Russia Is Worried About the Wrong Neighbor

By Edward Goldberg

Vladimir Putin is exhausting his country's fortune and reputation on Ukraine, fixated on the concept of Russia as a great world power. But Putin's view of power, as well as his view of the neighborhood he lives in, skirts the reality of the 21st century. Whether on account of poor leadership, or the curse of being blessed with extraordinary energy resources, modern Russia has for now lost the only power game that really counts in this day and age: the game of globalization.

China -- Russia's former student in autocracy -- is not only a winner in that game, but is now trying to master the difficult steps of reordering its economy to succeed in a new generation of globalization. Putin, on the other hand, doesn't seem to realize that a Westernized Ukraine is the least of Moscow's problems.

From the beginning of their experiments with capitalism, these two former ignoble giants of communist tyranny acted differently, with China being the more prudent. When the Soviet Union collapsed, Russia followed the "shock theory" in switching immediately from a communist economy to a mostly capitalist economy, a top down approach that led to economic anarchy. China under Deng Xiaoping followed a more judicious bottom up approach, experimenting with capitalist reforms in various zones before integrating a Chinese form of Capitalism throughout the country.

But more was going on than just a top-down or bottom-up approach. When Deng began his reforms, the world was just moving into its current form of globalization. Deng's reforms, whether by coincidence or understanding, caffeinated globalization with the introduction of millions of cheap Chinese factory workers.

Post-communist Russia did not add anything new or meaningful to the newly globalized world economy. Russia's exports basically continued as they were under the Soviets: raw materials, energy and commodity products that can be sold without an understanding of marketing or customer satisfaction. While energy generates huge cash flows, it also can be controlled by a few, and, more important, is generally free from a competitive push to change and improve.

Chinese leadership then demonstrated extraordinary global economic awareness when they agreed to the reforms necessary for China to join the WTO in 2001. These reforms enabled China to become a globalization super star, with an economy deeply integrated into the world's economy. Leadership took a huge risk. China had to relax over 7,000 tariffs, quotas and various other trade barriers. Within China's ruling circles at the time some feared that by reducing these tariffs foreign competition would decimate outdated state-owned enterprises (SOEs). That did indeed happen, but the risk was worth it. In the decade that followed China's GDP quadrupled, and its exports almost quintupled.

Russia, after 18 years of on and off talks, finally joined the WTO in 2012. The hesitancy represented the myopic Russian nationalist view that globalization threatens to replace existing Russian industries with new Western controlled enterprises. Globalization was seen not as a way to lift the Russian economy, as it did in China, but as a means for the West to invade Russia using economic weapons.

Of course, from the position of the Russian oligarchy, the only relevant export is energy. But the corollary to this argument was of course that Russia might not otherwise diversify its exports and be anything more then a commodity supplier unless its industry was allowed to compete in the world and learn from that competition.

China has one other advantage over Russia: capital controls. As Martin Wolf wrote in the Financial Times back in 2014: "China not only is a net creditor but also has exchange controls. Domestic creditors cannot take their money out of China. If they pull out of one part of the financial system, they will have to put it back into other domestic assets."

Whether out of hubris, or the demands of the Russian oligarchy, the ruble for all practical purposes is allowed to float within a dual currency basket of dollars and euros. Obviously the fact that the Yuan is not easily convertible has nothing to do with today's concepts of financial sanctions, but just imagine how much more secure Putin would now feel if he could repatriate all the funds that have left Russia in the last two months.

And finally, there is the issue of "territories that fall under their civilization," an issue that has little to do with globalization but has a lot to with how secure leadership is, as well as the nature of the culture they lead. China, in most cases since the mid 1970's, especially in its dealings with Taiwan and Hong Kong, understands that it has time on its hands. China realizes that even Taiwan -- which for decades directly challenged the legitimacy of the Beijing government -- is not its number one or even number two problem. Contrast this with today's events in Ukraine and Crimea.

Russia has been rightfully accused of following an old playbook in its dealings abroad, but that is only a symptom of Russia's present disease. Russia's biggest problem isn't its 19th century foreign policy, but its 19th century economy.

Edward Goldberg is an expert on globalization and how geo-economic/political events shape our lives. He is an Adjunct professor at Zicklin Graduate School of Business, Baruch College, City University of New York. In addition he is on the adjunct faculty of the New York University Center for Global Affairs.

(AP Photo)

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