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When the War Ends: Rebuilding Ukraine and European Security
€383 billion. This is the amount of investment the World Bank believes is required to reconstruct Ukraine over a 10-year period. Ukraine’s own government puts the post-war reconstruction bill at about €679 billion over 10 years. The European Bank for Reconstruction and Development puts the figure at €250 billion for 5 years, and the European Investment Bank even estimates an eye-watering figure of about €1 trillion is needed. The truth of the matter, however, is that no one can precisely gauge how much financial assistance will be needed by Ukraine over the coming years.
European leaders have already kick-started their efforts to support Ukraine’s economy and people over the coming decade. Three major pledging conferences in Berlin, London and Lugano have resulted in the creation of a funding and political framework for Ukraine’s reconstruction. In particular, the 2022 Lugano Declaration set out the terms for support including a need to link investments with reform, transparency, democratic participation and sustainability, among other benchmarks.
In particular, the European Union has dedicated approximately €53 billion in humanitarian, financial and military support to Ukraine so far. Around €15 billion of this amount has come in the form of military support, including through the European Peace Facility (EPF). Additionally, the European Commission has proposed that the European Union develop a new €50 billion Ukraine Facility for the country’s recovery and reconstruction. The aim is to provide financial assistance to Kyiv until at least 2027.
Securing Ukraine’s economy is clearly a core way of achieving the country’s security. In the short term, Ukraine will need continued financial support to maintain and re-stock its military. Thus, recent reports that the EU and its Member States are looking to ensure increased and sustainable multi-year funding under the EPF is to be welcomed. If the reports are correct that the Union plans to ensure €5 billion per year in support through the EPF, this will result in consistent EU military support. Hopefully, having in place a more structured approach to support under the EPF will not mean a reluctance to move beyond the proposed new funding ceilings – it would be a shame if a multi-year EPF would restrict funding beyond the proposed €5 billion per year. As has been the case so far with the EPF, it is better to identify needs first and then adjust the financial support accordingly.
“…it would be a shame if a multi-year EPF would restrict funding beyond the proposed €5 billion per year…”
Yet, Ukraine also needs financial support to cushion the blow from inflation, which is eating into the value of the financial assistance already provided to Kyiv. Although inflation in Ukraine has come down over the past few months (in April it was 17.9% compared to 12.8% in June), it is still higher than the eurozone average of 5.5%. In this sense, support to Ukraine must be geared to economic realities on the ground, especially given that food and consumer prices will likely be adversely hit by Russia’s decision to weaponise food exports from Ukraine by terminating the Black Sea Grain Initiative. Reconstruction will need to immediately focus on the rebuilding of housing, energy infrastructure and transportation. There is a need to focus on supporting education, health and the agricultural sector too.
Any support for Ukraine must, therefore, be sizeable, effective and sustainable. It is for such reasons that some are already calling for a “Marshall Plan” for Ukraine. Others are calling for donors to learn from the post-war experiences of countries such as Afghanistan and Iraq. Some estimates have it that the United States spent $220 billion over a 10-year period in Iraq after its invasion of the country. Yet, such comparisons should be put in context. There is still instability in both of Iraq and Afghanistan and extensive funding has not dealt with structural political issues that sit at the heart of instability there. The reality is that Ukraine – like all conflict zones – is a unique experience that will require tailored responses.
Indeed, we should not forget that Russia is likely to continue to be a threat to Ukraine and European security even after the guns have gone silent, whenever that may be. Ukraine has also received strong political signals that its destiny is within the EU and NATO, making reconstruction efforts less like other post-conflict scenarios. What is more, the line between the support needed to repel Russia and post-war reconstruction efforts is significantly blurred, not least because no one can accurately estimate when the war will end or what any post-war situation will look like in practice.
“…Calling for a “greener and more renewable” Ukraine is convenient… but Ukraine’s needs go well beyond energy…”
There is also a risk that European leaders see Ukraine’s reconstruction needs exclusively through their own perspectives. This is why constant dialogue with the government, private sector and civil society in Ukraine is absolutely critical. Indeed, the EU has been keen to structure its longer-term support for Ukraine around areas that it is also currently engaged in. Calling for a “greener and more renewable” Ukraine is convenient messaging, and while there can be no doubt that Ukraine’s energy sector needs reform and independence from Russia, Ukraine’s needs clearly go well beyond energy.
For example, Ukraine will need major support with de-mining large parts of the country and then there are less quantifiable needs such as how to support post-war trauma victims in the civilian population and amongst the Ukrainian armed forces. Research from other conflict zones shows how there was a higher rate of depression, anxiety, post-traumatic stress disorder and suicidality among conflict-ridden populations. Such health issues will, in turn, place even greater strain on a country’s health service. Furthermore, no amount of money can fix rule of law, transparency or corruption and so a strong popular culture and commitment to political reform is required in the country.
A major question then is how to sustainably incentivise European governments to support Ukraine over the longer-term. There are at least two incentives that are already obvious. First, to think about Ukraine’s reconstruction as an investment rather than charity. This is one of the ways to attract private capital and investment into Ukraine. Second, to view Ukraine’s reconstruction as a step towards eventual EU accession and NATO membership. European leaders have effectively opened the door to Ukraine’s entry into the EU, so having in place finances in order to aid Ukraine modernise its economy for EU accession is prudent. Investments that help reconstruct Ukraine in such a way as to ensure adherence to EU standards will be positive as far as the membership process is concerned.
“…let us not forget that the Marshall Plan went hand-in-hand with a significant US military presence on the ground in Europe…”
However, it is advised not to lean too much into the notion of a modern day “Marshall Plan” for Ukraine. First, the original Marshall Plan was valued at about $13.3 billion (about $150 billion in today’s value), so not at the level required by Ukraine under various estimates. Second, let us not forget that the Marshall Plan went hand-in-hand with a significant US military presence on the ground in Europe. No such presence is foreseen in Ukraine. So, while the allure of the idea of a “Marshall Plan” for Ukraine will no doubt remain (there was also some enthusiasm for a Marshall Plan after the Arab Spring too), we need to be careful about making simplistic parallels between Western Europe after World War II and Ukraine today.
All of this means that the burden of ensuring defence and some level of security will fall to the Ukrainians (something Ukraine has bravely been doing for months already). The real difficulty with support for Ukraine will therefore be how to ensure investments can be successfully deployed in a relatively secure environment. To put it rather bluntly, you cannot invest in new bridges if there is a risk that Russia will blow them up. This logic also means that, should there be any form of ceasefire with Moscow, the clock will start ticking on EU and NATO membership. Without a lasting security settlement for Ukraine, whereby Russia is deterred from any future military attack on the country, post-war economic and societal reconstruction efforts will be severely undermined.
