Different as these instruments may be, it is worth examining them jointly and severally. Each carries its own leading cast of countries and institutions, its own levers of state control and determinants of success, and its own set of externalities and implications for U.S. national interests.
Trade Policy
Trade as a geoeconomic tool has traditionally been utilized through positive inducement. Consider, for example, the Qualifying Industrial Zones (QIZs) in Jordan and Egypt. Created in association with the Camp David peace accord, an iconic example of American geopolitical accomplishment, the QIZs were designed to lure Jordan—unsuccessfully, as it turned out—into publicly supporting the Camp David agreement and subsequent peace process.2
But trade as a geoeconomic tool can just as easily assume a more coercive form. Take a closer look, for example, at some of Russia’s most notable trade measures since it joined the World Trade Organization (WTO) in 2012. As the Economist put it, “Product bans are a tried and tested form of political pressure in Russia.”3 In the recent past, Georgian wines, Ukrainian chocolates, Tajik nuts, Lithuanian and even American dairy products, and McDonald’s have all fallen afoul of sudden injunctions.
In the years before the 2008 Georgian war, Russia’s chief sanitary inspector closed the Russian market to all Georgian agricultural products, including imported Georgian wines and mineral water.4 The trade blockade only worsened when Moscow halted air, sea, road, and rail transport to Tbilisi, along with postal communication.5 Russia’s wine embargo was only lifted in the summer of 2013, a step that paved the way for a meeting in Prague between the two countries. Georgia’s president, Giorgi Margvelashvili, has expressed his country’s wish to pursue closer ties with Europe.6 But it is unlikely that the country will manage to orient too far westward so long as Moscow remains unilaterally capable of cutting off trade and crippling the Georgian economy.
Russia has since visited similar tactics on Moldova and Ukraine in an effort to coerce both countries away from signing association agreements with the European Union.7 In July 2012, Russia stopped imports from Ukraine’s main confectionary producer—due to the alleged presence of carcinogens in its products—and intensified customs checks on Ukrainian goods at the border, which reportedly led to some $500 million in losses for Ukraine.8 Throughout the spring and summer of 2014, the Russian government closed the border to most trucks coming from Ukraine, forcing some Ukrainian factories in Russia to shut down. And, as was expected, it increased the price of natural gas in an attempt to curb pro-Western enthusiasm as Kiev eyeballed the EU.9 Moreover, Russian officials have publicly stressed that signing the EU pacts would debar Ukraine from further integration with the Eurasian Customs Union and lead Russia to increase trade restrictions.10
In addition to targeting Ukraine with aggressive geoeconomic actions, the conflict has also led Russia to throw around its economic weight with EU countries that do not sympathize with its narrative of the Ukrainian issue. A year after Russia’s August 2014 ban on EU dairy products, European producers are seeing a 25 percent reduction in dairy prices resulting from the decrease in demand for their products.11 In a similar vein, the Dutch investigation into the downing of Malaysia Airlines Flight 17 over Ukraine found Russia at least partially culpable. Moscow retaliated by destroying huge quantities of Dutch flowers and cheese at the behest of the Kremlin in August 2015. The Russian government made little attempt to conceal the political motivations behind its economic reprimand. “The tit for tat has been so obvious,” explains Andrew Kramer, a Moscow-based correspondent for the New York Times, “that even pro-Kremlin commentators have dropped the pretense, saying the flower burning is intended as a warning to the Netherlands over risks to trade if the investigation proceeds unfavorably for Russia.”12
While dealing a significant blow to the Ukrainian economy, Moscow’s geoeconomic moves served, first, to remind Ukraine—and others in the region—of the consequences of decreasing ties to Russia in favor of the European Union; second, to reinforce Russia’s role as an economic regional hegemon; and third, to prevent the continued expansion of the North Atlantic Treaty Organization to Russia’s borders.13 Facing Russian threats on countless levels, Ukraine halted its plans to sign deals with the EU at the November 2013 Eastern Partnership summit in Vilnius.14
The U-turn, the Yanukovych government said, was for the “benefit of Ukraine’s national security.”15 Greeted overwhelmingly by Ukrainian popular opinion as a “disappointment … for the EU and the people of Ukraine,” the decision came as a clear if temporary victory for President Putin.16 The lesson Moscow learned was that skillful economic maneuvering can produce substantial geopolitical returns. And even where those returns fall short of their desired aim—the reintegration of Ukraine into President Putin’s revamped Russian sphere of influence—the consequences can be destabilizing and costly for the United States, for Europe, and for the world.
