The Volokh Conspiracy

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The Dynamic Effects of the Russia Sanctions, Public and Private

Say you lead a foreign country who you expect might encounter harsh condemnation from the West at some point; how would you harden your economic system to protect against such sanctions?

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I generally appreciate the West's sanctions on Russia for what strikes me as Putin's utterly unjustified invasion of Ukraine. That includes both the official government-imposed sanctions, and similar sanctions imposed by large private organizations, such as Visa, Mastercard, American Express, and PayPal. (My guess is that the line between the public and private here is not entirely crisp, since I suspect that a reasonable organization like that, especially a heavily regulated financial intermediary, would consult with important governments before taking action; and I also suspect that such an organization would be quite open to "suggestions" from such important governments, even if those suggestions aren't actual commands.)

At the same time, surely thoughtful foreign leaders are looking at this, and wondering: Might this happen to my country at some point, if it does something that sufficiently alienates the West?

Might it happen even as to something that appears to my country to be quite justified (e.g., an invasion of a neighbor that actually did do something very bad to us, or internal actions towards people my country views as rebels or terrorists)? Might it happen even as to nonmilitary actions on our part, if those actions are viewed as insufficiently liberal or egalitarian by the West? Indeed, if the sanctions are viewed as a great success story, a cornerstone of the New International Security Order, might they be pursued more often?

And if so, what can and should I do to harden my economic system against such threats?

My guess is that the Xi Jinpings of the world have already long thought about this, though I expect they'll think about it more now. And my guess is that most countries have considered it in at least some measure.

But I expect that other countries that are at least in some measure skeptical of Western attitudes, practices, and institutions—even ones who are friendly, but who might see themselves as at some point being at loggerheads with us if circumstances shift enough (I'm thinking, for instance, of India or perhaps even Israel)—are going to be thinking especially hard now. Surely they won't give up on globalization, which is vital to their economies; but I expect that they'll want to know what sort of escape hatches or protective measures they can create in advance as an insurance measure, even at some considerable cost.

In any event, this is not my field, so perhaps I'm mistaken on this; but it intrigued me, and I thought I'd ask our readers: What do you think countries can effectively do to protect themselves against such Western reaction (however justified the reaction might be)? And what do you think they are likely to do?

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  1. The Xi Pings should be worrried about a drone strike up their asses. Stop hurting entire populations to immunize oligarchs, and heads of states. They are no different than the Mafia. They are human garbage. They should be the first to die before a single peasant is fed to the war machine, for the unjust enrichment of our oligarchs and our lawyers.

    This fucking lawyer profession protecting oligarchs and sovereigns, is the most toxic occupation ever. It is not 10 times more toxic than organized crime. It is a 1000 times more toxic than organized crime, with its megadeaths and $trillions in damage wasted to its utter idiocy and corruption.

  2. 1. Form your own system
    2. Become a hermit kingdom and accept all the disadvantages it entails.

    Most countries who are big enough are doing a combination of the above. The internet is splitting into national fiefdoms and China and to a lesser extent Russia is sucking up and stealing all the foreign tech it can find in order to build its own homegrown systems and standards.

    Everyone has realized that the West and the US in particular has a monopoly on high technology systems and whether right or wrong a monopoly that can be used against you will eventually be used against you.

    1. 3. Don't care because the people at the top of an autocratic, authoritarian, or totalitarian society are more interested in their own goals. People are a resource to be used in such societies. Putin might have lost friendships with some oligarchs but he still has his dacha. Xi's subordinates might not be able to buy certain American goods directly but Xi can still hide the identity of his daughter from the Chinese public and torture anybody who reveals it.

      Is there an autocratic society today where the leader values the citizens more than himself? The Communist countries are run by gangs, the absolute monarchies are run by thugs, and the failed states are run by warlords.

    2. China already has its own payments system UnionPay, and its use is widespread in Asia, and countries that have significant amounts of Chinese tourists.

