When Russia attacked Ukraine in late February, many were afraid that a Chinese assault on Taiwan would be next. After all, President Xi Jinping had indicated that he wanted to resolve the ‘Taiwan question’ while he was in power. What better timing than while the world’s attention was on Ukraine?

Russia’s invasion of Ukraine has forced China and Taiwan to take a fresh look at their relations. Until recently, scenarios of an invasion by China were on both sides based on simulations and war games. Now they have a real-life example of how an invasion might play out, and how the world would respond. Decision-makers in Beijing and Taipei are paying close attention.

China is interested in three aspects. The first is military. The difficulties Russia’s armed forces have encountered in what looked like a straightforward invasion across the land border of a smaller and weaker neighbour have caught China by surprise. The Russian military was supposed to be strategically smart, experienced and well equipped.

Decision-makers in Beijing must be wondering what would happen to the People’s Liberation Army, which has little combat experience, if it crossed the Taiwan Strait in an attempt to invade a nation that has been preparing for war for decades. Invading Taiwan is by any standards a major operational challenge.

In addition to being centrally planned, Russia’s initial attack on Ukraine was plagued by weak logistics, substandard equipment and low morale. Corruption in Russia’s military is rampant, with funds often going into private pockets rather than for military expenditure.

In recent years, China has ramped up its military budget, which is now the world’s second largest. But Beijing’s leaders know only too well that corruption is rife in the PLA and that it suffers from many of the same problems as Russia’s armed forces.

The sinking of the Russian cruiser Moskva, which was built in Soviet-era Ukraine, has also shaken China, whose first aircraft carrier, the Liaoning, was purchased from Ukraine. If the Liaoning is as vulnerable as the Moskva, Beijing will be concerned that it may be at risk in an assault on Taiwan.

Second, Beijing has followed with trepidation the West’s imposition of tough sanctions on Russia. China’s economy is much larger and more diverse than Russia’s. But China is dependent on exports, global value chains and energy imports, which makes it vulnerable to sanctions.

Like Russia, China relies on US dollars and the SWIFT messaging system for international payments and is exposed to financial sanctions. More than half of China’s massive foreign reserves are denominated in dollars, held mostly in US government bonds, and with limited scope for diversification. The realisation that its reserves could be targeted by sanctions has come as a shock to China.

On top of this, China’s economy is at a critical juncture. Its real estate markets are teetering, measures to restrict entrepreneurship have spooked investors, and Covid-19-related lockdowns have brought economic centres like Shanghai to a standstill.

In March 2022, the National People’s Congress set a modest annual GDP growth target of ‘about 5.5%’, which is looking increasingly hard to achieve.

China’s third concern is diplomatic. Taiwan’s international status is much weaker than Ukraine’s. Despite Russian denials, Ukraine is a sovereign state with extensive diplomatic relations. It is a member of the United Nations, its specialised agencies, and other international organisations.

Taiwan, on the other hand, is recognised by only 14 states, is not a member of the UN and is excluded from all but a handful of international bodies, in which it participates as ‘Chinese Taipei’.

China has invested enormously in isolating Taiwan diplomatically, and must now be observing with concern the outpouring of international goodwill attracted by Ukraine, including a steady supply of modern weapons. In the case of a Chinese incursion, a significant showing of international support for Taiwan—military, financial and diplomatic—would be a slap in the face for China.

Taiwan, too, must be following with interest how effective Ukraine’s asymmetrical and nimble military strategy has been against a large and aggressive intruder. It will also have noted the logistical problems experienced by Russian forces and how quickly they ran short of munitions and fuel. The Taiwan Strait poses a far greater logistical challenge for any invader than the land border between Russia and Ukraine.

The downsides to Russia’s attempted invasion are becoming clearer by the day. In addition to its huge military and economic losses, Russia has paid a high price in human lives, and its international reputation is in tatters. The war has given NATO a major boost and Finland and Sweden are likely to join in the near future—exactly the opposite of what Russia intended.

What policy adjustments can we expect from the two sides? Taiwan is likely reviewing its response strategies and will further strengthen its defences, while China is considering what it can learn from Russia’s mistakes. China will also reduce the vulnerability of its economy and try to sanction-proof its financial system.

