Dear Readers,

This Venn diagram of global sanctions regimes is from 2019. Today not much has changed in terms of the countries named, which says something about the efficacy of economic punishment. In spite of this, in response to the current crisis in Ukraine, Western powers have targeted Russia with unprecedented new types and levels of financial sanctions.

The Ukrainians did not ask for this. Instead, they have urgently requested weapons, fighter jets, and most insistently, a no-fly zone which the US fears could result in direct NATO military engagement with Russia. Despite their entreaties, both NATO and the US have unswervingly refused; they are not prepared to risk kinetic conflict with Russia, preferring to erect an economic blockade instead. Despite the swiftness and intensity of their reaction, this strategy does not appear to be working to stop the invasion. The suffering in Ukraine continues.

Sanctions Theory

Economists have long debated whether or not sanctions are effective. They have proven especially unsuccessful with nuclear powers such as North Korea. I have included links below to some of the key theoretical arguments for and against, including an intriguing paper from the economics department of the National University of Kyiv, citing Iran as a case study.

Sanctions are not fundamentally economic instruments, although they have economic consequences. They are rather a projection of international law, highly dependent upon global institutions. A decision by the US to ban the import of Russian energy, if implemented, will be couched in legal terms legislated by Congress with legal consequences for those who do not comply.

The Value of a Human Life

Exerting economic pressure first is understandable. Americans emerging from the fatigue of the long fight against Covid and the shadow of the retreat from Afghanistan are not anxious to enter a new battlefield. Laws evolved to resolve disputes in order to avoid physical violence. However, once hostilities break out, can we really fight effectively from a distance with a series of legal actions that some, including China and India and perhaps the majority of humanity, do not acknowledge or support? A necessary linchpin in the current strategy, Beijing also knows that once established as the new norm, the same actions could someday be taken against China. Today, Wang Yi, China’s Foreign Minister declared that Russia is its greatest strategic partner. That is far from condemnation of its actions.

On Saturday, the orthodox Prime Minister of Israel Naftali Bennett flew to Moscow to meet with President Putin. The religious exemption that he used to travel on the Sabbath is called Pikuah Nefesh, meaning in the Jewish tradition that safeguarding human life is always the highest priority, taking precedence over religious tradition. Perhaps Western leaders are also acting under a similar precept, placing the value of the lives under their direct control above all other considerations, such as sovereignty and freedom, the principles we believe in as a people. We are no longer willing or confident of projecting them abroad at the cost of American lives.

Unintended Consequences

A newly-invigorated coalition of Western powers might be mistaken in their actions, if not their intent, in terms of calculating overall negative outcomes. The exogenous shocks of the sanctions, in an environment where energy and food prices were already trending upwards due to Covid, will hit poorer households hardest. Given that both Ukraine and Russia are the world’s largest producers of wheat, warfare means that fields will not get planted this spring. Fertilizer is already in short supply, and in a world of interlinked supply chains, we really cannot predict where the weak links might be. In 2020, I wrote about the possibility of famine due to Covid, but if this conflict goes on for very long, it will become a probability in 2022. Malnutrition is also a disease.

In the financial realm, the same risk applies. Causing any part of the highly-integrated global financial infrastructure to seize up can also have unintended consequences. While Russia represents just 2% of global GDP, and 1% of the revenues of a company like Apple, there are signs that sanctions might spread to other countries that have not joined us in banning all business with Russia.

Through the Countering America's Adversaries through Sanctions Act (CAATSA) the Biden Administration is now considering acting against both India and China, which would multiply current sanctions on Russia’s 145 million citizens to include at least another 3 billion people. This kind of contagion could result in a global financial crisis, accompanied by food shortages of unimaginable proportions, logistics bottlenecks, and a humanitarian crisis leading to political instability across the globe.

So what should we do? The sad and tragic truth as witnessed by centuries of human history is that military aggression is only countered by superior military might and no war has ever been won by threats or sanctions. However nuclear weapons have changed the calculus. Since 1945 and the bombings of Hiroshima and Nagasaki, major powers have not directly engaged in warfare. So how do we exit from this tragic imbroglio?

Putin’s Teapot

The reflection on Putin’s teapot reveals that although he appears to be speaking to an audience, he is actually facing an empty studio. It is symbolic to some of the hope that he is weaker than we first thought, and is bluffing. Others fear that escalation intended to lead to capitulation results instead in a step up to either nuclear warfare or broader conflict within the region, as a proxy war with Russia widens its scope.

