The Multipolar World Dies in Ukraine

U.S. State Department/Then-Vice President Joe Biden and Xi Jinping raise a toast, 2015

What does it take for a country to be able to determine its own future? As Russian Iskander missiles hammer Ukrainian cities, that existential question has become live for the great powers once again. 

For Europe especially, the first and most urgent answer to this question is the necessity of independent military power. For the past several years, French President Emmanuel Macron has been a major advocate of European “strategic autonomy.” In the wake of the invasion, this has received a newfound sense of urgency and acceptance in Germany and elsewhere.

After years of budget cuts and depleted morale in its armed forces, Germany recently announced that it will spend $113 billion to modernize its military and permanently commit to spending 2% of its GDP on defense. Official statements make it clear Germany is embracing the concept of European strategic autonomy with this move.

Europe’s Military Deficit

A 2018 assessment of the German military by the German parliament’s military commissioner described its lack of military readiness as “dramatic.” Besides lacking fundamental modern military capabilities there is by all accounts massive institutional rot. The military commission’s findings included that there was an officer shortage of up to 21,000 men. Germany’s military lacks leadership and operational capability at virtually every level. 

The new military spending is meant to address this. But a dysfunctional military that receives an influx of expensive new hardware doesn’t suddenly become a highly-capable military. The result of the new spending could just be a dysfunctional military with expensive hardware. The German military may not have the capacity to absorb a massive one-time modernization effort and rapidly transform itself into a military power. 

German officials initially plan to buy a wide range of foreign-made systems, including buying 35 American-made F-35 fighter jets and Israel’s Heron drone. They also reaffirmed their intent to jointly build the Future Air Combat System (FCAS), a 6th-generation fighter plane, with France and Spain, and develop a strong European defense industry. But the project to build a new fighter, and whatever other high-tech weapons systems will be needed for strategic autonomy, depends critically on the capacity of Germany’s industrial base.

The Shanghai-based technology analyst Dan Wang has popularized the concept of process knowledge. It is the idea that technology is not just tools and schematics; it is the tacit knowledge needed to develop technology based on deep human experience. As he noted in a review of the book Taking Nazi Technology: Allied Exploitation of German Science After the Second War, the extensive Nazi technical data acquired by the U.S. Army in the aftermath of the Second World War proved basically useless to the Americans. It was the hard-won tacit knowledge of men like the German aerospace engineer Wernher von Braun that helped transform America’s rocket program and put men on the moon. 

This is relevant to a new generation of German engineers. The example of Germany’s F125-class naval frigate is instructive here. First conceived in 2005, the ship was finally delivered for sea trials after several delays in 2016. It failed the sea trials in 2018 and was deemed unfit for sea. The frigate’s builder eventually worked through the myriad of issues with the ship and finally delivered the last of four ships in its class in January 2022 with commissioning scheduled for mid-2023, 18 years after the project’s launch.

When interviewed about the failure of the ship’s sea trials by the Wall Street Journal, Christian Mölling, a defense expert with the German Council on Foreign Relations noted: “There’s a whole generation of German engineers who haven’t worked on a major defense project…It’s not that they lost this skill; they never learned it.” 

After decades of neglect, this lack of process knowledge is going to make rebuilding Germany’s defense industrial base very difficult. In contrast to Germany, the U.S. will spend $112 billion on military research and development (R&D) alone in 2022—roughly equivalent to Germany’s entire multi-year modernization fund. It will keep on doing so for the foreseeable future.

In contrast, the U.S.’s R&D budget is going towards the development of a panoply of systems that appear to fulfill the promises of 1980’s science fiction movies. A selection of projects under development includes hypersonic missiles, rocket cargo transportation, “Skyborg” drones, “Golden Horde” networked weapons, and the B-21 Raider stealth intercontinental strategic bomber. The U.S. has the resources and existing defense research and industrial base to operate on a completely different technological level. 

In the end, even if Germany’s modernization efforts are successful, they will not be sufficient for the EU to emerge as an independent military superpower. The vast gulf between the capabilities of individual EU nations and the U.S. is not going to close. There is also significant disagreement within Europe about whether the Russian threat should drive the EU to more military autonomy at all. The Eastern European nations who feel most threatened by Russia have historically been opposed to the concept of strategic autonomy because they feared it could weaken the U.S.’s commitment to NATO.

The Nordic countries have also long held a similar aversion to deepening a unified European defense structure. Sweden and Finland are internally debating becoming NATO members, not supporting any kind of independent European military alliance. The Ukraine war will only amplify these beliefs.

Any attempt to create a future EU defense architecture will necessarily have to be limited in scope and appear to be a complement to NATO, not a substitute for it, in order to gain acceptance. And if that is the case, what is the point? 

