The Economic Consequences of Russian Sanctions
2022-03-21 · Guest: Jonathan Bydlak (R Street Institute) · 52:29
Economic repercussions of sanctions against Russia
Bob Zadek and Jonathan Bydlak discuss the long-term global economic repercussions of sanctions against Russia following the invasion of Ukraine. They explore the historical ineffectiveness of sanctions, the risks of dismantling global financial systems like SWIFT, and the reality of energy interdependence in a globalized market.
Topics: Russia, Ukraine, Economic Sanctions, SWIFT, Free Trade, Energy Independence, Cold War, Inflation, R Street Institute
Speakers: Bob Zadek, Jonathan Bydlak
Introduction to Sanctions on Russia [00:00]
Voiceover: You’re listening to the Bob Zadek Show, a full hour of libertarian discussion with the smartest guests on radio. Live, spontaneous, and thoughtful, it’s the show of ideas, not attitude. Now, your host, Bob Zadek.
Bob Zadek: Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. Thank you so much for listening this Sunday morning. We are always the show of ideas, never once the show of attitude.
Well, just when I thought I had everything figured out and I had views on what is going on in the world that I was totally comfortable with and had some confidence that I could reasonably understand what was going on and my positions, along come—along comes a new weapon to be used by the Western world against its “enemies,” Russia, formerly USSR. The weapon, of course, is economic sanctions.
Economic sanctions seem to be, at first blush, at least to me, an almost ideal weapon, if those two words can even coexist side by side, but I will do so. Ideal weapon. Ideal because it doesn’t kill people. Ideal because it doesn’t present a direct risk to American treasure or blood, indeed treasure or blood of the Western world. And it seems to be working. But more about the word “working” as we get into our show.
As I read more and more about sanctions, I began to wonder whether I was too hasty in my enthusiasm for sanctions as a weapon, if that’s the appropriate word. And I thought I would dig deeper. And sure enough, as I’m trying to learn about sanctions, up pops an article written by a dear friend of mine, a former guest on the show, Jonathan Bydlak. Jonathan is the policy director for governance and he’s a resident senior fellow at the R Street Institute. He has followed government economic issues in particular for most of his adult life. Before joining R Street, he was with the Institute for Spending Reform and he formed and headed up the Coalition to Reduce Spending—who’s not in favor of that?—before he joined the R Street Institute. Jonathan was kind enough to help in my learning by writing in the March 9th issue of The Spectator an article entitled “Sanctions on Russia will shake the world economy for years.”
Well, when I read the title of that article, I couldn’t really tell whether the article was simply matter-of-fact—this is what is going to happen. I couldn’t tell whether Jonathan, when I saw the title, was writing in support of, but with a warning, the use of sanctions, or whether he was opposed to the use of sanctions for various philosophical and policy reasons. Rather than try to figure it out and read Jonathan’s mind, the best way to figure it all out is to invite Jonathan to join us this morning, and that I have done. Jonathan, welcome to the show this morning.
Jonathan Bydlak: Thanks, Bob. Appreciate being on.
The Economist’s View of Sanctions [04:50]
Bob Zadek: Now, Jonathan, “Sanctions on Russia will shake the world economy for years.” Is that simply a warning, or are you and do you take a position on whether the use of economic tools as a weapon to harm or discourage enemies is a good idea? So tell us the headline premise of your article and then we will drill down.
Jonathan Bydlak: Sure. Yeah, so you know, I think, I mean, look, if you generally believe that free trade is a good thing, then you’re probably going to believe that sanctions are a bad thing because, you know, obviously sanctions are kind of the opposite, right? You’re making it more difficult for people in the private sector to trade and engage in economic transactions with one another.
Now, you know, I say that point or I make that point from the standpoint of an economist, not necessarily, you know, someone who is concerned about international relations. And I think that the reasons whereby countries decide to impose sanctions go well beyond the economic factors that we’re discussing. And so, you know, personally, I mean, my feeling is that generally speaking, the actions that we’ve taken in response to the Russia-Ukraine crisis are warranted.