European Statecraft, 2023 – By Daniel Fiott
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NATO and the Current Security Context
In many respects, the NATO Vilnius Summit of 11-12 July 2023 revealed one of the core issues facing the alliance today: how, when and if to enlarge to include Ukraine. Enlargement has always been a sensitive and contested issue for NATO, but the prospect of taking on a country that is currently the victim of Russian military aggression raises difficult questions. To be sure, the official summit communiqué stated that Ukraine’s “future is in NATO”, but there are clear differences in how NATO allies define the word “future”. The Vilnius Summit effectively served as a bellwether for where allies sit in relation to Ukraine’s NATO membership. The answer? One group wants to hold out until the war is over, whereas others want a clear roadmap and commitment for Kyiv, today. Admit Ukraine today, and there is a risk that NATO will be drawn into war with Russia. Stall or withhold membership, and Russia will be tempted to attack Ukraine (again) after a post-war settlement.
IDN Portugal Brief, 2023
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Analyzing the Outcomes of the 2023 NATO Summit
The NATO Summit in Vilnius on 11-12 July 2023 came at a testing time for the alliance. With the Ukrainian offensive, Russia’s war on Ukraine has entered a delicate phase. NATO allies and EU member states are turning to questions about what the post-war settlement might look like, and there are strong calls for Ukraine to be admitted – as rapidly as possible – into both NATO and the EU. Thus, the Vilnius Summit was largely seen as a bellwether of how far the United States and its allies were in favour of offering Kyiv NATO membership now, all while it continues to fight and repel Russian forces. The answer to rapid membership: not quite yet Ukraine. Although the official communiqué stated that Ukraine’s “future is in NATO”, there are clear differences between NATO allies on when this future should begin and under what conditions.
Korea on Point, 2023
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In Orbit: The European Union, Defence and Space Domain Awareness
Following the March 2023 publication of the European Union’s Space Strategy for Security and Defence, the Union has moved into new conceptual territory. In thinking about how to ensure its security and defence in outer space, the Union has emphasised the importance of “Space Domain Awareness”. The meaning of this new term is not easily understood but it takes the Union beyond the monitoring and tracking of outer space for largely non-military purposes. As this Policy Brief shows, Space Domain Awareness is about fusing data for military and non-military threats across the cyber, air, land and maritime domains and on a 24/7 basis. Beyond just conceptual innovation, this Policy Brief highlights the policy implications of this new approach to space monitoring and tracking. In doing so, it features some of the political, industrial and military challenges now facing the Union in the area of security, defence and space.
CSDS Policy Brief, 2023, No.22
Introduction
On 10 March 2023, the European Union (EU) published its first- ever “Space Strategy for Security and Defence”. The new strategy marks a departure from the EU’s 2016 Space Strategy, which largely focuses on the commercial uses of outer space. The new space and defence strategy sets out how the Union should counter ‘intentionally hostile activities’ in space, especially in a context of ‘increasing power competition and intensification of threats’. This focus comes on the back of the Union’s broader strategic re-focus with the March 2022 “Strategic Compass”, which represents the Union’s first-ever attempt at a comprehensive defence strategy. This document acknowledged that the EU has an ‘increasing dependency on space systems and services’, but is ‘more vulnerable to irresponsible and threatening behaviour by strategic competitors’.
One of the interesting aspects of the new EU strategy for space and defence is how it is framed by a wholly different organising concept: “Space Domain Awareness” (SDA). For the EU at least, this is a hitherto alien concept. The 2016 Space Strategy does not use the concept, even if it recognises the importance of situational awareness for space weather and cyber alerts. Interestingly, even the Strategic Compass does not specifically refer to the concept, instead calling for continued investments in ‘space situational awareness to better understand and reduce space-based risks, threats and vulnerabilities’. Therefore, the particular reference to Space Domain Awareness is something that was uniquely developed during the drafting of the new space and defence strategy.
It is the aim of this Policy Brief to shed light on the meaning, significance and policy implications of this conceptual evolution. More precisely, we seek to understand the relevance of Space Domain Awareness and probe its significance for defence planning, technology investments and military intelligence. In this sense, SDA is not solely relevant from a conceptual perspective, as it has the potential to reframe the Union’s space presence and how it protects sovereign capabilities such as Galileo, Copernicus and the future secure space communications system IRIS2.
What is “Space Domain Awareness”?
Given the nature of outer space and its importance for life on earth, a fundamental aspect of any space policy is being able to detect, monitor and track space activities and events. Space policy is an arena where terms like “Space Situational Awareness” (SSA), “Space Surveillance and Tracking” (SST) and “Space Traffic Management” (STM) are commonplace. It is therefore natural that the introduction of a different term such as “Space Domain Awareness” should add to the terminological fuzziness in the field. Traditionally, the EU has focused on situational awareness and traffic management as a way to detect and monitor space hazards such as debris, break-ups and/or collisions. The idea that the EU should therefore have some capacity to monitor space is not new.
If situational awareness (SSA) and traffic management (STM) are easily understood, and if the EU already conducts such activities, then we would be forgiven for questioning the need for a new concept such as Space Domain Awareness. Indeed, ‘there is no universally recognised definition’ for the term SDA. We should also acknowledge that any definition of SDA as the ‘capability to detect, track, identify and characterise space objects and the spaceenvironment’doesnotreallysettheconcept apart from other, well-established, labels such as SSA or STM. However, Space Domain Awareness can be contrasted with SSA and STM in the way it brings into sharper focus the military dimensions of space. Space situational awareness and traffic management are largely geared to non-military space risks such as debris, space weather and accidental collisions. There need not be anything malicious about these risks, even though they still pose a major issue for the Union in space.
What is more, some experts view space situational awareness as an operationally specific approach that only focuses on individual space risks and threats separately. For example, one particular form of SSA might predominately focus on detecting solar flares without simultaneously assessing other non- military and/or military space-based risks. Space Domain Awareness is different as it presupposes the integration of capabilities for the detection, monitoring and tracking of both non-military and military space threats. It thus integrates space situational awareness and traffic management activities together and fuses them with military needs (i.e. simultaneously detecting, monitoring and tracking collisions, fragmentation and debris, re-entry risks, solar weather, ballistic missiles and glide vehicles).
Fusing these military and civil aspects of space- based intelligence is vital to the proper functioning of armed forces, including their use of remotely piloted systems, integrated next-generation fighter aircraft and more. In this sense, the development of next-generation defence capabilities such as the Future Combat Aircraft System (FCAS) presupposes free access to and secure use of space. Space Domain Awareness provides militaries and defence planners with real-time information that could affect operations and interoperability. Accordingly, Space Domain Awareness can be thought of in two main senses:
1) fusion: an ability to monitor, detect, survey and assess the whole spectrum of space risks and threats (military and non-military) rather than specific facets of it; and
2) action: the ability to use the fusion of space data to directly inform strategic decisions and policy-making in as real time as possible, while also providing tactical, operational and strategic information.
What are the strategic implications of SDA?
