Does American-Chinese Interdependence Make War More Likely?

On the eve of World War I, French capital financed German industry to build Russian ships, launching a cycle of compromising dependencies that ended in all-out war or revolution and default. Today that cycle has returned.

In the years leading up to World War I, Russia was the main battleground in a financial war between France and Germany, the two greatest continental European powers and former and future adversaries of the war. This financial war was played out in the markets of Moscow and St. Petersburg, in a Russian state on the brink of collapse.

In September 1908, French decision-makers vetoed attempts by the Russian government to employ German designers to build a new battleship after learning that Moscow had contracted with German company Blohm & Voss for shipbuilding expertise. French officials were furious. France was the leading financial player in Russia, and Paris did not want French money to support German industry.

Thus, French officials turned to financial war. The following year, they made the crucial loan talks conditional on Russia using a non-German company.

Moscow was not in a position to decline these requests because the French loans were supporting the Russian economy. At the time, French financiers tenuous 12 billion francs of Russian sovereign debt and government securities, Paris holding 43% of sovereign debt. Entities financed by French capital accounted for over 60% of Russia’s strategic metal and energy production.

During this time, German industry was a key destination for Russian spending and, therefore, an end point for French capital flows. Russia has spent a lot on the German arms market, devote tens of thousands of German marks a year to the Essen-based armaments company Krupp. In addition, the German management sat at the top of Russian companies financed entirely by French capital in entities like the Putilov Works of St. Petersburg.

The complexity of these capital flows has led to uncomfortable outcomes for both powers. French capital financed the Russian acquisition of German arms. Krupp, the German company which received Russian contracts, built and shipped a cruiser and three submarines to the Imperial Russian Navy in 1904.

A contemporary observer on the eve of the First World War Put the succinctly: “The carriers of French capital in Russia are… German entrepreneurs. Circular investment made for a heavy interdependence.

Unsurprisingly, this arrangement did not end well for either France or Germany. Ten years later, during World War I, this Russian cruiser built by Krupp chased the German Navy across Southeast Asia. Meanwhile, after the Bolsheviks overthrew the Russian Tsar after three years of war, the new Communist leadership in Moscow in default on 9 billion rubles of French debt, a shock to the French economy so severe that Paris went overnight from net creditor to net debtor.

This implosion of complex capitalistic relations illustrates the dangers of militarized interdependence. In the end, what was once considered economic coercion gave way to economic disaster. During World War I, these capital flows had one of two results: helping the enemy wage all-out war or defaulting on decades of debt after the revolution.

The tragedy of the capital rivalry between France and Germany should serve as a lesson in the feasibility of financial weapons as coercive tools under conditions of financial interdependence.

Shrewd observers have rightly returned to this pre-World War I landscape to capture the nature of the great power competition under conditions economic interdependence and capital rivalry. This time, like now, has seen overlapping trade wars, technological wars, wars of influence and capital rivalries, triggered by the emergence of a rise in power which intended to overthrow the status quo and assume the prerogatives of its economic and military might.

Circular investments of this kind were corrosive to the war capacity of each power. Under the conditions of pre-war financial interdependence, compromising exposures went unnoticed until they exploded. While Russia did not end up using German designs for shipbuilding in 1908, it purchased a battleship directly from the shipyards in Kiel, northern Germany, in 1904. Today, too, the Americans provide a rival who prepares for war. In fact, 92% of Chinese companies funding the People’s Liberation Army’s artificial intelligence modernization are not captured by existing export controls.

Henry Kissinger celebrates blame a diplomatic “doomsday machine” – the intertwined pre-war network of alliances – to encourage war in 1914. The financial misadventures of France and Germany in Russia suggest another danger: a financial “doomsday machine” which makes coercive measures – outside of war – ineffective.

[This is part one of a two-part series on the perils of capital dependence in great power rivalry.]

Christophe Vassallo (@VassalloCMV) is a contributing writer for the National interest and a young fellow from the China and the Pacific program of the Center for the National Interest. He is a former Schwarzman Fellow and a research fellow at the Asia Society and the Harvard Belfer Center.

Image: Reuters.

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