The biggest military change isn’t the prospect of a more militarily powerful and independent Europe, it is the tightening of the security relationship between the U.S. and its European and Asian allies. Since the war started, Japan and Australia have both sought to accelerate their military integration with the U.S. In Japan, its former Prime Minister even broke a long-standing taboo by proposing to host U.S. nuclear weapons. In Europe, every Eastern European nation in NATO has been seeking a permanent U.S. military presence. The war has hardened commitments now that the threats aren’t merely abstractions.

Europe Has Failed at Energy Independence

In response to the invasion, the U.S. and its European allies have imposed harsh trade sanctions on Russia. Between this and the inevitable long-term tension that will follow, Europe’s dependence on Russia for energy is called into question. 

A strategically independent Europe would need to phase out its dependency on importing Russian thermal energy sources (oil, gas, and coal) as well as develop a plan to make the EU more independent of global energy suppliers. But this is a herculean task. Europe has built almost no infrastructure to support alternative supplies. Roughly 45% of EU gas imports, and 40% of gas consumed came from Russia in 2021, according to the International Energy Agency.

An accelerated build-out of renewable energy resources won’t be enough for any European energy independence strategy. They can’t be built fast enough and at a large enough scale to replace thermal energy sources. Renewables like solar and wind also suffer from the intermittency problem—there needs to be a baseload power source when the wind isn’t blowing, and the sun isn’t shining.

The Europeans may regret their decision, with the exception of France, to move away from nuclear power as a baseload energy source and accelerate the closure of their nuclear plants. It takes between five to seven years to build a new nuclear plant, but having long abandoned the process knowledge needed to build these projects, even those schedules may be unachievable for Europeans. The first new nuclear reactor built in Europe in 15 years went online in Finland this month; the project started in 2005 and was delivered 13 years after it was initially scheduled to be completed. Nuclear is no longer an alternative in any time frame that would matter for Europe.

The primary near-term option to replace Russian gas is importing liquified natural gas (LNG) from the United States and Qatar. Germany has already started pursuing this strategy with Chancellor Scholz’s recent call for the fast-track development of two LNG import terminals.

The U.S. has the potential to be the Saudi Arabia of LNG. When LNG facilities currently under construction are completed later this year, the U.S. will have the greatest peak export capability in the world at 13.9 billion cubic feet per day (Bcf/d) per the U.S. Energy Information Agency. EQT, the U.S.’s largest natural gas producer, stated this month that the U.S. could produce up to 45 Bcf/d by 2030. For context, one billion cubic feet of LNG is roughly enough gas to meet the needs of five million U.S. homes for a day.

The sudden change in the economics of LNG has been dramatic. During the COVID-19 pandemic, the LNG market was hit with low prices and oversupply due to decreased demand. LNG complexes are both fantastically expensive—typical construction costs range from $25 billion to $30 billion—and fantastically complex to build. The drop in prices led to investors refusing to fund new projects on a speculative basis—they required project developers to have supply contracts in place which led to a virtual halt to construction. In the U.S. alone, there have been more than 20 stalled LNG export terminal projects until recently. 

The pivot to LNG in Europe is an exploding green light to LNG developers in the U.S., as well as the other two major producers, Qatar and Australia, both of which are close U.S. allies. Perhaps not coincidentally given recent events, Qatar was named a major non-NATO ally of the U.S. this February by President Biden. Qatar is another country for whom security threats are not an abstraction. In 2017, the country was blockaded by Saudi Arabia, Egypt, Bahrain, and the UAE and its relationship with its larger neighbors remains difficult. Qatar’s defense relationship with the U.S. is highly valued and it subsidizes the cost of hosting a large U.S. military presence in its country.

In the long run, the U.S.—both individually and through its close allies—will be central to any European strategy to replace Russian gas, which will enhance its strategic relationship with the countries of the EU. But for now, the energy and commodity markets have devolved into pure chaos.

The severe economic sanctions against Russia by the West are forcing much of the world to reconfigure its assumptions about trade dependence, especially in energy. Any illusions Russia had about its vast energy, metals, and crop resources shielding it from severe economic fallout after its invasion of Ukraine have vanished. Russia has found it isn’t enough to have the resources—you need multiple buyers competing for these resources in a competitive market, as well as the project funding, managerial expertise, and technology needed to execute complex multi-billion-dollar infrastructure projects. Russia lacks many of these enabling pieces and has been dependent on the West to supply them.

Russia has some resource extraction expertise, but it relies heavily on Western firms to design, build, and maintain its energy infrastructure. Losing access to the expertise of Western oilfield services, construction, and engineering firms like Schlumberger, Halliburton, and Baker Hughes, along with Western technology ranging from drive motors to process automation software is a significant blow. The technological underpinnings of Russia’s oil and gas industry are primarily supplied by the West, but it lacks the process knowledge needed to reproduce them domestically. China may be unwilling or unable to provide replacements anytime soon.