There are reasons to think that Moscow will find the task of coercion easier elsewhere in the region than with Ukraine; Kiev may still exercise the option of warming ties with the EU (Ukranian president Poroshenko told his country that it should prepare to join the EU by 2020).17 The president of Kyrgyzstan, widely seen to be next on President Putin’s list of potential members for the Eurasian economic partnership, expressed his predicament clearly in December 2013: “Ukraine has a choice, but unfortunately we don’t have much of an alternative.”18
Russia’s 2013 ban on Moldovan wine marked the second time Moscow has clamped down on Moldovan vineyards, doing little to hide the fact that the bans are cudgels meant to dissuade Moldova from signing EU agreements.19 In the run-up to the 2013 Vilnius summit, the Kremlin also made threatening noises about cutting off Moldova’s gas supply and subjected Moldovans working in Russia to extra checks on their legal status.20
Moscow’s tactics ultimately did not work on Moldova either; Moldova did sign important agreements to deepen its ties with the EU at the Vilnius summit in 2013. But notwithstanding Moldova’s immediate decision at Vilnius, the big question is whether Ukraine, its giant neighbor, stays the course on its own ambitions to integrate with the EU. If not, Moldovans admit that it will be difficult to resist Russian pressure to abandon their country’s path to European integration. Though pro-Western political parties won 55 out of 101 parliamentary seats in Moldova’s November 2014 election, they lost the popular vote.21 Even as the country remains divided on European integration, Moldovan prime minister Iurie Leanca has made it clear that “we do not want to be a Ukrainian hostage.”22
That Russia would so brazenly resort to coercive trade measures, so close on the heels of its own 2012 accession to the WTO, bespeaks a certain exaggeration by the West of the power of its institutions; at the very least it reflects an underestimation of the growing presence and effectiveness of geoeconomic pressure, even in the face of Western alternatives and institutional constraints. “Hard power trumped soft power at the Vilnius Summit,” as one commentator quipped, referring to the way in which Moscow’s aggressive tactics proved the limits of the EU’s gravitational pull.23 The Eastern Partnership reflects a general allergy in Brussels to issues of hard security and geopolitics and a preference for economic integration as an instrument for enhancing stability and peace.24 During the chaotic months that followed the Vilnius summit, there was a pervasive sense that the Eastern Partnership, a key program of the EU, had lost out in the contest of “geopolitics versus economic modernization.”25 On the one hand, this interpretation misunderstands that the episode was really a struggle between two forms of geoeconomics—the magnetic power of the EU and the coercive pull of Moscow. The fact that the EU’s brand of pallid geoeconomics could be lost on so many, however, and could be widely seen as stripped of any geopolitical dimension offers a revealing indictment of the EU’s current geoeconomic performance, at least with respect to its Eastern neighbors.
Returning to a question posed in Chapter 1—how might the rise of geoeconomics alter the way states exercise mil
itary power?—the way Russia and the EU handle the EU’s Eastern Partnership going forward may offer one important data point.
Investment Policy
Forty years ago, 90 percent of all cross-border flows were trade-based; in 2014, 90 percent were financial.26 A large part of the current flows comes as some form of investment—whether shorter-term, more liquid “portfolio” investment or longer-term “direct” investment. From a geoeconomic perspective, then, investment matters more than in previous eras because there is simply a great deal more of it passing between states today, in both relative and absolute terms.
