by Adam Tooze
On the streets of Moscow the language was more inflammatory. In 2006 Nashi, the Russian nationalist movement, rallied its rent-a-mob following for street demonstrations against dollar hegemony. The lingering attachment of ordinary Russians to the greenback was not just a sign of psychological weakness. “Buying one hundred dollars,” its leaflets informed passersby, “you invest 2,660 rubles in the US economy. This money finances the war in Iraq, this money finances the construction of US nuclear submarines. Various estimates say that the US dollar is worth 15 percent to 20 percent of its face value. The secret of the dollar’s stability is the continued expansion of the dollar zone. . . . [T]his is a financial pyramid based on nothing but simpletons believing in the dollar.”35
In February 2007 President Putin made his first appearance at the prestigious Munich Security Conference. Attended by heads of government and ministers from around the world, the Munich conference is for security policy what Davos is for business and economics. The speech Putin delivered forced into the open the question of the power politics in an age of globalization.36 Looking back at the decades since the end of the cold war, Putin asked: What kind of world organization did the West want to see? It talked of rights and international law, but “today we are witnessing an almost uncontained hyper use of force—military force—in international relations, force that is plunging the world into an abyss of permanent conflicts. . . . One state and, of course, first and foremost the United States, has overstepped its national borders in every way. This is visible in the economic, political, cultural and educational policies it imposes on other nations. Well, who likes this? . . . [O]f course this is extremely dangerous. It results in the fact that no one feels safe. I want to emphasise this—no one feels safe! Because no one can feel that international law is like a stone wall that will protect them. Of course such a policy stimulates an arms race.” Once upon a time America had won an arms race against the Soviet Union on the back of its strong economy. In the new millennium, the United States still commanded huge stockpiles of nuclear weapons and missile systems. America’s military power was undeniable. But in light of contemporary economic developments, any claim to omnipotence was simply unrealistic. “[T]he international landscape is so varied and changes so quickly—changes in light of the dynamic development in a whole number of countries and regions. . . . The combined GDP measured in purchasing power parity of countries such as India and China is already greater than that of the United States. And a similar calculation with the GDP of the BRIC countries—Brazil, Russia, India and China—surpasses the cumulative GDP of the EU. And according to experts this gap will only increase in the future. . . . There is no reason to doubt that the economic potential of the new centres of global economic growth will inevitably be converted into political influence and will strengthen multipolarity.” Under such circumstances, for the West to imagine that a global order could be based on its own organizations—the EU and NATO—rather than the truly comprehensive authority of the UN was either self-deceiving or in profoundly bad faith. Nor could the West reasonably claim that NATO expansion into Eastern Europe had “any relation with the modernisation of the Alliance itself or with ensuring security in Europe,” unless it presumed Russian hostility. How, then, could Moscow not interpret such expansion as a “serious provocation”?
