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Mikael Wigell: Geoeconomic Trend Outlook

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Maa- ja metsätalousministeriö
Maa- ja metsätalousministeriö

Great power rivalry is accelerating in the economic domain as states view economic interdependencies as vulnerabilities and gear up for competition through new means of economic intervention. This is shifting the global economy from market capitalism toward more strategic and state-directed capitalism. States are increasingly using their economies as strategic weapons through sanctions and other policies. The global economy is becoming fragmented as economic networks decouple and competing spheres of influence emerge, potentially leading to a new Cold War dynamic or "balkanization" of the global economy. Western sanctions against Russia over Ukraine are having significant economic effects on both Russia and the global economy through commodity market disruptions and inflationary pressures.

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Geoeconomic Trend Outlook Mikael Wigell Research Director The Finnish Institute of International Affairs
The rise of geoeconomics • Great-power rivalry accelerating in the economic domain • Economic interdependencies seen as vulnerabilities • States gearing up for this rivalry by new means for economic intervention • Economics and security thinking increasingly intertwined putting pressure on the norms and rules that govern the global economy • From market capitalism to strategic capitalism
From market capitalism to strategic capitalism market capitalism strategic capitalism state capitalism state intervention scope Limited Selective Broad goal orientation Economic Security Political state-corporate relations Distant Varied Close
Weaponization of the economy Economic policy used as a strategic weapon  New financial sanctions with extraterritorial effects  Sanctions against companies and individuals  Companies used for espionage  Strategic corruption Vulnerability to sanctions, corruption and espionage increasing  Depending on China-Russia relationship - sanctions spiral
Accelerating use of sanctions 0 50 100 150 200 250 300 1950 1960 1970 1980 1990 2000 2010 2019 The Use of Sanctions (1950-2019)
Financial sanctions key, less use of trade sanctions 0 20 40 60 80 100 120 140 160 180 1990 1995 2000 2005 2010 2015 2019 Type of Sanctions (1990-2019) Trade Sanctions Financial Sanctions
Sanctions as a strategic weapon Instruments • Trade sanctions – export-, import controls • Financial sanctions – debt-, investment restrictions, financial embargoes (eg. De-swiftization) • Currency warfare • Asset seizures Usage • Three stages: (1) threat (2) limited use (3) economic warfare Aims • Primary vs. secondary aims Effects • Extra-territorial/secondary effects • Decoupling effects
Securitization of the economy  Security-sensitiveness increasing  FDI screening  Export controls  Science and technology cooperation restrictions  Data localization regulations  Critical infrastructure protection regulations  Reshoring subsidies  Leading to broader state control in security- sensitive sectors  Contingent on China-Russia relationship
The EU’s securitization of its economy
Balkanization of the global economy Disintegration of global economic networks into smaller ecosystems  Decoupling of global value and supply chains  Competition over technical standards and norms  Competing economic and technological ’spheres of interest’  De-globalization?  China-Russia relationship as accelerator
A New Cold War? US-China decoupling concentrated to the technological domain Russia facing economic isolation and economic collapse • China’s position key – will it shelter Russia or not? • If it does – global cold war!
West-Russia Economic Warfare Western sanctions  Russian central bank (done)  Swift (almost complete)  Banking (partial)  Export controls (tech almost complete)  Foreign investment (broad)  Airspace (almost complete)  Individual (Putin and big oligarchs)  Oil and gas (partial)  Minerals and timber (not yet) Effects on Russia  Russia decoupled from global economic networks  Brain drain and exodus of skilled labour  Massive corporate flight and private sector divestment  Technological backwardness
The Global Economic Toll  Russian response effects  Spillover effects  Systemic effects
Russian response effects  Foreign portfolio capital locked up  Broad asset seizures  Commodity export restrictions  Fertilizer exports (done) – hitting global food production  Energy exports (expected)  Critical minerals (expected) – hitting car, aerospace and semiconductor manufacturers and especially European tech production (fuel cell, hydrogen, 3D printing, robotics)  Other minerals (expected) – third biggests supplier of nickel used in electronic vechicle batteries and stainless steel  Nota bene – China controls similar (and more) mineral supply bottlenecks, which it can use to amplify its supply dominance  Threat to EU’s ability to deliver on its green and digital transformations
Spillover and systemic effects  International commodities markets  Price increases in oil, gas, wheat, metals, fertilizers and gold  Shortages of grain, metals and gas  Accelerating inflation (Global)  Reduced remittances (Central Asia)  Increased poverty (Developing Countries)  Reduced growth (Europe)  EU (except France) heavily trade-reliant, export-oriented growth model, so ill-suited to prolonged trade-reducing sanctions  Increased state intervention to be expected
Thank you! mikael.wigell@fiia.fi

