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Sanctions on Russia: The Collateral Damage and Strategic Risks of the West’s ‘Economic Weapon’

In response to Russia’s invasion of Ukraine, the United States and European Union have imposed unprecedented sanctions on the Putin regime. These measures are severely damaging the Russian economy. They are also disrupting international markets in energy and other commodities. Such large-scale use of the “economic weapon” risks further fragmenting the world economy.

Esteban Mercatante

April 25, 2022
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In response to the war in Ukraine, the United States, Britain, and the European Union — with the support of several dozen countries — imposed economic sanctions on an unprecedented scale to isolate Russia and freeze its economy. The “economic weapon” has been part of the toolkit of the most powerful capitalist states for more than 100 years, but since the end of World War II no sanctions have reached the level of those imposed on Russia.

The sanctions include severing Russia’s main financial institutions from the Swift international payment system and seizing half the country’s reserves, accessible to the United States because they were held as assets denominated in U.S. dollars. The West has also blockaded Russian exports — a sanction applied selectively by those countries most dependent on Russian oil and natural gas, but imposed quite strongly nonetheless — as well as pressure on multinationals to liquidate their assets inside Russia and to cancel any business they do with firms in the country. Combined, these measures mark a tremendous leap compared to the sanctions that imperialism has imposed on smaller countries — and against Russia itself — since 2014. While Iran, for instance, was excluded from the Swift system, these sanctions are at a much greater scale, given the far greater size of Russia’s economy (the world’s ninth largest) and the weight of its commercial ties with Europe when it comes to energy.

As I wrote previously, the far greater scope of these sanctions took the Putin regime by surprise; it had expected a response more along the lines of the sanctions imposed in 2014. Instead, Russia’s Central Bank reserves were frozen in what the Financial Times calls a “weaponization of finance,” setting a dangerous precedent for an international financial system that orbits around the dollar. The ruble, already in free fall at the beginning of the war, recovered its value in relation to international currencies, but only thanks to the imposition of strict capital controls and a radical increase in interest rates. This, coupled with the impact of trade restrictions imposed by other countries, foreshadows a double-digit decline in Russia’s economy this year (and probably more than 20 percent).

An attack of this sort on the economy is being felt most acutely as an assault on the living conditions of the working class and the most vulnerable in Russian society. Beyond that, the oligarchs close to the regime saw some of their luxuries and financial assets vanish overnight (for which they were duly compensated by Putin for remaining loyal). Meanwhile, the sanctions have had only a limited effect on their intended target: that is, the waging of the war itself, as evidenced by Russia’s continued assault on Ukraine. The sanctions might threaten Russia’s stability by stoking widespread, preexisting discontent, but they do not skew the military’s decisions. Sure, the sanctions could erode Russia’s military capabilities in terms of hampering access to strategic supplies from abroad, thus limiting the supply capacity of the country’s own military industry, but that will happen only in a more protracted conflict; these sanctions will not have such effects in the short period of a few weeks, or even months. This, then, raises the question of how long sanctions can be sustained without severely damaging the world economy and spilling over around the world.

Collateral Damage

Not only is Russia a major exporter of natural gas and oil, to Europe in particular, but it is also, together with Ukraine, a major supplier of wheat and other grains. The war has raised the prices of grains and sunflower oil, of which Ukraine is the world’s main exporter, and it remains to be seen whether there will be any production this year or whether any output could make it to the ports from which it is shipped to the rest of the world. By targeting Russia, the other major supplier of wheat, barley, and other grains, the sanctions have increased the overall disruption of grain markets, exacerbating the upward push of grain prices caused by the war itself. They have also added to the upheaval in oil and gas prices, multiplying the economic spillovers.

It is difficult to assign degrees of responsibility to the sanctions and to the war alone; they are mutually reinforcing. Nevertheless, the combined effects can be seen in the acceleration of price increases since the beginning of the hostilities. In March the United States had a year-over-year consumer price increase of 8.5 percent, something unseen for 40 years — before drastic measures taken by Paul Volcker, then the chair of the Federal Reserve, resulted in a shock that put an end to the inflationary spiral that had dominated the country throughout the entire decade of the 1970s. Moreover, what economists call “core inflation,” which includes the costs of goods and services but excludes those of the food and energy sectors, stood at 0.3 percent year-over-year. In other words, last month’s price increases in the United States (as well as in most of the world) were most significant with respect to those items affected by the war (fuel prices rose 18.3 percent in March compared to February, and no less than 48 percent year-over-year; the general price increase of food amounted to 10 percent in one year).

