First off, thank you for this. More explainers on the toolkit (and as I've argued, theorycrafting for new tools), seems desperately needed, especially before Putin gets frustrated and starts simply trying to wipe out civilian populations with any horrifying weapons or tactics available.
On sanctions being a double edged sword -- I was surprised to read this Kiel Institute study, which claims that the sanctions that would hurt Russia would counterintuitively result in small increases in EU GPDs, as they provide regional substitutions.
I worry this sounds like wishful thinking, but economics often has counterintuitive results. And even if their finger is on the scale, maybe it's still true Russia will feel significant pain for much more negligible costs in the EU?
I've sometimes disagreed with some of Noah's essays, but I have to say that the quality and foresight of his writing during this crisis has been almost unmatched.
First off, it's easy now to see the staggering weaknesses of the idea of competitive advantage: yes, it will be more productive to produce what you are best at and leave everything else to other nations. But that assumes a world where what you produce will always be needed or desired. If new technology is created, and it always will be, substantial chunks of your economy can suddenly disappear. In Russia's case, this would be cheap and reliable solar and nuclear energy.
Second, efficiency is not everything. It's always a good idea to be a little inefficient for the sake of producing certain essential goods and services yourself. Critical sectors of a nation's economy should mostly be controlled by native companies, not foreigners. In the case of Western Europe, this refers to energy supply. Although there are many other examples.
To the second point, while I really like the idea of sanctions, there is no guarantee they will automatically work: Cuba was under stringent sanctions for years- nothing changed. Iran was sanctioned - nothing changed. And there's a good case that sanctions on North Korea have only made things worse.
The problem is while sanctions hurt everyone, they don't hurt everyone equally: the masses tend to bear the brunt. If leadership is unaccountable to those masses, things may hardly change.
It might even backfire if the people in charge spin it as the fault of the outsiders. This is especially the case with the Russian people who have a strong tendency to prefer dictators as leaders.
I've also heard claims that we need to Russia-proof the global economy, but I'm not sure that's a good idea either. That kind of economic hermeticism entrenches despots. Ian Bremmer's The J-Curve is wonderful on this.
What is clear, as many have already wisely pointed out, is that the rest of Europe need to scale back their energy dependency on Russia and accelerate solar power projects, because right now, Europe is ironically paying for Russia to bully parts of it into submission.
Whatever happens, it's also obvious now that you don't need to always answer military force with military force, unless of course, your sovereignty is directly threatened. There are savvier and smarter ways to assist member nations. It is to the credit of the Biden administration that they have largely pursued those ways.
Thank you for a great post explaining the economic sanctions the West are / could use !
There is one thing I disagree with: "Even if not, the only thing average Russians can really do against Putin is to overthrow him in a mass uprising."
The Russian army is mostly composed of average Russians. If they don't believe in the cause that they are fighting for, they will not fight as effectively. Economic sanctions targeting the entire economy might degrade the morale of the average Russian solider, shifting the balance on the battlefield.
What is stopping Russia from printing foreign currency, making counterfeit Euros and Dollars then either using that money or flooding the west with it, causing economic chaos here, even something as silly sounding as dropping 100 or 500 billion in $50 or €20 notes over population centres
Since you are one of the few people writing sensibly about both tech and politics Noah, what tech sanctions could work? Shut down the Russian App Store and Google Play store? Stop services from Twilo, Stripe, cloud providers, etc. in Russia? The companies won't like it of course, but Russia is only a tiny part of their market. 90% of the cloud services everyone uses now are made in America or Europe. Why don't we use that power? Also the effect would be immediate rather than taking weeks to be felt.
"This is the thinking behind Biden’s idea of a multilateral task force to hunt down and deprive rich Russians of their toys and their money:" Great idea, hope it works. As a side question, any good estimate of the range of wealth that is hidden from taxation etc. Not just by Russian oligarchs but in total? Would be nice if the US in doing this to the Russians would also look for the millions/billions (?) that "vanished" from Afghanistan and from the USA!
