The economic isolation of Russia is unprecedented in terms of its scale – an impressive flexing of collective Western power against an aggressor. But it’s also inadequate, unfair and expensive
I’m looking at a picture of a different time. There are two men, one a Communist apparatchik, the other a Western capitalist, both, as it happens, in dark suits and maroon ties, both with neatly combed over hair, both sporting broad smiles and each brandishing a thumbs-up for the camera. Behind them, there’s the staff – all of them in their new red and yellow uniforms, and they’re crowded behind the tills, all of them, likewise, with big grins and each clambering to get into the picture.
Looking at that photograph, looking at all the pictures of the opening of McDonald’s in Moscow on 31 January 1990, is painful because it was a moment that was so hopeful. The one I’m looking at is a photo that was sent to me by a Tortoise member; and, perhaps because of that, it feels personal. There’s something a little giddy about it. You can sense that everyone in the picture felt they were at the start of something; you can see it on the faces of every person promising to serve the long, long queue of people waiting outside in the Russian winter.
As the Iron Curtain fell, those Russians placing those first orders for Big Macs, fillet-o-fish and hot apple pie were building the new order. Western capitalism was inviting Russians into a new way of life; if you like, ketchup to catch up. The Golden Arches in Pushkin Square planted a flag for globalisation. And, for the thirty years that followed, politicians and economists who argued that free markets were the most powerful means of securing peace in the world and raising people out of poverty, they held up the Big Mac as proof: no two countries in the world where McDonald’s operates its restaurants have ever gone to war.
Until Georgians might say, Russia moved on South Ossetia and Abkhazia in 2008. Or, unquestionably now, in 2022 – Russia’s invasion of Ukraine. McDonald’s has 847 restaurants in Russia; there are 108 in Ukraine. And this week they announced they were closing them. It’s unclear, when and if they will reopen. And the symbolism is as self-evident now as it was then: the opening of the restaurant, a smiling statement of Western capitalism’s self-confidence; the closing of those doors, its retreat from optimism.
I’m James Harding, editor and co-founder of Tortoise, and in this week’s editor’s voicemail I want to talk about the economic war – and the price to be paid for it.
Because you can’t help but wonder when you look behind the front pages dripping with schadenfreude at the sanctions against Roman Abramovitch and other billionaire oligarchs, whether we are seeing just one side of the story. When you reflect on the corporate exodus from Moscow and the severing of commercial and financial ties, whether we find an economic war that is powerful, symbolic and unprecedented, but, all the same, inadequate, unfair and expensive.
Inadequate, because the hard truth is that it’s not working. The pre-war sanctions didn’t deter Putin from invading; the economic chokehold is not likely now to get him to call the soldiers back. There are thousands already dead on both sides; the exact numbers can’t be verified yet. There are even more casualties, and more than two million refugees. President Zelensky of Ukraine is calling for a no-fly zone; he is, to be crass about it, getting a no-fries zone. For the people under bombardment in Mariupol and Kharkiv and the tightening siege of Kyiv right now, the economic war is simply not enough.
It’s unfair, because this is an economic war that is very uneven. Who’s sanctioned, who’s not sanctioned and why? Well, who knows? Who’s really pulled out, who’s partially pulled out, who’s performatively pulled out and who’s keeping their head down and buying into Russian business on the cheap? Again, who knows? What do private companies do by comparison with public ones, small businesses vs big ones, offshore vs onshore? Again, who knows? When Patricia Clarke, my colleague at Tortoise, started ringing around the big London law firms this week, she found Freshfields had pulled out; Allen & Overy and Clifford Chance were staying in Moscow, and then, a day later, Clifford Chance called back to say that it was pulling out too. Some firms famous for their Russian clientele didn’t respond or give a comment. The point is, companies are making very consequential decisions for their business futures, their employees and for their customers. And as we heard at our Open News ThinkIn – our open news conference – this week, once those businesses are out of Russia, they may well find they can’t come back – at least not until Putin has gone. And so, for many, if not most of those companies, the decision they’re making is a big one. But the decision they’re making is not based on regulation or the rule of law; it’s based on a mix of reputation management and their own sense of right and wrong. For some, in fact, they are being asked to make political judgments with limited and uncertain impact on the war against financial considerations that go against their responsibility to shareholders and staff. Corporates have been conscripted to the economic war, but the draft can certainly feel random.
And also, this economic war is expensive, because it’s an economic war against Russia, one of the world’s biggest commodity producers. The nickel market was forced to close, when prices quadrupled and one Chinese speculative short-seller was left nursing losses of $8 billion because Russia, the world’s biggest producer of one of the key metals in batteries, was being cut off from the world markets; the number of people in the world on the brink of famine has risen from 27 million to 44 million in the last three years, according to David Beasley, who runs the World Food Programme, and it’s expected to keep on rising, and many of the poorest will go hungry because the produce of Russia and Ukraine – between them the growers of 30 per cent of the world’s wheat – gets blocked by this war. And then there’s the spike in energy prices – energy prices which shot up to their highest levels in nearly 15 years this week, and now promised to bump inflation up above 7 per cent in the UK, and potentially force a crisis for businesses unable to pay their energy bills and families unable to afford to heat their homes. This kind of inflation hits small businesses, working families and the poor hardest. And so it’s going to be costly for Rishi Sunak, the chancellor, both financially and politically. Sunak somehow hopes to cling to a Thatcherite economic orthodoxy, promising to stick to his plans to balance the books by raising National Insurance contributions and then, at some point in the not-too-distant future, get back to cutting taxes. It’s not going to happen. The Treasury is going to have to choose between even higher taxes, less spending or, as I suspect, more debt.
The economic war, the one that the West is waging against Russia, is no doubt essential, it’s urgent and it’s impressive. It will take its toll on Russia and, in time I believe, on Vladimir Putin. It’s an unprecedented show of capital’s power, an historic example of business taking sides and a blessed reminder that, after a few years in which the world has seemed unable to coordinate, to stand up to a global threat, nations can, in fact, come together as one. But let’s not be seduced by our own sudden solidarity. The economic war is one front. It’s not enough. It’s not fair. And it’s not for free. It’s certainly not that 1990 picture of hopeful smiles. Instead, it’s a picture of uncertainty and unintended consequences.