As tensions between Russia and Ukraine continue to escalate, a bipartisan group of U.S. senators are closing in on finalizing legislation that would impose tough sanctions on top Russian officials. Distinguished Professor Emeritus and expert in international political economy Benjamin Cohen offers insight into the conflict and its implications for the U.S. and global economy.
The Current: How does the current situation between Russia and Ukraine differ from previous actions Russia has taken against its neighbor?
Benjamin Cohen: What is different is the magnitude of the threat from Russia. Apart from the capture of Crimea in 2014, previous actions against the Ukrainians have been relatively muted. The Russian intervention was limited to the small area of Donbass in the easternmost region of Ukraine. Western sanctions against Russia, as a result, have also been relatively limited.
But now Russia has over 100,000 troops on Ukraine’s borders, ready to attack if ordered. No one doubts that if the order is given, the whole country could be overrun in just a few days. So this time, the penalties are bound to be much tougher, as President Biden has promised.
And if Russian President Vladimir Putin retaliates in turn – for example by threatening the Baltic states or engaging in cyber warfare – the risk of an ever greater escalation of hostilities is considerable.
TC: What immediate impact does the conflict between Russia and Ukraine have on other parts of Europe and, by extension, the United States?
BC: We can expect a suspension of Russian gas sales to Europe, which will harm the economy of the European Union (EU), which is our second largest trading partner after Canada. This is bound to harm American exporters and, more broadly, all American companies dependent on supply chains across the Atlantic.
Currently, the EU depends on Russia for around 40% of its natural gas supply, and alternatives are few. A suspension of gas imports from Russia would require all sorts of cuts across Europe, from electricity to home heating.
The EU economy would not collapse, but it would certainly take a hit. Growth would be greatly slowed down. This in turn would have ripple effects on the US economy by depressing sales to Europe. The EU currently accounts for about 15% of US exports.
TC: Are other sources able to fill the void if Russia’s natural gas supply is cut off?
BC: Unfortunately no. In the global gas market, the only areas where there is potential for a substantial near-term increase in production are in the United States, in states like Texas and North Dakota. But the problem is getting the increased production to Europe.
In the European market, Russia has a natural advantage as it can provide supply via pipelines, most of which are onshore. The only way to get American gas to Europe is to ship it in liquefied form (LNG), which requires more terminals and specialized tankers than are currently available.
TC: Are certain business sectors more likely than others to be affected by an economic downturn in the EU?
BC: Overall, across the economy as a whole, the impact on the US economy would be moderate. But specific sectors could suffer setbacks due to their heavy dependence on the European market.
These include aircraft, motor vehicles, machinery, and pharmaceuticals and chemicals. Workers in these sectors could face cutbacks and layoffs. Consumers, on the other hand, could benefit from a slowdown in price increases.
TC: Are there any actions consumers should take now in anticipation of the broader impacts the sanctions could have on the EU and, therefore, on US economies?
BC: When it comes to our economy, we need to worry about other, bigger threats, including the ongoing pandemic, inflation, gnarly supply chains, and political gridlock in Washington. If Russia does invade Ukraine, our biggest concerns will not be economic, but military. Can we stop an ever increasing escalation of hostilities?
TC: The Russian economy is already suffering, even before the proposed sanctions are applied. What is the probability that they will have the desired effect?
BC: The Russian economy is, indeed, fragile and, for the most part, weak. Their military sector is top notch; they are the second largest arms exporter in the world after the United States. But otherwise, their manufacturing base is unable to compete effectively. Their exports are mainly agricultural (particularly cereals) and carbon fuels (oil and natural gas).
If the sanctions are as severe as President Biden has suggested, Russian companies will not be able to use global payment mechanisms, which rely heavily on the US dollar and access to the US banking system. Export sales will plummet, imports of vital goods will be hampered, and the Russian economy will stagnate.
The real question is, will all this count for Vladimir Putin? For Putin, what matters most is geopolitics, not material wealth. Most likely, he would appeal to the nationalism and patriotism of the Russian public. Don’t blame me, he will say, it’s all the fault of the aggressive West, which seeks to dominate and subjugate Russia.
We can expect to see his propaganda machinery revved up in an effort to shape national public opinion.