When you only have one buyer for your products your pricing power quickly evaporates. Russia is heading towards a future where it will be forced to accept whatever terms China offers. In the meantime, China is aggressively seeking energy independence of its own. Since the invasion of Ukraine was launched, China has announced plans to add an astonishing 455 gigawatts (GW) of solar and wind power in its northern desert regions. This follows earlier announcements of 97 GW of new solar and wind projects and a $440 billion build-out of at least 150 new nuclear reactors with around 147 GW of capacity. The combined capacity of these new projects is more than seven times the amount needed to power Mexico. China has no long-term interest in Russian gas but will take it at a discount for now.

The major fallout of this conflict for energy is that Europe will become dependent on the U.S. to buy energy, and Russia will become dependent on China to sell it. Strategic autonomy requires both access to energy and preferred access to an industrial base that can use it productively. Russia and Europe together might have been able to muster significant power, but U.S.-led sanctions are cutting Russia off of European industry, and Europe off from Russian resources. The war has undermined the secondary powers’ ability to maneuver, Europe and Russia. Instead of being able to play China and the U.S. off each other, they are being forced to pick sides and become much more dependent.

Why the Dollar Will Endure

On the surface, the weaponization of U.S.-affiliated financial infrastructure like SWIFT, the international payment service, creates an incentive for Russia and other countries to seek alternate infrastructure. This is already happening to some extent: China is building and promoting parallel structures to existing U.S.-led international institutions such as the Cross-Border Interbank Payment System (CIPS), China’s version of SWIFT. CIPS is being integrated with Russia’s own alternative System for Transfer of Financial Messages (SPFS).

It might seem then that this will inexorably lead to the end of the U.S. financial empire. But for the U.S. dollar itself to be replaced, there must be an alternative. The only two realistic alternatives, the euro and the renminbi, won’t work. Without an alternative, the entrenched U.S. dollar will remain a significant pillar of American power. And if anyone is going to wield this economic power, those countries who operate within the U.S.-alliance system would prefer it be the U.S.

The euro hasn’t emerged as a global reserve currency for multiple reasons, primarily related to member countries’ reluctance to make deep and costly economic and monetary reforms that would require them to give up part of their sovereignty. The European financial markets don’t have nearly the scale or liquidity of U.S. markets because they are divided by national lines. A project to replace national sovereign debts with a single EU government bond market that was fully backed by the European Central Bank would create a dollar alternative. But there is no realistic path for getting member nations to agree to reforms that are in many cases against their national interests and politically toxic for the nebulous benefit of being an additional reserve currency. 

This leaves the renminbi. Given the rise of China’s economy—it accounted for 17% of global GDP in 2020 versus 25% for the U.S.—it is important to ask why it hasn’t come closer already to replacing the dollar as the world reserve currency. After all, Chinese leaders have long complained about “dollar hegemony” and sought to replace its reserve currency status. And yet, according to SWIFT, the dollar accounted for nearly 40% of global payments in January versus the renminbi’s 3%.

There are two fundamental reasons that the renminbi hasn’t become a global reserve currency despite China’s economic growth: China has been unwilling to give up capital controls and few trust China to provide safety and liquidity of reserves. 

The reason China is unlikely to give up capital controls is that it fears that an outflow of capital could spark a market panic that results in further capital flight. For example, this was the most important factor in the 1997 Asian financial crisis. As Nobel Prize-winning economist Joseph Stilitz noted in Globalization and Its Discontents, a review of the history of financial crises:

[C]apital account liberalization was the single most important factor leading to the crisis. I have come to this conclusion not just by carefully looking at what happened in the [Asian] region, but by looking at what happened in the almost one hundred other economic crises of the last quarter-century…capital account liberalization represents risk without a reward.

Capital controls are ultimately about political control. Abandoning one of China’s primary levers of economic control presents political and social risks that are unacceptable to its rulers.

Even if China thought the risk of abandoning capital controls was worth it, countless private market participants would need to prefer the renminbi over the dollar. Because of network and political effects, a dominant currency tends to remain locked in long after it has been surpassed in economic weight. A prime example is the U.S. dollar itself. The U.S economy overtook the output of the entire British empire in 1916 but the dollar didn’t become the global reserve currency until after the Second World War, when U.S. power definitively surpassed British power.

Market participants would have to prefer the renminbi over the dollar out of pure self-interest. At least part of this calculation is the political risk of going against the U.S., and the perceived safety of its assets. 

