Macroeconomic & Geopolitical

If Sanctions Didn’t Stop the War, They Can Still Shape the Peace

March 2022 – 3 min read

After Ukraine’s allies decide how much to ratchet up pressure on Russia, they will face tough choices on how to ratchet down.

The world's biggest-ever experiment in economic statecraft is now underway, firmly knocking Russia back toward something resembling the isolated and impoverished Soviet Union of 50 years ago. Nothing will compare to the pain and suffering of Ukrainians through this invasion, but the damage to Russia and Russians will be unprecedented to anything short of actual war.

Ukraine's international allies now face two even more complex decisions as they seek to moderate a military attack almost entirely by economic means: when to escalate and when to pull back. If releasing pressure on Moscow seems unthinkable amid the current ghastly headlines, there will come a time when it will be the best way to change Russia’s behavior, and the thinking should begin now.

First, on escalation, a significant interruption in Russia’s oil and gas exports has always seemed like a red line neither side would cross, but that was several red lines ago. Oil majors like BP and Shell have now written down their Russian reserves, and oil traders are “self-sanctioning” by avoiding Russian transactions. Bipartisan support is building for a U.S. embargo on Russian oil and even Prime Minister Mario Draghi has suggested that gas-dependent Italy could weather an interruption in Russian imports.

Meanwhile, Vladimir Putin remains very much in his own escalation mode with little apparent concern for his country’s growth prospects. If sanctioning the Russian central bank renders its oil and gas revenues effectively unusable to prop up the domestic economy, why shouldn’t Moscow consider cutting off exports?

A complete end to the Russian energy trade still looks far-fetched, but the odds of a substantial contraction have sent oil and gas prices spiking. Few politicians can entirely ignore the economic costs of this next move, but few can comfortably defend sending $700 million per day to buy Russian commodities in the wake of its brutal intervention.

Unfortunately, even this dramatic next step won’t likely weaken Putin’s resolve, which means we are in for a period of cruel fighting that shocks the world’s conscience and roils the global recovery. What likely follows looks messy and unstable. A new regime in Kyiv that forswears NATO membership will need Russian troops to protect it from persistent domestic rebellion. At the other extreme, a coup in Moscow that topples Putin will hardly install a Jeffersonian democrat who orders retreat and offers reparations.

Between these extremes, however, the sanctions that failed to avert war can play an important role in shaping the peace. An outcome that somehow keeps the current Ukrainian government in place will require off-ramps for Putin or his successors. Fanciful as this may sound today, a combination of Ukrainian courage and a path back to the global economy will be part of the solution.

"Some will call this appeasement amid the current outrages, but the Cold War containment strategies that secured Eastern Europe’s freedom included a mix of economic carrots and sticks against a backdrop of political resolve and military strength."

The more likely scenario is that Russia will try to control Ukraine for a very long time and sanctions will be in place for longer. Even after a swift currency collapse and likely debt default, Russia’s economy will enter a downward spiral as critical infrastructure fails for want of spare parts, as health care collapses for lack of medical equipment, and as the ruble shifts from a store of value to a unit of account.

But a much poorer Russia is hardly a less dangerous Russia. Like North Korea, a country without any prospect of improved economic relations with its neighbors will find few reasons to avoid fresh conflicts on its European borders, in the Middle East, or in cyberspace.

At the right time, sanctions relief may involve precious access to those spare parts, permission to re-enter European airspace, or even control over central bank reserves in return for troop withdrawals, reconstruction or greater Ukrainian political autonomy. The specific tradeoffs will need to be tailored to the political configuration that emerges from the fighting; the bargaining may continue for years.

The decisions around relaxing sanctions will also be difficult and politically emotional, which is what makes it important to start thinking about them even now. Some will call this appeasement amid the current outrages, but the Cold War containment strategies that secured Eastern Europe’s freedom included a mix of economic carrots and sticks against a backdrop of political resolve and military strength.

Allies that tried to defend Ukraine by severing credit lines to a country willing to send tanks will have to use whatever leverage they have when the battles end. Soon enough, the best way to secure Russian concessions toward Ukraine may well be to signal what relief Moscow might expect in return.

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