Space Domain Awareness is then in part about monitoring military and non-military space activities, risks and threats – all at the same time. However, this is only part of the story. SDA equally implies an ability to fuse data across domains based on a range of technologies (i.e. radars, telescopes, lasers, sensors, etc.). The ability to fuse space data is notoriously difficult, as sensors, satellites and radars collect different types of information that focus on a specific object through space and time. This is frequently referred to as the “multidomain” aspect of space awareness and includes an ability to fuse data from across the cyber, land, maritime, air and space domains. Consider how necessary it is to track the trajectory of ballistic missiles across the land, air and space domains. Critically, in addition to this multidomain approach it is essential that threats are detected, monitored and tracked on a 24/7 basis – without interruption.
This places a substantial technological and strategic burden on any actor wishing to develop SDA in any meaningful manner. The United States (US), for example, has invested billions into developing its own vast network of space-based and ground-based sensors, radars and satellites as part of its SDA network. For its part, the EU has taken a piecemeal approach to SSA and STM based on “federating” national capacities to allow for the detection, monitoring and tracking on an EU-wide basis. Today, the EU relies on a space surveillance and tracking partnership (EUSST) that includes 15 member states based on a network of 40 sensorssuch as radars, telescopes and laser ranging stations to protect more than 400 satellites – the United Nations estimates that there are more than 8,000 satellites currently in orbit.
More than monitoring and tracking capabilities, however, SDA entails having command and control structures in place – even if not all member states would not necessarily agree to creating them. The collection of space-based data is one thing, but fusing various forms of data into militarily-relevant and actionable intelligence is a different matter. In the US, for example, Space Command relies on the National Space Defence Center to bring together military officers, intelligence officials and private contractors to conduct a part of America’ space domain awareness activities – where, one may wonder, is the Union’s like-for-like version of this set-up?
Indeed, today the EU does not have a fully-fledged command and control system for the space domain. At most, it has a capacity for certain military missions and operations but not one that can fuse, process and utilise intelligence in a centralised manner. To date, the EUSST consortium is the main network for space situational awareness and tracking and – as of 3 July 2023 – the EU’s Space Programme Agency (EUSPA) serves as the “front desk” for this consortium. However, these are non-military structures and there is a limit to the role they can play in ensuring effective SDA. Even with the new EU strategy for space and defence, it is not clear what appetite exists in all member states to introduce a more military focused approach to SDA, with many recently re-emphasising that EU STM efforts are designed to promote safe, sustainable and secure uses of space.
What are the expectations and challenges for the EU?
Whether the EU can genuinely shift towards a meaningful appreciation of the military risks of space will come down to politics. The fact that the EU Strategy for Space, Security and Defence did not replace the EU Space Strategy – but exists alongside it – means that member states will pick which strategy best represents their normative understanding of space. Some will be driven by motives other than norms, by also considering how any drift to space and defence applications may introduce technical requirements that cannot be met by civilian space SMEs. Yet, the EU has been heading towards space and defence for some time: for example, Galileo already foresees military applications through the Public Regulated Service (PRS), which will in time provide positioning, navigation and timing services to armed forces. What is more, the member states are already developing missile interception sensors, microsatellites and other space-defence capabilities under the European Defence Fund (EDF) and Permanent Structured Cooperation (PESCO).
There is no escaping the fact the EU Strategy for Space, Security and Defence puts down some extremely ambitious and sensitive political markers. For example, consider this line from the Strategy: ‘SDA is key for attributing space threats in orbit and triggering a potential EU response’ (emphasis added). Not only does this line presuppose that the Union’s ability to deter space threats may have failed at some time in the future, but the focus on “response” means that the EU has to forge ahead with a more military approach to space or it will simply not be considered credible. Here, the Strategy specifically states that ‘should a space threat or incident amount to an armed attack on its territory’, then member states would be able to invoke the Union’s mutual assistance clause (Article 42.7 Treaty on European Union). This, in turn, could necessitate a potential military response – again, new terrain for the EU – even if we have no details on what this response would look like in practice.
With such language and ambition, the EU is also steadily enmeshing its own concepts with those already present in NATO and this may have a positive pay-off for EU-NATO cooperation in space. Such cooperation is important given that both organisations agreed to cooperate on space mattersinthe2023EU-NATOJointDeclaration.For NATO, SDA has become even more important since the alliance recognised space as a fifth operational domain in addition to air, land, sea and cyberspace. For NATO, space is a critical enabler in support of military operations and intelligence and so ensuring that the alliance has a comprehensive picture of military and non-military threats in outer space is essential. This means that there is a growing consensus on space matters between the EU and NATO.
Such cooperation is even more essential after Russia’s war on Ukraine, but it remains unclear how the EU’s move into Space Domain Awareness could support European efforts to ensure deterrence and defence. For example, the capabilities eventually developed by the EU would clearly contribute to NATO’s Integrated Air and Missile Defence System (IAMDS) or the recently established German-led initiative for a European Sky Shield (ESSI). This is not to say that the EU would replace US space-defence surveillance and tracking capacities any time soon, but having EU assets in Europe’s overall space domain awareness arsenal is wise, not least for substitution and support services and activities.
Finally, in addition to needing coherent command and control systems for SDA, the EU clearly needs to invest in cutting-edge space technologies. This is easier said than done. Not only is a substantial boost to the EU Space Programme and EDF required in the next budgetary cycle of the Union, but there is a need to avoid industrial fragmentation in Europe. An injection of more investment will attract a range of space companies, big and small. However, the growth of the “new space” sector has raised as many concerns as benefits, as new market entrants in the European space sector – while more than welcome – do not have the industrial or technological critical mass to help develop SDA. While industry has already lent its support to the idea of SDA, seeing it as a fundamental basis for ‘developing a fully-fledged and autonomous STM architecture’, SDA presupposes greater military and political involvement in command and control and space domain awareness activities. Bringing together all of these actors to ensure that Europe sits on the technological frontier of space, while also ensuring credible autonomy in space domain awareness, is a key task at hand.
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Votes, Vetoes, Values: Foreign Interference, QMV and EU Foreign Policy in a Competitive Age
Abstract
In early May 2023, a group of nine European Union countries called for reform of the way the Union takes decisions in its foreign and security policy. Traditionally a field where consensus and unanimity are the norm, pleas in favour of Qualified Majority Voting – where a single state will no longer be able to vote down decisions desired by a majority of states – are not new, but they are growing. Russia’s war on Ukraine and cases where vetoes have been exercised have led to calls for decision-making reform. There are many reasons to support Qualified Majority Voting, but there are compelling arguments in favour of maintaining the status quo. This Policy Brief looks at the pros and cons of Qualified Majority Voting from the perspective of foreign interference. It argues that the need to counter foreign interference might be the most compelling argument in favour of decision-making reform.
CSDS Policy Brief, 2023, No. 21 (written with Giulia Tercovich)
Introduction
Many of the European Union’s (EU) strategic competitors and rivals have provided added reason to review the decision-making processes of the Union’s Common Foreign and Security Policy (CFSP). Russia’s invasion of Ukraine has seen the EU act in a unified, robust and speedy manner, but the sanctions on Moscow reveal tensions between member states. Some have sought opt-outs in industrial areas such as steel production and the diamond trade, whereas others have refused to join efforts on the military training of Ukraine’s armed forces or to sign up to economic assistance for Kyiv. In recent times, member states such as Hungary have also blocked EU human rights statements on China’s crackdown on democratic forces in Hong Kong. Whenever the threat or actual use of a veto is seen in some way as being beneficial to the Union’s strategic competitors, then suspicions are rightly raised about the motives for vetoes. Whenever a veto is used in such a context, it can be perceived as a victory for foreign interference – even if no evidence proving a direct link ever sees the light of day.