China is now likely to be in less of a hurry to cross the Taiwan Strait, unless it can be sure of a quick victory. One can only hope that the war in Ukraine has highlighted to Beijing the very significant advantages of a peaceful solution in its relations with Taipei.

Australia is Russia’s closest competitor in global markets and is the obvious winner as Russia loses sales under the impact of international sanctions.

Since the beginning of the year, the average price of Australia’s biggest exports has soared by more than 50% as major manufacturing centres, led by China and Europe, scramble to secure supplies of mineral and energy resources.

Despite vast demographic and geographic differences, the trade profiles of Australia and Russia are remarkably similar. Both export a diverse range of mineral and energy resources and are also major exporters of agricultural produce.

Both have relatively underdeveloped advanced manufacturing with a heavy reliance on imports, particularly from China. Russia has a much larger basic manufacturing sector and exports steel and other processed metals as well as chemical products including fertilisers. Australia sells more unprocessed mineral ores.

Russia is the world’s largest exporter of gas, while Australia is the second largest. In coal, Australia ranks first and Russia third. Australia is the dominant exporter of iron ore, but Russia is also a significant producer. Russia is a much larger exporter of oil than Australia, and both countries are important sources of nickel, aluminium, copper, lead, zinc and gold.

In agriculture, the two nations compete in the wheat and barley markets. Russia (and Ukraine) are bigger in oilseeds, while Australia is much larger in beef, wool, dairy products and wine.

Because they are so similar, Russia and Australia do little trade with each other.

Australian and Russian trade

Source: UN Comtrade (2020 data for goods, 2018 for services).

Commodity prices were already rising by February when Russia invaded Ukraine. The years of ultra-low interest rates helped a speedy economic recovery from the pandemic in much of the advanced world, with rising demand pushing up commodity market price-setters like oil and copper.

China’s economy softened through 2021, but both government-funded infrastructure spending and the boom in Chinese export industries caused by the Western recovery meant China’s demand for resources remained strong.

The sanctions imposed by the US and Europe and followed by many other countries including Japan and Australia initially sought to exempt Russia’s energy and agricultural exports. They did include iron, steel and other processed metals.

However, the extreme financial sanctions have made buyers of all Russia’s exports wary of transacting. The Russian banks they would make payments to have been banned from the SWIFT global financial network and Western banks don’t want to intermediate Russian sales. Russian oil is selling at a 30% discount to the general market, including China, and Russian wheat sales are at discounts of at least 10%.

Sanctions have spread to Russian coal. As a result, coal markets have experienced some of the most extreme impacts, with prices rising to levels that, to any longstanding observer, are simply surreal. Coal for power generation, which had dropped to just US$50 a tonne after China banned Australia’s exports in 2020, has recently reached records above US$400. Coal for steelmaking has risen above US$660 a tonne, or roughly double the peaks reached during the resources boom.

China must surely be regretting its ban on Australian coal and it wouldn’t be surprising to see it reversed if there’s a change of Australian government next month.

Prices for liquefied natural gas have also soared, as Europe looks for alternatives to Russian piped gas supplies. The Department of Industry predicts that Australia’s LNG exports will reap $82 billion in 2022–23, up from $30 billion in 2020–21.

Wheat and barley are also trading for as much as double their pre-war prices. Ukraine was an important exporter of both grains, particularly to China, but now, even if crops could be harvested they wouldn’t be able to get to ports in the Black Sea to be shipped. China must also be regretting its punitive tariffs on Australian barley.

Urban Australians tend to disregard the nation’s commodity riches as remote from their lives, but the wealth flows to them through increased government tax and royalty revenue, greater employment and a higher exchange rate. The boost in the exchange rate means that imported goods are all much cheaper, raising consumer living standards.

A key economic metric is the terms of trade, which compares the average prices Australia pays for its imports and the prices it gets for its exports. It is measured as an index, which has bounced between a score of 50 and 80 points for most of Australia’s history, rarely deviating more than five points from its long-term average of 63 points for more than a few quarters. Since the resources boom got underway in 2005, it has averaged 100 points and it could rise to as high as 140 points over coming months.

This means that every tonne of goods that Australia exports is buying around twice as many imports than has been the case throughout most of our history. In the 1990s, many thought resource prices were on an inevitable long-term downward slide that would take the Australian economy with it.