But that said, I think that, you know, it is important for us to think about what the impacts will be not just on Russia in the short term, but also the United States. I mean, the simplest example is just look at gas prices, right? Or the energy markets, for example, being roiled in the short term based on these actions that we’ve taken.
And then the other point of the article is that, you know, there are also long-term consequences in that some of these things, you know, may be difficult to go and unwind after the fact. And so even once, you know, we reach the point where Russia decides to go and stop with the invasion, that doesn’t mean that the economic situation is just going to be hunky-dory at that point in time. And so my main point in the article is to say that, you know, policy makers need to be thinking about not just, you know, the reasons for imposing sanctions on Russia today, but also what the impacts will be on the United States tomorrow and as well as in the short term. Because, you know, at the end of the day, sanctions don’t, you know, don’t stop at borders. It’s not like we can just go and impose sanctions on Russia and assume that’s not going to have impacts on other businesses and individuals around the world.
Historical Ineffectiveness of Sanctions [07:10]
Bob Zadek: Now, there’s a bit of déjà vu-ity, a word I just made up, déjà vu-ity in what you just said. It sounds an awful lot like the debate I was having on my show or discussions over the past two years involving COVID, when we had a policy issue, the pandemic, we had a solution, lockdowns and the like—no need to revisit that unpleasant experience—but we had economists, unfortunately quite marginalized, jumping up and down persuasively complaining, “Wait a minute, cure versus illness, are we making matters worse? Don’t forget the economic aspects and the like.” The economists were drowned out mostly to the long-term detriment of the world, certainly our country. The economists were drowned out by the doctors and the epidemiologists and the public health officials. Is this now, at this time, the economists—are they being drowned out yet again? And if so, are they being drowned out under the claim, for better or for worse, that yes, there will be economic consequences, but any other weapon used to discourage Russia’s behavior in the Ukraine, any other weapon is worse? So have you reached a decision that yes, while there are adverse consequences to sanctions, just as there are profound adverse consequences to war, if we start with another country’s bad behavior, there is no way to avoid some adverse consequence, and have you concluded that these adverse consequences from sanctions are better, worse, or we don’t know than adverse consequences from other weapons?
Jonathan Bydlak: Yeah, I mean, those are great questions. You know, I don’t think that economists are being drowned out in the conversation any more than usual, I suppose, because I think that one of the problems is that the conventional wisdom on sanctions is that they work. And, you know, there’s a substantial body of literature that says that actually they’re generally ineffective. And you know, and that I think that that idea has been out there in some of the public commentary.
But historically, sanctions have generally not worked. I mean, the last time President Obama in 2014 imposed sanctions on Russia during the Crimean crisis, and they were largely ineffective. And at that time, we also tried targeting them towards the oligarchs, for example, and they weren’t successful. And I think that, you know, if you go back and you look at other examples, oftentimes the difficulty with sanctions is that in a nutshell, they don’t actually harm the people you’re trying to harm. They end up going and, you know, harming the people who live in these countries that are in some sense, you know, more innocent bystanders.
And so I think that that’s a big part of the problem to begin with, is that the narrative around sanctions is a little bit skewed. And you know, and you ask yourself, well, why is that the case? Well, I mean, if you think about what our options are, I mean, they basically fit into one of three buckets. It’s either do nothing, it’s engage militarily, or it’s look for some sort of middle ground in which sanctions basically fits into that final bucket.
And so I think that, you know, the part of the reason we’ve gone that route is that, you know, on the one hand, we are appalled by what’s happening in Ukraine, and rightfully so, and so we can’t exactly go and sit on our hands. But at the same time, you know, we all know the difficulties that come from putting troops on the ground, as our recent misadventures in Afghanistan and Iraq have shown us. And so I think that the American people obviously don’t want to see that happen. And so then the question becomes, well, what can we do that’s sort of in between? And sanctions tends to be that answer regardless of whether or not, you know, they are proven effective.