To be sure, the use – or threat – of vetoes in EU foreign and security policy do not always easily align with the interest of foreign powers. In many cases, EU member states may have justified domestic reasons for vetoing an EU foreign policy decision (e.g. sanctions may hurt specific economic sectors). In other cases, vetoes are used to draw attention to specific national concerns, even if there is some benefit to foreign powers. For example, when Cyprus stalled the decision to impose sanctions on the regime in Belarus, it did so to receive an equal level of solidarity on sanctions for Turkey’s illegal actions in the eastern Mediterranean. The decision was not taken to aid Lukashenko, even if it helped slow down EU sanctions on the regime. With foreign powers seeking to directly influence EU policy, however, we cannot easily overlook how foreign powers may try to instrumentalise or encourage national vetoes in certain cases. As “Qatar Gate” has shown, EU bodies can – and will – be the direct targets of foreign influence operations.
A central question facing the EU then, is how to ensure that decision-making processes in foreign and security policy are free from foreign interference/influence. Combined with the need to manage a Union of 27 members that may enlarge in the future, the calls for the use of Qualified Majority Voting (QMV) in foreign and security policy are getting louder. In essence, QMV is seen as an alternative to unanimity because it overcomes the risk that any single member state can derail a decision. While QMV is used in other areas of EU policy, in foreign and security policy it is still seen as a taboo, especially for many smaller member states that fear having their sovereignty in national security undermined. Nevertheless, in May 2023 a group of nine member states formed a vanguard (or “group of friends”) calling for the introduction of QMV in the area of CFSP, a point also echoed by several EU foreign ministers in a commentary piececalling for practical steps towards QMV.
Whenever politicians have called for the introduction of QMV in CFSP, however, they have done so on the understanding that a removal of the veto would speed up the EU’s reaction to crises and help to uphold the universal value of EU principles, norms and values even when consensus at the level of 27 is difficult. Through such arguments, proponents of QMV accept that the unity and effectiveness of EU foreign and security policy may flounder. Although there is an established body of research into the merits and pitfalls of QMV, in this Policy Brief we seek to specifically weigh-up the costs and benefits of QMV through the prism of foreign interference and influence. In doing so, we want to understand whether QMV provides an effective enough shield against foreign interference/influence.
Foreign interference, influence and EU foreign policy
Since at least Russia’s seizure of Crimea in 2014, the EU has increasingly become aware of the dangers of foreign “interference” and “influence”. Cases of interference are easier to detect: for example, think of how pro-Russian hackerstook down the website and computer system of the French Assemblée Nationale, how China threatened Lithuania with retaliation for allowing Taiwan to effectively open a de-facto embassy in its country, the defamation suits launched against European academics for commenting on Chinese telecom firms, the counter-sanctions imposed by China on European parliamentarians or even the reports that Qatar has attempted to directly influence EU legislation. Cases of influence are much harder to detect and usually take the form of disinformation or the propagation of narratives among willing (or unaware) audiences. As the French authorities recently revealed, state-backed Russian actors – including embassies and cultural centres – launched a comprehensive disinformation campaign against France through fake social media accounts, web spoofing and digital identity theft.
For the EU, the question of foreign information manipulation and interference (FIMI) has become a central issue for Europe’s security. Indeed, in its first-ever report on FIMI threats the European External Action Service underlined that Russia and China use diplomatic channels to enable FIMI operations, but that the bulk of FIMI threats come from image and multilingual video based attempts to impersonate trusted organisations and individuals. The main aim of FIMI campaigns has been to ‘distract and distort’ from certain narratives or to shift blame (e.g. when Russia blamed Europeans for the grain shortages in Ukraine resulting from its illegal war on the country). Overall, FIMI operations are manipulative in nature and largely follow a three-step approach of planning (discrediting credible sources), preparing (create deceptive messages, images, videos or platforms) and executing (flooding the information space and amplification).
Yet, there is a difference between how foreign interference/influence meshes with public diplomacy efforts and more indirect attempts to influence the diplomatic and political actions of states. For example, through a mixture of financial investments and preying on weak or fragile state institutions and civil societies there is a risk of “elite capture”. Europe, being an open and decentralised polity, is increasingly vulnerable to harmful investments, loans, military ties and technological interconnectedness (e.g. 5G). In particular, the EU’s foreign and security policy decision-making is one area of interest for foreign actors, as the CFSP architecture is where member states collectively devise the strategic direction and actions of the EU on the world stage. Active measures to disrupt, disarm and disable EU foreign and security policy is no conspiracy theory. Indeed, the Union would not have developed policies designed to counter harmful foreign direct investment, trade and supply chain coercion or disinformation were it not for the risk of foreign interference/influence. As the EU’s Strategic Compass recognises, there is a need to ensure the decision-making autonomy of the CFSP.
Unanimity, QMV and foreign interference
It is not too difficult to see how foreign interference/influence may seek to disrupt, disable and disarm EU foreign and security policy. First, we should recognise that the issues that can divide EU member states are all publicly known, including migration and sanctions – we should expect interference/influence measures that play on the cultural, social and economic anxieties related to these challenges. Second, individual member states may have cultural and/or economic ties to foreign competitors and rivals, making it difficult to prove whether decisions are made, at least in part, to maintain or favour these relations. EU member states have a commitment to one another, as underlined the treaties, but they also maintain bilateral relations with non-EU states. When combined with the fact that unanimity prevails in CFSP, the potential effect of a foreign influence campaign is substantial. A veto by a single member state that, at least in part and albeit indirectly, serves the interest of a foreign adversary or rival is enough to undermine CFSP.
This risk may, however, appear somewhat tenuous and conspiratorial. The truth is that the opaque dealings of the EU foreign affairs council means that we can never know what really motivates member states to veto CFSP decisions. Beyond what intelligence services may know about the links between European elites and foreign adversaries and rivals, we only have incomplete and infrequent media reports about the context behind the threat and use of a veto. For example, when Hungary blocked an EU human rights statement on China’s crackdown of democracy in Hong Kong in 2021, press sources pointed to the close ties between Beijing and Budapest. They claimed that increased Chinese investment in Hungary and Hungary-China cooperation on medicinal and healthcare products during the Covid-19 pandemic, ensured that Hungary did not want to take a hard-line on China. However, Hungary ultimately did not block the parallel EU sanctions on exports of security equipment to Hong Kong, and the government’s own rationale for blocking the EU statement centred on concerns about the effectiveness of such statements, as well as an ideological position against Europe’s centre-left politicians.