The situation in the EU countries is similar: a year-over-year increase of 7.8 percent, up from 6.2 percent in February and well above the 1.7 percent of March 2021.

The magnitude of the collateral damage that sanctions may create will depend on how much they are sustained over time and whether they continue to escalate. The sanctions imposed after Russia annexed Crimea were never lifted, and the new sanctions could persist even if the war ceases. It is difficult, though, to sustain a homogeneous bloc of countries in favor of maintaining sanctions over time because of the effects they have on living standards and thus on wages and other costs. This is especially true for the EU, which is critically dependent on Russian energy. But even were the sanctions to be lifted quickly — which is not expected at the moment — the collateral damage will continue to be felt.

Disruptions in the grain markets are most likely to last. Let’s take the case of wheat, which is critical for food around the world. Wheat supply has been at historically low levels for several years now due to a combination of weather disruptions and changes in global demand. World production has been insufficient to replenish the stocks, which in turn has created an upward trend in prices. The near complete destruction of Ukraine’s production, the impossibility of exporting what there is because of the Russian invasion’s blockage of the ports, and the exclusion of Russia from international markets — all this foretells a dramatic fall in reserves and difficulties in meeting this year’s demand. Not only will prices be affected this year, but the effects will continue as long as it takes to rebuild reserves.

The inflationary cycle that disappeared as a problem in the imperialist countries from the early 1980s until 2021 would have reappeared even without the sanctions as a result of the war’s impact; inflation returned with the disruption of global production chains and the effects of the expansionary fiscal policies enacted to deal with the pandemic. But the sanctions and war have amplified its effects. They also reveal the Western powers’ limited ability to further punish Russia. The total exclusion of Russia from energy markets would bring industry in Germany and other EU countries to its knees, and it would drive up energy costs even further (which, next winter in the North, will be felt severely in all households).

While some analysts believe that inflation may be reaching its peak (if the relatively low level of core inflation is anything to go by) and could start to recede, the continuation of disruption in the energy and food markets promises to keep creating upheavals, and the momentum generated by increases — such as how higher fuel prices affect logistics as a whole — will continue to repercussions in the form of new price increases. For the central banks, which — the U.S. Federal Reserve first among them — insisted for most of 2021 that the price increases were a transitory result of the pandemic and specific supply problems, the scenario is increasingly complicated. While pressures are mounting to raise interest rates above 3 percent (leaving Treasury bonds at levels close to 7 percent, not seen since before the 2008 mortgage crisis), there are also those who warn that this will not necessarily attack the root causes of inflation, and will instead almost certainly push a recession in the United States in the coming year. In the immediate term, the war and the sanctions have already led to lower growth forecasts for the world economy this year than those made a few months ago, as the IMF recently made known.

Another instance of the sanctions’ collateral damage is the international effort to combat climate change (already limited and subject to capitalist imperatives). Scarcity and energy price increases have led to an all-out scramble for every available energy source to deal with the shortage, including coal, the reduction of which is critical to mitigate carbon dioxide emissions. But far from being reduced, coal use is reaching historic highs as a source for generating electricity. The war has breathed new life into the fossil fuels industry, which put on hold any talk of how urgent it is to transition to increased energy from renewable sources with less negative environmental impact. Even the debate on turning more to nuclear energy has been revived, both in Japan and Germany, although there remains little chance of it happening (notably, Russia is the main supplier of uranium to Germany).

Another Step toward Global Fragmentation

Thus, the sanctions have immediate economic effects on the countries that impose them, as well as on the countries that they are imposed on. These effects will be felt more deeply as the war and the punishment imposed by Western imperialism on Russia are prolonged. But what effect do these decisions have on international economic relations?

The internationalization of production has been a fundamental characteristic of capitalism over the last four decades, articulated through global value chains. These were formed by taking advantage of the growing economic opening created by the large multinationals that are based mainly in the imperialist countries. By shifting labor-intensive and highly polluting production to regions of the planet where wages are low and environmental regulations are lax, and by taking advantage of the competition between countries to reduce taxes and other requirements as a way to attract investment, firms created highly complex production networks, even outsourcing numerous processes to other firms and giving rise to new links between firms. The greater the internationalization, the greater the forced competition between wage earners from different countries, which gave rise to the so-called global arbitrage of the labor force that the capitalists have applied. This has, in the last several decades, allowed them to impose flexible work conditions and to lower wages, both in the dependent countries and in the imperialist centers.