Energy was an object of contention between Europe and Russia, Putin admitted. But what was the answer? Prices, he proposed, should be “determined by the market instead of being the subject of political speculation, economic pressure or blackmail.” With global demand booming, Russia had nothing to fear from the judgment of the market. Its experts were gleefully predicting a future in which oil prices would hit $250 a barrel.37 Gazprom was surging up the global corporate rankings. Within a few years it was projected that it would overtake ExxonMobil as the world’s largest publicly traded company.38 Nor was it reasonable to suggest that Russia was not open for business. Certainly the Russian state had asserted its legitimate national interest, but “26 percent of the oil extraction in Russia is done by foreign capital. Try, try to find me a similar example where Russian business participates extensively in key economic sectors in Western countries. Such examples do not exist!” Russia submitted itself to the judgment of the credit-rating agencies and celebrated the improvement in its standing. It was hoping to gain full membership in the WTO. What Russia would not tolerate, however, and here Putin’s tone harshened, was the repurposing of organizations such as the Organization for Security and Cooperation in Europe (OSCE) “into a vulgar instrument designed to promote the foreign policy interests of one or a group of countries.” Moscow deeply resented the critical commentary on the rigged Russian elections of 2004. It would stand for no repeat of the Western-backed revolutions in Georgia and Ukraine in 2003–2004.39
As one of Russia’s leading commentators, Dmitri Trenin, noted, Putin was driving home the reality of multipolarity: “Until recently, Russia saw itself as a Pluto in the Western solar system, very far from the center but still fundamentally part of it. Now it has left that orbit entirely: Russia’s leaders have given up on becoming part of the West and have started creating their own Moscow-centered system.” Russia was establishing itself as a “major outside player that is neither an eternal foe nor an automatic friend.”40 The question of course was who Russia meant to include in its new “solar system.” In particular, what were the implications for the post-Soviet and East European states? What did it mean for a state like Latvia, with its newly redecorated foreign ministry and its ambitions to spread its model of market economics to other former Soviet republics? At Munich in February 2007 the response of the Czech foreign minister, Karel Schwarzenberg, was immediate. “We must thank President Putin,” he remarked facetiously, “who has not only shown concern about the publicity for this conference, but has clearly and convincingly demonstrated why NATO had to enlarge.”41 Schwarzenberg spoke in the past tense. But the real question was the future. In the face of Putin’s challenge, could the West be content with upholding the status quo in Eastern Europe, or would that imply a tacit acceptance of Putin’s line in the sand? Was the only way for the West to respond to Putin’s challenge to push for even further enlargement of the EU and NATO? The urgency on the part of the smaller ex-Communist states was obvious. Their vulnerability in both security policy and economic terms was only too evident. But how would the big players in the European and transatlantic system—Washington, Berlin and Paris—respond? The question would explode embarrassingly into the open at the NATO summit hosted in Bucharest on April 2–4, 2008.
V
The venue for the meeting was in itself symbolic. Romania, as an eager exponent of the new Europe, had joined NATO in 2004 and the EU in 2007. Romanian soldiers were doing policing duty in the former Yugoslavia, Angola and Iraq. Meanwhile, EU accession triggered a subsidy payment of 19.8 billion euros to Romania’s population of 21 million. It also enabled freedom of movement and a massive migration of Romanians to the West, notably to Italy, where the Romanian population topped 1 million in 2007, triggering local anti-immigrant resentment that the Prodi government struggled to contain.42 Meanwhile, at home, Romania’s GDP growth was running at 6 percent, projected to rise to 7 percent in 2008. The Romanians dubbed themselves the “Tigers of the East.”43 There was talk of Romania joining the rich country club of the eurozone as soon as 2012. In Bucharest, its newly renovated capital, the Europe Real Estate Yearbook reported a vacancy rate for prime office space of no more than 0.02 percent.44 As US subprime was imploding, international investors like ING Real Estate were snapping up Romanian assets to add to their East European property portfolios.45 As host of the NATO summit in April 2008, Bucharest was the perfect stage for the last major effort by George W. Bush to burnish his presidential legacy. And there was no issue more decisive for the future of Russian and Western relations than NATO membership for Georgia and Ukraine.