Just because foreign interference/influence is one among many potential reasons for a member state to veto a CFSP-related decision, does not take anything away from the malign actions of foreign adversaries and rivals. Arguments in favour of QMV in EU foreign and security policy have not, however, always focused on a need to counter foreign influence and interference. In fact, most studies and political declarations have argued that QMV would help speed up EU action and thereby enhance its credibility as an international actor. The case for QMV points to how the threat or use of veto on human rights statements on China or sanctions on Belarus points on an urgent need to overcome unanimity. Critics argue, however, that QMV is a way of breaking unity and solidarity in the Union, and they question whether decisions taken even by a majority will be effective. For example, how to effectively implement sanctions on third countries when a member state actively voted against the imposition of them in the first place?
Others still may argue that, by and large, member states are still able to reach consensus when it pertains to major crises. In the response to Russia’s war on Ukraine, for example, consensus has prevailed over various rounds of sanctions. Indeed, where national interests needed securing (i.e. the protection of sectoral economic interests) EU member states have utilised the principle of constructive abstention more frequently: despite their neutrality, Austria, Ireland and Malta all abstained from the decision to send lethal equipment so as not to stand in the way of a common EU position.
Maintaining decision-making autonomy
While some have rightly observed that any CFSP decision taken by QMV may command less respect in the eyes of partners and/or adversaries, we believe that QMV could prove a useful approach to countering foreign interference/influence and maintaining the Union’s autonomy. In contexts where individual EU member states are particularly vulnerable or susceptible to economic coercion or political pressure, QMV can offer an effective “escape route” from influence and interference. For example, with QMV a government can still vote against a policy measure, which would placate its foreign partner, while still being bound by the agreed EU decision. In essence, this allows vulnerable member states to have it both ways while ensuring that the Union’s overall credibility and ability to act are not curtailed.
Using QMV may also send an important signal to foreign adversaries and rivals, and force them to reformulate their strategic calculations. In fact, knowing that QMV will enhance the Union’s protection against foreign interference/influence may even prevent foreign actors from attempting harmful investments, influence campaigns and other strategies in the first place. What is more, although QMV may be seen to shed light on divisions between EU member states, when a majority coalesce around a single position it can have advantages in upholding the Union’s fundamental principles, norms and values. In this sense, while QMV may be instrumentalised by foreign powers as evidence of a divided Union, the fact that no single member state would be able to undermine decisions that advance the EU’s values, norms and principles would send a powerful signal to the world and reinforce the idea that the Union’s founding principles are inviolable.
Of course, we recognise the risks of QMV. It is a challenge to the principle of sovereign equality in the foreign affairs council, and QMV can embody some degree of hypocrisy. For instance, smaller member states cannot credibly be accused of being captured by foreign powers when these same powers own critical infrastructure and investments in larger member states. We also recognise that needing to counter foreign interference/influence cannot be the only justification for QMV in CFSP and, for QMV to work, the Union needs to ensure the effectiveness of its policy once agreed: it is no good having faster policy-making procedures if its policy has little effect in the real world. We also recognise that, short of introducing QMV, the EU needs to counter foreign interference/influence across the board to help lower the risk that foreign powers dissuade, disarm and disable EU action. In the face of a more competitive era, debates about the Union’s decision-making apparatus needs to pay much greater attention to countering foreign interference/influence rather than just a focus on speed.
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The Weight of Expectations: The EU and the Protection of Europe
One of the consequences of the war on Ukraine has been a greater realisation that the defence industry matters to the European Union (EU). This may seem like an odd statement given that the Union started to stimulate its defence industry after the EU Global Strategy with frame- works and tools such as the EuropeanDefence Fund (EDF) and Permanent Structured Cooperation (PESCO). Since 2016, the vast majority of EU Member States have been involved in 60 PESCO projects and a host of defence research and capability development projects under the EDF. Before the war, the EU also sought to create greater linkages between its €115 billion (up to 2027) investments in defence, space and civilian research. So, the EU did not need a war to realise its defence industry was worth supporting.
However, what was always missing in the EU’s defence industrial policy was a compelling political reason for investing in the sector. To be sure, EU governments understood that investing in the defence sector was a matter of boosting the Union’s industrial competitiveness. What they did not have, however, was a reason to link the need to enhance the defence industry with any response to military aggression in Europe. Thus, what has been brought about by the war is a link between politics, military strategy and the defence industry. Recall, that some leaders have even referred to the need for a “war economy” characterised by greater defence spending and military production.
EU Military Forum, 2023, No. 2.
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Cooperation in an Era of Strategic Competition: EU-NATO Relations in the Context of War and Rivalry
This Policy Brief looks at the growing relations and cooperation between the European Union (EU) and the North Atlantic Treaty Organisation (NATO). It does so in the context of a return to war in Europe and growing strategic rivalry between the United States (US) and China. Europeans have long been called to take on more responsibility for their own defence and there is a window of opportunity to build these relations sooner rather than later.
Norwegian Institute of International Affairs, 2023
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Disorder: the War and Russia’s Economic Statecraft
Abstract
Since Russia’s invasion of Ukraine in February 2022, the West has looked to support Kyiv and impose crushing economic measures on the Russian economy. Sanctions and divestment have punctured a hole in Russia’s war fighting machine, but there are also fears that the Kremlin has been able to use a form of economic statecraft to weather the storm. If Ukraine is to succeed in defeating Russia, and if the West is serious about ensuring that Russia’s ability to wage future war is severely dented, then a greater focus on Russia’s economic statecraft is required. Yet, as this Policy Brief argues, Russia has used an effective suite of tools to ensure that the Russian economy is relatively protected from the West. What is more, the Policy Brief argues that the growing vassalisation of Russia to Chinese power is likely to alter the global order that has prevailed for decades.
CSDS Policy Brief, 2023, No. 13 (written with J. Alexander Thew, Frank Finelli and Mickey P. Strasser)
Introduction
Since Russia’s invasion of Ukraine in February 2022, Western countries have looked to support Kyiv and impose crushing economic measures on the Russian economy. These measures have punctured a hole in Russia’s war fighting machine, but there are fears that the Kremlin has been able to use a form of economic statecraft to weather the storm. For example, while Europeans have drastically reduced their dependence on Russian energy sources, Moscow still exports to global markets at nearly the same pre-war scale, which helps it generate the revenue needed to support the Russian economy and “weaponise” energy flows to new export markets – as it once did in Europe.
If Ukraine is to defeat Russia, and if the West is serious about denting Russia’s ability to wage future war, then a greater focus on Russia’s economic statecraft is required. This Policy Brief focuses on how Russia has adapted to changing economic circumstances and it details important aspects of the Kremlin’s approach to economic statecraft. What is more, the Policy Brief looks at the growing Sino-Russian partnership and how it is likely to alter the global economic order that has prevailed for decades.
Our arguments are based on observations made at an international security seminar held at the US Military Academy, West Point, on 9-10 February 2023. During this seminar, the authors were part of panel discussions as moderators, speakers, discussants and rapporteurs and they exchanged views on the evolution of geo-economics and global strategic competition. In this regard, this last piece in a series of three Policy Briefs from the international seminar provides a window into the importance of economic statecraft. Needless to say, we write here in our personal capacities and none of the content herein can be attributed to our respective employers.
