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The Turning Point of 2008

At first glance, the Georgian war ten years ago this month and the global financial crisis that erupted the following month seem unrelated. But this is to neglect the deeper currents driving the confrontation in the Caucasus.

NEW YORK – Ten years ago this week, Russian tanks halted a few hours’ march short of Tbilisi, the capital of Georgia. That short war in the Caucasus brought down the curtain on nearly two decades of post-Cold War Western hegemony in Europe. Encouraged by US President George W. Bush’s administration, Georgia had initiated NATO membership talks, impelling Russian President Vladimir Putin to defend the red line he had drawn the previous year. Russia, Putin announced at the Munich Security Conference in February 2007, would regard any further eastward expansion of Western institutions as an act of aggression.

In August 2008, European diplomats scrambled to stop the fighting. Within weeks, however, the onset of the global financial crisis captured the world’s attention. In Washington, London, Paris, Berlin, and Moscow, preventing bank failures, not military escalation, was the most pressing problem. At first glance, the Georgian war and the global financial crisis seem unrelated. But this is to neglect the deeper currents driving the confrontation.

The absorption of post-communist Europe into the West was not simply a matter of velvet revolutions. What Bush’s defense secretary, Donald Rumsfeld, called “new Europe” – the post-communist NATO allies and European Union members – depended on hundreds of billions of dollars in investment. The loans came from the same European banks that helped fuel the US real-estate boom and inflate the even bigger housing bubbles in the United Kingdom, Ireland, and Spain. The most extreme real-estate inflation in the world between 2005 and 2007 was on NATO’s Eastern frontier in the Baltics.

Along with a security guarantee against Russia, the post-communist countries craved prosperity. By the early 2000s, former Soviet republics like Georgia and Ukraine, which had not gained admission to either NATO or the EU, feared being left behind. Their desire to “catch up” prompted the so-called color revolutions of 2003 and 2004, reflecting their belief that economic growth, democratization, and a pro-Western orientation went hand in hand.

But it was not only the Soviet Union’s former satellites that benefited from the debt-fueled global boom. The authority and power of Putin’s regime, too, was (largely) a function of globalization – specifically, the huge surge in oil prices. In 2008, it seemed that Russia’s state-controlled energy giant Gazprom, benefiting from unprecedented growth in emerging-markets demand, led by China, might soon become the world’s largest corporation.

In 2008, two pressure fronts of global capitalism were rushing toward each other across Eurasia. While Western investment drove economic growth in Central and Eastern Europe, the commodity boom sustained Russia’s geopolitical revival. Of course, these trends need not have led to a clash. According to the mantra of globalization, at least, trade benefits all sides.

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The EU insists on the innocence of its model of integration. The goal is peace, stability, and the rule of law, not geopolitical advantage, its senior representatives guilelessly maintain. Whether or not they truly believe it, the EU’s new post-communist members saw it differently. For them, NATO and EU membership were part of an anti-Russian package, just as they had been for West European countries in the 1950s.

Whenever Germany pushed détente with Russia too far, tensions flared. In response to the agreement in 2005 to construct the Nord Stream gas pipeline, Poland’s then-foreign minister, Radek Sikorski, denounced it as a new version of the 1939 Molotov-Ribbentrop Pact.

Although Ukraine, too, applied for NATO membership in 2008, it did not provoke Russian intervention. But the war in Georgia split the Ukrainian political class three ways, between those who favored alignment with the West, those who favored Russia, and those who preferred a policy of balance. These tensions were further exacerbated by the impact of the financial crisis.

No part of the world economy was hit harder by that crisis than the former Soviet sphere. When global lending imploded, the most fragile borrowers were cut off first. Followed closely by a collapse in commodity prices, it dealt a devastating shock to the “transition economies.”

As one of the world’s largest oil and gas exporters, Russia was one of the worst affected. But after the humiliation of the financial crises of the late 1990s, Putin had seen to it that Russia was armed with substantial dollar reserves – the third largest after China and Japan. Reserves of $600 billion enabled Russia to ride out the storm of 2008 without external help.

The same was not true of its former satellites. Their currencies plunged. Interest rates soared. Inflows of foreign capital stopped. Some found themselves turning to the International Monetary Fund (IMF) for help.

In fact, the impact of the 2008 crisis split Central and Eastern Europe. The political leadership of the Baltic states toughed it out, accepting savage austerity to continue on their path toward euro membership. In Hungary, the governing parties were discredited, opening the door to Prime Minister Viktor Orbán’s illiberal regime.

But no country in the region was strategically more important, more fragile politically, or worse hit economically than Ukraine. In a matter of weeks, Ukraine was dealt a devastating one-two punch by the war in Georgia and the financial crisis. This opened the door to the successful presidential candidacy of pro-Russian Viktor Yanukovych in 2010, and set in train desperate financial negotiations with the IMF, the EU, and Russia, culminating in the crisis of 2013. Given current talk of trade wars, it bears recalling that it was an argument over Ukraine’s association agreement with the EU that led to Yanukovych’s overthrow and an undeclared war with Russia.

Back in 1989, the end of the Cold War seemed to suggest that market-driven economic growth was an irrepressible force that gave the edge to the US-led West. It was a small step from there to assuming that extending capitalism to the post-Soviet world would continue to shift the balance of power in the West’s direction.

The events of August and September 2008 taught two painful and deeply disconcerting lessons. First, capitalism is prone to disasters. Second, global growth did not necessarily strengthen the unipolar order. Truly comprehensive global growth breeds multipolarity, which, in the absence of an overarching diplomatic and geopolitical settlement, is a recipe for conflict.

Ten years later, the West is still struggling to come to terms with these disconcerting realizations. Today all eyes are on Asia, the rise of China, and its growing influence across Eurasia, Africa, and Latin America. But Putin’s Russia continues to be a spoiler. So we should not forget the Georgian crisis of August 2008, when it first became obvious how dangerous the new global economic dispensation might become.

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