because corporate decisions affecting millions of people are not made through democratic processes.
There is another consequence that extends far beyond Russia and Europe: food.
Russia and Ukraine are both major exporters of wheat and other agricultural commodities. Ukraine is also an important exporter of maize and sunflower oil, while Russia and Belarus are significant suppliers of fertiliser-related products.
War, sanctions and disruption around Black Sea trade are therefore affecting global commodity markets.
This matters because the people most vulnerable to rising food prices may live thousands of kilometres from Ukraine and have no connection whatsoever to the political dispute.
A household in Egypt, Lebanon or another food-importing country can experience Russia’s invasion through the price of bread.
That is how globalisation transmits conflict.
Interdependence spreads prosperity during normal periods.
It can spread shocks during crises.
The same network does both.
This is why sanctions cannot be analysed only through their effect on the target. Restricting Russian exports can reduce Russian revenue while increasing world prices. Higher prices can partly offset the loss of export volume. They can also impose costs on countries that never imposed sanctions at all.
Policy therefore produces second- and third-order effects.
Suppose Europe stops buying Russian oil. Russia sells some of it elsewhere at a discount. Global oil supply becomes tighter, pushing prices higher. European consumers pay more. Russia sells fewer barrels but receives more per barrel. Other oil exporters gain revenue. Developing countries importing oil face larger bills.
The original policy objective—reduce Russian resources for war—has now created a chain of responses across several markets.
This does not mean sanctions are ineffective.
It means effectiveness cannot be measured by the announcement.
We have to follow the equilibrium adjustment.
Markets respond.
Countries reroute trade.
Companies find substitutes.
Consumers reduce demand.
Governments subsidise prices.
Producers increase output where possible.
Russia looks for alternative customers.
The final economic effect can differ substantially from the immediate one.
This is where economics becomes essential to foreign policy. Sanctions are attempts to alter incentives inside systems where every affected actor adapts.
Static analysis is rarely enough.
Energy prices also create domestic political problems for Biden and European leaders. American petrol prices have risen sharply. European households face much higher energy bills. Inflation was already elevated before the invasion.
Politicians can explain that some additional costs are connected to confronting Russian aggression.
That explanation will work only to a point.
Public willingness to absorb economic costs for foreign policy is not unlimited.
This makes democratic sanctions policy particularly interesting. Putin can impose substantial economic costs on Russian citizens while facing highly constrained electoral accountability. Biden, Scholz, Macron and other democratic leaders eventually face voters who can punish them for higher prices.
That does not necessarily give authoritarian governments an advantage. Authoritarian regimes face their own risks from economic dissatisfaction and elite conflict.
But democracies have more immediate and visible channels through which public costs enter policy.
Western unity will therefore be tested not primarily while images from Ukraine dominate television, but months from now if energy prices remain high and the war continues.
Solidarity is cheapest at the beginning.
The durability of solidarity depends on how costs are distributed afterwards.
Governments can make that distribution more politically sustainable. If energy prices rise, targeted assistance can protect poorer households. Windfall revenues can potentially be taxed. Energy conservation can reduce demand. Alternative suppliers can be developed.
Again, fairness becomes part of strategic effectiveness.
If sanctions disproportionately hurt lower-income households while wealthier citizens can absorb the costs easily, political support will deteriorate faster.
Distributional policy therefore becomes foreign policy.
There is also a climate dimension that creates an extraordinary contradiction. Europe has spent years trying to reduce fossil-fuel consumption because of climate change. Russia’s invasion now provides another reason to reduce fossil-fuel dependence: security.
In the long run, those objectives can reinforce each other.
Renewable energy generated domestically does not merely reduce emissions. It reduces dependence on imported fossil fuels.
A wind turbine does not require continuous gas deliveries from an authoritarian supplier.
Energy efficiency does not only lower emissions. It reduces strategic vulnerability.
The economics of decarbonisation therefore changes when the security value of energy independence is included.
