So one thing I like to waste a lot of time doing while I should be making videos is watching
nature documentaries.
There is one in particular that I have been thinking about a lot recently which is a story
about a colony of honey bees defending their hive from a hornet.
Since these particular bees didn’t have stingers or any other kind of offensive weaponry
they came up with an ingenious solution to deal with the unwanted guest.
They swarmed the hornet and started jiggling their little bee bodies to create heat.
The genius came from the fact that the bees could survive in temperatures up to 47 degrees
celsius, whereas the hornet could only survive up to 45 degrees so if the little bee ball
could generate temperatures of 46 degrees they could slowly cook the hornet alive while
narrowly avoiding death themselves.
Nature is pretty metal.
Now I promise I have a point here, which is that these bees couldn’t use offensive weaponry,
so instead they inflicted pain upon themselves because they knew it would inflict more pain
upon the hostile invader.
This is the same logic that countries use when they impose sanctions on other countries
that they see as hostile belligerents.
There has obviously been a lot of talk in the news about sanctions recently, and even
before the hostile Russian invasion of Ukraine, sanctions are often cited as the reason economies
like, North Korea, Venezuela, or Cuba have struggled to prosper economically.
This all begs the question though, what are sanctions?
Short of being a bad thing that one country does to another country, not many people stop
to consider the detail of what these sanctions involve, or how they’re any different from
something like basic trade restrictions.
These economic hostilities may be seen as more palatable alternatives to military hostilities,
especially when dealing with nuclear power, but will they be as effective?
And could this all just push a cornered nation into the arms of systems that undermine the
global status quo?
To find out, we as always need to understand the answers to some very important questions.
First and foremost
What are sanctions?
How are they used to inflict damage on countries?
And more pressingly, How do they hurt
the economies
doing
the sanctioning?
Alright, every time we cover a current issue I have to give the big disclaimer, which is
that nobody can predict the future, least of all economists.
It is entirely possible that sanctions work exactly as intended and Russian leadership
simply shrugs off the suffering of their economy and continues with their hostilities.
But with that out of the way.
Sanctions are simply diplomatic actions taken by governments or multilateral organizations
against other states in order to protect international law and safeguard against security threats,
be they real or perceived.
Sanctions can take many forms.
There are military sanctions that can range anywhere from a country kicking another country's
foreign military base off their soil, all the way to banning the international travel
of military personnel.
There are diplomatic sanctions, usually involving the expulsion of foreign dignitaries and embassies.
There are even things like sports sanctions where sovereign nations are barred from recognition
in international sporting events like the Olympics.
But of course, the one you are all interested in are the economic sanctions.
Economic sanctions normally involve a restriction outright ban on either trade, currency flows,
investments, corporate governance, or some combination of all of these things.
We mostly think of trade restrictions but these other limitations are often much more
appropriate.
For example, a foreign businessman might be barred from being an executive in a company
if they are a citizen of a restricted country like North Korea.
It’s also important to note that not all sanctions are absolute.
Some sanctions simply target specific industries or perhaps even specific groups or individuals,
for example, the USA has no sanctions against the country of Bangladesh, but it does have
sanctions against individuals associated with a specific paramilitary force within the country
itself.
Now you might ask what is the difference between economic sanctions and regular old trade restrictions?
Australia taxes the import of American-made cars, but obviously, Australia is not sanctioning
the United States.
Well the difference really comes from the motivation, Australia taxes the import of
foreign cars because it wants to protect its local car industry, unfortunately, nobody
has told our politicians that we don’t have a local car industry anymore but you know,
let them believe they are putting up the good fight I guess.
The world trade organization's primary function is actually to combat restrictions like this
that are levied for economic benefit.
The reasoning is that international trade is almost always a net positive on countries
that embrace it, but it does require trusting your trading partners.
If a country gives up food security to focus on manufacturing it wants to be sure that
its trading partners hold up their end of the bargain to buy their manufactured goods
and sell them food without any restrictions.
The World Trade Organisation is basically the global kindergarten teacher telling all
of the world's economies to share their toys so that everybody can have fun.
They will intervene if a country stops trading for economic reasons, but they will not intervene
if a country stops trading for political or militaristic reasons, in other words, they
won’t intervene in sanctions.
Sanctions can have exactly the same net result as trade restrictions with the only difference
being that the motivation behind the restrictions is political not economic.