Second, just know, I'm all for crushing the illegal and wrong invasion for Ukraine, Glory to the brave fighters of Ukraine, we need to help them win their fight for world democracy.
Third, we have to acknowledge what we are using is financial nukes.
We actually just used these financial nukes for first time, in Afghanistan, almost totally shuttting down their banking system to punish the Taliban but have also so harmed the general population.
Devastating to regular working people, who have lost their money system and wiped out any banked money savings, no ability to access wages in their private accounts.
Now we are also financially nuking all Russians because of Putin's invasion.
It's one thing to laugh at Richy Riches losing their Italian villa, it's another to wipe out the savings and banked wages for the entire Russian population.
At first many Russians were appalled that their leader was invading Ukraine and we're in opposition, but soon they will be appalled their whole economy has been wiped out by a global financial mob, understandably angry about Putin's attacks on democratic, sovereign nations, and yet still a mob in the anarchy of global relations.
Only thing I can think of close to what we've done to Afghanistan, and now to Russia, in past was global disinvestment in apartheid So Africa and that was so mild compared to these financial nukes.
We have a new, extremely powerful and harmful weapon that is fairly easy to use when big chunk of globe is on board in opposition to a country/regime. It's like an opposite financial neutron bomb, leaves the people standing but wipes outs and shuts down their economy, banking infrastructure
We need rules for this and have to start thinking this as akin to how we feel about using actual nukes.
We are doing this to avoid a shooting World War but have stumbled into a digital World War, with intercontinental financial WMDs being launched.
I wish we knew more of this power before we started firing this barrage of financial missiles.
This weekend, I
went from hanging on every victory of Ukraine with fate of world democracy in the balance, to now being freaked about financial nukes as an extremely dangerous, disproportionate power that may so escalate this, in a way we were trying to avoid by not directly entering combat.
I fear where escalation on nukes and financial nukes will lead us.
Second, just know, I'm all for crushing the illegal and wrong invasion for Ukraine, Glory to the brave fighters of Ukraine, we need to help them win in their fight for world democracy.
Third, we have to acknowledge what we are using is financial nukes.
We actually just used these financial nukes for first time, in Afghanistan, almost total shut down of their banking system to punish the Talibannbut have so harmed the general population.
Devastating to regular working people who have lost their money system and wiped out any banked money savings, no ability to access wages in their private accounts.
Now we are financially nuking all Russians because of Putin's invasion.
It's one thing to laugh at Richy Riches losing their Italian village, it's another to wipe out the savings and banked wages for the entire Russian population.
At first many Russians were appalled that their leader was invading Ukraine and we're in opposition, but soon they will be appalled their whole economy has been wiped out by a global financial mob, understandably angry about Putin's attacks on democratic, sovereign nations, and yet still a mob, in the anarchy of global relations.
Only thing I can think of close to what we've done to Afghanistan, and now to Russia, in past was global disinvestment in apartheid in So Africa and that was so mild compared to these financial nukes.
We have a new, extremely powerful and harmful weapon that is fairly easy to use when big chunk of globe is on board in opposition to a country/regime. It's like an opposite financial neutron bomb, leaves the people standing but wipes and shuts down their economy, banking infrastructure
We need rules for this and have to start thinking this as akin to how we feel about using actual nukes. We are doing this to avoid a shooting World War but have stumbled into a digital World War, with financial nukes being launched.
I wish we knew more of this power before we just started launching it.
This weekend, I went from hanging on every victory of Ukraine with fate or world democracy in the balance, to now being freaked about financial nukes as an extremely dangerous, disproportionate power that may so escalate this, in a way we were trying to avoid by not directly entering combat.
Fear where escalation on nukes and financial nukes will lead us.
One question about this: "Bailouts could cause inflation to accelerate via money creation or fiscal deficits, putting further pressure on the Russian economy and eroding rich Russians’ wealth."
Don't most rich Russians have a large chunk of their wealth in euro- or dollar-denominated assets? (And in particular, Russians who are adjacent to the gray and black market economies often hold a non-trivial amount of money in $100 bills, in contrast to US wealthy who generally don't keep a lot of cash around because they'd rather have their money in forms that earn interest, and they trust our banking system.)
