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John Browne: Trade sanctions bite back

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Saturday, Aug. 16, 2014, 4:24 p.m.
 

Initial calls for American-led sanctions against Russia over Crimea and Ukraine met with less than universal enthusiasm. Now that the costs of trade sanctions imply damage to a world with worrying threats of recession, economists are expressing concerns.

Within an increasingly global economy, trade restrictions are effective only if enforced universally or by means of a military blockade. The larger the targeted country, the more difficult it is to police sanctions. Further, in the global economy, trade embargoes against a major nation imply significant costs to those imposing the restrictions. Soon, they become a two-edged weapon.

Sanctions could erode the world's Reserve Currency role of the dollar. For how long can the United States and allies sustain sanctions against Russia?

Allied trade sanctions against small countries such as Rhodesia were quite damaging. Even against larger countries such as Iran, when oil could be purchased from alternative sources, trade restrictions proved largely successful. But Russia is a former superpower with a political reach far greater than its economy would indicate.

For example, the United States is seeking possibly decisive Russian support in its nuclear negotiations with Iran and would lose by forcing Russia back into a close relationship with China.

The Obama administration appeared not to recognize the Crimean dispute as a mirror image of the Cuban affair in which President Kennedy could not climb down even if it meant nuclear war. In Crimea, the administration failed to see that Putin could not climb down. Instead of finding a face-saving exit, Obama beat a threatening drum — making Putin's victory all the more impressive and disturbing to the international community. Further, it exposed important splits within NATO, possibly encouraging Putin to go for Ukraine.

According to the German Foreign Office, Germany transacts $106 billion in Russian trade, about 3 percent of its international total. Bloomberg estimates American trade with Russia at $40 billion, about 1 percent of its global total.

Germany imports 36 percent of its natural gas and 39 percent of oil from Russia, according to Deutsche Welle. The EU relies on less. While there are expensive energy alternatives, Russia can do serious damage to the EU's and Germany's economic engines.

“We are alarmed by the escalation of trade conflict with Russia,” Anton Boerner, head of BGA, the German Trade Association, said recently.

Giant EU companies like Siemens, Volkswagen and Shell have warned of the damage implied by sanctions against Russia. Furthermore, recent Russian retaliatory sanctions are increasing recessionary pressures on Europe and internationally.

The starkly different implications for the United States and EU explain the important initial split within NATO.

Russia has forged trade relationships with Asia, particularly China. The trading likely will be conducted in non-dollar currencies, eroding further the dollar's international importance and threatening its longer-term Reserve Currency status.

As the sanctions of both sides bite deeper, a growing awareness of the costs, inconvenience and even suffering likely will strike Western populations.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne70@yahoo.com.

 

 
 


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