Nicholas Mulder, who studies sanctions, declares a watershed moment in world economic history
JIT DAM Western sanctions against Russia have moved political and economic systems around the world into uncharted territory. By December, it was already clear that Russian aggression against Ukraine would be met with a wave of American and European economic pressure. But although Vladimir Putin’s sudden and brutal invasion shocked us all, the Western economic response was equally astonishing.
A first round of sanctions on February 24 targeted Russian banks and technology exports; a second round on February 26 cut off access to the QUICK financial messaging network, seized the foreign wealth of the Russian oligarchs and, above all, froze most of the reserves of Russian central banks abroad. Before that, no G20 the economy had never faced such drastic economic sanctions, nor had it suffered so many in such a short time.
European leaders are remarkably candid about the strength of their sanctions. French Finance Minister Bruno Le Maire said the West would wage “total economic and financial war against Russia”. But the significance of this sanctions campaign goes beyond its geopolitical significance. Already he has galvanized NATO, tightened the transatlantic alliance and unified the European Union. Yet it is also a turning point in world economic history.
One can look for comparable historical episodes by considering the severity of the sanctions, the size of the target, or the goal: to stop the war. Over the past two decades, only Iran, Venezuela and Afghanistan have had their external central bank assets frozen. What definitely sets Russia apart from these cases is its size. As the 11th largest economy in the world, Russia is a giant compared to the small Afghan economy and the averages of the Islamic and Bolivarian republics.
It is not only the target of sanctions, but also the ambitions of those who use them that are much greater. If the goal of the West’s economic war is to end Mr. Putin’s war of aggression in Ukraine, then historical experience suggests that different measures will be necessary. Sanctions alone have a poor track record for stopping military adventures. During the 20th century, only three of the 19 attempts to use sanctions as a policy to prevent war were successful: two of these were the work of the League of Nations. It nipped in the bud the nascent 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 US financial pressure on the pound sterling, which forced the end of the British 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 pressing another. There is only one instance in which a state of similar weight to Russia has been embargoed in order to curb 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 hinder the invader and save the defenders.
What effect will the sanctions have on Russia? The initial financial shock will surely be severe, leading to severe inflation and popular misery. Yet there are reasons to expect that, if Russia weathers this immediate crisis, it will continue at low or negative growth rates for some time thereafter. Iran suffered severe currency crises in 2012 and 2018 as a result of Western sanctions, but after the initial contractions it adjusted and stabilized. Russia is more closely integrated into the global economy, but it also has a much broader economic base, higher tax revenues and a more diversified export sector than Iran.
Russia’s economic isolation will have dramatic repercussions on the global economy. This is a function of its role as a leading supplier of several key commodities. Comprehensive sanctions against Iran and Venezuela have affected the global economy mainly in specific segments of the oil market. But Western sanctions will certainly force a painful adjustment and affect Russia’s ability to supply its varied share of the global commodity basket: 6% of aluminum production, 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; the sanctions make their continued food supply precariously dependent on the decisions of Western policymakers. Global financial markets will need additional support from central banks to offset the withdrawal of Russia’s large currency surpluses from currency swap markets.
Although the sanctions have so far sidestepped Russia’s most essential commodity exports, their fear will scare off wholesale buyers, middlemen and end consumers. Private sector decisions to divest from Russia are accelerating. Maersk and MSctwo freight giants that control a third of the global container market, have already suspended shipping orders to and from Russia. BP and Shell are pulling out of the country’s oil industry. Air travel, tourism and other connections between Russia and the West are all being cut rapidly.
After the 2015 nuclear deal, the paltry Western corporate interest in Iran showed that overreaction to sanctions could outlast the measures themselves. They are rooted in corporate behavior. There are also unintended consequences. The devaluation of the Russian currency negatively affects the five Central Asian republics, whose currencies follow the rouble. Without assistance, a year that began with protests against the rising cost of living in Kazakhstan will bring new challenges to this region. But the shocks are already emanating much further away. Wartime disruptions, supply shortages and fears of sanctions are driving a global shock to commodity prices. It could usher in a global 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 globalization. On their current scale, they constitute a storm that will alter the nature of globalization itself in major ways. Given the criminality of Mr. Putin’s invasion, it is necessary to punish Russian aggression with economic, financial and diplomatic measures. But Western policymakers must be very careful in designing these interventions. Sanctions have a deterrent 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 global economy, the unintended political and economic effects of sanctions can quickly spiral out of control. Instead of rushing with new sanctions, Western policymakers should focus on directly helping Ukrainians defend their independence. They must also quickly define clear conditions for the lifting of sanctions in order to encourage de-escalation and an end to this catastrophic war.