For much of the rest of the world, the impact of the Russian invasion on commodity prices means lower living standards.

This is particularly the case for the poorest nations, especially those dependent on imported grain. The United Nations Food and Agriculture Organization counts 20 countries dependent on Russia and Ukraine for at least half their wheat.

The FAO’s index of traded food prices has risen by almost 20% since February and is a third higher than a year ago. Oilseed prices have doubled, while wheat is up by around 40%.

The supply shortage from Russia and Ukraine is being made worse by major consuming nations, led by China, building their reserve food stocks.

More generally, Russia’s war is pushing inflation higher globally while incomes are lagging. This increases the risks to the world economy, with the potential for rising interest rates to generate debt crises and recession. The International Monetary Fund has cut its forecast for global growth this year from 4.4% to 3.6% because of the war, but warns that uncertainty is high and ‘downside risks to the global outlook dominate—including from a possible worsening of the war’.

Australia was one of the few countries to have its growth outlook upgraded by the IMF in its half-yearly global review; however, Australia’s burst of prosperity in the wake of Russia’s war on Ukraine would not survive a global downturn.

Amid a heightened fear in Europe of the Russian missile threat, Germany has expressed an interest in buying the Arrow 3 missile-defence system, a joint Israeli–US system designed to confront long-range Iranian missiles. At the end of March, German Chancellor Olaf Scholz didn’t conceal the fact that he was seeking to defend his country from a Russian missile threat: ‘[A missile shield] is certainly among the things we are discussing, for good reason … We must all prepare ourselves for the fact that we have a neighbour presently ready to use force to assert its interests.’

This is an intriguing development for a number of reasons. Unlike Eastern European countries such as Poland and Romania that have enthusiastically supported US missile-defence deployments in Europe, Western European countries have traditionally been sceptical of and even hostile towards the idea of fielding missile defences. That’s largely because it entails a military commitment from Washington.

Back in the early 1980s, Britain and West Germany expressed acute concern over US President Ronald Reagan’s Strategic Defence Initiative, arguing that it posed great risks of destabilising the superpower strategic relationship. Many European countries were unenthusiastic about President George W. Bush’s missile-defence plans, fearing the impact on arms control and relations with Russia and China.

During the Cold War, both the United States and the Soviet Union invested considerable efforts in developing missile-defence technologies to escape the vulnerability of their home territories to massive nuclear destruction. Each side recognised that missile defence could damage strategic stability and lead it into a new form of dangerous competition at great expense. The 1972 Anti-Ballistic Missile Treaty emerged from the Strategic Arms Limitation Talks (SALT) after the Soviet leadership demonstrated its readiness to accept restrictions on offensive and defensive weapons.

Yet Bush announced his intention to withdraw from the ABM Treaty in December 2001. A few years later, his administration unveiled controversial plans to deploy missile-defence interceptors in Poland and a tracking radar in the Czech Republic. At the time, Russian President Vladimir Putin asserted that the ABM withdrawal would be a ‘mistake’ but that Russia would find ways to overcome the problem. Former US ambassador to NATO Robert Hunter has argued that ’the ABM Treaty had been one of the few indicators that Russia, as the principal legatee of the Soviet Union, was recognised by the United States as still being in the big leagues’. This step undermined strategic stability and was arguably a humiliation for Russia.

Putin’s fierce opposition to missile-defence deployments in Europe has been on display almost as long as he has been Russia’s president. He has exaggerated the threat posed by these systems, but previous Russian leaders have expressed similar concerns, including Mikhail Gorbachev in the wake of Reagan’s announcement of SDI. However, Russia has also been active in carrying out extensive upgrades to its own missile-defence systems. Indeed, this Russian activity was a major factor in Britain’s decision in March 2021 to increase its nuclear stockpile, fearing that improved Russian defences would neutralise the UK nuclear deterrent.

Although Barack Obama’s administration abandoned Bush’s controversial missile-defence plans, in 2009 it unveiled a new anti-​missile system, known as the European Phased Adaptive Approach. The US has made it clear on numerous occasions that such systems are too limited to threaten Russia’s strategic forces. Nevertheless, Moscow has consistently rejected US and NATO claims that missile defences are intended to deal with the dual threat of ballistic missiles and weapons of mass destruction emanating from the Middle East, and maintains that it is actually directed at its own strategic nuclear forces. A NATO anti-​missile facility has been deployed in Romania, and another deployment has taken place in Poland.