This starts to expose the first big problem with sanctions.
There is a reason that countries take trade deals so seriously, which is that if they
fall apart they can do a lot of damage to the participants, and the global economy as
a whole.
Normally sanctions are going to be far more severe than trade restrictions which means
their side effects will be more severe too.
The sanctions imposed on Russia in the last month are the most aggressive ever placed
on a major global economy, this is what they did.
They blocked Russia from purchasing high-tech goods, like computers and machinery from participating
nations.
They blocked the purchase of military equipment from participating nations.
They froze the assets and put travel restrictions on ten individuals who were identified as
the primary beneficiaries of Putin's regime.
These are the guys that are having their yachts seized all over the world.
And the big one was that they blocked major Russian banks from international transfers
to and from participating nations.
This was later followed up with restrictions placed on their access to the SWIFT network.
The SWIFT network is easiest to think of as the internet of banking, it's a cooperative
network of hundreds of banks that makes passing money around the globe as simple and standardized
as sending an email.
Just like the internet, there are alternatives, but just like the internet, it’s very hard
to do business without.
Russian companies are going to find it extremely difficult to do business under these circumstances,
which is going to be bad for them, but also bad for the rest of the world.
So it’s probably best to start with caution and consider
What can go wrong with sanctions
Russia is a major supplier of food and energy in Europe, Asia, and the Middle East sanctions
limiting trade means that these countries will go without.
Russia and Ukraine account for over 30% of the world's wheat supply.
Ukrainian farmers are too busy harvesting Russian tanks to tend to their crops right
now and banking restrictions are cutting off Russian farmers from the financial services
they need to receive payment for selling their crops internationally.
This is threatening to hit vulnerable nations like Egypt, Kazakhstan, and Turkey particularly
hard because they have grown dependent on these grain exports to feed their populations.
These nations had nothing to do with the invasion, most of them didn’t even participate in
imposing sanctions, but they are going to be real victims here.
It’s important to remember that a lot of these countries weren’t in the best economic
shape even before this got kicked off.
Just like the bees sanctions are going to hurt everyone in the hope of hurting the hornet
more.
Another example of this explains why Europe was so apprehensive about cutting off Russian
banking connections.
Europe has billions of dollars in Russian debt which now can’t be repaid because Russian
financial institutions have no way of sending the money to them.
There is another major issue that probably isn’t getting enough attention either, and
that’s asset seizures, and no I don’t mean the superyachts that are making headlines,
I mean the stuff that Russia is seizing from the west.
The world's largest airline company is the Dublin-based AerCap which owns and operates
over 1,000 jets around the world, never heard of it?
Well, that’s because they just rent the planes out to regular airline companies who
don’t have the capital or the desire to buy their own planes.
There are a lot of airlines in operation today that do not own any of their own planes and
rely exclusively on companies like AerCap to lease them their fleets.
One of the biggest of such airlines is the Russian-based Aeroflot.
Aeroflot and other Russian-based airlines have no practical way of paying the leases
on the planes in their possession which would normally mean that these companies would just
take back their planes, but you know, good luck taking an airplane from a Russian airport
at the moment.
Russia is set to effectively steal over 10 billion dollars worth of foreign-owned planes.
In the short term, this might give Russian airlines a boost to their balance sheet, but
nobody is ever going to lend them planes again, and that effectively puts a time limit on
how long these companies can continue to operate.
It also means that companies like AerCap are now facing bankruptcy after having billions
of dollars in assets wiped out overnight.
This could have knock-on implications for the entire airline industry, especially budget
carriers, because if these rental companies go out of business then so too do the airlines
that utilize their planes, so if you were planning a post lockdown holiday you might
want to get on it sooner rather than later.
Now if you weren’t planning an overseas trip it might have been because you blew your
entire holiday budget filling up your car at multi-year high prices.
Following the invasion of Ukraine, oil prices spiked on anticipation of disrupted supplies.
Despite being a net oil-producing nation the united states still imports a lot of crude,
primarily to refine and resell all over the world.
Russia is a major oil producer which has historically fueled very thirsty developing nations like
China.
If they can’t get their oil from Russia, they are going to get it from somewhere else
which can start a bidding war, pushing up the price of oil in international markets.
Ironically prior to these sanctions, Russian oil imports to the united states were at all-time
highs accounting for around 10% of all imported oil, up from less than 4% in 2008.