Since the 2008 crisis and its consequences — including, among others, a relative weakening of international trade — all this scaffolding began to be questioned and was socially contested by the Left and Right. Brexit and the Trump presidency, with its “America First” mantra and its rejection of trade agreements, were exemplars of the deep unease. In 2021, as the economy began to recover from the pandemic, the many risks inherent in the scaffolding of internationalized production — so highly profitable for large companies but subject to numerous bottlenecks — became apparent. This crisis has increased companies’ concern about strengthening the “resilience” of value chains — that is, reducing their exposure to disruptions that arise from bottlenecks in the logistics circuit. But this is a difficult problem to resolve because it requires the capitalists to rethink the fundamental structures of contemporary capitalism, which multinational firms are reluctant to abandon given the tremendous improvement in competitiveness and profitability the scheme has generated for them.

It is in this context, then, that we must analyze the consequences of economic sanctions: the relative decline of globalization, which has been taking place for some time now, without the emergence of anything to replace this hugely profitable enterprise. The disruptive effects of sanctions on global economic integration might come from the decisions of countries — and particularly their central banks — and of companies that end up giving establishing two or more differentiated economic spaces, with much less interrelation between them than that which characterizes today’s economy. Specifically, we could see an eventual abandonment of the use of the dollar and dollar-based assets by “revisionist” powers that may feel threatened, and a reorganization of global production chains abandoned by multinationals from countries that may eventually suffer sanctions, with those countries seeking to gain degrees of “autarky” — economic independence — with respect to strategic inputs.

In a recent Financial Times article, Robin Wigglesworth, Polina Ivanova, and Colby Smith ask whether there will be a backlash against the dollar as a result.

The power of the sanctions on Russia is based on the dominance of the U.S. dollar, which is the most widely-used currency in trade, financial transactions and central bank reserves. Yet by explicitly weaponising the dollar in this way, the U.S. and its allies risk provoking a backlash that could undermine the U.S. currency and sunder the global financial system into rival blocs that could leave everyone worse off.

The discussion about the future of the dollar is not new; it has come up whenever the United States has faced a crisis, at least since the bursting of the “dot-com” bubble and the Enron and WorldCom scandals in the early 2000s. Announcements from China, Russia, Iran, and India of agreements to trade with each other using their own currencies and bypassing the dollar were followed by analyses of the bleak future awaiting the dollar as a pillar of the world monetary system. Meanwhile, as observed in a recent IMF working paper by Serkan Arslanalp, Barry J. Eichengreen, and Chima Simpson-Bell, some indicators point to a decline in the dollar, in this case as a reserve currency: it went from composing 71 percent of central bank reserves in 1999 to 59 percent in 2021. That is a marked decline, but the dollar still holds an overwhelming majority position.

Could the qualitative leap in the sanctions imposed on Russia trigger an even greater fragmentation of the world economy? The power of sanctions is based on the depth of interconnections that characterize the modern economy, and on the undisputed prominence of the dollar and the financial institutions of the imperialist countries. But as Nicholas Mulder warns in the foreword to The Economic Weapon: The Growth of Sanctions as a Tool of Modern Warfare, the use of this power — in a context that, as we have seen, is already marked by a growing trend contrary to internationalization — can conspire against the very conditions that make sanctions powerful. Referring to the period after World War I, Mulder observes, “Sanctions exploited the economic networks of interwar globalization but ultimately undermined its political foundations.” And he warns,

Today, as the world economy reels from financial crises, nationalism, trade wars, and a global pandemic, sanctions are aggravating existing tensions within globalization. That sanctions are intended to promote international stability is, unfortunately, no defense against this risk: unintended negative consequences can be just as destructive as premeditated harms. 1Nicholas Mulder, The Economic Weapon: The Rise of Sanctions as a Tool of Modern War (New Haven, CT: Yale University Press, 2022), 13.

Those who today call the shots in the imperialist states and are punishing Russia are in every case aligned with the interests of the globalist sectors of the bourgeoisie. They seek, at whatever cost, to save the status quo from its decline, even if that seems an impossible undertaking. Contrary to their aspirations, though, their actions are pushing toward a world increasingly fragmented into confrontational blocs. This is an increasingly explosive cocktail that invites the deepening of clashes between powers and weakens any moderating element that may arise from economic interdependence.

First published in Spanish on April 24 in Ideas de Izquierda.

Translation by Scott Cooper


1 Nicholas Mulder, The Economic Weapon: The Rise of Sanctions as a Tool of Modern War (New Haven, CT: Yale University Press, 2022), 13.
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Esteban Mercatante

Esteban is an economist from Buenos Aires and a member of the PTS.

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