Capitalisn’t: Ukraine—A Restart of History

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: This week, we had a different episode in mind. But, of course, our attention, as everybody’s attention, is on the war in Ukraine.

Speaker 7: Outgunned and outmanned, but Ukrainian forces are still putting up a valiant fight for their sovereign nation as Russian troops attack from land, sea, and air.

Speaker 8: The US and allies have assembled the most extreme set of financial sanctions ever put on a G20 country. But the question is, will those sanctions work?

Speaker 9: As nations increase economic pressure on Russia, President Biden has warned that some of those moves could also end up hurting US consumers, especially at the gas pump.

Luigi: We thought that we should acknowledge that neither Bethany nor I are military experts, unless, Bethany, I missed some part of your CV.

Bethany: I read something just this morning and it was about how all the epidemiologists—the fake epidemiologists—on Twitter, are now pivoting to becoming experts on Ukraine. And, definitely, I was not a good fake epidemiologist. I don’t think I ever pretended to be one.

I agree with Luigi. I think this changes the world. And I think it’s important to talk about it, but with the large caveat that I am definitely not an expert.

Luigi: Neither of us is a military expert. However, in my view, this event is one of those events that really changes the course of history and will have dramatic implications from an economic and even from a political point of view.

So, I would like to title this episode “The Restart of History,” because after the fall of the Berlin Wall, political scientist Francis Fukuyama famously proclaimed the end of history. And, to be fair, he meant the end of history as an evolution of ideology in a particular direction, because, in a sense, this was a triumph of liberal democracy, capitalism, liberal, democracy that was prevailing in the West and became prevalent in the vast majority of the world.

But also, in my view, it’s the beginning of a period, roughly of 30 years, that I would like to call Pax Americana, because it is a period when the United States of America was the only superpower who played the role of hegemon, supervisor, but also enforcer of some international rule of law.

On the eve of the Russian invasion of Ukraine, I think that history seems to have restarted. In my view, the tension, of course, is not between capitalism and socialism anymore, as it was for the better part of the 20th century, but it is a tension between liberal capitalism and autocratic capitalism. It’s a tension between globalism and nativism. It’s a question between a state that is subordinated to economic interests and economic interests subordinated to the state. And I think that this really restarts this debate in a major way.

Bethany: I think you’re exactly right. And I love that phrase, a state subordinated to economic interests versus economic interests subordinated to the state. I think we also all believe . . . not only the end of history, I think it was Arthur C. Clarke, who first said it, although I’m not sure, who first raised the question, the extent to which economic ties would preclude war. Not only economic interests ruling over the state, but economic interests basically ruling the world, in the sense that the entire world was subjugated to economic forces, because economic forces would prevent anybody from going to war, since it wasn’t in anyone’s interest, economically speaking.

And I think Ukraine challenges that assumption as well, or at least it raises a question about it. It will be interesting to see what happens as the sanctions play out.

Speaker 10: As the crisis escalates, pressure is mounting on Vladimir Putin. New Western sanctions are isolating Russia even further and devastating the Russian economy, but that’s also fueling concerns that Putin could become more erratic.

Luigi: Sanctions are very good to threaten, but they’re never very good to implement. They’re very costly to implement and they might lead to radicalization. Everybody talks about the analogy between Hitler’s threatened invasion and then invasion of Czechoslovakia, and what Putin has done in Ukraine. But I would like to make another analogy, not particularly positive, either. But Mussolini invaded Ethiopia in 1936.

The king of Ethiopia chose not to fight and to appeal to the League of Nations, which at the time had just started. And the League of Nations started to have sanctions against Mussolini. However, like many sanctions, the sanctions were not total. There were two things that were really important. One was the right to go through the Suez Canal. Because if you know a little bit of geography, supplying Ethiopia from Italy through the Suez Canal is a piece of cake. Going around Africa takes forever.

So, if you want to really cripple the Italian army in Ethiopia, the first thing you do is you block the Suez Canal. They didn’t. The second thing is oil. Italy does not have oil. You need oil to fight any war, but particularly back in those days. Oil was not embargoed. But the threat—this is an important point for today—the threat of these two events happening had the consequence of putting a lot of pressure on Mussolini to finish the war fast.