      I heard China is making its Union Pay system available to Russian banks to offer to their customers.

      Here is Wikipedia:
      "UnionPay (Chinese: 银联; pinyin: Yínlián), also known as China UnionPay (Chinese: 中国银联; pinyin: Zhōngguó Yínlián) or by its abbreviation, CUP or UPI internationally, is a Chinese financial services corporation headquartered in Shanghai, China. It provides bank card services and a major card scheme in mainland China. Founded on 26 March 2002, China UnionPay is an association for China's banking card industry, operating under the approval of the People's Bank of China (PBOC, central bank of China).[1] It is also an electronic funds transfer at point of sale (EFTPOS) network, and the only interbank network in China that links all the automatic teller machine (ATMs) of all banks throughout the country. UnionPay cards can be used in 180 countries and regions around the world."

      1. There are two spheres of power: the Chinese sphere and the US/European sphere. When the US/European sphere cuts a country, like Russia, off from its systems, that country will move closer to the Chinese sphere, and vice versa. The Chinese have developed their own banking, payments, and digital systems that offer an alternative to ours.

        This is the same dynamic as in the Old Cold War. One of our advantages during that period was our dominant economic power. We have largely conceded the field of production to the Chinese. Any country that wants to buy actual goods will prefer the Chinese sphere to our sphere. That makes our sphere less appealing. We would be wise to do something about that.

        The Chinese currency will become the reserve currency for countries in their sphere. Our leaders should consider the likely effects on the US economy when the dollar is no longer the reserve currency of the entire world and plan accordingly.

  3. What did America do after the oil embargo in the 1970s? Talked about energy independence while becoming more dependent on foreign oil.

    The answer may be different for powerful countries. China has been accused of evading existing sanctions by importing Iranian oil, while Venezuela doesn't have the same luck. China brought Meng Wanzhou home by taking hostages.

    1. actually not true. The embargo forced several advancements like fuel efficiency and domestic source development. The US is probably less dependent on foreign oil than ever if it really wanted to be

      1. Yes, the idea that we're more dependent on foreign oil than ever is complete nonsense.

        https://www.eia.gov/todayinenergy/detail.php?id=51338

        We're currently pretty close to even if you count both crude oil and refined products, and you can see the net imports steadily decreasing over time. Since 2005 we've reduced demand significantly in absolute terms, and domestic production has increased since the 70s as well.

        1. Let's not confuse "buying foreign oil" with "dependent on foreign oil."

          Just because we choose to import oil, most likely for financial reasons, doesn't mean we couldn't make those imports up domestically, albeit at a higher price.

          So long as that is feasible, we are not "dependent" in any physical sense.

          1. Yes, but we do have to make smart decisions, and we need to realize that not all foreign oil is the same. Despite Canada's recent descent into fascism is still say its better to do business with them than Russia or Venezuela.

            But Jan Psaki saying that we shouldn't try to increase domestic production because it makes it harder to transition to renewables is not a smart decision, it just leaves us and Europe more dependent on Putin:
            "That's a misdiagnosis or maybe a misdiagnosis of what needs to happen," said Psaki. "I would also note that on oil leases, what this actually justifies in President Biden's view is the fact that we need to reduce our dependence on foreign oil, on oil in general ... and we need to look at other ways of having energy in our country and others."

            1. "But Jan Psaki saying that we shouldn't try to increase domestic production because it makes it harder to transition to renewables is not a smart decision, it just leaves us and Europe more dependent on Putin:"

              Yep.

      2. Now the US is not dependent on foreign oil. It took close to 30 years to get from the embargo to independence.

        1. Yeah it did take 30 years, we had to develop new technology to do it and then overcome at least 10 years of kicking a screaming by luddites to deploy the technology. In fact while the Marcellus Shale formation in PA and OH is producing 14BCF of natural gas a day, NY still won't let any development in their part of the field (the formation is named after Marcellus, NY). Or let a pipeline be built so Massachusetts doesn't have to use LNG tankers to bring in gas at several multiples of the pipeline price.

