The Sanctions Dilemma

Today I put out my April Global Economics Monthly, discussing the prospect of intensified sanctions against Russia.  It’s an issue that requires a much better effort at quantification than I have seen to date.  Still, I think that we can draw a number of tentative conclusions from the debate so far:

1. Intensified sanctions against Russian corporations and banks could have powerful effects, most importantly through financial channels.  A forced, rapid deleveraging—Russia’s “Lehman moment”—would hit hard a Russian economy that was already weakening prior to the crisis due to structural distortions and poor economic policies.

2. The power of sanctions comes not only by pressuring Russian business elites, but also by the message it sends to other countries that there will be costs to territorial aggression.

3. Sanctions, and the likely resulting retaliation, may well be recessionary for the West.  I am not convinced that, because Russian gas is a small percentage of Europe’s overall energy consumption, that the short-term dislocation will be minor if the plug is pulled overnight.  Being willing to accept this pain as the price of achieving global political stability makes the threat of sanctions more credible.

4. My colleague Michael Levi persuasively points out here and here that liberalizing U.S. exports of oil and gas will have little short-term effect on flows. The benefits of energy reform and liberalization come in the longer run, as infrastructure is put in place and sources of energy diversified away from Russia.  European policies to diversify supply also must be part of the equation.  In the near term, the political statement that these initiatives send is more important.   A comprehensive discussion of the energy issue also is here.

5. This suggests an “all of the above approach”: intensify the sanctions, diversify energy, hold back on trade and financial negotiations, and support Ukraine with financial assistance—and be prepared to accept the necessary dislocations.  It is striking to me how sanguine global markets are that we will not have to confront this scenario.