Does Russia’s recent behaviour fit with Papayoanou’s framework?

For a personal project that I am working on, I have been looking into theories and frameworks that attempt to relate economic interdependence between countries to the potential for conflict. In his 1999 book, The Lexus and the Olive Tree, Thomas Friedman outlined his “Golden Arches theory of conflict prevention”, and it has been something that has stuck with me ever since. The reason for its resonance was probably the simplicity of its logic: when two countries both have McDonald’s restaurants, which signal the economic sophistication of their respective economies, they will be less inclined to engage in conflict with one another. Arguably, it is fair to say that the simplicity of this theory, while attractive, was probably its downfall. As an economist, it has always attracted me that once two countries, or regions for that matter, are economically integrated, the chances of a conflict are greatly reduced. Unfortunately for me, and for Friedman’s theory, the world is not this simple.

What really troubled me about this notion of economic interdependence and conflict was the level of integration between Great Britain and Germany before the First World War. A quick google search will reveal many articles and scholarly papers to point to the fact that Germany and Great Britain were significant trading partners, with areas covered in goods trade, investment and financial services linkages. So, given this, I needed to find some work that was a bit more sophisticated in terms of international economics and conflict.

After a bit of searching – and I should note that political economy theories were not a major part of my academic studies – I came across an incredibly thought-provoking article by Paul A. Papayoanou, “Interdependence, Institutions, and the Balance of Power: Britain, Germany, and World War”. While the article is worth a read in full, in summary, there are a few ideas that help to structure Papayoanou’s theory:

  • Countries are either ‘status-quo’ countries or ‘revisionists’. Status-quo countries are content with how things are, while revisionist countries would like a different world or regional structure;
  • Economic interdependence does matter, as it enters into the equation of the final decision to engage in conflictual behaviour. Leaders will consider the economic cost of conflict if there is an interdependence between. From Papayoanou: “Economic ties can affect mobilization capacities in two ways – by the role played in the political process by vested interests created by international economic ties, and by modern political leaders’ need to be concerned with the effects of security policies on their states’ economic links and economies.”
  • Political institutions also matter. Papayoanou talks about the ‘median’ voter as an important consideration. In a more democratic situation, the concerns of the median voter are more easily heard, and when there are great economic ties between the countries, it is probably that the median voter would not want conflict to go ahead.

Great Britain and Germany pre WW1 as a case study….

In the build up to the first World War, Papayoanou’s theory would predict a weak British response to the growing threat from Germany due to two factors: the interdependence of the two economies and the democratic political structure of Great Britain that allowed the vested interests of these economic relationships to have political influence. Indeed, Papayoanou cites a number of examples that supports his assertions about the British response to the German threat:

“Britain’s ambivalent “straddle policy” in the period leading up to August 1914 is consistent with the prediction. The policy included entente balancing with France and Russia and a response to the German naval challenge. However, the ententes were merely agreements to consult in a crisis; no commitments to come to the aid of France or Russia were made. And while the naval buildup helped insure Britain’s survival, it added little to the security of the Continent. Moreover, Britain failed to build up its army’s resources or to undertake conscription, and was unwilling to commit to sending the expeditionary force to the Continent. Britain also pursued something of a detente with the Germans, negotiating over naval, political, economic, and colonial matters after 1911. And in the crisis of July 1914, Grey pursued mediation and only issued a private, informal warning to Germany. All in all, then, British policy was a mix of balancing and conciliation, as predicted.”

Russia, Ukraine and Papayoanou

The ongoing conflict in Eastern Ukraine would seem to fit Papayounou’s framework quite well. In particular, the mixed and less-than-united response from European countries seems to be driven by the varying economic ties that some European countries have to the Russian economy. For example, France took a longer than expected amount of time to cancel a delivery of warships to Russia, as the conflict had been going on for a while when this decision came in November 2014. At the time of writing the conflict has escalated after a brief respite following the Minsk agreement, but in December, the divisions were evident again. From Bloomberg:

“French President Francois Hollande floated the prospect of scaling back sanctions on Russia, becoming the first major European Union leader to offer to ease the Kremlin’s economic pain. “If gestures are sent by Russia as we expect, there would be no reason to impose new sanctions but on the contrary to look at how we could bring about a de-escalation from our side,” Hollande said as he headed into an EU summit in Brussels yesterday….

