At the present moment in history, I observe a general trend toward the weakening of international organizations and the rise of nationalism in various forms. The root cause can be identified either as the decline of the West or the rise of the rest. None of this is irreversible – the decline of the West was first identified by Werner Sombart in 1890, and there have been several ups and downs since.
The crash of 2008 destroyed the Washington Consensus. Since then, both the United States and the European Union have been preoccupied with their internal problems. A stable international order requires a hegemonic power or powers to contain conflicts. As the West has turned inwards, emerging regional powers have tried to fill the vacuum and conflicts have festered.
Since the economic crash of 2008, the situation has become even more complicated. The Washington Consensus was based on the belief that markets tend toward equilibrium but 2008 disproved that belief. Since then, both financial markets and international affairs have been in what I call far-from-equilibrium conditions.
With the spread of unresolved conflicts to Europe, the dynamics of financial markets and international affairs have become more intimately intertwined. This has greatly increased the level of uncertainty, volatility, and unpredictability both in financial markets and international affairs, because financial events are extraneous to political dynamics and international affairs are extraneous to the dynamics of financial markets. So, the increased interaction between the two is experienced by both as external shocks.
One example of this is the financial sanctions against Russia and the collapse of oil prices. Neither of them on its own would have caused a financial crisis in Russia. Meanwhile, in international affairs, misconceptions and an inability to adjust to unexpected developments play an increasing role in determining the course of events.
I shall focus on interconnected issues that together constitute my top priority today: a new, resurgent Russia, and a new, democratic Ukraine. For me, it feels like déjà vu. I am reminded of 1989 – but the differences are illuminating. Then, the Soviet empire was disintegrating and the integration of the EU was at its peak; now, Russia is resurgent and the EU is disintegrating. This gives the new Ukraine a pivotal role. How it stands up to Russian aggression will determine the fate not only of Ukraine but also of the EU.
Russia has become a mafia state in which the rulers use the resources of the country to enrich themselves and to maintain themselves in power. They preserve the outward appearances of democracy, such as holding elections, but there is no rule of law and no arrangements have been made for a legitimate transfer of power.
Vladimir Putin became popular because he established stability after a period of profound turmoil and he used a portion of the oil revenues to assure people a rising standard of living. As long as he was popular, he was reasonably tolerant of dissent provided that it remained on the margin. But after the prearranged transfer of the presidency from Dmitry Medvedev to Putin in 2012, the rising middle class joined the protests and Putin became repressive at home and adventurous abroad. He started supporting President Bashar al-Assad of Syria with arms on a large scale. He also felt threatened by the Arab Spring and, from a Western point of view, became a spoiler in the Middle East.
At first, Putin’s adventurous foreign policy was very successful because of the domestic preoccupation of Western powers. Remember how Putin saved President Barack Obama from a domestic defeat by persuading Assad to surrender his chemical weapons? It was a diplomatic triumph.
Then came the Association Agreement of Ukraine with the European Union in 2013. Putin had no difficulty in outbidding the EU. The Association Agreement was designed for the Yanukovych regime, which could not be trusted; therefore, it asked for a lot and offered little in exchange.
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This article is a version of remarks made by George Soros at the World Economic Forum, Davos in January 2015.