But the short-term effect may move in the opposite direction. Governments trying to replace Russian gas may rely more heavily on coal, seek new fossil-fuel suppliers or expand LNG infrastructure.
Climate objectives and security objectives align over decades and can conflict over months.
Time horizon matters again.
This is why policymaking cannot simply optimise one objective.
Europe wants lower emissions, affordable energy and less dependence on Russia.
Achieving all three immediately may be impossible.
The task is deciding which compromises are temporary and which create new long-term dependencies.
Replacing Russian gas with permanent dependence on another authoritarian supplier may solve one geopolitical problem while constructing another.
Diversification may therefore be more important than complete self-sufficiency.
No major economy can or should produce everything domestically. Autarky would destroy many of the benefits of trade.
The lesson from Russia is not that interdependence is inherently dangerous.
It is that concentrated dependence on an actor capable of weaponising the relationship is dangerous.
That distinction matters enormously.
Globalisation works partly because specialisation creates efficiency. Countries buy from whoever produces something most cheaply. Security policy introduces another variable: resilience.
The cheapest supplier may not be the safest supplier.
A supply chain optimised entirely for efficiency can become fragile when political shocks occur.
Governments and companies may therefore accept somewhat higher costs in exchange for diversification, inventories or domestic capacity.
Economists would recognise this as paying for insurance.
Insurance looks inefficient when nothing goes wrong.
Then something goes wrong.
The pandemic already exposed this problem through medical supplies and semiconductors. Russia is exposing it through energy.
The likely political consequence is not the end of globalisation.
It may be a different kind of globalisation in which security increasingly shapes where countries are willing to depend on one another.
Trade may become organised more heavily around political trust.
That has costs too. Dividing the world economy into geopolitical blocs reduces efficiency, creates duplication and can make political confrontation more permanent.
Economic separation can reduce an adversary’s leverage.
It also removes some of the economic costs that discourage future conflict.
Interdependence therefore creates both vulnerability and restraint.
Decoupling creates both resilience and fewer restraints.
Again, there is no policy that maximises everything.
This is why I would not conclude from Ukraine that Europe’s decision to trade extensively with Russia was simply stupid.
For decades, that trade provided cheap energy, profits and some degree of mutual economic interest in stability. Those were real benefits.
The mistake was allowing economic interdependence to become sufficiently concentrated that Europe had limited short-term alternatives if political relations collapsed.
Interdependence is not the same thing as dependence.
The first can create mutual benefits.
The second creates leverage.
Perhaps the best economic relationships are those in which countries are connected enough that conflict is costly but diversified enough that coercion is survivable.
That balance is difficult because markets naturally reward efficiency more visibly than resilience. A company knows exactly how much it saves by buying cheaper gas. The value of maintaining an alternative supplier is hypothetical until the primary supplier disappears.
Political systems therefore have to price risks markets may underweight.
That is not an argument for governments deciding every supply chain.
It is an argument for recognising that some economic relationships have strategic externalities not captured in the market price.
Russian gas was never only gas.
Its price did not fully include the geopolitical cost of dependence.
Europe is beginning to calculate that cost now.
The same principle will inevitably be applied elsewhere—to semiconductors, rare-earth minerals, pharmaceuticals, telecommunications and other technologies concentrated in particular countries.
That may become one of the largest long-term consequences of this war.
Not simply higher defence spending or stronger NATO.
A reassessment of the assumption that the most economically efficient relationship is automatically the strategically optimal one.
Three weeks ago, Germany was still defending parts of an energy model built around deep commercial links with Russia.
Today Nord Stream 2 is suspended, Europe is planning to reduce Russian gas dependence dramatically, and governments are discussing energy security with the vocabulary normally reserved for military strategy.
The pipelines did not prevent geopolitics from returning.
They became part of it.
Perhaps that is the lesson.
Trade does not replace power politics.
It creates another arena in which power operates.