And you know, I should also add one last point, which is that, you know, I do think that there is a little bit of a difficulty here too when we talk about sanctions because what we’re doing right now at this point in time is much more substantial than when we have imposed sanctions in the past. And so even though I said that, you know, by and large, they have generally not been effective as means of changing the actions of rogue actors, if you will, I think that this time around, there’s sort of a little bit of an untested question here. I mean, we’ve never removed a country from SWIFT, for example. And so we don’t necessarily know how that will work and what the implications will be in the short and long term. But you know, we kind of find ourselves, I guess, in this middle bucket because of the fact that we don’t want to commit troops, but we also don’t want to do nothing.
Sanctions as a Blunt Instrument [12:40]
Bob Zadek: You mentioned earlier and others have mentioned it as well that one of the downsides of sanctions are that it harms the people—this is my summary of what you said, if it’s inaccurate please correct me—but sanctions as a blunt instrument harm the average Russian citizen who did nothing wrong. I guess the people who did something wrong are Russian military and political leadership, Putin and the like. And many others have expressed that opinion as well, that sanctions as a blunt instrument harm the wrong people.
And I found myself asking myself, and now Jonathan, I’m going to expand the question to include you: if sanctions hurt the wrong people, why is the killing of soldiers hurting the right people? After all, they didn’t choose to be there. They were sent there under the threat of something terrible happening to them. Most of the soldiers don’t want to be there. So in warfare, isn’t almost everybody a victim except for the very handful of political leaders who caused it all to happen? So focus on this “it hurts the wrong people” or “a blunt instrument.” I don’t see any other choice but for innocent people to be harmed. It’s unavoidable. And in this case, isn’t it better to harm them economically, which might be considered to be short-term, rather than to harm them by killing them, which is kind of long-term?
Jonathan Bydlak: Yeah, no, I mean, I think it’s a great point. I mean, there’s no doubt that war in general is the worst possible outcome. And there are huge costs, of course, to war, first and foremost the immediate loss of human life and on top of that, just the incredible destruction that we’re seeing to the country of Ukraine. So I agree with you 110 percent. And if you’re going to pick which one is the better action, I think that economic measures are certainly the way to go in this instance if you’re not going to go and do something more drastic.
But the only thing I would add to that is that that doesn’t necessarily mean that sanctions somehow makes sanctions or these economic, these punitive economic measures more effective, right? That at the end of the day, they are what they are and the impact that they have are the impacts that they have. And you know, if they don’t have the kind of effect or the desired effect on, in this case, you know, the leadership in the Kremlin and Putin specifically, then they won’t necessarily be effective.
And so, you know, I think that generally speaking, I mean, when we’ve decided to engage in warfare, it’s been with the understanding—I don’t think that after Pearl Harbor, for example, we obviously knew that engaging in World War II was going to result in the loss of life not just of American soldiers but also those overseas, but you make that kind of determination in sort of a crude cost-benefit sense, I guess, that the potential downside is outweighed by the potential upside of taking that military action.
I think that in this case, I mean, we are making similar kinds of calculations. But again, my main point, the main point of my article is that we should go into it with our eyes wide open and be very aware not just of the harm that we’re attempting to inflict on Russia and whether or not that will be effective, but also what the implications are for the rest of the world at this point in time and the world that we will enter into when this conflict comes to an end. I mean, at some point, the war in Ukraine is going to end and there’s going to be some sort of peace deal and the world is going to move on. And the question is, what is that world going to look like? And so how what that world does look like will be impacted by again the measures that we are taking now. And so it’s just important that policy makers not discount the very real impacts that these measures are ultimately going to have.