          NY is also making insane decisions like.not letting its own NatGas utility to expand its pipeline because its running out capacity, but then when it said it didn't have the capacity to add new customers, NY said it had to hook them up anyway so they could avoid the political blowback of denying rich long Island suburbanites gas stoves.

      3. Eh, I think you're confusing the timing. We are far less dependent on foreign oil now but for the several decades between the oil embargo and the fracking revolution, we were getting steadily more dependent on foreign oil. There were some modest movements toward increased fuel efficiency but demand increases far outstripped the efficiency gains.

  4. Those leaders could avoid threatening and invading their neighbors, but maybe that's too simple.

    1. Yes it is too simple. It assumes everyone has the same standards and the same knowledge of everyone's internal affairs. Thailand has lese majeste up the wazoo; is that something democracies might sanction some day? The US doesn't have an NHS like most European countries, and allows private ownership of guns; could they sanction us for that some day?

      1. "could they sanction us for that some day?"

        They can try.

        Europe depends on the US for security. We depend on them for luxury cars.

        If sanctions might save Ukraine, we can do it and worry about low probability events later.

        1. Yes. Sanctions are really only viable when the economies are unequal.

          1. Russia would be the 4th most economically powerful US state, after California, Texas, and New York, but ahead of Florida, in spite of having 30 million more people than those four combined.

            1. Corruption is bad enough here, but where it rules, which is 2/3 the world (many nominal democracies suffer badly) this shows how weak world technological progress is compared to where it could be.

              We all suffer for that.

      2. Look at the extreme actions is took to get the level of sanctions we have against Russia now. There were some in place before that were based on things like invading Georgia and stealing Crimea. It takes a lot to get a strong set of international sanctions in place.

  5. This ignore that sanctions affect all parties concerned. Notice how US sanctions did not include Russian oil, surely their biggest hard currency source. All those oligarchs spend a lot of money on western toys, like yachts and personal airliners; now they can't.

    Sanctions are only effective on globally-important economies, yet those are the ones which hurt the sanctioning country most.

    I think sanctions are mostly self-limiting as the triggering changes from egregious invasion to butthurt feelingz.

    1. "All those oligarchs spend a lot of money on western toys, like yachts and personal airliners; now they can't."

      Loose change for the West.

      Oil prices, not subject to sanctions, going up is the real risk to the West. Letting Putin get away with aggressive war is worse in the long run, the next crisis may impact more vital Western interests.

    2. "All those oligarchs spend a lot of money on western toys, like yachts and personal airliners; now they can't."
      Oligarchs have also lost a lot of money which directly hurts their influence and power. Not being able to fulfill orders, attract investment, or trade currency has quite a few oligarchs now calling for peace. Deripaska, one of the men closest to Putin and very powerful in his own right, is calling for an immediate peace. Tinkov, the 30th richest man in Russia last year with $4.7 billion, isn't even a billionaire anymore.

      Sanctions have most definitely done something; the question is more if it's enough to put Putin's control in peril. While it probably is not, sanctions have definitely hurt "them" more than "us."

      1. Yes to that last. Asymmetrical economies and all that. Russia is a pretty weak state in every way except nukes. Sanctions would be less effective on China if it attacks Taiwan.

        1. China relies on the wealth of the West to fund its growth and that is a lot of money to give up for Taiwan. Even short term trade sanctions of which there most certainly would be could be enough to push their economy off the deep end.

          Russia has a Putin problem and Putin's problem is how to stay in power if he quits Ukraine. The world won't accept him parceling it up and he won't be able to hide from his people the cost in man and machinery if they do stop fighting. It will be all over social media with pictures to back it all up and people in Russia will know its true from the thousands who don't come home.

          The best option is to pay him to go away or wait for a General to make him go away

    3. Sanctions are only effective on globally-important economies

      I don't think that's right.

      ISTM that smaller countries, more dependent on trade, would suffer greatly.