Russia has cited the US withdrawal from the ABM Treaty as the reason behind its investment in dangerous new technologies such as hypersonic missiles. For Russia, the missile-defence deployments in Romania and Poland are symbols of NATO enlargement eastwards, which it objects to.

Early in 2018 Putin said:

After the US withdrew from the Anti-Ballistic Missile Treaty we’ve been working hard to develop new promising weaponry systems and this enabled us to make a big step forward creating new strategic arms … US global missile systems are mainly against ballistic missiles and these are the core of our nuclear deterrent. This is why Russia has been developing extremely effective systems to defeat missile defence and all our ICBMs are equipped with such systems now.

In March, Russia reportedly fired a Kinzhal hypersonic missile at an underground arms depot in Western Ukraine. The Kinzhal can carry a nuclear warhead as well as a conventional one. Uzi Rubin, a leading Israeli missile expert and the former director of the Arrow missile-defence program pointed out in a recent conversation with me that it is difficult to calculate the trajectory of a high-velocity and manoeuvrable hypersonic missile because of its unpredictability. The Russians claim that the Kinzhal can hit a target up to 2,000 kilometres away and can fly faster than 6,000 kilometres an hour. However, this doesn’t mean that it can’t be shot down. Rubin maintains that the Arrow 3, ‘a very manoeuvrable missile, might be adaptable for engaging the Kinzhal’.

Germany would need both Israel and the US to agree to the sale of the Arrow 3 since it’s jointly produced by them. Germany’s announcement of its interest in purchasing the system may further heighten Russian paranoia on this issue. There is an irony at work here: Putin’s Russia has long claimed that US and NATO missile-defence deployments in Europe are a Western plot aimed at weakening Russia. Moscow’s actions in Ukraine may yet ensure that this will now become a self-fulfilling prophecy.

President Joe Biden announced last week that the US will tap into its emergency oil reserves to minimise the blowback to the US economy from its sanctions on Russia. That move will go some way to alleviating the pressure on petrol prices, but more is needed, and the Biden administration has also been seeking to ease sanctions on Iran and Venezuela.

Venezuela and Iran are the only two oil producers with significant spare capacity to compensate for the suppression of Russian supplies, if only US sanctions policy would allow.

Over recent years, the US has been seizing oil tankers from Venezuela and Iran on the high seas and auctioning off their contents, with the proceeds going to a fund for US victims of terrorism.

The ‘economic weapon’ hasn’t been used so forcefully against a major power since the 1950s when the Soviet Union was the target of comprehensive US sanctions.

However, both Iran and Venezuela have suffered a similar intensity of international economic blockade and are witness to the failure of what former US president Donald Trump termed ‘maximum pressure’ economic sanctions to achieve their geostrategic objectives. Trump aimed for regime change in both nations but achieved it in neither; in fact, conservative clerics have strengthened their control of Iran.

The capacity of sanctions to cause lasting economic harm to the target is beyond dispute. A study based on a new database of sanctions going back to the 1950s found that comprehensive sanctions destroyed an average of 77% of the bilateral trade between the countries imposing sanctions and their targets.

Moreover, trade takes a long time to recover—an average of eight years—after sanctions have been lifted. When sanctions are lifted, businesses in the countries imposing them remain reticent, while businesses in target countries have become used to exclusion. The study also found evidence of trade weakening ahead of the imposition of sanctions.

The average sanction regime lasts for six years, but there is wide variation. The study (published late last year) found the Arab League had imposed sanctions on Israel for 66 years while the US had maintained sanctions against North Korea for 58 years and Cuba for 54 years. The damage to trade is greater for sanctions that last longer than five years.

In theory, economic sanctions impose hardships on both the elites and the broader public on whom rulers of target countries depend for their legitimacy and, as a result, translate into political pressure for those leaders to abandon their course of action. To have this effect, there must be a clear objective and the targets must believe that the sanctions will be removed if they comply.

In practice, sanctions often become a form of long-lasting punishment short of military action with no clear remedial agenda or timetable for review.