The ruble in the rubble?
Quite understandably, Russia’s military invasion has Western minds focused largely on Ukraine’s military effort. There are daily scenes of brave Ukrainian soldiers fighting in drenched trenches, reminiscent of the First World War. Yet, beyond the fighting fields in Ukraine there is a wider story of Russia’s attempts to increase its power. While it is true that territorial landgrabs through military force are central to Russia’s geopolitical strategy, we cannot overlook its wider interest in competing with the West more generally, and the United States (US), in particular. Russia wants to dilute the power of the US and the West by supporting rival blocks and carving out “spheres of interest” for itself. Yet its military is not the only method through which it seeks to compete with the West: its economy is another.
While there is confidence that the sanctions imposed on Russia will drastically constrain the Russian economy, Western countries have to be wary of Russia’s ability to adapt to changing economic circumstances. Russia makes use of a sophisticated pool of macroeconomic specialists that were educated and cultivated during the Cold War – a time when the Soviet economy was also undergoing economic pressures despite being one of two global powers at the time. Individuals such as Elvira Nabiullina – the governor of the Russian central bank – are often depicted as economic modernisers, but she earned her spurs working in economic development, trade and industry during the post-Soviet period and the rise of Putin.
Without overly mythologising such individuals, their ability to help stabilise the Russian economy in the wake of unprecedented Western sanctions bears some reflection. In essence, such individuals have been able to use the peculiarities of the Russian economy to their advantage – at least for now. In Russia, market relations between firms and the government are tightly organised, giving central government far more scope to manipulate the economy for geopolitical ends. Even though Russia cannot be likened to the Soviet-era centrally planned economy, Russia’s so-called “market economy” is in fact largely concentrated in the hands of a few state-controlled oligarchs. Accordingly, the strong linkages between state planners, political officials and economic actors is more reminiscent of the Chinese system.
While Western countries should continue to impose its far-reaching sanctions, Russia has been able to weather the economic storm so far by distinguishing between real capital and money capital. In practice, this means that the Russian state is able to protect the physical elements of production in critical economic areas such as agriculture, raw materials and energy. To this end, Russia is seeking to shield itself from Western sanctions and divestment by protecting its means of production. Thus, while Russia is excluded from international finances via SWIFT, Moscow has been able to stabilise the ruble and ensure that the most basic needs of society are still met. In fact, the ruble appreciated to $/RUB50 last July, nearly six months into the war – the strongest level since late 2014. What is unclear is how sustainable Russia’s reliance on a current account surplus – worth some $227 billion in 2022 – will be over the medium- to longer-term, especially as it tries to rebuild and modernise its military.
For Western countries, it is important not to fall into the trap of measuring Russia’s economy through the favoured metrics of liberal economists (e.g. GDP). Indeed, if Russia is able to adjust to economic pressures by protecting its critical industries and trading international in Chinese yuan, this causes a major issue for the West’s future relations with Russia and China. The Kremlin’s ability to wage war in the future is conditioned on the health of its productive capacities. True, Russia will likely lose access to critical Western-sourced technologies, but it still might largely retain its ability to produce the means of war. In this sense, Russia is not just a major energy producer but it has a raw material base that makes it a continued danger to NATO and neighbouring countries.
“It’s the geo-economy, stupid!”
One of the more direct lessons from the war on Ukraine is that Western countries cannot measure Russian actions through its liberal mindsets and its own norms. Another lesson is that Russia will surely try to compensate for its lacklustre military performance in Ukraine by focusing on its geo-economic power over the longer-term. Cultivating its industry and using the power of the state to give direction to its economic relations with the world poses a particular challenge for the West. While many have become comfortable with the notion that free market societies are more resilient than state-controlled economies, this does not make authoritarian states and economies any less dangerous. This can be seen in the way that Russia continues to trade with countries such as China, Turkey, India and Central Asia.
However, one of the growing issues facing the West is how Russia may seek to offset some of the economic damage it has experienced since the war on Ukraine through closer ties with China. We know that Russia and China agreed to a “no-limits” partnership in early February 2022, and since the war countries such as China and India have replaced Germany as the world’s leading importer of Russian oil and gas. We also know that both Vladimir Putin and Xi Jinping have world views that were forged through their upbringing in communist systems. For both China and Russia, power is not simply about military force but mobilising the industrial base to erode the West’s economic dominance: keep in mind that for such leaders the economy means more than just growth, for it links to ideologically informed understandings of inequality and development. As Xi Jinping stated during a speech to senior Chinese officials in February 2023, China’s economy must be more efficient than Western capitalist economies and it should seek its own, non-western, route to economic development.
We have already seen Russia and China become closer in relation to capital flows, with Moscow keen to gain access to China’s money markets and capital investment. Closer financial and economic ties between Russia and China could eventually undermine the dominant role of the US dollar, and we have seen how the two countries have announced plansto create a parallel capital transfer system to SWIFT largely based on China’s existing Cross-Border Interbank Payment System (CIPS). True, some caution that China and Russia do not presently have the financial reach of SWIFT and that capital and payment transactions under CIPS still only represented 6% of the global total in 2020. However, it is unclear today to what extent CIPS will become the major transactions system in the Indo-Pacific in the future, with countries such as India – with huge existing and future financial stakes – reportedly interested in a rival payments system to the dollar and euro.
Of course, economic statecraft involves the instrumentalisation of technology and the fundamentals of economic life such as energy and food. We have, therefore, seen bold steps in Western countries against the use of services offered by Chinese companies such as Huawei and TikTok. Yet, a focus on how Russia and China develop strategies to potentially up-end the West in capital markets is equally, if not more, important than the more blatant instruments of economic statecraft. One of the major concerns for the West is that, at a time when the Communist Party has exerted far greater control over the Chinese economy, Western investments in the country continue. While investment confidence in China has started to wane, firms continue to invest in areas like vehicle battery technology and high-tech components. This marks a core vulnerability for Western businesses that could be exploited by authorities in Beijing. Incidentally, this is an issue that is also recognised by senior leaders in the EU with the President of the European Commission calling for the Union to de-risk its diplomatic and economic relations with China, in addition to calling for a new economic security strategy for the EU.
However, it would be a mistake to only view Russia’s approach to economic statecraft through the prism of closer Sino-Russian ties. In fact, there is evidence to show that Russia has been using its current account surpluses to lend to capital-starved borrowers in the non-Western world. Such investments did not begin with Russia’s war on Ukraine, but the crisis has lent greater credence to Russia’s need to generate economic dependencies globally. Thus, research has shown how Russia has been prepared to invest in countries even China largely avoids, including Cuba, Bolivia, Ecuador, Nicaragua, Tanzania, Venezuela, Zimbabwe and more. Russia seeks to invest in fragile countries for a multitude of reasons including raw materials and using economic ties to undermine Western interests in international fora, all while using para-military organisations like Wagner Group to ensure the stability of investments and the political narrative of “anti-colonialism”.