The Global Impact of Removing Russia from SWIFT [17:40]
Bob Zadek: You mentioned in your article and you mentioned it earlier this morning that looking back at the very short history of economic sanctions, specifically Crimea or the Crimean crisis when Obama first experimented with the use of sanctions, and you commented quite correctly that they were for the most part ineffective. Weren’t they ineffective because they were half-hearted? That we have learned, number one, we have learned how to do it better. Number two, we have more tools because the world is incrementally more economically interconnected now than it was before, so that makes sanctions more effective. And lastly, the sanctions at the time of the Crimean crisis was for the most part the US with a half-hearted buy-in by some of the Western world. These use of sanctions are much more universal than in ‘14. So is it—have we learned simply how to do it better? And is it simply a more powerful weapon now than it was before? After all, bombs in World War II ultimately would have carried the day, but it would have taken a long time. Hiroshima and Nagasaki were the ultimate better bomb, if you want to use that phrase—I hate it, but just to make my point—but the war ended in months. So is this—these sanctions when the world is doing it, the atom bomb, and it is proving to be or it may prove to be a very effective tool, meaning the history of sanctions is kind of irrelevant, we’re just better at it now?
Jonathan Bydlak: Yeah, I mean, I think there’s definitely a point to be made there. I think the question is not just are they more effective, but how much more effective? And that’s what we don’t know, right? I mean, we certainly know that the United States and indeed the whole Western world is taking actions that they did not in 2014 or that they have not in prior instances when we’ve imposed sanctions. That doesn’t necessarily mean that those sanctions are more effective in the sense of being targeted more effectively to leadership in the Kremlin, although I think there’s a strong case to be made that they are.
But of course, from the standpoint of the economist, it’s not just are they more effective, it’s how much more effective are they and at what cost? And so, you know, that’s the thing that we’re sort of in a sense seeing a natural experiment right now. I mean, at this point in time as we’re speaking, the conflict is still going on. I mean, Putin is not pulling out troops, he’s largely doubling down. And so from that standpoint, as of yet, they have not been effective if the ultimate goal is to convince Russian leadership to end the war, then it’s kind of hard to say that they have been effective, as warranted as they may be, and they may of course ultimately prove effective, we just don’t know at this point in time.
The other point I’ll make here is that it is a little bit different than the analogy about advances in military technology or things like that because again, some of these actions that we’re taking may have long-term consequences. I mean, one of the points that I make in the article is the eliminating or cutting off Russia from SWIFT, which is sort of this important part of the way that the world processes international transactions. And you think about what that might mean for other countries. Well, you know, you got to believe, for example, that China might be looking at this and saying, “We really need an alternative to SWIFT.” And so you might end up in a situation whereby some of these tools that theoretically could be more effective or may prove more effective right now end up not being more effective down the road because we may not have them at our disposal. And so again, we may ultimately decide, policymakers may decide that these actions are completely warranted, and I would agree with them, but I think it’s very important that we consider and think about and come up with solutions to these potential long-term problems that will ultimately cut against the so-called soft power that the Western world is able to utilize in these kinds of situations.
Energy Independence and Comparative Advantage [22:44]
Bob Zadek: Economists have expressed some concern, and I think I can include you in that category, that as you had just pointed out in several references to SWIFT—and for our audience, SWIFT is an acronym which describes the secure worldwide system by which banks communicate, and communicate means move currency or move value electronically around the world securely and quickly. It is the lubricant that makes worldwide commerce relatively inexpensive and secure. And it brings the world together. And economists have expressed concern that if that becomes, if that exposes autocratic countries to risk, it may cause the countries, certain countries, to become less connected, to rely less upon foreign trade and more upon self-sufficiency. Russia has been trying to do that for years, mostly ineffectively. And it will discourage world trade, which is good for everybody.
Jonathan, it’s a foreign affairs question as much as it is an economics question, and therefore you’re allowed to say if you wish that you haven’t really reflected upon that. But if you have, how much does that concern you, that the discovery that foreign trade and dependency upon by one country on another country economically will cause countries to be less willing to become reliant upon trade to the worldwide detriment of us all?
