Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

Print Print Cite Cite
Style: MLA APA Chicago Close


The Sanctions Dilemma

by Robert Kahn
April 1, 2014


Today I put out my April Global Economics Monthly, discussing the prospect of intensified sanctions against Russia.  It’s an issue that requires a much better effort at quantification than I have seen to date.  Still, I think that we can draw a number of tentative conclusions from the debate so far:

1. Intensified sanctions against Russian corporations and banks could have powerful effects, most importantly through financial channels.  A forced, rapid deleveraging—Russia’s “Lehman moment”—would hit hard a Russian economy that was already weakening prior to the crisis due to structural distortions and poor economic policies.

2. The power of sanctions comes not only by pressuring Russian business elites, but also by the message it sends to other countries that there will be costs to territorial aggression.

3. Sanctions, and the likely resulting retaliation, may well be recessionary for the West.  I am not convinced that, because Russian gas is a small percentage of Europe’s overall energy consumption, that the short-term dislocation will be minor if the plug is pulled overnight.  Being willing to accept this pain as the price of achieving global political stability makes the threat of sanctions more credible.

4. My colleague Michael Levi persuasively points out here and here that liberalizing U.S. exports of oil and gas will have little short-term effect on flows. The benefits of energy reform and liberalization come in the longer run, as infrastructure is put in place and sources of energy diversified away from Russia.  European policies to diversify supply also must be part of the equation.  In the near term, the political statement that these initiatives send is more important.   A comprehensive discussion of the energy issue also is here.

5. This suggests an “all of the above approach”: intensify the sanctions, diversify energy, hold back on trade and financial negotiations, and support Ukraine with financial assistance—and be prepared to accept the necessary dislocations.  It is striking to me how sanguine global markets are that we will not have to confront this scenario.

Post a Comment 2 Comments

  • Posted by Alexis de Pleshcoy

    Right now two future major superpowers: India and China (if not already one) are watching and waiting.
    China could at any time buy all the resources Russia could sell; let’s not forget that around 300 million people there still live on $2/day, and they need electricity to get started; they could be very easily absorb any natural gas available. In fact China is working as we speak the details for massive purchases of natural gas from Russia.
    It is hard to predict the consequences of what appears to be economic war, but it is shocking that the Europe in general and the EU in particular don’t appear to be really involved. After all Europe should also behave as a superpower. An inspection (superficial, true) of the web sites of some publications there doesn’t show preoccupation on this subject.
    The UK (they signed the Budapest Memorandum on Security Assurances) should have taken the lead in military matters, mobilizing Germany and France to bear together the brunt of protecting their own Eastern borders.
    Economically the EU could have immediately enacted for Ukrainian citizens the right to free movement to live, work, study or retire in the EU, one of the goals on the EU Internal Market concept (and would come later anyway).
    As a side note, forcing a Lehman moment on Russia reminds actually of the frailty of the global economic system, and is not really something to brag about in any Western country; it simply showed we are not good at managing money.

  • Posted by Alexis de Pleshcoy

    I also want to make crystal clear my opinion, the statement:
    “Being willing to accept this pain as the price of achieving global political stability makes the threat of sanctions more credible” is not consistent with the present situation, if we look at the present, global globe. It will be another major tension point, to many more.
    We should never forget that precisely a century ago the wars of 1914-1945 begun not far from that part of the world. But at least the European people greeted that with popular enthusiasm (which quickly vanished in the trenches of the Western front).

Post a Comment

CFR seeks to foster civil and informed discussion of foreign policy issues. Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions. All comments must abide by CFR's guidelines and will be moderated prior to posting.

* Required