Towards a Western strategy of statecraft?
In this last Policy Brief in a three-part series, we have argued that Russia’s economic statecraft gives Western countries even more reason to out-compete authoritarian states. There is today no coherent Western blueprint for economic statecraft, even if the contours of an approach are becoming clearer. This can be seen in the steps to “reshore” or “near-shore” critical industrial capacities back in the West and to lower dependences on authoritarian states. In the specific case of energy, we saw how Europe moved quickly to cut its fossil fuel dependency on Russia. Yet, the EU is only getting started on understanding the scale of Russian state-backed assets held in European banks. Europe can still place more economic pressure on Russia but the challenge posed by growing ties between Russia and China requires a rethink about how Western countries protect their economic interests.
Clearly, Washington increasingly recognises that the federal government has an important role to play in ensuring that US economic interests are safeguarded. This is the logic behind the Inflation Reduction Act, which seeks to support US industry and jobs through financial incentives worth some $500 billion and tax incentives for clean energy. In February 2023, the EU came up with its own strategy but without committing any new finances, even if its €750 billion“NextGenerationEU” effort is directed towards the digital and green transitions. The risk facing the US and EU is a “subsidies race” that, while helping to address climate change, may lead to missed opportunities to strengthen transatlantic supply chains and technology cooperation.
While the EU and US are discussing their mutual efforts to avoid any undue economic harm, the reality is that the EU has been historically far too cautious with investing in major strategic industries. In all of the high- and critical-technology areas where the US dominates today, successive governments have been willing to take a risk on investment and spend to strengthen strategic industries. If the EU is the ‘world’s trading superpower’ that it thinks it is, then it needs to be bolder on investments in key critical sectors.
However, the US and EU will not be able to simply invest their way out of competition with China and Russia: more transatlantic unity on critical raw material supplies, technology control and countering harmful foreign investment is required. This Policy Brief has outlined some of the ways in which Russia is using economic statecraft to offset its, as yet, poor military performance in Ukraine. Western countries cannot be lured into a sense of comfort over Russia’s military deterioration; more than likely, Russia will use economic tools to menace its neighbours.
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In Every Crisis an Opportunity? European Union Integration in Defence and the War on Ukraine
Russia’s war on Ukraine has upended the European security order. Ukraine has requested EU membership, unprecedented sanctions have been imposed on Russia, European countries have shipped weapons and munitions to Ukraine and NATO has shored up its military presence. Despite such action, is it possible to speak of a transformative moment or ‘Zeitenwende’ for EU security and defence? This article analyses the state of EU integration in defence since the war on Ukraine. Drawing on hypotheses developed under ‘new intergovernmentalism’, this article analyses how EU Member State preferences in defence and intergovernmental-supranational dynamics are being shaped by the war. In particular, the article probes how supranational and intergovernmental institutions have reacted to the war and how domestic preferences have fed into recent EU defence efforts. In doing so, the article provides a preliminary assessment of the state of EU integration in defence since Russia’s invasion of Ukraine.
Journal of European Integration, Vol. 45, No. 3
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Counter-order: Chinese Power, the West and Geo-economics
Abstract
The United States (US)-led world order that has prevailed for the past few decades is being contested by rival powers such as China. A crucial aspect of great power competition is economic statecraft and China is skilfully fusing various aspects of its economic diplomacy and financial strength to undermine the US and its allies. China’s rise occurs in a specific context: the looming challenge of a more decentralised global economy marked by non-state actors and alternative currencies. Maintaining the US’ dollar dominance has emerged as a key plank of Washington’s overall grand strategy toward China, but the West still needs to collectively develop a coherent strategy for economic statecraft. This Policy Brief outlines and analyses the prevailing global economic context, the counter-order being developed by China and the growing importance of geo-economics for Western countries.
CSDS Policy Brief, 2023, Vol. 12 (written with J. Alexander Thew, Frank Finelli and Mickey P. Strasser)
Introduction
Global order over the past three decades has been governed by the rules and institutions set by the United States (US) and West. Globalisation has led to increased trade and this has contributed to a reduction of poverty and higher standards of living across the globe. China has been one of the main beneficiaries of this trend. Yet, rising incomes and integrated markets have become somewhat of a double-edged sword because the wider distribution of resources means any war will result in high economic costs. The idea that globalisation, interdependence and trade will bring world peace has been challenged. If anything, wider access to wealth, industry and capital has led to the military modernisation of states that want to subvert the very order that led to their development. This Policy Brief looks at how rival powers such as China are using economic statecraft to enhance their relative power and subvert the Western order that has prevailed since at least 1944.
Our arguments in this Policy Brief are based on observations made at an international security seminar held at the US Military Academy, West Point, on 9-10 February 2023. During this seminar, the authors were part of panel discussions as moderators, speakers, discussants and rapporteurs and they exchanged views on the evolution of geo-economics and global strategic competition. In this regard, this second piece in a series of three Policy Briefs from the international seminar provides a window into the growing importance of economic forms of power and the weaponisation of economic interdependencies. Needless to say, we write here in our personal capacities and none of the content herein can be attributed to our respective employers.
Creating the counter-order
China is a major economic power but it is ruled by a single, authoritarian, political entity called the Chinese Communist Party (CCP). In this sense, the Chinese “state-capitalist” economic model is different to those found in the US and Europe. The CCP is in a position to align its economic and geopolitical strategy. For example, China has offered negative real interest rates to subsidise loans to State-Owned Enterprises (SOEs), which has fuelled Chinese firms’ global expansion, drowned out fair competition and supercharged the China’s industrial development. With Russia’s sizeable resources and its closeness to the Chinese economy, the world is steadily bifurcating between the American and Chinese economic models.
However, the US and China are still engaged in an economic relationship of convenience. The West’s wealthy consumer base supports China by importing its goods. Only relatively recently have we seen measures to “reshore” or “near-shore” manufacturing capacity back to the West and to protect key industries (e.g. semiconductors). Given the economic interdependencies between the West and China, and in the context of growing strategic rivalry, a greater focus on economic security is to be expected. However, this focus cannot be confined to lowering trade dependencies. To be sure, ensuring that Chinese technologies cannot be used for the purposes of espionage, surveillance and/or sabotage (e.g. 5G) remains an important priority.
The US dominated global financial system is being questioned by China. Should the Chinese yuan effectively challenge the dollar in parts of the global financial system, then capital flows could shift more easily in China’s favour. China and its like-minded partners have a vested interest in weakening the dollar, even if they do not want the responsibility and cost of becoming the world’s reserve currency. What is more, China has a stake in not weakening state power in global currency markets more generally. Indeed, in 2021 Beijing outlawed crypto trading and mining. Such steps were taken as the rise of bitcoin led to capital outflows from China and a depreciation of the renminbi.
