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A Russian oil rig in the Arctic circle

The Economic Consequences of Russian Sanctions

“This is only the beginning.”

Those six ominous words are not what Americans want to hear when it comes to the gas prices they’ve been paying lately.

Whenever I have to break the bad news to my audience about the state of out-of-control spending or inflation in the United States, I turn to my friend Jonathan Bydlak. Jonathan is director of the Governance program at the R Street Institute , and the creator of the first ever real-time spending site that tracks the fiscal records of Members of Congress. If you’re looking for a hard dose of reality, follow Jonathan on Twitter and check out SpendingTracker.org to find out how much your representatives vote for in spending each year:

Then, give his latest essay in the Spectator a read on the topic of what’s likely to result from our sanctions against Russia.

Who’s really behind rising gas prices? Moscow or Washington D.C.?

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Economic sanctions have always seemed to me like an ideal weapon. You can harm your opponent without directly killing anyone or risking American blood and treasure in expensive foreign wars.

Reading Jonathan’s article, however, I came to question this view.

Jonathan doesn’t doubt that some response to Putin’s aggression is warranted, but he worries about the long-term impacts of our economic sanctions against Russia. Much like a trade war or steep tariffs/quotas, you can’t expect to punish your enemy economically without shooting yourself in the foot as well.

When it came to Trump’s War on Trade, economists like Hoover Institution scholar Richard Epstein made a clear case against the policies, and yet Trump did not listen. During COVID-19, economists’ voices were drowned out relative to the public health establishment.

Is it Déjà Vu all over again with sanctions on Russia?

“There’s a substantial body of literature that says that actually, [sanctions] are generally ineffective,” says Bydlak.

SWIFT Sanctions: A Wrench In the Gears of Global Trade

Sanctions appear attractive relative to a hot war, so we can feel like we’re “doing something” without sacrificing American soldiers, but we overlook their ineffectiveness — as well as the innocent bystanders who are most severely hurt (the “unseen” in Frederic Bastiat’s framework).

So why do we think this time is different? What makes the Biden administration believe we can reign in a rogue actor like Putin with such a blunt instrument? Is it merely that the sanctions this time around are bigger than they were in 2014, following Russia’s annexation of Crimea? Does this round represent the “atomic bomb” of economic sanctions?

Jonathan concurs that the whole western world is imposing stronger sanctions this time around, but this means that the backlash and economic harms to the west are also proportionally larger. He notes that, “Putin is not pulling out troops, he’s largely doubling down.”

The strongest sanctions, such as cutting Russia off from SWIFT (Society for Worldwide Interbank Financial Telecommunication), might even lead countries like China to look for longer-term alternatives to depending on a Belgium-based banking system.

Trade is good for everyone. Making trade more difficult, by definition, would seem to be bad for everyone. In a perverse way, we are playing into Russia’s hands by helping them in their long-time mission of becoming less dependent on the rest of the world. This doesn’t mean that Jonathan opposes sanctions, but that we must be clear-eyed about how effective they will be.

“Despite the costs being great, I still support the current sanctions regime. But I think we have to be realistic about what we can achieve with them and account for the potential long-term consequences. I worry lawmakers aren’t thinking enough now about how to roll them back when the time is appropriate so that the economic costs are mitigated,” he told me in a follow up email to our conversation.

The False Promise of American Energy Independence

Free trade is in America’s DNA, and yet we’ve also long recognized the value of being less dependent on foreign oil — an essential resource. This underlines the reality that sometimes there are other considerations beyond just free trade. The same argument could be made to justify economic sanctions on Russia. However, independence comes with one major drawback — the abandonment of the principle of comparative advantage.

Jonathan makes a domestic analogy to fruit growing:

“I’m originally from Massachusetts. We don’t grow oranges in in Massachusetts. Why don’t we? Because, obviously, it’s a lot easier to have them grown in Florida. We instinctively understand at the intra-country level, that there’s value in having different areas of the country specialize in areas where they have an advantage — whether that’s an absolute advantage or comparative one.”

He points out that America has become a net-exporter of energy in recent decades — i.e., we are already “energy independent” — and yet we still see gas prices rising, since the price of oil is set in a global market.

“We are in an interconnected world, whereby prices are set globally.”

As sanctions start to have a greater effect on the people of Russia, one would expect the people to push back against the Putin regime — much like people all over the world did when COVID-19 restrictions became too onerous.

Not so fast, says Jonathan — Russia does not enjoy the same free speech that we have in the Western world, meaning they might be able to force their people to endure the hardship for longer than the west. Furthermore, the people may parrot Vladimir Putin in blaming the west for the effects of sanctions.

Playing the Long Game

Ultimately, Jonathan thinks it’s an open question whether these sanctions will be worth the cost:

“[I]t’s not clear to me that this is a way to go if the ultimate outcome we want is for Putin to be out of power. It’s not clear to me at all that this will happen in the way that we want it to, or on the timeline that we would want it to.”

So what should we expect to see long term?

The inflation woes of the past year in the United States are sure to get worse before they get better. We can’t entirely blame this on Moscow, given the extent of U.S. spending in recent years and our own internal economic dysfunction.

If Russia has a higher tolerance for economic pain, then that reinforces the case against sanctions. Countries like Finland, which borders Russia, will suffer especially great harms.

Which side will ultimately have the greater endurance for the harms caused by economic sanctions?

I would remind my audience that the Cold War was ultimately waged and won on economic grounds after Soviet Russia packed it in and declared the international equivalent of Chapter 11 bankruptcy.

And yet, as Jonathan points out, we didn’t exactly force the Soviet Union into economic submission — they imploded under the weight of their own heavy-handed central planning.

“The way that we won that the Cold War economically was by out-producing and out-innovating the command and control economies of the East.”

Rather than trying to crush Russia with heavy sanctions, it might be worth considering the alternate path of simply letting the fruits of freedom speak for themselves.

I’m grateful to organizations like the R Street Institute that fight for free markets, and act as consistent advocates of limited government in the areas and issues that other groups tend to neglect. Even when it’s unpopular, freedom must be considered the first and best solution to the plethora of problems facing us today.

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Bob Zadek

Bob Zadek

http://bobzadek.com • host of The Bob Zadek Show on 860AM – The Answer.

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