The primary driver of this increased demand for Russian oil was the fact that America
could no longer import oil from Venezuela because they put sanctions on them.
It’s important to point out that Russia can still technically sell oil and gas internationally
because of what is known as a carve-out.
A carve-out is just an exception to sanctions that are normally reserved for humanitarian
goods, or goods that are identified as essential.
Conveniently enough the west has deemed Russian oil and gas essential, but there is still
massive social pressure in place for western oil companies to pull out of Russia anyway.
It’s pretty clear to see that sanctions really are a double-edged sword, and in the
long term, if countries think there is a chance they could be the next victim of, or even
collateral damage from these types of sanctions, they will be more inclined to pursue policies
of self-sustainability rather than mutually beneficial free trade.
Obviously, this isn’t going to make for any flashy headlines right now because it
could take decades to play out, but global free trade has been the primary driver of
wealth creation in the last century, moving away from it could do more damage than any
of us realise.
So with such great costs, the question needs to be asked,
Will these sanctions work
Well, that depends on what these sanctions are trying to do in the first place.
Sanctions have been placed on countries with one of three goals in mind.
To stop international crimes, like human rights abuses in China, and 1960s South Africa.
To stop the development of weapons of mass destruction, like the nuclear programs of
North Korea and Iran.
Or in the most severe cases, sanctions can be imposed with the intention to cause regime
change, this was first used in Zimbabwe in the 1960s in an attempt to force out the ruling
party and enable fair elections.
This was eventually achieved more than a decade later, but it came at a staggering human cost.
Nobody will say it out but a regime change is probably the desired outcome of these current
sanctions on Russia.
Now If the desired result of these sanctions was simply to stop the Russian invasion dead
in its tracks, make it pack up, and head back home, I’m sorry they are just not going
to do that.
Political situations within Russia aside, that’s just not really what sanctions do.
The first issue is that, Russia probably already knew this was coming.
Sanctions impact different countries differently.
In general, countries that are more isolated, less democratic, and have had less time to
prepare are going to be most susceptible to sanctions than countries that are the exact
opposite of these things.
Russia can feed and power its own population, the experience of the people doesn’t mean
much to leadership, and they had time to prepare.
When Russia invaded Crimea in 2014, they had a series of sanctions imposed on them that
were really just heavily watered-down versions of what is being imposed on them today.
Since then they have made a visible effort to bulk up on foreign currency reserves, as
well as hard assets like gold.
Now, being isolated from the global banking system has meant that a lot of those foreign
assets are now more or less useless as they are frozen in banks that can’t interact
with the global economy, but even still the dream of bankrupting Russia into submission
is probably nothing more than wishful thinking.
History has shown that sanctions are better used as a threat than as a weapon.
There are countries in the world today that have been sanctioned for years that still
possess a very threatening military, Iran and North Korea being the obvious examples.
If Russia continues down a path of hostility it’s going to prioritize military spending
over all other spending meaning its citizens will suffer and perversely this could make
it harder to back out of the conflict.
Iraq was one of the worst sanction failures of all time and the parallels between it and
Russia today are quite frightening.
In 1990, President Saddam Hussein’s invaded Kuwait and triggered the same kind of international
condemnation visible today over Putin’s invasion of Ukraine.
Of course, Iraq did turn into an active warzone, and Iraqi forces were forced out of Kuwait
by American troops, but Saddam Hussein refused to comply with the conditions of surrender
and so sanctions dragged on.
By the end of the decade, a third of Iraq’s children were malnourished, and poverty was
rife in what used to be one of the wealthiest most prosperous countries in the middle east.
Saddam's rule did eventually come to an end but it was a second war that did that, not
the sanctions.
Iraq demonstrated that if dictators are willing to isolate their countries and starve their
people sanctions can simply be ignored.
There is the very real possibility that the coming decades will see the eleventh largest
economy in the world, home to more than 140 million people, and the largest nuclear arsenal
in the world effectively cut off from the global economy.
Now while it’s hard I do want to end this video on a positive note, which is that the
world has seen firsthand how quickly blatant acts of aggression will be punished by the
global community.
Any country with aggressive ambitions will surely be watching this and thinking to itself
that maybe taking an otherwise worthless piece of land is not worth jeopardizing their entire
economy.
For everyone's sake, we can only hope that they make
the right choice.