The new art of economic warfare and the global need to regulate it

Economic warfare is so new in a globalized world that we do not yet fully understand it and few rules govern it. With no well-defined list of punitive devices, there are likely to be far less reliable estimates of direct and collateral damages.

So, when Russian President Vladimir Putin invaded Ukraine, Western policymakers were suddenly faced with questions they were unprepared for. US President Joe Biden’s administration and America’s North Atlantic Treaty Organization (NATO) allies decided to use sanctions instead of troops to halt Putin’s actions and prevent the war from escalating into a nuclear conflict.

But now Western governments are faced with the enormous task of using all the new data and information available to analyze the effectiveness of these tools. And the world needs to introduce some rules to control the economic war before the start of the next superpower conflict.

The immediate concern is how to use economic sanctions more effectively to defeat Putin. Cutting off Russia from trade and financial interactions with the US, Europe and other advanced economies has hurt the Russian economy, but not as much as one might have initially thought. For example, the US sanctions on Russian oil caused the price of Brent crude to rise above $100 a barrel, as well as a sharp depreciation of the Russian ruble against the US dollar. But the ruble has not fallen as much as many expected and has recovered somewhat recently.

It is easy to see why this happened. Consider a market with many buyers and sellers, in which a major buyer, U, says that he will no longer buy oil from a major seller, R. There will be an initial setback as u want to buy from other sellers, which drives up the prices. , But, over time, this effect will wear off as R can sell to someone else, e.g., X, and suppliers who previously sold to X can now divert some of their oil to U.

True, the price of oil will still be higher than it was before the sanctions, as longer supply routes would increase delivery costs. But, as in one of those Old Hollywood music scenes where dancers change partners, the supply relationship will change, making the initial shock too far away. show must go on.

There may be another mitigation factor helping Russia in this instance. A rise in global oil prices due to US sanctions means that while Russia’s oil exports may decline, its total earnings may not decline. The partial recovery of the ruble signals that this could happen.

To make sure Russia can’t easily get around a US oil embargo, the US needs to use the “triple threats” more effectively – not only to Russia but also to those who buy its oil.

The US is a master when it comes to quarterly sanctions and has used them in unethical ways against smaller countries. In 1973, for example, US President Richard Nixon cut food aid to Bangladesh amid a famine on the grounds that the country was trading with Cuba. While Nixon’s move was unethical and had no legal basis, that changed with the Helms-Burton Act of 1996, a Machiavellian piece of federal law designed to isolate Cuba. In my book Prelude to Political Economy, I discuss how the US used this law to crush Cuba through quarterly sanctions.

Similarly, the US used rigorous strategic analysis during the 1962 Cuban Missile Crisis to steer the world away from the brink of nuclear war. It is important that the US still uses the same analytical precision as NATO faces a dictator like Putin on its border.

To defeat the threat, Washington DC must communicate more clearly that its sanctions against Russia are only for Putin and his allies, and that as the Kremlin’s current ruling cabal is gone, the US must completely destroy the Russian economy. will help to restore. This is a message that needs to reach all Russians.

Raghuram Rajan recently stressed that another, longer-lasting matter, is the need to set rules of engagement for economic warfare. In today’s globalized world of complex multinational value chains, large and powerful states can use a variety of techniques to flatten another country’s economy—including cutting off the supply of some critical inputs.

Similarly, a major power that is in conflict with a developing country could fuel hyperinflation within weeks by simply printing the local currency and showering notes on cities and towns. Unless such actions are formally banned, one is bound to resort to them.

The severe sanctions that the West has imposed on Russia may have been justified to defeat Putin at this point in time, but they have escalated the economic war to unprecedented levels. Just as we have rules governing conventional warfare, such as restrictions on targeting civilians, we will need to create rules for what is allowed and what is forbidden in economic conflict. ©2022/Project Syndicate.

Kaushik Basu is a former Chief Economist of the World Bank and Chief Economic Adviser to the Government of India and currently Professor of Economics at Cornell University.