Collateral Damage from the Economic Bomb

By Kevin D. Williamson

Thursday, March 10, 2022

 

As we explore the limits of using economic weapons in the pursuit of national-security goals, one thing should be clear: This is why you don’t use tariffs and other economic weapons to try to accomplish economic goals.

 

The sanctions put into place after Vladimir Putin’s invasion of Ukraine already are grinding down the Russian economy, and things are going to get much worse for Russia the longer they remain in place. Putin’s Russia is different from Khrushchev’s Russia, because it is a different world economically — in the globalized world, even Lada, the famously independent Soviet-era automaker, has suspended its operations in Russia and put its workers on leave. With Russia isolated economically, the firm cannot get the parts it needs. Many other Russian manufacturers are in the same position or soon will be.

 

But the United States and the other nations imposing sanctions on Moscow are going to pay a price, too, possibly a very high one. Globalization is a two-way street.

 

Inflation already was a problem in the United States before the sanctions, and the disruptions in trade probably are going to make that worse, though the dollar currently is being buoyed a little bit by all that capital furtively fleeing Russia and looking for a new home.

 

Oil prices have hit a 14-year high, and Americans are paying more for gasoline than they are used to or comfortable with. Only fools and professionals (the categories overlap) believe they can predict commodities prices, but it is reasonably likely that the price of oil will stay high, and it may even continue rising. Six months from now, Americans may be looking back nostalgically on the era of $4.50 gasoline.

 

Russia and Ukraine are two of the world’s great breadbaskets, and the war and the sanctions already have sent grain prices up by almost 80 percent. That means paying more for your carbs — from naan, noodles, and tortillas to brioche and bagels. That means more expensive animal feed, which means more expensive beef, pork, chicken, and turkey. It also means more expensive milk and cheese, and more expensive eggs.

 

On a more local scale: There is sudden turbulence in the high-end real-estate markets from London to Miami as Russian oligarchs look to liquidate their assets and find some relatively safe new place to park their money. Expect more volatility on that front. And expect similar volatility in the markets for some other very-high-end goods, such as yachts. We don’t have to worry very much about the billionaires who buy yachts, but we do have to think about the blue-collar workers and non-billionaire professionals who build, sell, maintain, insure, and finance them.

 

The United States and many other countries already were struggling with persistent supply-chain difficulties, and the sanctions will make some of those worse. Boeing is currently scrambling to find new titanium suppliers — its dealer in Moscow, Sergey Chemezov, is a Putin crony from his old KGB days and is under personal sanctions. Supplies of many other components and raw materials will be disrupted, too.

 

And the fact is, we do not know how effective these sanctions will be as an instrument of geopolitics, because sanctions on this scale have never been implemented before.

 

Americans are not ready to pay any price and bear any burden to discourage Putin’s empire-building project. But we are willing to pay some price and to bear some burden. There is no plausible scenario in which Americans do not share substantially in the economic pain that is coming.

 

War by old-fashioned means is economically disastrous. War by economic means is going to be economically ugly, too, because disrupting global trade and finance to pursue national-security ends will get very expensive very quickly. Doing the same thing or something similar in the pursuit of economic ends — e.g., trying to change our balance of trade with China — would almost certainly prove catastrophically counterproductive. The hammer we now have in hand would be the wrong tool for that job, and it very well may not be a big enough hammer for the job we’ve given it, either. We do not know whether this is actually going to work; we haven’t even agreed on what “working” would look like.

 

What we want is options. But a country with a large debt-to-GDP ratio, many trillions of dollars in unfunded liabilities, and an energy industry hamstrung for narrow ideological reasons has fewer options — and less-attractive options — than one that has its act together. The price we pay for our fiscal indiscipline and political dysfunction is not only an economic price, and the risks we incur are not only economic risks.

 

So we had better get realistic both about the limits of our own economic weapons and about our vulnerability to the economic weapons that may be deployed against us in the future. We are on the sidelines in this crisis. We’ll be on the front lines in the one that is coming.