And so, what Mussolini did, which was awful, was that he was the first one to violate the Geneva Conventions on the use of gas, and he used gas against the Ethiopians. It was a massacre. And, two, Mussolini used the propaganda of fighting in his nation to become extremely popular inside the country. And then, three, Mussolini ironically did not have that good of relations with Hitler. But after the sanctions, Mussolini found a huge supporter in Hitler. And so, the alliance between Hitler and Mussolini really started after those sanctions.

Now, why do I go through this piece of history that is probably only known to Italians? I think it’s very instructive of the fact that, no matter how well-intentioned sanctions are—and in that case, they were absolutely well-intentioned—you have to be careful about their consequences, because you are dealing with people who have some agency and can do crazy stuff. They might become more brutal in order to finish the war fast, or for fear of what the new sanctions will be. And you can push them to radicalize, as was definitely the case with Mussolini.

Bethany: That raises really interesting questions, along the lines of history rhymes but doesn’t repeat, whether it’s Putin’s not-so-veiled threats of nuclear weapons. I want to believe, although I could be wrong on this, that the interconnectedness of the global banking system and the exclusion of Russia from SWIFT is actually a very, very powerful weapon, and changes the game with sanctions. But I might be wrong about that. What do you think?

Luigi: First of all, I think we need to explain to our listeners what SWIFT is, because I think most people had never heard of it until a few days ago. And now it’s become like common parlance. It’s a bit like R-naught in epidemiology.

Bethany: That’s exactly what I was thinking.

Speaker 11: The latest sanctions targeted disconnection from the SWIFT banking system announced by the EU, US, and UK leaders. But what is SWIFT? SWIFT stands for the Society of Worldwide Interbank Financial Telecommunication, and simply put, it is a messaging service that financial institutions use to transact or speak to each other.

Luigi: SWIFT is a system to exchange messages that allow the transfer of money. The international monetary payment system is based on this protocol, which of course must be very secure, because you don’t want to have people abusing it. It authorizes the transfer of money from one correspondent bank to another correspondent bank. SWIFT, ironically, does not send money but sends messages. However, without those messages, you cannot authorize the movement of money.

If you read the fine print—and in sanctions, it’s very important to read the fine print—the Russians were not completely excluded from SWIFT. A number of Russian banks were excluded from SWIFT, but some others are still operating. And you say, “Why is that the case?” I can see your face, Bethany, saying, “What the F?” And the answer is because, like in the Italian episode, energy has not been blocked.

Speaker 12: A column in yesterday’s Wall Street Journal suggests that sanctions against Russia and President Vladimir Putin will not really hurt until they include energy. Oil and gas. And that they should not be ruled out.

Luigi: We, and particularly the Europeans, are buying a lot of energy from Russia. And we pay Russia, I heard—I don’t know firsthand, but I heard—something like $800 million a day for gas. Now, the interesting question is, what happens if you stop paying that? Actually, if you stop paying, they probably stop sending it. But if they stop sending it, what happens to Europe? And the good news is, we’re in March, and so it’s warmer. And so, we probably make it to summer. OK. However, next winter, either the houses are not going to be warm, or the factories are not going to be working at full speed, or a bit of both.

So, Europe. . . and when I say Europe, I say, number one, Germany, and second, Italy. But number one, Germany made itself extremely dependent on Russian gas, more than oil, in a way that is not easy to substitute. So, when you are talking about the double dependency, that’s exactly it.

Bethany: That’s fascinating. I’m skiing in Telluride, and I randomly had lunch with a group of Texans the other day, many of whom are in the oil-and-gas business. And we were talking about this, because one of the whole promises of US fracking was that it would free Europe from its dependence on Russian natural gas. That was the idea. The idea was that we were going to build these terminals that convert natural gas into LNG and then convert it back into gas again.

And despite the fact that natural gas in the US . . . thanks to fracking, actually, we produce natural gas at one of the cheapest costs of any place in the world. I think the only place that’s cheaper is Qatar. But nonetheless, once you built in the enormous cost of these facilities, it became so much more expensive than Russian natural gas that it simply didn’t happen.

It remained this promise floating out there that Europe could be freed from its dependence on Russian natural gas. Anyway, what the Texans said to me—and I’m not a hundred percent sure this is true, I have not researched it, but there’s some evidence that it might be true—is that now, with the price of Russian natural gas having soared, even with the cost of having to convert our natural gas produced here, that it is actually economical now for Europe to import fracked gas from the US.