The success or failure of sanctions can be difficult to gauge. The longevity of the communist government in Cuba is often cited as evidence of the failure of US sanctions policy, but the pain that Cuba has suffered may have discouraged other leftist governments in Latin America from expropriating US property.

While sanctions clearly encouraged the military in Myanmar to step back from absolute power in 2011, the threat of them did not stop it seizing power again 10 years later.

It used to be said that the imposition of sanctions on Russia over its annexation of Crimea may not have persuaded it to withdraw, but discouraged further incursions into Ukraine. That is obviously no longer the case: the threat of far-reaching sanctions delivered no restraint to the actions of Russian President Vladimir Putin.

Another study using the new database attempts to measure the success of sanctions by comparing their stated goals with determinations by the authorities imposing them on whether they had been achieved. Excluding sanctions that are still in force, it found that 42% of sanction measures fully achieved their goals, while 16% partly achieved their objectives. If sanctions still in force are included, the success rate (full or partial) drops to about 30%.

Since 1950, 44% of sanctions have been intended to defend democracy or promote human rights, while 20% were aimed at preventing or ending war. Over the past 20 years, combatting terrorism and supporting human rights have become more popular goals than preventing and ending war.

The use of sanctions has accelerated over the past 15 years. From 1990 through to 2005, between 200 and 250 sanctions regimes in place around the world, about a third of which were levied by the US. The US share rose to almost 50% under the Trump administration, with the total numbers in force peaking at 550.

Trump was sharply critical of the Middle East wars that followed the 2001 terrorist attacks in the US. In his major foreign policy speech ahead of the 2016 US election, he declared that, unlike other candidates for the presidency, ‘war and aggression will not be my first instinct’. Rather, he said, ‘financial leverage and sanctions can be very, very persuasive, but we need to use them selectively and with total determination’.

The US has increasingly imposed financial sanctions, which ban the use of the US dollar in dealings with a nation, rather than simply embargoing trade. These measures are routinely extended to third parties—a bank from a third country facilitating a trade with a sanctioned nation will itself be banned from transacting in US dollars.

The reason sanctions often fail to achieve their objectives is because the targeted leaders use them to rally nationalist sympathy. And, when economic objectives collide with those of national security, the latter will usually prevail.

This dynamic is clear in Australia. China’s economic coercion of Australia has indeed provoked a change of Australian government policy but not in the direction China may have wished; national security concerns are now paramount in managing the bilateral relationship.

Moreover, economies are flexible: pressure in one part gets compensated elsewhere. If trade is curbed, domestic demand can rise instead. Sanctions on Iran had a severe effect. The economy contracted by 9% over 2018 and 2019, though the ground had largely been made up by 2021. Sanctions mean Iran has had no real growth in purchasing power for the past decade, but everything hasn’t stopped: business continued.

Sanctions, combined with government incompetence, were much more damaging in Venezuela, where the ‘purchasing power’ measure of national output has collapsed 66% since 2016. However, Venezuela’s economy was always more narrowly based and less sophisticated than Iran’s.

Russia’s economy has the size, diversity and sophistication to adjust, although there will be some undoubted hardships and oligarchs will rue the loss of their London pads and Mediterranean yachts.

A larger question is raised by Cornell University’s Nicholas Mulder, the author of a penetrating new history of the use of economic sanctions between the First and Second World Wars. Economic sanctions were employed by the members of the League of Nations in pursuit of internationalist goals: they believed the ‘economic weapon’ as they termed it (and the title of Mulder’s book) could be used to make nationalist wars obsolete.

Instead, they compounded the effects of the Great Depression and fuelled the rise of nationalism in Germany, Italy and Japan, which sought to achieve self-sufficiency to defeat economic embargoes through conquest of supplier nations. ‘Blockade phobia’ was a propelling force towards World War II. Mulder cites Adolf Hitler declaring in 1939: ‘I need Ukraine so they cannot starve us out like in the last war.’

Sanctions designed to discipline nations departing from globally accepted norms may speed the breakdown of global comity rather than prompt its restoration.

It is five weeks into Russian President Vladimir Putin’s war against Ukraine. Actually, there are two wars: a Russian war waged mainly against Ukraine’s cities and civilian population, and a war fought by Ukraine’s armed forces against Russian troops. Russia is winning the former; Ukraine is winning the latter.

