U.S. Secretary of State John Kerry speaks with New York Times columnist Tom Friedman before the two have a conversation on January 17, 2017, at the World Economic Forum in Davos, Switzerland. [State Department photo/ Public Domain]
In her co-authored 2018 book Political Risk, former U.S. Secretary of State Condoleezza Rice tells the story of an hourlong negotiation with Russian President Vladimir Putin. For what were clearly protectionist reasons, Russia had banned U.S. pork products. To justify the ban, Putin claimed American pork posed an unacceptable risk of the parasitic disease trichinosis because Russians tended to cook their pork less. “You wouldn’t believe it,” Rice recalled. “We spent an hour, an entire hour, on pork. … And we had this long discussion of cooking habits in Russia compared to Alabama, where I’m from.”
In the three decades since the end of the Cold War, the world was mostly stable enough to allow leaders to concentrate on pursuing and preserving economic opportunities—not only for pork producers but for all kinds of companies, small and large. The U.S.-Japan trade disputes of the early 1990s, which were mostly about Japan’s reluctance to buy more U.S.-made cars, beef, rice, and semiconductors, were a top priority for U.S. President Bill Clinton. So was the conclusion of the North American Free Trade Agreement with Mexico and Canada, which was driven largely by corporations seeking lower wage costs. For decades, Berlin encouraged German companies to look the other way at Russia’s increasingly aggressive actions in Chechnya, Georgia, Ukraine, and elsewhere; Germany is now Russia’s largest trading partner after China. World leaders made the annual trek to Davos, Switzerland, for the World Economic Forum to discuss the future of a global economy that was highly integrated and seemed to be getting more so each year. Efficiency and seamless trade were top of mind for the world’s government and corporate decision-makers.
Russia’s brutal invasion of Ukraine five weeks ago, and the punishing Western economic sanctions that have followed, did not on its own smash this complacency. The U.S.-China trade war launched by former U.S. President Donald Trump had already caused some companies to rediscover geopolitical risk and reconsider their exposure in China. The business lockdowns and travel restrictions triggered by the COVID-19 pandemic left companies around the world scrambling to find reliable suppliers. Right now, more disruptions of the global economy look likely as Shanghai and other parts of China lock down yet again to control the virus.
But the losses triggered by the war in Ukraine—and the speed at which they’ve been incurred—are unprecedented. The British energy giant BP, the biggest foreign investor in Russia, is taking a $25 billion write-down and losing a third of its oil and gas production after divesting its share in the Russian oil company Rosneft. European aircraft leasing companies could lose up to $5 billion worth of aircraft trapped in Russia by sanctions. The French automaker Renault has lost 30 percent of its market value as it unwinds its Russia-based production. Nearly 400 large foreign companies have pulled out of Russia entirely or suspended their operations, compared with fewer than 40 continuing business as usual.
The result is shaping up to be a great risk recalculation. After decades in which issues such as pork protectionism could be deemed a problem serious enough to engage a U.S. secretary of state, the possibility of truly catastrophic economic losses suddenly looms large. Were China, for example, to attempt an invasion of Taiwan, the costs would dwarf those faced by companies over Russia’s war in Ukraine. Investors are paying attention. Already, foreign owners of Chinese stocks and bonds are fleeing the market; the Institute of International Finance (IIF) has described this divestment as “unprecedented” in scale and intensity, far exceeding outflows from other emerging markets. While the institute’s chief economist, Robin Brooks, cautioned that it was too soon to draw definitive conclusions, he and others wrote in a recent IIF report that “the timing of outflows—which built after Russia’s invasion of Ukraine—suggests foreign investors may be looking at China in a new light.”
