There are two clashing arguments about whether the threat of economic sanctions can be effective now in deterring Russian aggression in Ukraine. One is that sanctions against Russia following the 2014 invasion of Ukraine didn’t prompt any improvement in behavior, nor did sanctions promote good behavior when imposed against Cuba, Iran, Iraq, North Korea and Venezuela. So it’s unrealistic to expect sterner sanctions to work against Russia this time.
The contrary view is that sanctions would be effective now because they could cause real economic pain. It’s the Russians themselves, oddly enough, who have expressed this view most prominently. In 2014, Alexei Kudrin, a former finance minister who is close to President Vladimir Putin, said that cutting off Russia’s access to Swift, a bank messaging network that proponents of sanctions have contemplated using as leverage, could cause Russian gross domestic product to fall 5 percent. In 2019, according to the Moscow-controlled broadcaster RT, the prime minister, Dmitri Medvedev, said that cutting off Swift access would be regarded as virtually a declaration of war.
After poking around this question for a couple of days I’ve concluded that the predictions of harm to Russia from a Swift cutoff are overblown, but sanctions can be at least somewhat effective. And even though sanctions are far from a perfect solution, they’re the only alternative to either armed conflict or acquiescence to Russian aggression. A war in Ukraine could be the biggest in Europe since 1945.
In a hopeful sign on Tuesday, Putin said that Russia would “partially pull back troops” near the border with Ukraine and was seeking a “diplomatic path” to work out its differences with the West. On Wednesday, though, the United States and NATO said they had seen no sign of a pullback.
International relations scholars by and large support sanctions despite their so-so record to date. Nearly 90 percent of 362 scholars at U.S. universities who were surveyed in December and January favored economic sanctions in case of a Russian invasion of Ukraine, according to researchers at the College of William and Mary and the University of Denver.
One oddity of the debate is that a Swift cutoff, which is sometimes described as the nuclear option, would be less devastating than many Westerners — and, apparently, many Russians — seem to think. Swift, which is officially the Society for Worldwide Interbank Financial Telecommunications, is a messaging network connecting more than 11,000 financial institutions. It doesn’t move money itself but it lubricates transactions through messages that confirm the identities of senders and recipients and track that the money moves as intended. Trying to do international banking business without Swift is cumbersome and costly but not impossible. Russian banks could do business (albeit laboriously) by email, fax machine or possibly even telex, the telegraph-like system that preceded Swift and still exists vestigially.
The bigger risk to Russia would come from certain other measures that are under discussion. Most significantly, the Biden administration could simply prohibit U.S. banks from dealing with their Russian counterparts, which would make Swift access largely irrelevant. Most of the rest of the world’s banks would most likely follow suit for fear of running afoul of the United States if a transaction between them and Russia inadvertently triggered an interaction with a U.S. bank. A cutoff from Swift could be imposed sometime later to mop up some of the banking transactions that might still be occurring despite a ban imposed by allied nations.
To better understand how this would work, I spoke with Brian O’Toole, a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center and a former senior adviser to the director of the Office of Foreign Assets Control at the Department of the Treasury. He gave an example of a currency conversion: To turn rubles into euros, foreign-exchange dealers typically use dollars as the go-between, first exchanging the rubles for dollars and then exchanging the dollars for euros. The portion of the transaction involving dollars would usually be cleared through the United States and thus violate U.S. sanctions, O’Toole said.
Railways, metals and mining, insurance and diamonds are other sectors that the United States and its allies might target with sanctions, O’Toole said. Companies in the United States as well other countries could be effectively blocked from selling Russia critical components such as computer chips. The consideration of such extreme measures reflects America’s abandonment of hope that Putin can be cajoled into becoming a responsible player on the world stage.
The perfect sanction would penalize Putin and his cronies while causing no harm to ordinary Russian citizens or to the United States and its allies. Alas, such a sanction does not exist, says Emily Kilcrease, senior fellow and director of the energy, economics and security program at the Center for a New American Security in Washington.
“We do need to be willing to take some of that pain as well,” Kilcrease told me. “We’ve already used the sanctions that don’t cause us a lot of pain,” such as travel bans on Putin allies and a ban on providing technology and loans to the Russian oil and gas sector. New sanctions would hurt companies that do business with Russia and could lead to retaliation. “Western banks should be prepared for cyberattacks,” Kilcrease said. “Clearly there is a scenario here where there’s a further escalation.”
Russia has braced itself for sanctions by building its stockpile of foreign-exchange reserves. Likewise the West has braced itself by, among other things, asking oil and gas producers to be prepared to raise their output if needed to offset the loss of fuel from Russia.
The West’s strategy must be a calculated combination of clarity and ambiguity, Kilcrease said. “The piece you want to be clear about is the range of options you’re considering,” she said. On the other hand, she added: “We don’t want to give him the entire playbook because then he could say, ‘Well, we can live with that.’ We want to leave room for escalation if needed.”
Elsewhere
The share of U.S. local daily newspapers owned by private equity funds increased from about 5 percent in 2002 to about 23 percent in 2019. What was the result? To find out, Michael Ewens of the California Institute of Technology and Arpit Gupta and Sabrina Howell of New York University’s Stern School of Business painstakingly built and then analyzed a database of 1,610 newspapers, 262 of which have ever been owned by private equity.
In a working paper circulated by the National Bureau of Economic Research this month, Ewens, Gupta and Howell conclude that private-equity ownership leads to higher digital circulation and lower chances of newspapers’ shutting down. However, they write, “the composition of news shifts away from local governance, the number of reporters and editors falls, and participation in local elections declines.”
Quote of the day
“Truth emerges more readily from error than from confusion.”
— Francis Bacon, c. 1610, “The Works of Francis Bacon,”edited by J. Spedding, R.L. Ellis and D.D. Heath (1896)
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