Jonathan Bydlak: I mean, I think it’s a great point, right? And you know, I mean, just a few days ago, three or four days ago, Congress voted on the President’s suggestion to remove normal trade status for Russia and for Belarus. And you know, this is an interesting question in that context because while again that may be warranted in a short term and theoretically can be reversed at the end of the war, you have to ask yourself, would we perhaps find ourselves in a situation whereby that becomes a more permanent economic reality whereby the United States and Russia would no longer be trading or at least not be trading in the same way that we are currently or have been up to this point?
And again, these are difficult questions because they involve differing types of expertise. As you pointed out, I mean, there are international relations questions that are obviously first and foremost here and in some cases trump the economic standpoint. All I can say is that from the standpoint of someone viewing this through an economic lens, the preference no doubt is to have more trade and to have countries sort of be engaging in a diplomatic fashion.
And you know, I should also say that historically anyway, there is this argument both in the economic realm but also in the realm of international relations that countries that trade together and interact with each other peacefully tend not to go to war with one another. Now, obviously what we are seeing right now in Ukraine I think is perhaps the exception that proves the rule in a sense. I mean, we’ve operated under this assumption that European countries were not going to go to war with one another because they were by and large unified in not just in the European Union but essentially had a very tight-knit trading network. And so perhaps the confidence with which we’ve operated under that belief for a long time is no longer warranted or at least not warranted to the degree that we’ve historically thought about it in that way.
But these are very difficult questions that we’re going to have to continue to grapple with and they’re going to require input from people who are not just considering the international relations aspect of this, but also the very real economic realities that again our actions will end up having.
Bob Zadek: The United States likes to take the position that it favors open trade borders, low tariffs, putting aside the Trump administration’s experiment with heavy tariffs, but in general, I think it’s part of our DNA to favor foreign trade. But yet, let’s remember it was an important part of our economic and political foreign policy to become energy independent. There was a complaint we were dependent upon—remember the phrase?—foreign oil, and that exposed us and we felt vulnerable as a country to the extent that we were dependent upon other countries to supply us with this essential resource. So we became energy independent. That almost is a statement by US policy that there is an exposure if you rely too much on foreign trade. We opted in regards to energy to not become dependent upon foreign trade but to become independent. So it’s almost as if we acknowledge that there is a downside in the security of a country to become too dependent upon others.
So I just wanted to throw that out, Jonathan, just as an observation that we ourselves support hunkering down in certain regards and we are not universally in favor of dependent upon foreign trade, although foreign trade has made our life better. And that’s because of the principle, Jonathan, that perhaps you can explain to us, the somewhat recently discovered, written-about principle of comparative advantage and why foreign trade is so much better for all. The principle being that some countries can simply provide something cheaper than somebody else and it’s better to get it from somebody else cheaper than to manufacture yourself. A principle that Russia is struggling with today. So help us understand the effect of comparative advantage on the discussion of foreign trade and sanctions.
Jonathan Bydlak: Sure. Yeah, and there’s a lot to unpack here. I think the example that I always like to use when talking about comparative advantage is, you know, I’m originally from Massachusetts and you know, we don’t grow oranges in Massachusetts. Why don’t we? Well, because obviously it’s a lot easier to have them grown in Florida. And so we sort of instinctively understand at the intra-country level that there’s value in having different areas of the country specialize in those areas where they have an advantage, whether that’s an absolute advantage or a comparative one.
I think that sometimes when we talk about this in the international context, however, that lesson is lost and we forget about that, you know, that there may be value in having Ukraine, for example, grow grain and grow wheat and having other places specialize in other things. Now, the time where that can break down a little bit obviously is in the context of armed conflicts whereby now you are potentially exposed to not having those particular industries or raw materials being produced within your country’s borders. And again, this is to go back to my last point, why we certainly need to think about not just the economics but also the potential strains or difficulties that we can have in situations where very real conflict arises.