Hollande’s initiative put him at odds with Germany, Britain and most of eastern Europe as well as the U.S., which want Russia to comply with demands on Ukraine before offering any easing of sanctions. The divergence became public as rival EU factions added up the costs and benefits for Europe’s sluggish economy of the curbs on business with Russia.”

http://www.bloomberg.com/news/articles/2014-12-19/hollande-floats-russian-sanctions-relief-in-eu-split

The last sentence highlighted from this article captures Papayoanou’s theory nicely: the decision to ‘balance’ against Russian aggression in eastern Ukraine is heavily influenced by considerations of the economic costs that the conflict, and any escalation, would have on the domestic economies.

Papayoanou on Russia

While this theory was outlined in 1996, Papayoanou had some insightful views on Russia:

“If Russia becomes part of the international economy without, however, having made a transition to full-fledged democratic institutions, economic ties could have a negative effect, as in the years preceding World War I…

There is thus no assurance that economic integration would have pacifying consequences on Russian foreign policy because internationalists might not have much of a restraining influence in the domestic arena in the future. And if that happens, Western democratic leaders may find themselves constrained by domestic economic interests just as Britain was before the First World War.

While it is essential that Russia be brought into the international economy to see a transition to a stable market democracy, the West must do so with great care. It should carefully design economic concessions and interactions that will support internationalists and democratizing forces within Russia, without creating ties in the West that would be too politically costly to break should the nationalists win domestic political battles and promote aggressive foreign policies that need to be balanced against. To do otherwise risks revisiting 1914.”

Some comfort from Papayoanou’s theory

In his theory, Papayoanou talks often about ‘adjustment costs’, or the economic costs that would occur should a conflict take place and economic ties break down. Papayoanou usually talks about this from the perspective of the ‘status quo’ countries, but it would also apply to a ‘revisionist ‘like Russia. In this sense, the economic sanctions, especially when combined with the large fall in the oil price and the Russian currency, seem to offer strong ‘adjustment costs’ on the Russian economy. As I would assume policymakers in the West would hope, these adjustment costs are becoming quite severe and should serve as a deterrent to future escalations of the conflict. Even today, the latest news is that the West is considering cutting the Russian economy off from the SWIFT system – which is the international financial system used for settling transactions between banks. This would hurt the Russian economy even more and take these adjustment costs to an even higher level.

Going forward: what can we glean from this theory about Russia’s behaviour in 2015

The Economist Intelligence Unit recently released it’s latest Democracy Index, where Russia was ranked 132nd. Given the state of democracy in Russia, it is relatively easier for Putin to carry out his security strategy in eastern Ukraine than a country with a democratic system of governance. However, as the economic adjustment costs rise – with increasing inflation, recession and unemployment – we would expect to see growing dissent in the country. So to maintain his strategy in Ukraine, Putin would need minimise this dissent, consolidate power and control the public message of this conflict. Indeed, this is what is happening now in Russia, from The Economist:

This ratcheting up of anti-Western rhetoric is in part a response to a deteriorating economy. Indeed, Mr Putin upgraded the war into a Russia-NATO conflict just as Standard & Poor’s, a rating agency, was downgrading Russia’s credit rating to junk…. Mr Putin has also planted new defences within Russia. On the day the rebels launched their attack on Donetsk airport, an “anti-Maidan” movement was launched, consisting of tough-looking Cossacks, Russian veterans of wars in Afghanistan and Chechnya, black-leather-clad bikers called night wolves and professional sportsmen trained to fight any sign of liberalism.

http://www.economist.com/news/europe/21641278-russian-president-stepping-up-both-war-ukraine-and-his-confrontational-rhetoric

As tensions escalate again and the Minsk agreement fades into the distance, it must be hoped that the mounting economic costs to the Russian economy will ultimately persuade Putin to change course. With the threat of SWIFT sanctions in the air, these costs will continue to mount. Not wanting to ignite a broader conflict and regional war with Russia, the West has stepped cautiously with it’s response to Russia. With the humanitarian costs of such a war so obvious and striking, the West should stay the course on Russia and continue to exploit its economic power. Ironically, although Papayoanou notes that economic interdependence can weaken the West’s resolve in these matters, once the first stages of a conflict have begun, they can and should be utilised to exert maximum pressure on the Russian economy in the hope of avoiding larger scale conflict and all-out war.

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