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Mikael Wigell: Geoeconomic Trend Outlook

  • 1. Geoeconomic Trend Outlook Mikael Wigell Research Director The Finnish Institute of International Affairs
  • 2. The rise of geoeconomics • Great-power rivalry accelerating in the economic domain • Economic interdependencies seen as vulnerabilities • States gearing up for this rivalry by new means for economic intervention • Economics and security thinking increasingly intertwined putting pressure on the norms and rules that govern the global economy • From market capitalism to strategic capitalism
  • 3. From market capitalism to strategic capitalism market capitalism strategic capitalism state capitalism state intervention scope Limited Selective Broad goal orientation Economic Security Political state-corporate relations Distant Varied Close
  • 4. Weaponization of the economy Economic policy used as a strategic weapon  New financial sanctions with extraterritorial effects  Sanctions against companies and individuals  Companies used for espionage  Strategic corruption Vulnerability to sanctions, corruption and espionage increasing  Depending on China-Russia relationship - sanctions spiral
  • 5. Accelerating use of sanctions 0 50 100 150 200 250 300 1950 1960 1970 1980 1990 2000 2010 2019 The Use of Sanctions (1950-2019)
  • 6. Financial sanctions key, less use of trade sanctions 0 20 40 60 80 100 120 140 160 180 1990 1995 2000 2005 2010 2015 2019 Type of Sanctions (1990-2019) Trade Sanctions Financial Sanctions
  • 7. Sanctions as a strategic weapon Instruments • Trade sanctions – export-, import controls • Financial sanctions – debt-, investment restrictions, financial embargoes (eg. De-swiftization) • Currency warfare • Asset seizures Usage • Three stages: (1) threat (2) limited use (3) economic warfare Aims • Primary vs. secondary aims Effects • Extra-territorial/secondary effects • Decoupling effects
  • 8. Securitization of the economy  Security-sensitiveness increasing  FDI screening  Export controls  Science and technology cooperation restrictions  Data localization regulations  Critical infrastructure protection regulations  Reshoring subsidies  Leading to broader state control in security- sensitive sectors  Contingent on China-Russia relationship
  • 10. Balkanization of the global economy Disintegration of global economic networks into smaller ecosystems  Decoupling of global value and supply chains  Competition over technical standards and norms  Competing economic and technological ’spheres of interest’  De-globalization?  China-Russia relationship as accelerator
  • 11. A New Cold War? US-China decoupling concentrated to the technological domain Russia facing economic isolation and economic collapse • China’s position key – will it shelter Russia or not? • If it does – global cold war!
  • 12. West-Russia Economic Warfare Western sanctions  Russian central bank (done)  Swift (almost complete)  Banking (partial)  Export controls (tech almost complete)  Foreign investment (broad)  Airspace (almost complete)  Individual (Putin and big oligarchs)  Oil and gas (partial)  Minerals and timber (not yet) Effects on Russia  Russia decoupled from global economic networks  Brain drain and exodus of skilled labour  Massive corporate flight and private sector divestment  Technological backwardness
  • 13. The Global Economic Toll  Russian response effects  Spillover effects  Systemic effects
  • 14. Russian response effects  Foreign portfolio capital locked up  Broad asset seizures  Commodity export restrictions  Fertilizer exports (done) – hitting global food production  Energy exports (expected)  Critical minerals (expected) – hitting car, aerospace and semiconductor manufacturers and especially European tech production (fuel cell, hydrogen, 3D printing, robotics)  Other minerals (expected) – third biggests supplier of nickel used in electronic vechicle batteries and stainless steel  Nota bene – China controls similar (and more) mineral supply bottlenecks, which it can use to amplify its supply dominance  Threat to EU’s ability to deliver on its green and digital transformations
  • 15. Spillover and systemic effects  International commodities markets  Price increases in oil, gas, wheat, metals, fertilizers and gold  Shortages of grain, metals and gas  Accelerating inflation (Global)  Reduced remittances (Central Asia)  Increased poverty (Developing Countries)  Reduced growth (Europe)  EU (except France) heavily trade-reliant, export-oriented growth model, so ill-suited to prolonged trade-reducing sanctions  Increased state intervention to be expected