But I do have to say, since you brought up the topic as well of energy independence, you know, I think one of the under-discussed impacts or observations to be made from what’s happening in Ukraine is, you know, we as you pointed out, we basically had this conversation that we needed to be energy independent for all of these sort of what I would argue were by and large wrong-headed economic reasons. And this is an idea that’s been bought into by members of both parties. Right, we have President Biden on the one hand standing up and saying, “We need to go and buy American and produce things domestically,” and you see this from Republicans, sort of more nationalistic oriented Republicans all the time.
But you know, what’s interesting is that the United States right now is by and large energy independent. Unlike a decade ago, we are ultimately a net exporter of energy. And it’s not perfect because we don’t exactly have the full refining capacity to refine all of the Texas sweet crude, for example, but by and large, we are far more energy independent. And yet, if you look at what’s happened to gas prices or the worldwide price of oil, we very much been exposed.
Now, those prices have since come down a little bit since the early days of the war in Ukraine, but at the end of the day, we are in an interconnected world whereby prices are set globally. And so just because we are energy independent doesn’t mean that we are not exposed to economic consequences from sort of the way that the world operates. And so unless you’re basically going to propose some sort of autarky and closing borders and producing everything domestically to be prepared for these kinds of situations, which of course would carry huge economic consequences for any country for the reasons we already discussed about the value of trade, then there’s always going to be some level of exposure to these potential harms.
And I think that, you know, I’m actually working on an op-ed about this topic right now, that this whole idea that energy independence is somehow this gold standard thing that we should all be searching for—I mean, there may be some value, but let’s not kid ourselves and say that this is going to solve all of our problems when these worldwide conflicts come up because they certainly haven’t in this point in time and we’re not even engaged militarily like we have been in other conflicts. So I do think it’s an interesting point and it’s an interesting lesson to be learned.
Public Pressure and Political Freedom [36:00]
Bob Zadek: You used the phrase that the world is interconnected, and I would say of course that’s true, we are reliant upon foreign trade to keep prices down, certain goods and services are better created by cheap foreign labor—that’s a phrase that’s often and should be hyphenated, “cheap-foreign-labor”—which means people around the world are willing to work for less money to give us what we want at the price we are willing to pay for it.
I think the phrase “the world being economically interconnected” maybe does require and I invite it, a bit of drilling down. We are interconnected economically but only because we want everything we possibly could have in the whole world at a price we’re willing to pay for it. I don’t think survival requires interconnectedness, but rather the quality of life we all aspire to have requires it. So it’s not like oxygen and water and sunlight, which is essential, it just makes life infinitely better.
And an interconnected world economically simply makes everything better and cheaper, but it’s not essential for survival. And I think as Russia starts to experience—you mentioned sanctions are not working. They’re not working the way the lockdowns during COVID, again lots of parallels, in the initial stages of the lockdown, the shelves became more plentiful, it was harder to get commodities that we wanted from breakfast cereal to toilet paper and the like, and there started to be at first an inconvenience, a new experience, but ultimately—and this I think has been under-reported—is that the growing pressure on Americans as they started to—it got a little tiresome to say the least to not have what we’re used to, and that created the pressure to cause government to reverse the lockdown faster than perhaps autocratic state and local governments would otherwise have done so.
My point being that I think the sanctions in Russia will have an effect because ultimately it must have an effect. Too many people will not stand for it and there’s no way for the Russian government to put the blame anywhere else and the pressure will grow from within. So when you say the sanctions haven’t been working, I would say I would change your period to a comma and add “yet.” Do you believe—and this is probably as much a political question as an economics one—but don’t you believe ultimately the result of sanctions on the enormous Russian population will have the desired effect and will prove to be a very effective weapon?
Jonathan Bydlak: Yes, I mean, as I said earlier, I mean, I do think they will prove effective, although again I’ll add a couple of caveats to that. One is exactly how much we are unsure of, and it’s unclear how long that will take. I mean, the example of sanctions that people point to most often as being effective is in the case of getting rid of apartheid in South Africa, and those sanctions took a very long time if you want to go and attribute them to having been successful at changing the reality in that country. So it’s not clear to me that we will achieve the desired impact within a period of time that is what we want to.
