System Shock

The price of oil hit nearly US$140 a barrel in early March, less than two weeks after Russia invaded Ukraine, a dramatic increase from $80 a barrel at the beginning of the year. The jump was caused by fears that Moscow, a major oil-and-gas producer, would cut off supplies to Western Europe in response to condemnations of the attack by the European Union. Oil prices have remained high and volatile since then, raising gasoline prices with them and distressing consumers around the world. Worries about natural-gas supplies have forced Germany to draw up plans for gas rationing. Meanwhile, in the United States, Germany, and Spain, these price hikes are helping push inflation to levels unseen since the 1980s. Is all of this from the war?

Adam Tooze is the Kathryn and Shelby Cullom Davis professor of history and the director of the European Institute at Columbia University, as well as the author of books about World War I, German economic history, the Great Recession, and the economic effects of the Covid pandemic. According to Tooze, the war may be having powerful effects on global commerce, but it’s not causing a major break in the broader trajectory of the world economy. Climbing prices for energy and food drove already rising markets even higher. In the long run, Tooze says, substantially greater costs for oil and natural gas will likely accelerate the move away from fossil fuels and toward renewable energy already underway in Europe. Similarly, surging commodity prices will drive inflation somewhat higher, though economists had already forecast inflation in the coming years. The truly historic economic effect of the war, for Tooze, is the unprecedented sanctions against the Russian central bank, which have created a new financial dynamic that will redefine the nature of global economic power.

Michael Bluhm: What do you see as the most significant effects of the war in Ukraine on the global economy?

Adam Tooze: It dramatically exacerbates a pre-existing period of tension in global commodity, oil, and gas markets. That tension was the effect of complicated conditions, most notably an uneven but unexpectedly rapid economic recovery from the Covid crisis.

We came into the war primed for market shocks, and Putin’s extraordinary decision to launch the war triggered important ones in energy prices and commodity markets. On the commodity side, it’s above all about wheat and maize—foodstuffs that are particularly essential for low-income populations around the world. In the global economy, that’s the most immediate effect. It will line up alongside the big price surges of the 1970s or 2008 in the history of commodity markets over the last half-century. It’s a shock at that level.

The more dramatic historical departure—it’s harder to think of any real precedents here—are the central-bank sanctions: not the strikes against oligarchs or the decision to withhold the delivery of microchips to the Russians that they could put to military use; the real shock is the decision to go after the Russian Central Bank.

Bluhm: Why is that so important?

Tooze: Central banks treat each other as partners in the business of managing global capitalism, so the idea that they would impound the reserves of a colleague institution is a breach of everyone’s preconceptions. The Russian reserves are between US$490-$600 billion—a lot of money by anyone’s reckoning—and were invested in assets in dollars or euros, and therefore supposed to be liquid and available to Russia when it needed them.