By Invitation | Russia and Ukraine
Nicholas Mulder, who studies sanctions, declares a watershed moment in global economic history
Russia’s economic isolation will have dramatic repercussions for the world economy
Mar 4th 2022 (Updated Mar 5th 2022)
The barrage of Western sanctions against Russia has moved political and economic systems around the world into uncharted territory. In December, it was already clear that Russian aggression against Ukraine would meet a wave of American and European economic pressure. But although Vladimir Putin’s sudden and brutal invasion shocked us all, the Western economic response has been just as astonishing.
An initial round of sanctions on February 24th targeted Russian banks and technology exports; a second round on February 26th severed access to the swift financial messaging network, seized the foreign wealth of Russian oligarchs and, most significant of all, froze most Russian overseas central-bank reserves. Before this, no g20 economy had ever faced such drastic economic sanctions, nor experienced so many of them in such a short span of time.
European leaders are remarkably forthright about the force of their sanctions. The French finance minister, Bruno Le Maire, has declared that the West will wage ‘economic and financial total war against Russia’. But the significance of this sanctions campaign goes beyond its geopolitical meaning. Already it has galvanised nato, tightened the transatlantic alliance and unified the European Union. Yet it is also a watershed moment in global economic history.
We can look for comparable historical episodes by considering the severity of the sanctions, the size of the target, or the goal: stopping war. In the past two decades, only Iran, Venezuela and Afghanistan have had their external central-bank assets frozen. What sets Russia decisively apart from these cases is its size. As the world’s 11th-largest economy, Russia is a giant compared with the small Afghan economy and the middling ones of the Islamic and Bolivarian Republics.
It is not just the target of the sanctions, but also the ambitions of those using them that are much larger. If the goal of the West’s economic war is to end Mr Putin’s war of aggression in Ukraine, then historical experience suggests different measures will be needed. Sanctions alone have a poor record of halting military adventures. During the 20th century, only three out of 19 attempts to use sanctions as a policy to impede war have been successful: two of these were the work of the League of Nations. It nipped in the bud incipient border wars in the Balkans, between Yugoslavia and Albania in 1921 and between Greece and Bulgaria in 1925. The other successful use of sanctions was American financial pressure on sterling, which forced an end to Britain’s Egyptian military expedition in the Suez war of 1956.
Significantly, the first two of these cases were threats rather than actual applications, while the third was a case of one cold-war ally squeezing another. There is only one instance in which a state of similar heft to Russia has been embargoed in order to rein in its aggression. In 1935 the League of Nations imposed sanctions on Mussolini’s Italy, which was the world’s seventh-largest economy for invading Ethiopia in 1935. But these measures failed to hobble the invader and save the defenders.
What will the effect be of the sanctions on Russia? The initial financial shock will surely be severe, leading to serious inflation and popular misery. Yet there is reason to expect that, if Russia weathers this immediate crisis, it will thereafter lumber on at low or negative growth rates for some time. Iran suffered acute currency crises in 2012 and 2018 as a result of Western sanctions, but after initial contractions it adjusted and stabilised. Russia has been more tightly integrated into the world economy, but it also possesses a much broader economic base, larger fiscal revenues and a more diversified export sector than Iran.
Russia’s economic isolation will have dramatic repercussions for the world economy. This is a function of its role as a leading supplier of several key commodities. Comprehensive sanctions against Iran and Venezuela affected the world economy mainly in specific segments of the oil market. But the Western sanctions will certainly force painful adjustment and affect Russia’s ability to furnish its variegated share of the world’s commodity basket: 6% of aluminium output, 7% of nickel supply, 12% of crude-oil production, 18-19% of wheat and natural-gas exports and a quarter of copper supply. Egypt, Tunisia, Iraq and Lebanon are already experiencing rising prices due to the closure of Ukrainian ports; sanctions make their continued food supply precariously dependent on the decisions of Western policymakers. Global financial markets will require further support from central banks to offset the removal of Russia’s large foreign-exchange surpluses from currency swap markets.
Although sanctions have thus far steered clear of Russia’s most essential commodity exports, fear of them will scare off bulk buyers, intermediaries and final consumers. Private-sector decisions to divest from Russia are accelerating. Maersk and msc, two cargo giants which control a third of the global container market, have already suspended shipping orders to and from Russia. bp and Shell are withdrawing from the country’s oil industry. Air travel, tourism and other links between Russia and the West are all being scaled back rapidly.
Following the 2015 nuclear deal, the paltry interest of Western business in Iran showed that overreactions to sanctions may outlast the measures themselves. They become entrenched in business behaviour. There are also unforeseen spillover effects. Russia’s currency devaluation is negatively affecting the five Central Asian republics, whose currencies shadow the rouble. Without assistance, a year that began with protests at the rising cost of living in Kazakhstan will bring further hardship for this region. But the shocks are already emanating much further. Wartime disruption, supply shortages and sanctions fears are driving a global commodity price shock. This may inaugurate a worldwide recession and undermine the political stability of societies in North Africa, the Middle East, Asia, and beyond.
Sanctions are no longer scalpel-like instruments that exploit globalisation. At their current scale, they are a tempest that will change the nature of globalisation itself in major ways. Given the criminality of Mr Putin’s invasion, punishing Russian aggression with economic, financial and diplomatic measures is necessary. But Western policymakers should be very careful in designing these interventions. Sanctions have a chilling effect that will persist in private-sector decision-making. Once the perception that the measures are permanent sticks, any chance of using them to steer towards peace in Eastern Europe will be lost.
In an already fragile world economy, the unintended political and economic effects of sanctions can quickly spiral out of control. Instead of rushing forward with further sanctions, Western policymakers must focus on directly helping the Ukrainians defend their independence. They must also promptly outline clear conditions for the removal of sanctions to encourage de-escalation and an end to this catastrophic war.
Nicholas Mulder is an assistant professor in the history department of Cornell University in New York. He is the author of “The Economic Weapon: The Rise of Sanctions as a Tool of Modern War” (2022).
