World Economy

Sanctions on Russia and collateral damage

Sanctions on Russia and collateral damageSanctions on Russia and collateral damage

The American government tends to see sanctions against Russia as a low-cost policy that will eventually force Vladimir Putin to change course in Ukraine.

But this conventional wisdom obscures significant costs. Just as using drones to target suspected terrorists in Pakistan may have created more converts to Islamic militancy than it has eliminated, sanctions advocates haven’t reckoned with the unintended consequences of the policy — consequences that could prove far more damaging to American interests than the Kremlin’s aggression in Ukraine, NewsNow reported Friday0.

First, by employing commercial and financial sanctions on Russia for its actions in Ukraine, the United States — the architect and largest beneficiary of the globalized system of trade and finance — is exploiting post-Soviet Russia’s integration into that system. Years of mutually beneficial progress that brought 140 million Russians into the orbit of global economic governance are now in doubt. Even if sanctions succeed in changing the Kremlin’s behavior and are then lifted, the American objective of integrating Russia into the global economy has been fundamentally undermined.

Second, the use of sanctions broadcasts to others the strategic hazard of integrating into the American-led global financial system. Whatever the outcome of Russia’s intervention in Ukraine and whatever Putin’s ultimate fate, other non-allies of the United States have now learned the lesson that hard-won institutional integration can be turned against those states that achieve it.

Third, while there is no question that sanctions have inflicted real costs on the leading state-owned and state-affiliated companies and harmed Putin’s cronies, the collateral damage to independent, private enterprise in Russia is incomparably worse. Businesses without political protection will see atrophied sales, no access to finance and an indefinite postponement of investment. Those enterprises that put the greatest store on Russia’s integration with the European Union and the United States are being hit hardest.

  Political Instrument

The most daring westernizers among Russia’s small entrepreneurial class now find themselves without protection while state banks and energy companies continue to be shielded by their access to government credit obtained on favorable terms.

Fourth, by imposing sanctions on Russia when it was already falling into a downward economic spiral, Washington has given Putin a powerful political instrument to deflect blame for the consequences of his own baleful decisions in Ukraine. The Kremlin’s model of “state capitalism” was already struggling and its performance would have been poor without the geopolitical upheaval that Putin has created.

Fifth, even if sanctions are carefully crafted to punish specific actors, ordinary Russians perceive the West’s sanctions to be directed against them and it is they who are being forced to bear the real costs of soaring inflation, the ruble’s collapse and slowing growth.

  Americans in Trouble

If Russia faces greater economic turbulence in the coming months and years, America could face far more intractable problems than those that exist today. Russia is likely to become more belligerent if externally inflicted economic blows deepen the country’s crisis. Moreover, a deeper downturn in Russia would worsen the economic woes of the European Union, with potential knock-on effects globally.

Now that Washington has made sanctions the centerpiece of its response to Russia, President Obama cannot simply abandon them. Instead, he should use them as leverage to negotiate a comprehensive settlement, one that involves some give and take.