That raises a whole bunch of questions, too, about the future of fracking here. Many of us, me included, have thought that fracking wasn’t economical, particularly fracking for oil isn’t economical. But there’s always been a different argument that fracking for natural gas actually could make money if the price of natural gas only went up a little bit. But you can see this potentially being a huge renaissance in US fracking for natural gas, which will not delight those who think we need to be transitioning away from fossil fuels, and given the destruction that fracking wreaks on the environment, probably not a good thing in some ways, but an interesting economic change.

Luigi: Let me first discuss another piece. What I was the most surprised by was not the SWIFT thing, but the freezing of the assets of the Russian central bank.

Speaker 13: It’s a move with a goal of essentially trying to limit Russia’s access to any transactions worldwide, to take direct aim at depleting any rainy-day reserves that Russia has been building up for the last eight years.

Luigi: As most of our listeners know, central banks, especially central banks of developing countries that need to somehow be able to support their currency in moments of crisis, tend to hold reserves of foreign currency, precisely to intervene in moments like this. When your currency depreciates 50 percent overnight, you might have a lot of disruption at home, and so you want to try to at least reduce that disruption by softening up the change. How do you do it? By buying your currency and paying with foreign currency.

If you are the Russian central bank, you’re going to buy rubles, offering either dollars or euros or other currencies that people want to receive on the market. Now, how do you do that? You have reserves of this currency in various places. So, the Russia central bank used to own a lot of reserves, mostly in Western countries. Now, Putin has prepared for this invasion for eight years, because he tried with Crimea first, so he knew that this was coming.

The Russian central bank has diversified quite a bit. It used to be that the biggest chunk was in the United States, and then France and then Germany, and so on and so forth. Now, the biggest chunk is in gold in Russia. Then, the second biggest chunk is in China. And then, of course, there are some chunks in France, there are some chunks in Germany, also in the United States. So, those chunks will be frozen. But it’s pretty clear this will have very important long-term consequences in that Russia will become more and more attached to China, and more and more detached from the rest of the Western world. That is one of the consequences of the sanctions.

But whether it is the threat point or the actual amount, theater is important in the sense that there is a war fought in the field. And there is a war fought in the souls and minds of people. Churchill during World War II, after having lost every other possible tool, he mobilized the English language to the defense of Britain. And sanctions do play in that game by being vague.

One of the things I learned is that the reason why we don’t know the exact details is not because we’re not well-informed. It’s because they are by design kind of ambiguous. Why? Because, number one, if I am a company, I don’t want to even come close to ambiguity in this moment, so I create a lot of distance. And, two, because in a sense, I want to create panic. The lines that we saw in the pictures in Moscow, because there were fears of bank runs. They might be a feature, not a bug. It might be that the Western nations, with the threat of withdrawing access to SWIFT and blocking the deposits of the central bank abroad, et cetera, they were on purpose trying to strike fear into the hearts of Russians that their money will not be safe.

And especially if you are Russian, history is not very good on your side. If you have an account in the United States, you say, “Look, I never lost a dime by keeping my money in my bank account.” And so, it’s hard to create fear so easily. But in Russia, that’s a different game, and so it doesn’t take much to strike fear. And, of course, especially in bank panics, fear is self-fulfilling. So, it does serve a purpose of kind of pushing for regime change.

One of the articles I saw on the debate is, what is our goal in this moment with the sanctions? Is it to have Russia withdraw? Or is it trying to create a regime change in Russia without deploying any troops?

Bethany: It’s an interesting open question, at least. I haven’t seen a good answer, and I don’t think there could be one about what the state of mind is of the Russian people. Do they want this war? Do they not want this war? And even if we could know that answer, per your point about Ethiopia and Italy, how quickly could that change? Could sanctions backfire in that sense, even if the Russian people don’t want this war? And even if Putin is losing some of them because they don’t want this war, could sanctions be the thing that makes them want the war? I also started to think when you were talking about the purposeful vagueness of the sanctions, it made me wonder when you see the news about US companies pulling out of Russia.

Speaker 14: ExxonMobil, America’s biggest oil company, pledged on Tuesday to leave its last remaining oil-and-gas project in Russia. Another American company stopping business due to the invasion, Ford Motor Company saying it will suspend all its operations in Russia effective immediately.

