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The new art of economic warfare

World needs to introduce some rules to govern economic warfare before the next great-power conflict erupts



Reuters
Reuters

By Kaushik Basu

Published: Thu 31 Mar 2022, 12:13 AM

The use of economic weapons during war has a long history. But the rise of globalisation and cross-border supply chains has given these nonviolent munitions unprecedented power. While economic and financial sanctions may not strike with the immediacy of an artillery shell, their impact can nonetheless be devastating.

Economic warfare in a globalised world is so novel that we do not yet fully understand it, and few rules regulate it. There is no well-defined list of punitive instruments, much less credible estimates of the direct and collateral damage each is likely to cause.

So, when Russian President Vladimir Putin attacked Ukraine, Western policymakers were suddenly confronted with quandaries for which they were not prepared. US President Joe Biden’s administration and America’s Nato allies rightly decided to contain Putin and prevent the war from escalating into a nuclear conflict, by using sanctions instead of troops.

But now Western governments face the enormous task of using all the new data and information available to analyse the efficacy of these tools. And the world needs to introduce some rules to govern economic warfare before the next great-power conflict erupts.

The immediate concern is how to use economic sanctions more effectively to defeat Putin. Cutting off Russia from trade and financial interactions with the United States, Europe, and other advanced economies has hurt the Russian economy, but not as much as one might have initially thought. For example, the US embargo on Russian oil caused the price of Brent crude to shoot above $100 per barrel, accompanied by a sharp depreciation of the ruble against the US dollar. But the ruble did not fall as much as many may have expected and has recently recovered somewhat.

It is easy to see why this happened. Consider a market with several buyers and sellers, in which a major buyer, U, says it will no longer purchase oil from a major seller, R. There will be an initial shock as U seeks to buy from other sellers, causing prices to rise. But, over time, this effect will dissipate because R can sell to someone else, say, X, and suppliers that previously sold to X can now divert some of their oil to U.

True, the price of oil will still be higher than it was before the sanctions, because longer supply routes will cause delivery costs to increase. But, as in one of those old Hollywood musical sequences where the dancers switch partners, supply relationships will change, causing much of the initial shock to wear off. The show must go on.

There may be another mitigating factor helping Russia. The oil-price spike triggered by the US embargo means that, even if Russia’s oil exports decline, its overall income may not fall. The ruble’s partial recovery signals that this may be happening.

To ensure that Russia cannot easily get around the US oil embargo, America needs to use “triadic threats” more effectively – sanctioning not just Russia but also those who buy its oil.

The US is a master when it comes to triadic sanctions and has used them in unethical ways against small countries. In 1973, for example, President Richard Nixon cut off food aid to Bangladesh in the middle of a famine on the grounds that the country was trading with Cuba. While Nixon’s move was unethical and had no legal basis, that changed with the 1996 Helms-Burton Act, a Machiavellian piece of federal legislation designed to isolate Cuba. In my book Prelude to Political Economy, I discuss how the US used this law to throttle Cuba via triadic sanctions.

Similarly, the US used rigorous strategic analysis to steer the world away from the brink of nuclear war during the 1962 Cuban Missile Crisis. It is important that America deploy similar analytical precision today as Nato confronts a tyrant like Putin at its border.

To defeat the threat, the US should communicate more clearly that its sanctions against Russia are meant only for Putin and his cronies, and that America will help to restore the Russian economy fully as soon as the Kremlin’s current ruling cabal is gone. This is a message that needs to reach all Russians.

The other, long-run matter deserving attention, as Raghuram G. Rajan recently emphasised, is the need to set the rules of engagement for economic warfare. In today’s globalised world of complex multinational value chains, large and powerful states can use a variety of techniques – including cutting off the supply of some vital input – to flatten another country’s economy.

Likewise, a major power in a conflict with a developing country can spark hyperinflation within weeks simply by printing the local currency and showering the notes on cities and towns. Unless such actions are formally prohibited, someone is bound to resort to them.

The severe sanctions that the West has imposed on Russia may be justified to defeat Putin, but they have escalated economic warfare to an unprecedented level. Just as we have rules governing conventional warfare, such as a prohibition on targeting civilians, we will need to create rules for what is permitted and what is forbidden in economic conflict. — Project Syndicate

Kaushik Basu, a former chief economist of the World Bank and chief economic adviser to the Government of India, is professor of economics at Cornell University and a non-resident senior fellow at the Brookings Institution.


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