Ideally, negotiations will lead to a ceasefire and a lasting settlement. But it is equally if not more likely that the conflict will continue for some time, especially if Putin decides to embrace a strategy that reduces the exposure of his troops to combat and rejects a negotiated outcome on terms the government of Ukraine could accept. ‘Limited war, no peace’, to paraphrase Trotsky, would be the result.

Who would be the winners and losers in such a scenario?

It’s easiest to point to the biggest loser: Russia. It’s clear now that Putin will be unable to achieve the political objectives he likely sought, namely, to march into Kyiv and replace Ukrainian President Volodymyr Zelensky’s government with one friendly to the Kremlin. Putin’s war of choice may have destroyed much of Ukraine physically, but the unprecedented sanctions and economic isolation his decision has wrought are destroying Russia economically.

In addition, many talented Russians have voted with their feet and left the country. Russia’s army has been decimated (losing as many as 15,000 soldiers in a month) and exposed as something of a Potemkin force, one that will take years to rebuild.

The calculation is more complex when it comes to Ukraine. The resilience of its leadership, society and armed forces are a marvel. Its national identity is more robust than ever and Ukraine’s staunch resistance has strengthened its young democracy.

But that strengthening has come at a great cost. An estimated 10 million Ukrainians—a quarter of the population—are internally displaced or refugees. The economy has been wrecked. Rebuilding will take a lot of time and a lot of money.

NATO, although untested militarily, is a big winner so far. It is more united and stronger as a result of Russia’s aggression. It also benefits from the poor performance of the Russian armed forces, which appear to be no match for the Western alliance, and from an American president who believes in it.

Germany and its new government and chancellor are another big winner. Implicit in the response of Chancellor Olaf Scholz’s government is the understanding that the legacy of Scholz’s predecessor, Angela Merkel, is now decidedly more mixed, because she allowed Germany to become so dependent on Russian energy.

Scholz’s decision to cancel the Nord Stream 2 gas pipeline, commitment to doubling defence spending and willingness to funnel arms to Ukraine represent dramatic, significant changes. The only disappointment is that it will take years for the German economy to wean itself from Russian gas, a reality that provides critical ballast to Russia’s economy.

US President Joe Biden has also gained. He has for the most part skilfully managed a policy of supporting Ukraine, penalising Russia and, by rejecting calls for putting ‘boots on the ground’ or establishing a no-fly zone, done so without risking World War III.

Biden has also brought America’s allies together, something sorely needed after four years of Donald Trump and a mishandled US withdrawal from Afghanistan. His one major slip has been to corner Putin further by calling him a war criminal and hinting at regime change when the goal of US policy ought to be to get Putin to stop the war and avoid escalation of any sort.

China and its president, Xi Jinping, are in a worse position strategically than they were just a month ago. By associating so closely with Putin, Xi has exposed himself to criticism for a flawed judgement that damages China’s reputation and raises the risks it will be targeted with secondary sanctions.

While China has long sought to divide the West, its alignment with Russia has done the opposite, alienating Western Europe, where it had been making significant economic inroads. It will also lead to a much tougher US policy towards China and highlight the costs China could face if it were ever to move militarily against Taiwan.

Otherwise, there are many more losers than winners, as befits a war. The United Nations and especially the security council appear feckless. The war is bad for global efforts to slow the spread of nuclear weapons. Ukraine gave up its stockpile 28 years ago in exchange for an assurance of its territorial integrity, only to be invaded twice since 2014. The crisis has likewise been bad for efforts to combat climate change, which at least temporarily appears to have taken a back seat to measures designed to promote energy security.

It is also a bad crisis for those who have been arguing that territorial conquest and wars between countries were a thing of the past or those who have argued in recent years that things have never been better. Events have also worked against the arguments of those on the left and right alike that the biggest danger to international security is American overreach and that the United States can safely turn inwards.

Last but far from least, there is the matter of what this conflict will mean for world order. Russia’s invasion violated the most basic tenet of what stability exists in the world: that borders are not to be changed by the threat or use of force. Much will hinge on whether Putin gets away with his gamble, or whether the price he is forced to pay exceeds any gains. That, more than anything else, will determine history’s ultimate verdict regarding what was won and what was lost in Putin’s war.