Beyond issues of scale, the patterns of investment—the “capitals of capital,” so to speak—are different. Twenty years ago, the United States enjoyed a dominant position (what some have called “uniquely dominant”) in terms of where capital originated, how it was intermediated, and where it ended up.27 But this dominance has eroded on all three scores. According to the Global Financial Centres Index, Middle East financial centers, with Qatar leading, continue to rise; Tokyo, Seoul, and Shenzhen are doing significantly better than neighboring Asian finance hubs.28 Gross capital transfers to emerging markets have quintupled since the early 2000s, according to the IMF, with portfolio flows becoming a more important, and volatile, part of the mix.29 South-South flows of capital are also rising sharply, with approximately $1.9 trillion in foreign investments between emerging economies.30
In addition, compared to the past, states directly own or control a far greater share of this cross-border investment. Obviously for commodity-producing states such as Russia, Brazil, and many Gulf countries, these assets have long represented sources of revenue and power too attractive to leave in private hands. But it is only with sharp rises in commodity prices over the last decade that these resource flows have generated the sort of profit margins—and swelling state coffers—seen today.
The concentration of outbound foreign direct investment, in particular, into state hands now extends well beyond the energy sector. State-owned companies and state-owned investment vehicles of all kinds are venturing abroad, in some cases as a result of coordinated, state-financed campaigns.31 And it is not just the suppliers but now too the consumers of these flows that are state-owned. One clear example is China’s increasing appetite for energy supplies. The vast majority of China’s energy deals are with other governments. The result is a growing set of transactions that involve sovereign counterparties on both sides, such as the Gazprom-China National Petroleum Corporation $400 billion deal or the 2013 Rosneft-Sinopec oil deal.32 It would be difficult to imagine that geopolitics would not enter into these agreements.
Finally, along with new sums, new players, and new investment patterns, today’s investment tools are also relatively novel—in kind, by order of magnitude, or both. As of mid-2015, foreign exchange reserve levels exceeded $11 trillion globally, up from $2 trillion fifteen years ago.33 Emerging nations in particular have increased their reserves from just over $700 billion in 2000 to $7.5 trillion in 2015. Levels like these—many times beyond what is needed to provide import cover—mean that the states sitting atop these reserve stockpiles enjoy greater flexibility to invest them in a broader range of asset classes.34 If China maintains $4 trillion in reserves and roughly $125 billion in monthly imports, for instance, these stockpiles yield over two years of import cushion for Beijing. (For those who argue that these stockpiles are less about import cushion than insurance against fickle capital markets—in effect, learning the lessons of the 1997–1998 Asian financial crisis—it is worth remembering that Chinese swap lines amounted to $30 billion during that crisis, far less than what China is currently holding.)35 With such investment flexibility comes greater diplomatic sway and, at least for certain types of asset classes, the possibility of geopolitical leverage during crises.
Twenty years ago, state-owned enterprises (SOEs) were little more than domestic employment vehicles. Ten years ago, there was widespread skepticism about whether these firms, saddled with bad debt and inexperienced leadership, could succeed beyond their home markets. Today they include some of the world’s biggest companies, backed by some of the globe’s largest pools of capital, and can claim over half of the world’s top ten IPOs over the last six years. Bearing little resemblance to yesterday’s SOEs, today’s state-backed companies supply a growing share of outbound FDI globally (over a third of all outbound FDI from emerging markets) as well as the majority of listings on some of the world’s leading stock markets.36 That is not to say that today’s SOEs do not come with problems of their own—most are notoriously less efficient than their private counterparts.37 But economic efficiency is not the point. What matters is that SOEs are far more politically pliant than most private firms.38
Likewise, global sovereign wealth funds (SWFs) have ballooned rapidly. By the time the term sovereign wealth fund was coined in 2005, these funds had already begun to challenge dominant Western private capital flows. Estimates from mid-2013 state that SWFs hold between $3 trillion and $5.9 trillion of assets under management (estimates vary depending on whether calculations include domestic invested funds as well as foreign invested funds, and on whether certain reserve asset management entities are included).39 By way of comparison, the total value of all hedge fund assets under management globally reached a record $2.4 trillion as of mid-2013.40 There are roughly thirty-seven SWFs with holdings that exceed $1 billion.41 As a class, SWFs remain highly concentrated—the top ten SWFs account for roughly 85 percent of total SWF assets, or $3.5 trillion. As noted earlier, Norway is the only democracy represented among these ten.42
Added to these sources of direct financing for states are large state-owned banks. China’s biggest four banks have a combined balance sheet of over $9 trillion, as well as “an ongoing responsibility to balance commercial decisions with the government’s broader economic and social objectives,” as a recent Standard & Poor’s assessment put it, “[where] the government maintains heavy influence over banks’ decision-making through its major shareholder status.”43
In taking the strategic measure of these various instruments of state wealth, SWFs offer a good benchmark, since they are often described as the most professionally managed and least worrisome form of state wealth from a geopolitical perspective.44 That is not to say that concerns do not exist. Much of what has been written on SWFs in the past decade speaks of market participants and governments alike harboring mounting anxiety.45 Nor are these worries necessarily hypothetical, as Russia proved by channeling fully one-sixth of its SWF—which, up until that point, was avowedly apolitical—into the December 2013 bailout package Moscow offered to Kiev as part of its bid to keep Ukraine tethered to Russia.