Poland, a member of NATO since 1999, is especially at risk. The US is working with Warsaw to intercede by providing Ukraine with fighter jets that we promise to replace, positioning them in the crosshairs of the Kremlin. This is in addition to the hundreds of thousands of Ukrainian refugees they must now support. Polish markets and the zloty are already reacting to this new reality.

The Role of China and the Indo-Pacific

Another possibility, and in my view the most likely, is a partition agreement, if both sides can de-escalate sufficiently to have that conversation. However even if the current crisis is defused, some hope by China’s intermediation, the world might change forever as a consequence of this war. We thought Covid was an accelerant, but this conflict has added jet fuel to decoupling.

Putin and Xi Jinping have each clearly said that they are willing to build national economic fortresses in order to lessen their dependence on the West. In the National People’s Congress Two Sessions meetings this weekend in Beijing, “dual circulation” was dropped from the agenda and “self-reliance” was in.

In addition, the conflict in Ukraine has put cracks into the hoped-for Indo-Pacific alliance. Seventy-plus years of relative peace, prosperity and trade integration might be giving way to a much more inward looking, bifurcated world by 2050. A world with potentially two financial systems, two sets of telecommunications and transportation infrastructures, two versions of technological standards and parallel cross-national institutions represents a major shift away from globalization. It began with Covid, but now that it has started, it will not end there. This evening, Russia announced that all companies there must use the .ru extension by March 11th, effectively cutting off its Internet users from the rest of the world.

I live on the edge of Ukrainian Village in Chicago, which has a large population with ties to Eastern Europe. Feelings are running high; there was no joy when the mask mandate that was lifted last week. Crime is at unprecedented levels even in formerly peaceful neighborhoods, and now there is a real fear of nuclear war for the first time since the Cuban Missile Crisis. Although the threat of Covid is receding, the world does seem to be in a far more dangerous place.

Sanctions Theory

August 12, 2019 / Council on Foreign Relations

What Are Economic Sanctions? A Backgrounder

Jonathan Masters

For many policymakers, economic sanctions have become the tool of choice to respond to major geopolitical challenges such as terrorism and conflict.

August 12, 2020 / Baltic Journal of Economic Studies

Economic Sanctions: Theory, Policy and Mechanisms

Anton Filipenko, Olena Bazhenova, Roman Stakanov

The processes of world economic globalization cause the activation of new economic mechanisms in international relations to influence the policy and behavior of a particular governments or group of states acting in the interests of public security. The application of international economic sanctions and debate about their effectiveness and scale of losses are now at the centre of international politics. In today's globalized and interdependent world.

Key finding: sanctions lose their impact over time, but after a period of 4-8 years.

February 13, 2015/ Harvard International Law Journal Online

The Sanctions Theory: A Frail Paradigm for International Law?

Farshad Ghodoosi

The article argues that the theory of economic sanctions remain a vague and understudied paradigm, which has been based on shallow ground. The social sciences’ academic debate has obsessively concentrated on the question of whether sanctions work or yield the desired results. International law scholarship for a long time limited itself with the standards applicable to the imposition of sanctions. However, recently, a new move endeavors to reformulate the entire field of international law based of the theory of sanctions. New scholarship aims to argue that the imposition of economic sanctions should act as a long-missing element in international law, which was enforcement, a remedy that is far more humane and accessible than use of brute force.

1988/ The American Economic Review 78, no. 4

The Theory of International Economic Sanctions: A Public Choice Approach

William H Kaempfer and Anton D. Lowenberg

Both economists and political scientists have expressed considerable skepticism about the effectiveness of international economic sanctions as a means to bring about economic dislocation and desired political responses in the target country. It is generally pointed out that sanctions are costly to the sanctioning country as well as the target, that substitution possibilities in world markets diminish the impact of boycotts, and that severe sanctions can induce perverse political responses in the target country.

March 1, 2022 / China Finance Forum 40 (Chinese Academy of Social Sciences)

Assessment of the Impact of Financial Sanctions on Russia

Xu Qiyuan and Hou Lei

Financial sanctions imposed on Russia in Europe and the United States are constrained by the following three points: trillions of dollars of assets owned by foreign capital in Russia, Russia is a commodity "superpower", and global supply chains are already very tight.