In February 2008 both Georgia and Ukraine formally applied to be put on
a NATO fast-track Membership Action Plan (MAP).46 After the Baltics they would be the fourth and fifth Soviet republics to join the Western alliance. Georgia, like the Baltics, was touchy but small. Ukraine was in a different league. With its population of 45 million, its substantial economy, its strategic location on the Black Sea and its historic significance for the Russian Empire, for Ukraine to join the Western coalition would be a terrible blow to Russia, precisely at a moment when Putin had announced his intention to stop the slide. Despite, or perhaps because of, its spectacularly provocative nature, President Bush immediately threw his authority behind the NATO membership bid. Welcoming Ukraine and Georgia into the MAP would send a signal throughout the region, the White House announced. It would make clear to Russia that “these two nations are, and will remain, sovereign and independent states.” It was a proposal that was bound to please the new Europe. Poland’s government was delighted. The fact that Berlin and Paris had reservations was not off-putting. Nor was Bush in any mood to spare their sensibilities. En route to Bucharest in early April, the American president paid a flying visit to Kiev, where he announced: “My stop here should be a clear signal to everybody that I mean what I say: It’s in our interest for Ukraine to join.”47 As one US official remarked, the outgoing president was laying “down a marker.”48
At the NATO meeting in the Romanian capital the fallout was predictable. Putin, who was attending the joint Russia-NATO session for the first time before handing over the Russian presidency to his associate Dmitry Medvedev, was in no mood to compromise. In February 2008 the West had rubbed salt in the wounds of Russian resentment by extending recognition to an independent Kosovo, overriding the claims of Serbia, which Russia regarded as its client. When, at the NATO meeting, the conversation turned to Ukraine and Georgia, Putin stalked out in protest. This left it to Berlin and Paris to fight the idea of the MAP to a standstill. In so doing they could count on the backing of Italy, Hungary and the Benelux countries against the East European and Scandinavian advocates of NATO expansion. The Americans looked on. As one senior Bush administration official commented to the New York Times: “The debate was mostly among Europeans. . . . It was quite split, but it was split in a good way.”49 Condoleezza Rice was less sanguine. The clashes she witnessed between the Germans and the Poles were disturbing. The arguments in Bucharest were, in her words, “one of the most pointed and contentious debates with our allies that I’d ever experienced. In fact, it was the most heated that I saw in my entire time as secretary.”50 No formal process of membership application was initiated. But Merkel conceded that the summit should issue a statement endorsing the aspirations of Georgia and Ukraine and boldly declaring, “These countries will become members of NATO.”51 It was a fudge, and a disastrous one at that. It invited the Russians to ensure that Georgia and Ukraine were never in a fit state to take the next step toward NATO accession. It invited Georgia, Ukraine and their sponsors to force the pace. Ambiguity was a formula for escalation. And both sides responded accordingly.
In May, at the urging of Poland, the EU adopted the idea of an Eastern Partnership for Ukraine as one of the key elements of the new EU foreign policy to be developed under the terms of the Lisbon Treaty.52 Despite the opposition they had voiced at Bucharest, there was no counter steer from Berlin or Paris. The EU and NATO stayed locked in step. Meanwhile, Russo-American relations took a sharp turn for the worse. Though he liked to present himself as a modernizer, Putin’s successor as president, Medvedev, continued to steer a hard line. As the financial markets in the United States convulsed in the summer of 2008, dark rumors circulated that Moscow was about to move from verbal attacks on dollar hegemony to concerted action. US Treasury Secretary Paulson had not named his sources, but in the run-up to the Olympics, his Chinese contacts informed him that they “had received a message from the Russians which was, ‘Hey let’s join together and sell Fannie and Freddie securities on the market.’”53 The fragility of America’s mortgage market was about to be turned into a geopolitical weapon. China, which was celebrating its global coming-out party as the host of the Olympic Games, had too much at stake in the US economy to take this suggestion seriously. But over the course of 2008, Russia did unload its portfolio of $100 billion of Fannie Mae and Freddie Mac bonds. As Reuters reported it, the decision was motivated primarily by domestic political concerns.54 “The holdings have met hostility from some Russian media and the public, who are wary of risky investments.” By the summer of 2008, one didn’t need to be a Russian nationalist to view American mortgage securities as a bad investment. The GSE were at the heart of the mortgage crisis and were on the point of spectacular failure. Patriotic Russians saw no reason why they should be propping up the United States, which so openly flouted Russia’s national interests. Looking back, Treasury Secretary Paulson ruefully admitted: “[I]t just drove home to me how vulnerable I felt.”55
Whereas China refused to participate in a move that would upset the international order, America’s friends in Tbilisi were less cautious. In early August 2008, with Russian encouragement, irregular forces in the rebel province of South Ossetia began shelling positions of the Georgian army.56 On August 7, apparently believing that they had Washington’s approval, the Georgian government took the bait. A sudden counterstrike by Georgia’s American-trained army would subdue Ossetia and Abkhazia, settle the outstanding territorial questions and clear the way for a successful NATO membership application. As the awe-inspiring opening ceremony of the Beijing Olympics exploded across Western TV screens, Georgia launched its army and air force into an invasion of South Ossetia. Moscow’s response was devastating. In a matter of days the Russian army crushed Georgia’s undersized forces, inflicting hundreds of casualties. According to Georgian sources, 230,000 civilians were put to flight. After a rapid advance, Russian tanks halted on the Gori-Tbilisi highway, an hour’s drive from the capital.