I would expect ruble inflation to suck for middle to upper-middle class Russians who don't have large amounts of off-shored wealth. But for oligarchs? Nah. Inflation in the ruble is irrelevant to them. Sanctions that prevent them from _reaching_ their foreign denominated wealth are way more important.
However, please don’t make it sound like prosecuting financial crimes relating to Russian oligarchs (with consequences such as seizing the yachts and Italian villas) is easy and fun. That’s completely disconnected from reality. Yes, one could find it “funny” to watch an oligarch lose a toy, but for those actually involved in the investigations, trying to go after these assets, the task will be difficult as hell and with very little chance of success.
The reality is that sanctions thus far have been focused on areas which the EU doesn't lose significant exports nor are core EU economic interests affected (cheap Russian energy).
I am also not very convinced what part of the $630B Foy asserts of foreign assets is actually Russian government vs. say, Russian oligarch, Russian citizen, Russian company or multi-passport Russian internationalist. If Russian government or offshored Russian shell company - I'd say it is actually to Putin's and RF's government interest to show just why offshoring wealth isn't always a great idea.
Nor am I the least bit convinced that the pain to Russia to actually sanction energy - is going to affect Putin, the Russian people and the RF government as opposed to how the loss of this energy will negatively impact the people and governments of Europe. Freezing in winter vs. LVMH handbags or Mercedes/BMW cars - which is less critical?
US urging for "maximum pain" sanctions is hypocritical because no core US economic interests are seriously affected, although Hawaii and California might be screwed.
First off, thank you for this. More explainers on the toolkit (and as I've argued, theorycrafting for new tools), seems desperately needed, especially before Putin gets frustrated and starts simply trying to wipe out civilian populations with any horrifying weapons or tactics available.
https://www.ifw-kiel.de/publications/media-information/2022/with-these-sanctions-the-west-hits-russias-economy-the-hardest/
On sanctions being a double edged sword -- I was surprised to read this Kiel Institute study, which claims that the sanctions that would hurt Russia would counterintuitively result in small increases in EU GPDs, as they provide regional substitutions.
I worry this sounds like wishful thinking, but economics often has counterintuitive results. And even if their finger is on the scale, maybe it's still true Russia will feel significant pain for much more negligible costs in the EU?
Welcome your thoughts. Thanks for the post!
I've sometimes disagreed with some of Noah's essays, but I have to say that the quality and foresight of his writing during this crisis has been almost unmatched.
First off, it's easy now to see the staggering weaknesses of the idea of competitive advantage: yes, it will be more productive to produce what you are best at and leave everything else to other nations. But that assumes a world where what you produce will always be needed or desired. If new technology is created, and it always will be, substantial chunks of your economy can suddenly disappear. In Russia's case, this would be cheap and reliable solar and nuclear energy.
Second, efficiency is not everything. It's always a good idea to be a little inefficient for the sake of producing certain essential goods and services yourself. Critical sectors of a nation's economy should mostly be controlled by native companies, not foreigners. In the case of Western Europe, this refers to energy supply. Although there are many other examples.
To the second point, while I really like the idea of sanctions, there is no guarantee they will automatically work: Cuba was under stringent sanctions for years- nothing changed. Iran was sanctioned - nothing changed. And there's a good case that sanctions on North Korea have only made things worse.
The problem is while sanctions hurt everyone, they don't hurt everyone equally: the masses tend to bear the brunt. If leadership is unaccountable to those masses, things may hardly change.
It might even backfire if the people in charge spin it as the fault of the outsiders. This is especially the case with the Russian people who have a strong tendency to prefer dictators as leaders.
I've also heard claims that we need to Russia-proof the global economy, but I'm not sure that's a good idea either. That kind of economic hermeticism entrenches despots. Ian Bremmer's The J-Curve is wonderful on this.
What is clear, as many have already wisely pointed out, is that the rest of Europe need to scale back their energy dependency on Russia and accelerate solar power projects, because right now, Europe is ironically paying for Russia to bully parts of it into submission.