The substantial impact of financial sanctions on Russia's energy exports has begun to appear. The price difference between Russian crude oil exports and the international market has risen significantly, but Russia can still bear it at present.For many policymakers, economic sanctions have become the tool of choice to respond to major geopolitical challenges such as terrorism and conflict.

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EconVue Experts

2018 Global Outlook I EconVue (A Prescient Look Back)

Nikolai Tagarov

Russia will continue to flex its military muscle, in the Middle East and elsewhere. However, its military resurgence will come at the cost of further economic decline, and therefore due to increasing unpopularity of the ruling elite the Russian state will continue with its repressive policies domestically in order to stymie dissent. It is likely Putin will win the 2018 presidential elections. Ironically, we will continue to observe the (re-)building of the pre-Communist era Russian Empire, with all the sociological, ideological, political and economic implications that this brings.

Alberto Fernandez' Magical Odyssey to Russia and China
R. Evan Ellis

President Alberto Fernández’s state visit to Russia and China this month was tragic for Argentina—its national interests, its reputation as a democratic voice in the region, and moderates within Peronism who sincerely believe in the government as a tool for social justice and progress.

Does A Weak Yen Really Help Japan?
Richard Katz

With the yen continuing to slide downward, Bank of Japan Governor Haruhiko Kuroda wants Japan to continue using that crutch. He insists that a weak yen is a “net positive,” even though he admits that “the yen's depreciation might have a negative impact on household income through price rises.”

Conventional Wisdom is Wrong: Americans Are Better Off Even AFTER Inflation
Robert Shapiro

The reason the conventional wisdom doesn’t seem right is because it’s wrong: The incomes of most Americans, adjusted for inflation, increased in 2021.

Related Analysis

January 22, 2022/ Nikkei Asia

Ukraine crisis looms large as China-Russia trade tops record $140bn

Dimitri Simes Jr.

Trade between China and Russia is reaching new highs as friction with the West brings the countries closer.

June 1, 1999 / Brookings

The U.S. Decision to Enlarge NATO: How, When, and Why

James Goldgeier

Not everyone in the United States felt the same way. The dean of America’s Russia experts, George F. Kennan, had called the expansion of NATO into Central Europe “the most fateful error of American policy in the entire post-Cold War era”.

March/April 2022 / Foreign Affairs

A Rival of America’s Making? The Debate Over Washington’s China Strategy

G. John Ikenberry; Andrew J. Nathan; Susan Thornton; Sun Zhe; and John J. Mearsheimer

Mearsheimer goes further, arguing that the United States’ strategy of engagement with China ranks as one of its worst foreign policy disasters and that an alternative strategy, containment, would have prevented or at least delayed the emergence of China as a threat.

February 18, 2022 / YouTube VIDEO

Rise and Fall of Technology in Chinese History

Weatherhead East Asian Institute

China led the world in technological innovation, and then turned inward. Why that occurred is one of the great puzzles of Chinese history. Excellent discussion based on an upcoming book by Yasheng Huang including the politics of innovation in China today.

February 18, 2022 / WBUR VIDEO EPISODE 1/5

Richard Nixon's 'crazy' idea: Make befriending the Chinese Communist Party his legacy

Jane Perlez & Grace Tatter

Richard Nixon was sitting in the Oval Office, just days after his inauguration, mulling over an idea he believed could cement his legacy as a great president. He called his national security adviser, Henry Kissinger, and told him that he had an urgent imperative: make friends with China.

February 14, 2022 / The Counter

Corn ethanol was supposed to help the climate. Instead, its production may have made things worse

Jessica Wu

Environmental advocates have long warned that incentivizing ethanol production could be a net loss for the planet. A new study suggests that those fears may be well-founded. Substitution doesn’t always work.

February 2022/ The Spectator

Frozen: can China escape its zero-Covid trap?

Cindy Yu

Xi looks prepared to wait, but keeping up the zero-Covid approach will come at an economic cost. Some four million small businesses closed last year and migrant workers have been seen sleeping in the streets as their zero-hours contracts are cancelled overnight. Let’s not forget that the largest nation on earth still has not been exposed to Covid.

With best wishes for peace for all,

Lyric Hughes Hale
Editor-in-Chief
EconVue
Chicago
lyric@econvue.com
Twitter: @lyrichues
@HaleReport