The US dollar will likely maintain its dominance for the foreseeable future, but China is able to erode Western economic power in other ways – not least by deploying infrastructure and aid programmes. China’s “Belt and Road Initiative” (BRI) is both infrastructure and aid development because it seeks to increase interdependencies between Beijing and developing countries. China seeks to use the BRI to globally promote its SOEs and norms, and ensure that the developing world sides with Beijing. To this end, China coats its interactions with normative pleas to historical anti-colonial movements, all while pursuing its own national interests.
Although there have been reports about the supposed demise of the BRI, the Chinese state holds to the idea of investing US$1 trillion until 2027 in infrastructure projects such as roads, railways and ports in over 70 countries. The challenge facing China is how to effectively leverage these BRI infrastructure projects when recipient states do not share China’s normative view of the world or interests in international fora such as the United Nations. In such cases, China needs more than economic inducements and so it may choose instead to use its diplomatic and military power to coerce BRI partners. China is already opening military bases in Africa.
China’s efforts have given rise to US and European Union (EU) alternatives called the Build Back Better World (B3W) and Global Gateway initiatives, respectively. These initiatives offer developing countries an alternative because the sustainability of the BRI could be called into question in the future. Any major economic shock in China or change in the CCP’s economic strategy could choke inward investment flows to developing nations, which would be destabilising.
Alternatively, the growing dependency of developing countries on China could benefit the CCP for more than just economic reasons. For example, if these countries default on debt payments, they could become even more dependent on China because these financial agreements are often collateralised with rights to critical infrastructure. This, in turn, could lead developing countries to “hand over” strategic infrastructure assets (e.g. ports and electricity grids) to China in the form of direct ownership or favourable concessions. High profile cases in Ecuador and Sri Lanka already point to some of the fears associated with the BRI.
Furthermore, there is also evidence to suggest that China will weaponise its vast wealth in critical raw materials. China’s relations with countries in Asia, Africa and Latin America are partly predicated on the strategy of securing further global supplies of raw materials. Both the US and the EU are taking steps to ensure access to supplies of materials, but the challenge facing Western countries is that resource needs will only increase with the technological demands of the digital economy. We already see how governments in the West are becoming more aware of the importance of critical minerals: in 2018, the US listed 35 minerals that were deemed critical for the economy and national security, but this list was increased to 50 in 2022
The currency of power
In addition to China’s strategy, there is a need to think about the overall health of the global financial system. For example, cryptocurrencies seek to circumvent state authority by verifying transactions and maintaining records with a cryptographically based and decentralised system. Although China and other countries have sought to ban or strictly control cryptocurrencies, there are still high adoption rates in emerging markets and bitcoin even bounced back within months of China’s ban. While cryptocurrencies and blockchain technology still fail to substitute traditional government-backed currencies, and are as yet to be tested as a viable alternative on a global scale, they are an issue of growing concern to governments.
In fact, the regulation of cryptocurrencies might be one of the few areas where China and the US currently agree, though China appears to be on a much more aggressive path for implementing a central bank digital currency, which could be quite disruptive. State-backed currencies have allowed governments to both regulate the global economy and exercise state power (e.g. central banks manage prices and inflation). For this very reason, advocates of cryptocurrencies tend to be ideologically opposed to the role of the state in the global financial system, and cryptocurrencies are seen as a way of decentralising financial transactions.
Questioning the role of governments clearly threatens to up-end traditional forms of global financial governance. Here, crypto entrepreneurs seek – but have so far failed – to supplant the state’s traditional role of ensuring trust between sellers and buyers. Indeed, the increasing uptake of cryptocurrencies threatens to make it harder for the West to impose sanctions on hostile individuals, firms or states. For example, cryptocurrencies have the potential to skirt the SWIFT banking system entirely – this system handles more than 44 million financial messages per day.
Cryptocurrencies raise serious public policy concerns. For example, there is no agreed international tax system for goods and services traded with cryptocurrencies. Tax avoidance and evasion through cryptocurrencies can undermine state tax-takes and dent public budgets for critical spending areas such as defence. In this respect, cryptocurrencies could overlap with the creation of new tax havens and expanded illicit activity, which could be instrumentalised by state rivals and/or criminal organisations.
Relying on cryptocurrencies implies a greater need to enhance cybersecurity protocols and the protection of the electronic information network. It is questionable whether a decentralised currency has the resources or political authority to provide such security and assurances. The US and its partners have a vested interest in not seeing cryptocurrencies finance illicit economic activities. With this decentralised currency system in place, it would be certainly harder to trace and punish illegal activities – some research already claims that 23% of all cryptocurrency transactions are associated with criminal activities.
The challenge facing the West and China in the coming years is how to benefit from digitalised banking, while still being able to control the negative effects of this evolution in financial markets including greater control of these currencies by private actors. Both the US and EU are exploring the benefits and possibilities of introducing a “digital dollar” or “digital euro”, but both have taken a rather cautious approach to the issue. China, for its part, has been more adventurous in the pursuit of a “digital yuan” and the government sees it as a way to boost domestic equality and economic growth. Thus, while China, the US and Europe all want to maintain political control over innovative currencies, the full geo-economic implications of the introduction of digital currencies are unknown but some features are becoming clearer. This includes how China could utilise a “digital yuan” to facilitate cross-border payments to reduce the impact of U.S. sanctions.
The demands of dominance
In this second Policy Brief in a three-part series, we have discussed some of the geo-economic undercurrents at play in the rivalry between the US and China. Clearly, strategic rivals like China have a vested interest in challenging – while not fully replacing – the dominance of the US dollar, but we have also touched upon the interplay between finances and infrastructure, aid and currencies. The logic that has guided us in this Policy Brief is a belief that state planners in Western countries are still behind the curve in developing strategies of economic statecraft. While it is true that the US, the EU, Australia, Japan and others are rapidly developing their economic security strategies, we have tried to show how capital flows, debt and economic dependencies form an intricate web of vulnerabilities for Western countries. It is unclear how digital currencies will develop in the future, but we see significant risks in this unconventional currency, which could give rise to decentralised financial flows and more organised crime.
The maintenance of the US dollar as the world’s reserve currency has been a fundamental element of US power and the foundation for the growth of democracies around the world, but the risks associated with the rise of rival currencies such as the renminbi are clear. Today, the US dollar is faced with growing competition in currency markets. China is seeking to use the renminbi to lure states around the world into its own economic orbit. The major challenge for the Western world today is how China can combine its currency ambitions with other tools of economic statecraft including infrastructure projects through the BRI, the instrumentalisation of debt in developing countries and using its relative wealth in critical raw materials to control global supply chains.
The solution to these growing challenges is far from simple. As Western countries continue to use sanctions, tariffs and technology controls to challenge rivals, states caught in the cross-hairs of such measures may be tempted to align with China in acts of self-preservation. This observation is not a call to lower the sanctions imposed on Russia, but it is an invitation for the West to think about all its other diplomatic relationships around the world in places such as Latin America, Africa and Asia. China today finds it far too easy to pull out the “colonialism” card against the West, but the world should be reminded that China is in many respects engaged in a form of “neo-colonialism” in many parts of the world. So far, Western countries have not come up with a compelling narrative and strategy that can rival China.
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Daniel Fiott 