Kokomo Tribune; Kokomo, Indiana

March 16, 2014

MICHAEL HICKS: Russia sanctions are risky

Armed conflict could fan ethnic tension.


Kokomo Tribune

---- — The Soviet, er ... I mean Russian, invasion of Ukraine offers a nice reminder of JFK’s old dictum that domestic policy can defeat us, but foreign policy can get us killed. As we pay higher gasoline prices this weekend we ought to think about the world as it is and our options.

The 70 years of Soviet control saw the sprinkling of ethnic Russians throughout the empire, including Ukraine, as a method of homogenizing the socialist republic, which is why many Ukrainian citizens are sympathetic to Russia. This is a poisonous admixture that should remind us of the Balkans. Adding armed conflict to a place with even a tiny whiff of ethnic tension rarely turns out well.

We should prepare ourselves for low-level violence in a formerly peaceful part of Europe. Even if Russia backs down, it should be made to pay for this risk to peace and a still-fragile world economy. But how can it be made to pay?

The Russian military is weak. Its official 2013 budget is less than the GDP of Muncie, though that is an official lie. While the military spends about one hundred times that on armaments, it is smaller and less well-trained than the Iraqi Army of 1991. With a little preparation, it could be humiliated in a two-month air campaign and a few days of sharp fighting. The prospect of this is enough to lure me enthusiastically out of military retirement, but the Russians have nuclear weapons and are a long, long way away. So, any intervention will be economic, not military.

The Russian economy is only modestly susceptible to economic sanctions. All sanctions rely on interrupting trade. Russia’s chief export is oil, and that is devilishly hard to control through economic means alone. Because oil is a commodity and universally in demand, preventing its sale is almost impossible. Moreover, doing so would drive up prices everywhere, so is not for the politically faint of heart. Even if we could stop Russia’s oil exports, it adds more risk and uncertainty to a weak world economy.

We could perhaps impose some sort of information blockade of telecommunications content or services, but that seems counterproductive. Moreover, Russia is fighting a war against terrorists in lots of places, and we wish them well in this work.

In the end our most potent weapon against Russia is our banking system. A systematic denial of foreign exchange by the Federal Reserve, followed by deposit controls by large banks should be sufficient to seriously damage the Russian economy. If the Bank of England and European Central Bank go along, Russia will face a deep crisis.

We cannot know how bad the situation will become, or how much damage to the world’s economy the threat of another European war will do. However, the sharp rise in oil futures two weeks ago bodes ill. At least we can credit midterm elections for focusing the American response, for there’s nothing like the prospect of $5 gas in the weeks before an election to spur action.

Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and a professor of economics at Ball State University. Contact him at mhicks@bsu.edu.