Whatever happens, it's also obvious now that you don't need to always answer military force with military force, unless of course, your sovereignty is directly threatened. There are savvier and smarter ways to assist member nations. It is to the credit of the Biden administration that they have largely pursued those ways.
Thank you for a great post explaining the economic sanctions the West are / could use !
There is one thing I disagree with: "Even if not, the only thing average Russians can really do against Putin is to overthrow him in a mass uprising."
The Russian army is mostly composed of average Russians. If they don't believe in the cause that they are fighting for, they will not fight as effectively. Economic sanctions targeting the entire economy might degrade the morale of the average Russian solider, shifting the balance on the battlefield.
What is stopping Russia from printing foreign currency, making counterfeit Euros and Dollars then either using that money or flooding the west with it, causing economic chaos here, even something as silly sounding as dropping 100 or 500 billion in $50 or €20 notes over population centres
If the U.S. were to publish an offer to give every invading Russian soldier that surrenders $50,000 and a Green Card, Putin's invasion would collapse.
Since you are one of the few people writing sensibly about both tech and politics Noah, what tech sanctions could work? Shut down the Russian App Store and Google Play store? Stop services from Twilo, Stripe, cloud providers, etc. in Russia? The companies won't like it of course, but Russia is only a tiny part of their market. 90% of the cloud services everyone uses now are made in America or Europe. Why don't we use that power? Also the effect would be immediate rather than taking weeks to be felt.
"This is the thinking behind Biden’s idea of a multilateral task force to hunt down and deprive rich Russians of their toys and their money:" Great idea, hope it works. As a side question, any good estimate of the range of wealth that is hidden from taxation etc. Not just by Russian oligarchs but in total? Would be nice if the US in doing this to the Russians would also look for the millions/billions (?) that "vanished" from Afghanistan and from the USA!
https://www.youtube.com/watch?v=RPdwQYzolB8
> has changed minds I’ll discuss each of these in turn
Typo, I think there should be a period there.
This was a very insightful piece. Thank you
First thanks for this great info Noah
Second, just know, I'm all for crushing the illegal and wrong invasion for Ukraine, Glory to the brave fighters of Ukraine, we need to help them win their fight for world democracy.
Third, we have to acknowledge what we are using is financial nukes.
We actually just used these financial nukes for first time, in Afghanistan, almost totally shuttting down their banking system to punish the Taliban but have also so harmed the general population.
Devastating to regular working people, who have lost their money system and wiped out any banked money savings, no ability to access wages in their private accounts.
Now we are also financially nuking all Russians because of Putin's invasion.
It's one thing to laugh at Richy Riches losing their Italian villa, it's another to wipe out the savings and banked wages for the entire Russian population.
At first many Russians were appalled that their leader was invading Ukraine and we're in opposition, but soon they will be appalled their whole economy has been wiped out by a global financial mob, understandably angry about Putin's attacks on democratic, sovereign nations, and yet still a mob in the anarchy of global relations.
Only thing I can think of close to what we've done to Afghanistan, and now to Russia, in past was global disinvestment in apartheid So Africa and that was so mild compared to these financial nukes.
We have a new, extremely powerful and harmful weapon that is fairly easy to use when big chunk of globe is on board in opposition to a country/regime. It's like an opposite financial neutron bomb, leaves the people standing but wipes outs and shuts down their economy, banking infrastructure
We need rules for this and have to start thinking this as akin to how we feel about using actual nukes.
We are doing this to avoid a shooting World War but have stumbled into a digital World War, with intercontinental financial WMDs being launched.
I wish we knew more of this power before we started firing this barrage of financial missiles.
This weekend, I
went from hanging on every victory of Ukraine with fate of world democracy in the balance, to now being freaked about financial nukes as an extremely dangerous, disproportionate power that may so escalate this, in a way we were trying to avoid by not directly entering combat.
I fear where escalation on nukes and financial nukes will lead us.