The other thing I’ll make, the other point I’ll make is that there is a bit of an assumption I think in your argument that people will ultimately not stand for it like they may not have stood for certain actions that took place during the pandemic. But there’s a very important difference between the Western world and Russia and that’s this issue of freedom. I mean, obviously within the United States, people have the ability to go and either vocalize this frustration, whereas of course in Russia, they’ve basically shut down any independent media and alternative viewpoints from the ones that are being sanctioned by the state. You have the ability to go and protest, you have the ability to vote out elected officials, whereas in Russia now you do not have the ability to protest, you do not have the ability really to vote out Vladimir Putin.
And so to me, that creates a much more challenging situation. And again, so the argument can be, well, even if sanctions are not as effective at targeting the leadership because of the pain that they will impose on the general populace, they won’t be able to blame anyone else. But of course, what they will blame is the West because the West are the ones who are imposing the sanctions. And so and that’s exactly what we’ve seen from the Russian propaganda outfits and how they’ve been kind of messaging the actions so far by the West. So it’s not clear to me that if the ultimate outcome is that we want Putin to be out of power and that this is a way to go and get it to get us to that point, it’s not clear to me at all that that will happen in the way that we want it to or in the timeline that we would want it to. And so again, on the margin, I think it’s absolutely it will have an impact and I am personally supportive of by and large the actions that the US and the rest of the Western world has taken economically, but those aren’t without costs and it doesn’t mean that the desired effects are going to happen in a reasonable timeline.
Lessons from the Cold War [47:24]
Bob Zadek: The headline of your article and of course the body makes reference to—and this is an important thrust of your article—makes reference to the fact that sanctions, headline quote, “will shake the world economy for years.” Take us if you will, and you’re obviously speculating but your opinion counts for an awful lot more than mine does because this is your area of expertise, take us into post-sanction world because you worry about and you caution us that there will be long-term effects. What will be the expected—you can’t be certain but expected—long-term effects on the world economy as a result of sanctions? Help us look into the future so we know what to be alert to when it happens.
Jonathan Bydlak: Sure. So you know, I mean, to your point, obviously these are difficult things to predict and if I had that level of expertise, I probably would be running my own hedge fund instead. But I think there are a couple of reasonable things that we can expect.
I mean, one is, you know, the uncertainty within energy markets. Obviously, there are so many industries that are ultimately dependent on affordable energy and Russia provides a very significant amount of energy for in particular Europe. And so even though they don’t necessarily to the United States as we talked about earlier, these are world markets where prices are set in a world marketplace. And so I think that there’s the potential for higher energy prices than we’ve had before, which of course will only flow through to the prices of other goods and services. And you know, obviously we’ve been dealing with inflation for the last six-plus months now or close to a year. And so this was a problem before the turmoil that we were seeing in Eastern Europe. And so I think that these actions could very well have real consequences in the future well beyond when whenever the sort of military or on-the-ground clashes end. And so to me, that’s the most obvious thing.
The second is to piggyback off of a point that I made earlier. I mean, you think about things like the efficacy of SWIFT or some of the ways in which the world processes financial transactions or as you pointed out, you know, perhaps can be described as the lubricant of the international financial order. I think there’s an open question here as to whether or not it will be quite as robust as it was before or whether or not you might ultimately end up in a world with more factionalization and decentralization, I guess, if you want to call it that, which can be perfectly fine and doable, but there’s obviously advantages to having standards and having the quick and inexpensive processing of international transactions in a world that is interconnected. And so that’s another potential I think potential casualty.
And beyond that, you know, there are just all sorts of other impacts that we haven’t really thought about. I mean, for example, Finland, which of course borders Russia, it’s estimated that around a quarter of their companies do significant business with Russians. And so of course you might expect there to be even disproportionate impacts on the economies in some of these areas that are even more tied to the Russian economy. I think you could see perhaps a decline in trade generally because of some of these actions that have taken place, which again carries a lot of, you know, I guess what Bastiat might have called the hidden sort of costs in this context where you don’t necessarily know what those costs will be because those transactions never ultimately take place.