Bethany: Are they doing it because they’ve been told to do so by the government, because they’re afraid of running afoul of sanctions, or because it simply seems like the right thing to do? And I can’t believe, me of all people, that I’m saying a company would do something because it simply seems like the right thing to do, but it raises an interesting question.

Luigi: I think that’s a fascinating question. And I think, in my view, that one of the game-changing aspects of this war is that we have private individuals, and in particular digital platforms—but not only digital platforms—that are playing a gigantic role here in a way that I don’t think was true since the invention of the modern state in 1648, in the sense that you have Elon Musk, who decides to give internet to Ukrainians, thanks to Starlink.

Speaker 15: Billionaire Elon Musk is bringing a critical asset to Ukraine after receiving a Twitter request for help from the country’s vice prime minister. The SpaceX CEO activated his satellite broadband service called Starlink, helping to get Ukrainians back online after parts of the country, including Kyiv, were left without internet access.

Luigi: So, now a private individual like Elon Musk is playing a gigantic role in this war. And then you have all the digital platforms, from Google to Facebook, that decided to restrict access to information or restrict access to Russia Today, the Russian TV channel. The United States is not at war with Russia. Why do we want to restrict access to Russian TV? In fact, I would like to see what Russia Today shows, because I want to see what kind of message Putin is giving to his people.

And so, why we allow private individuals to have such a gigantic role in all this is really baffling. Because then, the flip side of that is that it’s clear that, first of all, China was right in prohibiting all the big tech companies from entering, because they are clearly showing that they are at the disposal of the US government, or at least aligned with the US government. So, this business that companies have no country is not true. They do have a country, and that is very important.

To me, this is the moment where the globalization of the ’90s and early 2000s is breaking down in an irreversible way, and moving forward, we’re going to have geopolitical blocs with very limited trade in between.

Bethany: That’s fascinating. It goes back to the point you raised at the beginning about whether economic interests are subordinate to national interests, or national interests are subordinate to economic interests. I would have strongly argued that we lived in a world where the latter was the case for a long time, that big companies had transcended any sort of national ties and would do what was in their economic interest, regardless of what was in the country’s interest.

But you’re absolutely right. This moment is challenging all of that. There was a fascinating piece about Microsoft’s cooperation with the US government over malware that Russia was using and how Microsoft was the one to detect it. And you’re right. It proves the lie to this idea that a company sort of rises above its country or stands independent of its country. And whether or not that’s a good thing or a bad thing, I don’t know.

I’m not sure you’re right that it’s any different, though. Although we were at war, but when you look at the way GM and Ford were mobilized during World War II to be turned into industrial production for warfare equipment. Roosevelt even had someone, I’m blanking on his name, but basically in charge of mobilizing industry. And that’s always been the case, right?

So, I guess the difference you’re pointing out is that it’s a private individual rather than a corporation, but I’m not sure of the line there. And I guess another difference is that the United States isn’t at war now, but corporate interests have always been mobilized in the time of war.

Luigi: No, of course they’ve always been mobilized. What is surprising is that here it seems they chose to mobilize. There is not a mandate. If the US Congress were to vote that we confiscate Starlink, or we order Elon Musk to do X, Y, and Z, I think that is not surprising. The fact that Elon Musk does that because a minister in Ukraine asks him on Twitter—at least that’s the story that we heard, maybe there is another story behind it, I don’t know. But that’s the story you hear in the press.

And that is unprecedented. Because, in the same way, he might choose not to do it. And the ease or the eagerness with which the platforms decided to stop all this stuff. But the problem here is you cannot even contest this stuff. If you have a law, you can at least go to the Supreme Court and appeal a law. But if a private individual does that, what do you do? You have no recourse. And the power of these people is enormous. It’s an indication of what the future is going to be.

Bethany: What do you think about what this means for Nord Stream?

Speaker 16: Well, Nord Stream 2 is a natural-gas pipeline that runs under the Baltic Sea. It can deliver Russian natural gas directly to Germany without having to go through Ukraine and Poland. For years now, the United States has been warning that Nord Stream 2 would increase Europe’s dependency on Russia for gas.