Even beyond the Russia-Ukraine case, there is research suggesting geopolitical motivations influencing SWF investment patterns. Studies have found political relations between the SWF’s country of origin and the country of its target investment to be a factor in SWF investment, with geopolitical motives able to explain variance in SWF investment patterns in some cases.46 The irreducibly sovereign nature of SWFs, some argue, endows them with unique geopolitical levers—many of which need not be exercised to achieve their desired effects. SWFs are part of what Georgetown University law professor Anna Gelpern describes as “a new generation in state commerce where diverse economic, political, and legal systems come in continuous, intimate contact.”47 The legal and regulatory systems of most Western countries poorly anticipated this new generation of investment, and as Gelpern explains, the task of retrofitting long-standing goals of openness to accommodate SWFs may not be easy:
SWFs are public and private at the same time; as such, they do not fit into neat legal and regulatory boxes. Even when they act commercially, SWFs are sovereign—profit will drive them, until it does not. States may not respond to regulatory incentives as private actors do; yet they are often subject to the same laws. SWFs have separate information and communication channels to regulators, raising the possibility of both insider trading and reg
ulatory capture. Their decision-making may be insulated from politics and markets alike, or exposed to both. More daunting yet, each state is different: Brazil, China, Norway, Qatar, and the United States mix public and private in different ways. When their hybrids go global, they expose distinct tensions in the law and structure of global finance.48
In terms of what sort of clout such investment buys, at times there are fairly explicit geopolitical conditions. Norway banned its $810 billion sovereign wealth fund—the biggest in the world—from investing in Israeli firms with ties to settlements in the disputed West Bank territories.49 Prior to his ouster, Libyan leader Muammar Qaddafi offered to use funds from Libya’s SWF to dampen the impact of the Greek debt crisis and to help rid African countries of Western influence.50 China’s leading asset manager has openly predicated investment on disavowal of Taiwan, most notably succeeding in persuading Costa Rica into severing relations with Taiwan through the purchase of $300 million in bonds.51 Chinese FDI in Africa likewise comes only on recognition of Beijing’s one-China policy.52 It has proven effective. Within five years of China’s first investments in Africa, the number of African states to recognize Taiwan fell from thirteen (roughly half of all states to recognize Taipei globally) to only four.53
Apart from whatever terms might characterize a deal initially, these sovereign investments may yield influence in the breach. Consider voting patterns within the African Union regarding support for coalition air strikes against Qaddafi and how well they map to investments by the Libyan Investment Authority across the continent.54 As the Libya case suggests, there is also a risk that geopolitically motivated investments gone awry can backfire, creating a separate, if equally real, set of foreign policy challenges. Prior to his ouster, many Libyans thought Qaddafi was wasting Libyan money on Africa, which in turn fueled what at least one analyst called “very strong anti-African sentiments in rebel-held areas.”55
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