Ever since the end of the Cold War, certain segments of the U.S. elite has viewed the world as if it is just one big happy marketplace, and that economic policy is the only thing that matters in global statecraft. Wars and instability have been seen as things that happen in parts of the world that are meaningless, except to the extent that those places contain oil. In any case, whatever global shocks do occur as a result of political instability have been short-lived as markets have tended quickly recover and resume their “normal” path. In this view, Europe and Asia have come to be seen as a continents of political &economic stability. What instability there was here has been seen as a function of poor economic policies, with better economic policies being seen as the solution.

Recently, Vladimir Putin and Russia have intruded rather abruptly into this mostly happy narrative with actions in Crimea and the Ukraine. By bringing back specters of the Cold War, Putin has reminded everyone that Europe’s destiny as a fortress of political stability (like the continental United States) where war has, to quote one European politician, “been absolutely ruled out”, is far from assured.

To those who have followed Russia over the last 15 years, these developments are not terribly surprising. While Europe and Asia (and to some extent South America) have been liberalizing markets and crafting a liberal-market economic order, Russia has been operating along its own set of rules. While most states seem to see economic policies as a tool to improve the performance of companies and increase the prosperity of their citizenry, Russia appears to see its companies and economic policies primarily as a tool of global statecraft. For example, Germany has made itself so dependent on Russian gas (and Putin has shown no qualms about reducing or turning off the gas flow in other disputes) that it is inhibiting a united European response to the situation in the Ukraine.

Since the end of the Cold War, European states outside of Britain and France have largely tended to look at defense spending as a sort of welfare spending. Without an obvious threat and with the United States underwriting the security of Europe anyway, defense spending has not been a high priority. Consequently, European states have built up their economies, focused on trade, and enjoyed life (at least until the debt crisis). Going forward however, geopolitics is likely to have a more visible impact on the economic sphere. Firstly, as Europe increases defense spending, economic growth is likely to slow as defense spending tends to be economically unproductive spending, especially when you are just buying arms from another country. Secondly, with Russia appearing to be attempting to reconstitute the Soviet Empire is some form, they are likely to take (or threaten to take) economically disruptive actions from time to time, further hampering global economic growth. Thirdly, investments will now need to be made to counter or work around Russia, raising the cost of maintaining the global economic order and slowing economic growth.

Over the last 25 years, the field of economics and the policymaking elite appears to have forgotten the geopolitical aspect of economics. Economics is often seen as the interplay of market forces. To the extent that politics plays a role, it is often seen as secondary and being driven by market forces. What we have in the case of Russia may be a situation where politics is primary and economics is secondary. The Russian model of state capitalism appears to be organized along this assumption, in which many actions of its global companies appear designed to achieve political results rather than economic ones. Russia today is an actor that appears to be operating on a different set of assumptions than what has underpinned the global economic order. The surprise of the elite was expressed by no less a personage than President Obama when he stated that Russia was taking a 19^th century action in the 21^st century. Like it or not, Russia is determined to be a political player, and it appears that its actions are likely to have a negative economic impact globally.