  6. The Russia sanctions, and particularly the near-unified application of them, are extraordinary in every meaning of the word. Although it’s wise to plan for any possibility, this sort of action becoming de rigueur and applicable or even possible in every future crisis is unlikely.

  7. Probably many countries will take actions to counter such action. I suspect that because of this, the Russian sanctions are going to hit harder than any before or after.

    However, I doubt there would be such a unifying act in the foreseeable future. Russia started a war of unabashed conquest. They didn't even wait for a paltry excuse for a casus belli. This is the most blatant act of aggression by a major power since the second world war. I don't think we will see this many groups set aside their differences at once ever again.

  8. This is basically what Putin tried to do after Russia was sanctioned for the invasion of Crimea. He built up massive reserves of hard currency at great cost to the Russian economy. He diversified these reserves among many currencies and held them in many countries (the US, Europe, Japan, China, as well as gold held in Russia). These massive reserves were intended to help stablize the ruble's exchange rates in the event of sanctions. This is why, before the invasion, some commentators were calling Russia's economy "sanctions proof" (plus western dependence on Russian oil and gas). His problem is that the west went much further than most people anticipated, sanctioning Russia's central bank directly and freezing these currency reserves, and that the US, Europe, and Japan all took this step together, meaning that diversification was of limited use. He's still got lots of reserves in Chinese banks, but those are primarily useful for buying things from China at this point. You can't really use them to defend the ruble's value against the dollar or the euro. Russia also has massive stocks of gold bullion that it can probably find buyers for given enough time, but the logistics of selling gold at this scale are daunting (I can imagine this being the plot of a heist movie).

    So yes, many autocrats may see the value of making their economies resistant to western sanctions. However, I think the other lesson from this is that if you piss off enough countries, and piss them off badly enough, they will find a way to make sanctions hurt.

    1. The numbers I've seen for Russian reserves are in the hundreds of billions.

      M1 in Russia is about 40 trillion rubles. I don't know how the numbers work, exactly, but it sure doesn't seem that they can handle a run.

      I doubt most countries could, on their own.

      1. FWIW, recent lecture at West Point. The first 20 or so minutes are a discussion of Russian finances.

  9. What is true on a small scale is often true on a larger scale: if an armed attacker asks for you wallet, it is perhaps wise to give him your wallet... or at least to realize the fact that he is indeed armed and may not hesitate to use his armament. With your wallet in his hand, he still may not hesitate to use his armament. Yes, you can stand your ground... but you'd better be a well-armed, fast, and accurate shooter.

    I have long mentioned that the "new economy" is a myth. Weaponry, water, food, energy, clothing, and shelter remain essentials of life regardless of the number of hits any website receives; similarly, old distributed commerce is as effective today as it was a thousand years ago, with a pound of gold being worth some quantity of guns or water or food or oil or cloth or brick. Everyone with common sense has already looked beyond the limitations of the mythical Swift, Visa, MasterCard, and CryptoCurrency new-commerce giants. Why -- other than morality -- worry at all about the non-essential people and effects? Non-essentials will become available to the patient once the essentials are in hand.

    Be we already know this! "If some ban on banks’ operations or on their use of one or another currency follows, it would be possible to clearly call it a declaration of economic war, and it would be necessary, it would be needed to react to this war economically, politically, or, if needed, by other means. And our American friends need to understand this.”
    (2018 -- Aug 10. At https://www.reuters.com/article/us-usa-russia-sanctions/russia-tells-washington-curbs-on-its-banks-would-be-act-of-economic-war-idUSKBN1KV0FK )

    1. Just so the links are side-by-side, more recent commentary from Medvedev are at https://www.cnn.com/europe/live-news/ukraine-russia-news-02-26-22/h_9c2bc6bd9b89cc90b115760c98ba59ab

  10. "But I expect that other countries that are at least in some measure skeptical of Western attitudes, practices, and institutions—even ones who are friendly, but who might see themselves as at some point being at loggerheads with us if circumstances shift enough (I'm thinking, for instance, of India or perhaps even Israel)—are going to be thinking especially hard now. Surely they won't give up on globalization, which is vital to their economies; but I expect that they'll want to know what sort of escape hatches or protective measures they can create in advance as an insurance measure, even at some considerable cost. In any event, this is not my field, so perhaps I'm mistaken on this; but it intrigued me, and I thought I'd ask our readers: What do you think countries can effectively do to protect themselves against such Western reaction (however justified the reaction might be)? And what do you think they are likely to do? "

    What?

