President Joe Biden sign the law on suspension of normal trade relations with Russia and Belarus and the law on ending the importation of Russian oil come into force on April 8, 2022. These laws deprive Russia of its preferential trade status – allowing states States to impose higher tariffs on Russian products – and ban the import of Russian energy into the United States.
The two bills previously passed Congress on April 7, 2022 with overwhelming bipartisan support, according to The New York Times. The United States and several European countries have previously banned the export of military goods, flights and luxury goods to Russia, according to an article by the BBC. Some Russian government officials and their family members have also been sanctioned.
The Herald spoke to several faculty members at the University of the Watson Institute for International and Public Affairs and the economics department about how these laws – and the wider Russian-Ukrainian conflict – will affect the economy America and economic trends around the world.
With preferential trade relations, “you typically charge the lowest tariff on imports from that country,” said Mark Blyth, director of the William R. Rhodes Center for International Economics and Finance. Russia lost this preferential status after signing these new acts earlier this month.
The United States and its “European allies … (are) embargoed on imports and exports of various goods” from Russia, said David Weil ’82, an economics professor. “They tell their companies, ‘It’s illegal for you to send a shipment of machine tools to Russia, or it’s illegal for you to import various things from Russia.'”
Weil thinks the economic consequences are inevitable for the United States and Russia, because “trade is, in general, mutually beneficial.” But the “suffering” of American households will be incomparable to that of Ukrainians directly affected by the war, he added.
Because Russia is a major energy exporter, “even partially removing Russia from the world market is going to drive up the price of oil,” Weil said. “It’s going to help stoke inflation at a very unfortunate time when we (are) already having trouble with rising inflation.”
“Most of Russia’s oil and gas (goes) to the European Union,” said Heidi Peltier, senior research associate in international and public affairs. “But of course, whenever there is a shortage of oil or gas anywhere in the world, prices go up everywhere. We see this at the (gas) pump in the United States”
Weil also noted that, as is the case with most embargoes, various companies that export goods to Russian markets will inevitably lay off some workers.
Russia and Ukraine are also major grain exporters. Together, the two countries account for more than a quarter of global wheat exports, according to a report by The New York Timesand are “also key suppliers of barley, sunflower seed oil and corn, among other products”.
While food prices around the world are expected to rise, the United States will not feel the worst of these effects because it is also a major food exporter, “and therefore it competes rather than complements” the products. Russians, Blyth said.
While products produced and consumed locally will remain largely unaffected by rising food prices, Peltier noted that all products that require significant transport – whether food or other goods – will be affected by the aforementioned rise in gasoline prices.
But Peltier remains aware that Americans will be affected differently depending on their income bracket. “High-income people can more easily afford some price increases” for these products, she said. It is people living in poverty and the lowest income brackets who “are (most) affected because a greater part of their household budget is spent on purchasing energy and food”.
Due to the limited relationship between the United States and Russia in terms of hydrocarbon and food exports, the Russian economy will not be crippled just by the withdrawal of the United States from the oil and grain trade. , according to Blyth.
“What the United States is really doing in terms of sanctions is working on the financial channel,” Blyth added. The United States is “essentially freezing central bank reserves and excluding certain Russian banks and individuals” from the Society for Worldwide International Financial Telecommunications, a popular financial system used by banks to securely exchange financial messages.
Trade embargoes have existed for hundreds of years, according to Weil, but the ability to cut off Russian financial firms’ access to such complex global financial systems is a more recent “special superpower” of the United States.
However, due to the “correspondent banking problem,” these bank sanctions are still flawed, according to Blyth. In theory, a sanctioned Russian individual can open an account with a Russian bank and transfer their assets to an unsanctioned Belarusian bank, which can then transfer the money to a Chinese bank, which can then invest that money in US stocks. , Blyth explained.
“When you don’t sanction the whole network of banks, there will be ways around” the restrictions, he added. “There are a lot of holes in these sanctions, some on purpose and some because it’s very difficult in a modern, integrated global economy to sanction everything effectively.”
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China’s continued political alignment with Russia also mitigates the effect of sanctions, according to Peltier. “As long as they continue to trade with Russia, … it weakens everything the West does,” she said.
Although Weil wouldn’t describe the current economic situation in Russia as a “recession”, he expects that there will be an “extremely sharp contraction in income, both because they fail to export as much energy than before and that there is less money coming in.”
Besides its advanced military and energy prowess, the Russian economy is not very good at producing goods and services, according to Weil. “If you take out all energy and major goods exports, it will mean a lower standard of living, especially for middle-class households,” he said. “They’re not going to freeze and they’re not going to starve, but that would definitely be a big step backwards.”
“Sanctions are more likely to harm the Russian people than the Putin administration or the oligarchs in charge of the Russian economy,” Peltier said. Most politicians in power “don’t care about the Russian people, and therefore the sanctions…will not lead to any change unless there is a massive uprising against Putin.”
Instead of provoking political reform, the sanctions had a “side effect” of “voluntary disengagement (of) many and many West American corporations” from Russia, Blyth said. “For example, all McDonald’s have now become At Uncle Vanya’s, … and it’s really an isolationist strategy in Russia, using that as a way to isolate the national economy and (say) ‘Who needs a McDonald’s? We have Uncle Vanya.
J. Nicholas Ziegler, professor of international and public affairs, believes that these sanctions will have a longer-term effect on the Russian economy rather than effectively stopping the current military conflict.
For Weil, sanctions are a way to deter other global players from going against the will of the United States. “We said before the invasion that if you do this thing, we’re going to inflict this pain on you,” he said. If the United States did not follow through, it “would not be an effective threat. … You invest in your credibility.
While the United States and Russia may weather the economic consequences of the conflict, smaller, highly industrialized countries not directly involved in the conflict could face more severe effects, according to Ziegler.
“The decline in the food trade may be the most serious consequence of war for countries not directly affected,” Ziegler said. Ukraine’s disengagement from the agricultural economy will have “serious consequences across much of the Middle East and Africa”.
The conflict has also created an unprecedented situation refugee crisis in which more than five million Ukrainians have fled the country since the Russian invasion. Poland has felt the full effects of this crisis, currently hosting more than 2.8 million Ukrainian refugees.
Ukraine’s economy was not prosperous before the invasion, according to Weil. “His trajectory was lower than that of virtually everyone in Europe. The rampant corruption was absolutely correct, they had terrible land reform policies, … they are out of shape,” he said. “Given the collapse of the economy, you are going to see a lot more Ukrainians in European countries. … We don’t know how it’s going to work.
The refugee crisis is both an asset and a burden for host countries, Peltier said. “If it’s a longer-term situation where (Ukrainians) end up moving and working, it can actually be good for the host country,” she said. “In the short term, this can put a strain on resources.”
As more European countries accept refugees, they are unwilling to more actively sanction Russia’s oil exports, according to Peltier. Indeed, European nations are much more dependent on Russia for their energy supply than the United States.
As a result of the conflict, Western European countries have become more aware of the threat that stems from such a heavy reliance on Russian exports, Weil said. There have been active European efforts to diversify their energy mix, particularly their sources of natural gas, “which could significantly diminish” Russia’s energy resource economy over time, he added.
“On the eve of the invasion, the world economy was globalized in a way it had never been globalized before. … We had reached a point of very articulated cross-border connections,” Ziegler said. “That degree of interconnectedness is changing decisively as different countries pull back and realize that there are certain products and processes that they cannot allow to exist only in certain countries.”