China has long weaponized market access to gain a geopolitical advantage. This power has been used rather indiscriminately to punish or coerce foreigners on matters large and small. And unlike the West, China’s leadership much more explicitly dictates the actions of ostensibly private companies. It requires little imagination to believe that the Chinese government would weaponize its currency as well to achieve its political goals.

The risk of an eventual Chinese invasion of Taiwan is nonzero and it is basically guaranteed that China will fully leverage its economic power to force acceptance of such a move. But the last thing global market participants want is a bureaucrat in Beijing with his finger hovering over the delete key of their digital yuan holdings if their country is found to be too “unsupportive” of Beijing’s actions in the future. China would have to demonstrate a much longer track record of stability and a de-politicized business environment, and the U.S. would have to decline much further on these metrics, to change this calculation.

Ultimately the weaponization of the dollar against Russia won’t end the dollar era—it will extend it. The position of the dollar is primarily a risk for those countries that are outside of the U.S. alliance. The decision to weaponize the dollar was made collectively by the U.S. and its allies and does not represent much of a risk to those within the alliance, especially when compared to relying on the renminbi. The U.S.’s overall alliance system includes collective defense agreements with over 50 countries: this group accounts for the vast majority of non-Chinese global GDP. Those inside the U.S. alliance system have no reason to disarm or cut themselves out from this newly unleashed economic weapon only to hand the same means of economic coercion to China.

The World Order After Ukraine

One thing we can say with near certainty as a result of this invasion and its geopolitical ripple effects is that the powerful will become even more powerful. While the U.S. may find itself with strengthened security alliances and an important role in the E.U.’s energy transition, China seems set to be the real winner in this mess.

Russia may find that on its way to create a client state in Ukraine, it will become one itself. Instead of being one pole in a multipolar world, China could become the head of a continental order that stretches across the Eurasian landmass. Any lasting sanctions regime against Russia will leave China as virtually the sole buyer of the world’s second-largest source of minerals, many of which are critical to U.S. industrial capacity. China has already leveraged rare earth minerals access for political gain, and this represents yet another potential lever of control.

The economic damage inflicted on Russia due to its reliance on Western technology and financial infrastructure has been viewed by China with horror. China is already taking steps to ensure domestic control of the energy, food, and technological systems that underpin its economy, including the already mentioned CIPS expansion as an alternative to SWIFT. These initiatives will find new urgency in the aftermath of the invasion.

Instead of the commonly expected multipolarity, this war will lead to a bifurcation of the world into Chinese and U.S.-led spheres. The EU aspires to strategic autonomy, but it does not meet the preconditions necessary to achieve it. Strategic autonomy requires scale, key economic prerequisites, and a unified political identity and structure. The EU provides the illusion of scale but can’t cohere into a true power because its member nations have their own deeply-rooted identities and national interests. Any attempt to centralize power within the European Union to create the scale required for strategic autonomy will just result in more reactive Brexit-like moves. The individual member nations don’t want to integrate their militaries for example, even if it might be necessary to build a European superpower.

The problem of scale is evident in the EU’s call for European technological autonomy. The U.S.’s five largest technology companies alone spent $149 billion on R&D in 2021—more than the total R&D spending of any country in Europe. The EU can’t dictate that the technologies of the future are invented or built out in Europe. And if they can’t invent the future or acquire its process knowledge, they won’t be able to participate in it. 

The U.S. and China are unified markets that together comprised 42% of global GDP and 52% of global defense spending in 2021. Their ability to leverage hard military power and economic coercion is an insurmountable obstacle to the emergence of the other powers that would make a multipolar world order. With the potential long-term exception of India, no country has the size and strategic resources to compete individually, and current multinational institutions like the UN and the EU are built on soft foundations which cannot be transformed into hard power.

If world history continues to be driven by power and intimidation, where will that leave these weak multinational institutions? City-state-type entities like Qatar or Singapore may establish stable positions as bridges and traders within this world order, but they will not be sovereign within it nor become primary players. New alliance structures arguably built on firmer foundations, such as AUKUS, a trilateral security pact signed between Australia, the U.K., and the U.S. in 2021, may evolve into more consequential forces within the world order.[xx] 

For now, the Ukraine war is hastening the birth of a new world order, but it isn’t a multilateral one. The U.S. and China are establishing themselves as the two separate suns that all other nations orbit.

The basic truth about power in the world is that all states, organizations, and actors are not created equal. Power is so unequally distributed, and some actors are so much stronger than others, that the most powerful—those we call great powers—not only get their way most of the time but are, in fact, a categorically different kind of actor. The great powers can craft the fundamental rules of the international order that all other countries must follow.

Brian Balkus is a market intelligence principal at an energy infrastructure firm. You can follow him at @bbalkus.