    What should or could India, Israel, or others do to avoid consequences if they find themselves in Russia's position, having offended the advanced, modern nations of the world?

    What's the next installment of this 'gee, I'm just wondering here' feature at The Volokh Conspiracy?

    'Do any of our readers have any background that could provide useful tips for Saudi Arabia if it wishes to do a better job of covering up the next bonesaw assassination of a pesky journalist?

    'Anticipating that another group of Federalist Society members might find themselves being targeting by liberals and radical bar associations because they enable and support torturers -- I'm hoping our readers will have some thoughts on what could these targeted lawyers could do to prepare to avoid consequences in such a situation?'

    'I'm curious -- what do our readers think rapists and murderers should or could be doing to frustrate these big tech companies that might be interested in responding to subpoenas with incriminating information about rapists and murderers?'

    Your dislike of -- and detachment from -- the modern American mainstream seems to be intensifying, Prof. Volokh. I am not referring solely to your increasing partisanship, and the associated changes in position (boycotts and disassociation; First Amendment protections; affirmative action; publisher liability). I am referring to a dark trajectory that is taking you toward (or perhaps already into) some strange, unattractive places.

    I hope you regain at least some of your bearings.

  11. I think that its very difficult to insulate your economy in 2022. Russian sanctions have essentially cut them out of global financial markets for at least a decade. They will default on their debt. The ruble has declined 50% (and will decline more), increasing inflation to 25% plus. Putin has effectively put Russia back to the 1990s. The sanctions are not as easy to unwind as they are to implement because corporations are risk averse. Shell and BP had to walk away from billions in investments. They will think hard about investing again. Russia depends on western technology to produce oil. Look at how Venezuela ruined their economy in a few years.

    China has a very bittersweet relationship with Hong Kong. China depends on western finance (and technology). Sanctions will bite then harder. The west is also more dependent on China so they will be more reluctant to impose them. China cannot really insulate themselves from sanctions without also insulating themselves from the global financial & trade market and a major source of their growth.

    I have no doubt that their leaders *think* that they can. But like Putin, dictators always see so many conflicting opinions in a democracy and see weakness and lack of resolve. Sometimes thats true. Then they go over the line, and are surprised how quickly people adjust their attitudes.

    Adaptability the real benefit of Western Democracies. Germany changed on a dime and threw $110 billion at defense. Russia and China do not adapt. Russia is stuck for years with Putin, who will never admit he made a mistake.

  12. This attempt at sanctions is hilarious.

    Russia has formed an alternative to the SWIFT system, and already has both China and India using it. Just those three countries are more than half the world's population -- about 3.8 billion people -- and they have more than half the manufacturing capacity, too.

    Try to fence out that much of the world and you find that your idea of who is "inside" the fence and who is "outside" are backwards.

    1. The alternative is in no shape to handle the volume.

      Also, without access to swift, they are cuts them off from the western financial markets. China and India are not a substitute for western capital.

      Perhaps a better criticism of the sanctions might have been that Russian banks are not fully cut off yet (only about 40%), Europe continues to buy their oil, and not all the oligarchs are sanctioned (last I read only about 10/100)

  13. "I generally appreciate the West's sanctions on Russia for what strikes me as Putin's utterly unjustified invasion of Ukraine."

    What a weak sentence! How about this: "I appreciate the West's sanctions on Russia for Putin's utterly unjustified invasion of Ukraine."

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