So I think there’s a lot of, you know, generally speaking, there’s a potential to have a little bit of a breakdown of the smoothness with which the overall international economy operates. And as we know, I mean, uncertainty is ultimately the worst thing that market participants don’t want to deal with. And so when you think about stock market growth or sort of the ability of companies to be able to ultimately get access to the capital that they want to invest and so forth, I think that to the degree that there’s increased uncertainty on the international stage, that also has the potential to in general retard worldwide growth and put us ultimately at a worse-off standard of living than we otherwise might have been over the course of the next decade or two.
Bob Zadek: I would just mention in passing that sanctions are of course, and this has been the subject of our conversation, sanctions are an economic weapon. Using trade and economics broadly have become the weapon of choice for the West to influence Russia’s aberrant behavior. I would point out, just in case you have any thoughts on this, Jonathan—this is not part of the thrust of your article—but when the Cold War, where the adversaries were the West on the one hand and USSR on the other, when the Cold War was won, it was won economically. When Russia, the USSR, packed it in and said, “We’re done,” and the USSR was then split up to some degree, that from all that I have tried to learn was driven by economics. Russia, the USSR, was bankrupt. It was like an international Chapter 11, if you will, or maybe a Chapter 7, a liquidation. And doesn’t the experience in the Cold War show that wars, the Cold War, wars can be won economically with perhaps a short-term detriment on the rest of the world, but ultimately a long-term benefit? So this wasn’t part of your article, but since you are an economist, I just thought I would toss that out in the few moments we have left to see if you have any thoughts about whether our victory, if we had a victory in the Cold War, proves the effect of this of economic matters as a weapon.
Jonathan Bydlak: Yeah, it’s a really great point and I think that your assessment of the Cold War is accurate. Right, if you look at the predictions of many academics or experts in Eastern Europe in the mid-’80s, the vast majority of them did not believe that the Soviet Union was anywhere near a collapse. In fact, many of them believed that the Soviet Union was stronger than the United States was at that time. And so I think you’re correct.
What I would add, however, is that not all economic measures are the same. I mean, I don’t think we won the Cold War because of sort of our adversarial economic relationship with the Soviet Union and with the Eastern Bloc any more than we’ve won in Cuba by having the Cuban embargo over this same period of time. To me, the way that we won the Cold War economically was by basically out-producing and out-innovating the command and control economies of the East. And so at the end of the day, we were just able to produce too much wealth, too much of what our citizens needed. I mean, there’s that famous example of Boris Yeltsin coming to the United States and seeing all of the American supermarkets and what have you. I think that it was largely through that, through unleashing the creative potential of our educated workforce to engage and innovate economically in a way that the East could not ultimately compete with.
And so to me, that’s the important lesson here, is that we need to be thinking about the things that we can be doing to ensure that Americans continue to have the ability to innovate and produce in this way. But the lesson should not be that we need to go and continually work to retard trade or end up going and not engaging economically as much as we possibly can because ultimately that is how we won the Cold War. It wasn’t through sort of pulling ourselves away from the rest of the world.
Bob Zadek: Jonathan, thank you so much for the piece you wrote in The Spectator. The Spectator being the oldest magazine in the world, 1828 I am told is when it was founded. Jonathan, thank you so much for your article, “Sanctions on Russia will shake the world economy for years.” But I will end with “shaken but not broken.” We will survive. I think sanctions is Biden is timid but basically getting it right. Jonathan, thank you so much for your time this Sunday morning. Keep up the great work at the R Street Institute.
Jonathan Bydlak: You bet. Thanks. Great conversation.
Bob Zadek: I’ll happily be back again next Sunday for another hour of opinion, not attitude. Thank you so much and enjoy your Sunday.