First thanks for this great info Noah
Second, just know, I'm all for crushing the illegal and wrong invasion for Ukraine, Glory to the brave fighters of Ukraine, we need to help them win in their fight for world democracy.
Third, we have to acknowledge what we are using is financial nukes.
We actually just used these financial nukes for first time, in Afghanistan, almost total shut down of their banking system to punish the Talibannbut have so harmed the general population.
Devastating to regular working people who have lost their money system and wiped out any banked money savings, no ability to access wages in their private accounts.
Now we are financially nuking all Russians because of Putin's invasion.
It's one thing to laugh at Richy Riches losing their Italian village, it's another to wipe out the savings and banked wages for the entire Russian population.
At first many Russians were appalled that their leader was invading Ukraine and we're in opposition, but soon they will be appalled their whole economy has been wiped out by a global financial mob, understandably angry about Putin's attacks on democratic, sovereign nations, and yet still a mob, in the anarchy of global relations.
Only thing I can think of close to what we've done to Afghanistan, and now to Russia, in past was global disinvestment in apartheid in So Africa and that was so mild compared to these financial nukes.
We have a new, extremely powerful and harmful weapon that is fairly easy to use when big chunk of globe is on board in opposition to a country/regime. It's like an opposite financial neutron bomb, leaves the people standing but wipes and shuts down their economy, banking infrastructure
We need rules for this and have to start thinking this as akin to how we feel about using actual nukes. We are doing this to avoid a shooting World War but have stumbled into a digital World War, with financial nukes being launched.
I wish we knew more of this power before we just started launching it.
This weekend, I went from hanging on every victory of Ukraine with fate or world democracy in the balance, to now being freaked about financial nukes as an extremely dangerous, disproportionate power that may so escalate this, in a way we were trying to avoid by not directly entering combat.
Fear where escalation on nukes and financial nukes will lead us.
One question about this: "Bailouts could cause inflation to accelerate via money creation or fiscal deficits, putting further pressure on the Russian economy and eroding rich Russians’ wealth."
Don't most rich Russians have a large chunk of their wealth in euro- or dollar-denominated assets? (And in particular, Russians who are adjacent to the gray and black market economies often hold a non-trivial amount of money in $100 bills, in contrast to US wealthy who generally don't keep a lot of cash around because they'd rather have their money in forms that earn interest, and they trust our banking system.)
I would expect ruble inflation to suck for middle to upper-middle class Russians who don't have large amounts of off-shored wealth. But for oligarchs? Nah. Inflation in the ruble is irrelevant to them. Sanctions that prevent them from _reaching_ their foreign denominated wealth are way more important.
Very interesting piece.
However, please don’t make it sound like prosecuting financial crimes relating to Russian oligarchs (with consequences such as seizing the yachts and Italian villas) is easy and fun. That’s completely disconnected from reality. Yes, one could find it “funny” to watch an oligarch lose a toy, but for those actually involved in the investigations, trying to go after these assets, the task will be difficult as hell and with very little chance of success.
This piece explains why:
https://blogs.lse.ac.uk/europpblog/2022/02/25/the-problem-of-tracing-dirty-money-from-russia-how-illegal-are-illicit-flows/
Great an thorough article. Thanks!
A big pile of meh.
The reality is that sanctions thus far have been focused on areas which the EU doesn't lose significant exports nor are core EU economic interests affected (cheap Russian energy).
I am also not very convinced what part of the $630B Foy asserts of foreign assets is actually Russian government vs. say, Russian oligarch, Russian citizen, Russian company or multi-passport Russian internationalist. If Russian government or offshored Russian shell company - I'd say it is actually to Putin's and RF's government interest to show just why offshoring wealth isn't always a great idea.
Nor am I the least bit convinced that the pain to Russia to actually sanction energy - is going to affect Putin, the Russian people and the RF government as opposed to how the loss of this energy will negatively impact the people and governments of Europe. Freezing in winter vs. LVMH handbags or Mercedes/BMW cars - which is less critical?
US urging for "maximum pain" sanctions is hypocritical because no core US economic interests are seriously affected, although Hawaii and California might be screwed.