Thread by @ProfPaulPoast

Russia seems to be following the British WWI financial model.

That didn't end well for Britain...or the World economy.

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We'll get to the British in a moment.

Let's first consider the current state of the Russian war economy, which can be summarized in two words: not. good.

bloomberg.com/news/articles/…

Russia is already coming up short on material....

https://twitter.com/KofmanMichael/status/1501562863357472774

...manpower...

forbes.com/sites/alisondu…

...and money.

reuters.com/markets/europe…

As a result, it was reported yesterday that Russia is turning to China for material and "other" assistance in prosecuting its war in Ukraine.

ft.com/content/308504…

This is coupled with discussion of Russia possibly shifting to China's currency (and away from the euro and dollar) to settle trade transactions with China.

https://twitter.com/hofunghung/status/1502666310530052101

On the one hand, this raises big questions about Russia's status as a major power.

https://twitter.com/dandrezner/status/1503105766168969225

On the other hand, none of the above is surprising given the extent to which economic sanctions have shut Russia out of Western economies.

bbc.com/news/world-eur…

Moreover, the Russian economy was far from capable of "self-sufficiency" heading into the war.

https://twitter.com/kamilkazani/status/1499855858456567809

And let's be honest: a lack of self-sufficiency during war is not new for Russia.

For instance, during World War II (a.k.a. "The Great Patriotic War" in Russia), the Russian war effort relied heavily on the American armaments it secured through Lend-Lease.

Similarly, the Russian war effort during World War I relied on loans from its French ally.

But the case of Russia turning to China in this war has a different feel from USA/French assistance to Russia during the World Wars.

In the case of the World Wars, the relationship was more of an "equal partnership": the allies were jointly opposing a common threat (i.e. Germany) and sought a division of labor (Russian manpower + Ally Money = Fighting Force).

The current case is different. Though it might be true that Russia and China are (sorta-)allies...

newyorker.com/news/daily-com…

...China has been clear that Ukraine is not its fight.

theconversation.com/chinas-balanci…

Accepting material and financial assistance from China would clearly make Russia the junior partner in the relationship, even a "client state"

https://twitter.com/sarahbauerle/status/1503004681626337286

Such dependency is something @TheEconomist foreshadowed years ago.

https://twitter.com/theeconomist/status/1154394387788566528

Hence, Russia turning to China for money and material assistance in this war strikes me as analogous to a different case: the British turning to the United States during World War I.

Financially, fighting in "The Great War" cost the British A LOT. How much? It *only* took 100 years to pay off the debt

cnbc.com/2015/03/09/uk-…

The war was costly not only because of its length, but because the intensity of the fighting quickly depleted the allies existing stock of war material. More supplies were needed, and quickly.

journals.sagepub.com/doi/abs/10.117…

Early on, the British were essentially the financial arm of the allied effort. This made sense, since, as @NormaCohen3 and co-authors point out, Britain was the wealthiest of the allies (France, Russia, and eventually Italy being the other main allies).

voxeu.org/content/extrao…

But Britain couldn't rely on its own assets to cover these costs. It had to start borrowing. For that, it turned to a neutral market...Wall Street.

As @adam_tooze writes in "The Deluge":

"As of 1915...the most powerful states in Europe were now borrowing from private citizens in the United States and anyone else who would provide credit."

amazon.com/Deluge-America…

By "Wall Street", I really mean J.P. Morgan.

cambridge.org/core/journals/…

Relying on private markets was proving expensive and unsustainable. By late 1916, the British were close dire financial straights. Consider the warning of then Chancellor of the Exchequer Reginald McKenna.

He warned in October 1916,

"We ought never to be so placed that only a public issue in American within a fortnight stands between us and insolvency. Yet we are quickly drifting in this direction...

...If things go on as present, I venture to say with certainty that by next June or earlier the President of the American Republic will be in a position, if he wishes, to dictate his own terms to us."

Quote from Kathleen Burk's essential history

amazon.com/Britain-Americ…

By early 1917, McKenna's fears were being realized. As of 1 April 1917, Britain had only enough dollars to last three more weeks.

More private funds weren't coming (why keep throwing good money after bad, right?)

Fortunately, the British received a "reprieve" the next day: Wilson's speech calling for the United States to enter the war.

During the speech, Wilson received applause (it's noted in the Congressional Record) when he said that US cooperation with the allies will involve "the extension to those governments of the most liberal financial credits"
archives.gov/milestone-docu…

The War Bond Act (the First Liberty Loan), passed on April 24, authorized the Treasury to buy the debt of “foreign governments then engaged in war with the enemies of the United States.” US government money started flowing to the allies, specifically Britain,immediately.

So the war effort could continue. That's great for Britain, right?

Not really. Recall the warning by McKenna (who was now out of government): that the British would be in a position where the US President "if he wishes, to dictate his own terms to us."

That was now happening. And Wilson was well aware of it. Indeed, that was a goal of the loans.

On 21 July 1917, Wilson, in a correspondence with Colonel House, confirmed that the idea of offering loans gives the United States the ability to exercise leverage over the European powers in crafting the peace after the war.

Wilson wrote, “England and France have not the same views with regard to peace that we have by any means. When the war is over we can force them to our way of thinking, because by that time they will, among other things, be financially in our hands.”

In other words, Wilson didn't trust the Europeans to craft a post-war settlement that would be acceptable to the United States.

The loans could provide post-war leverage at the negotiating table.
amazon.com/Paris-1919-Mon…

This is a key reason why the British hoped (pleaded) for the loans to be converted to grants or just forgiven following the war: that would alleviate American leverage after the war. But the US refused.
online.ucpress.edu/phr/article-ab…

The result was that the British didn't have the financial strength they needed to push back on French demands for reparations from Germany after the war.
amazon.com/Reparation-Wor…

At this point, I think most folks know how the rest of the story goes.

The reparations were viewed (even at the time) as a bad idea...

google.com/books/edition/…

...the British economy had lost its dominant position in the global economy (which would have consequences for when they tried to reestablish the gold standard later that decade)...
amazon.com/Englands-Cross…

...and the British were also no longer in a financial position to maintain its empire (though that collapse would take time).
amazon.com/Pity-War-Expla…

Most of all, Britain was now clearly the client state of the United States. The "special relationship" is one in which the US could largely dictate the terms of cooperation.

jstor.org/stable/2148010…

In sum, this is the path that Russia is heading down vis-a-vis China. If the British experience is any indication, it won't end well for Russia's ability to be major power in the future.

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