Bethany: The fate of Nord Stream is an interesting question and the economic interests that allowed it to progress this far. In other words, back to where we started this conversation. If you wanted to believe that economic cooperation would prevent war, then you would have wanted to believe that Nord Stream would be a tool for preventing war. Because Nord Stream is closer economic cooperation between Europe and Russia, you would have wanted to believe that would have prevented war rather than caused it. So, I think the question about the future of Nord Stream is an interesting one, as well as the role it plays and what that means.

Luigi: Absolutely. I think you’re absolutely right, and it actually was sold as such by Germany. And what I find most surprising out of everything that happened—and there are a lot of surprising things, but this is the most surprising—is the 180-degree change that Germany made on its military policy.

Speaker 17: German Chancellor Olaf Scholz says that Russia’s invasion of Ukraine has ushered in a “new era in world history,” noting that the events of the past week have raised serious questions over the ability of Western allies to deter “warmongers like Vladimir Putin.”

Luigi: Germany basically did not invest much in armaments and was absolutely against selling arms to any country at war. Within a day, it decided to invest 2 percent of its GDP in armaments for the first time since 1945, and it decided to sell lethal weapons to a country at war like Ukraine. What is most surprising of all this is that this is a government coalition, but led by a party, the SPD, that has been very close to Russia. In fact, many people say too close.

Let’s remind our listeners that the former chancellor of the SPD, the last chancellor the SPD ever had before Scholz, is now sitting on the board of Rosneft and in the process of getting on the board of Gazprom. So very, very interconnected.

This 180-degree change is really shocking to me, and my suspicion is that they learned something that we don’t know, and they’re very afraid. And so, politics as we used to know it is gone. And so, while a week ago, I would have said very confidently that Germany will never abandon Nord Stream 1 or 2, now I’m not so sure anymore.

Bethany: Before we run out of time, I wanted to turn to something we’ve touched on, which are the larger implications of this, if this can have larger implications. The implications are large enough. But we mentioned China. I have a couple of thoughts on that, but I’d love to hear your opinion. One is there’s this rosy, beautiful, silver-lining thing floating around out there, which is, “Isn’t this great, because it’s brought back liberal democracy and a consensus on liberal democracy, and it strengthened this thing that was failing, particularly across Europe.”

And I thought as you were talking earlier, well, sure. But if this leads to Russia and China becoming closer than they were in the past, does it matter? And is this necessarily a good thing if we’re, once again, dividing the world into two camps, both of arguably equal power?

And then the other thing I’ve thought is, how closely is China watching this? Does what happened with Ukraine have implications for what will happen with Taiwan? And if the world’s attempts to handle this economically are successful, does that matter for what’s likely to happen with Taiwan and China? Does it not matter? And so, I’d love your thoughts on both of those issues. I actually have no answers to them.

Luigi: There is a proverb in Chinese that sounds like you cut off the head of the cat to scare the monkey.

Bethany: Gross.

Luigi: It’s gross but very appropriate. And I think that’s exactly what’s happening in this situation. I think China is watching for the invasion of Taiwan. There was no doubt to me that if there was no reaction, China probably would have followed soon, in fact, immediately. In fact, there were some rumors that they would do it contemporaneously. There were some planes that flew over the airspace of Taiwan.

So, one of the effects of the sanctions—back to my historical analogy—one of the effects of the sanctions is clearly to send Russia into the arms of the Chinese, because they have their reserves there. And because China is trying to build an alternative monetary system and an alternative network of exchange, and Russia will happily join. And they have a lot of points in common, including their system of governance.

And I was reading that even some of the powers in the Gulf, like Saudi Arabia, might happily join. So, MBS is shunned by the West for obvious reasons. And I think that he finds incredible alignment with Putin in many dimensions—including, by the way, the price of oil. So, it was in Orwell that there were like three gigantic powers in the world, and one was Eurasia.

Bethany: Yeah. It’s Orwell.

Luigi: It seems that we’re going that direction. I think there is basically an Asian power and an American power plus Western Europe. And the big question is, where does India fall? Because India is not obviously with Russia and China, especially because there’s a lot of tension with China. But it’s not obviously with the United States, either. And I don’t think it’s strong enough to be a third bloc in the game. But I think we’re going to two blocs, and we have to recognize—I think he had a lot of other defects, but we have to recognize it was the genius of Kissinger 50 years ago to do kind of a chess move and reestablish relations with China to tear China apart from the Soviet Union. That strategy worked for 50 years, and now it’s in reverse, and I think we are on the losing side of that.