While President Medvedev announced to his Security Council that August 8, 2008, marked a turning point in the international order and that henceforth the world would have to reckon with Russian power, in the West the reaction was opprobrium.57 The presidents of Poland, Ukraine and the Baltics flew into Georgia to express their solidarity. Estonia demanded sanctions against Russia, including the expulsion of Russian students studying at Western universities and travel bans on oligarchs.58 Poland called for urgent action to break Gazprom’s grip on Europe’s energy supplies. And Warsaw moved hastily to sign an agreement allowing the deployment of the US missile shield to Poland. But the response was not so unambiguous everywhere. On August 12, 2008, while the United States was preoccupied with Wall Street and the presidential election, President Sarkozy shuttled from Paris to Moscow in the hope of patching up a cease-fire. Though Chancellor Merkel now came out in favor of admitting Georgia to NATO, on September 1 at a special EU summit, any drastic anti-Russian moves were blocked by a united front of France, Germany and Italy. Russia was given three months to withdraw its forces. But Moscow had made its point. In conversation with Western experts as part of the Valdai Discussion Club in Sochi on September 11, Putin remarked that any effort to push Ukraine toward NATO membership would result in severe countermeasures.59 Meanwhile, $25 billion in foreign capital fled Russia. But that was no cause for panic. This was not 1998. Moscow had ample reserves to deal with such a minor market mood swing. It was America, not Russia, whose financial system looked to be imploding.
VI
Splits within the transatlantic alliance were not new. The disagreements among Berlin and Paris and the Bush administration over the Iraq War in 2002–2003 had been headline grabbing. But Russia and post-Soviet Europe were far closer to home, far more fundamental to the future of Europe and far more directly linked to the advance of financial and political integration over the previous decades. When added to the incomplete project of the eurozone and the missing political frame for the North Atlantic financial system, the unresolved geopolitics of Europe’s “Eastern Question” completed a trifecta o
f unanswered political questions that hung over Western power in the summer of 2008.
This was the backdrop of the sixty-third meeting of the UN General Assembly assembled in New York in September 2008. Heedless of the precariously balanced state of the global economy, for the first time since the end of the cold war, Russia and the Western powers had engaged in a proxy war. Russia had announced that it would resist any further extension of Western influence and it had made good on that threat. For its part, the West was disunited. For all the saber rattling in Warsaw and Washington, there was neither the political will nor the resources to back up further eastward expansion. It was against this backdrop that President Sarkozy declared to the UN General Assembly: “Europe does not want war. It does not want a war of civilizations. It does not want a war of religion. It does not want a cold war. . . . The world is no longer a unipolar world with one super-Power, nor is it a bipolar world with the East and the West. It’s a multipolar world now.”60 He was, in effect, conceding the point Putin had made eighteen months earlier in Munich. Even if there had been the capacity or the will to further escalate the geopolitical clash, by the fall of 2008 the giant wave of capital that had carried Western political influence deep into Eastern Europe was receding fast. A generation of globalization under the sign of Western power and money had reached its limit. For the immediate future, the sheer shock of the financial crisis would tend to dampen geopolitical tensions. But the damage done by the escalation of 2007–2008 would prove to be long lasting.
Part II
THE GLOBAL CRISIS