Report on the March 2022 event When Trade is a Weapon of War?

On March 29, 2022, the Sciences Po American Foundation held the European Affairs Webinar: When Trade is a Weapon of War? Philippe Martin, dean of Sciences Po School of Public Affairs and Chairman of the French Council of Economic Analysis was joined by Jamieson Greer, partner in the International Trade team at King & Spalding, and Sonia Dridi, journalist and French Correspondent in the U.S., to discuss trade in the context of war.

On February 24, 2022, Russia invaded Ukraine. One of the immediate reactions of Western allies in support of Ukraine, including the United States and Europe, was to apply strong sanctions on the Russian Central Bank. Alongside this recent financial weaponization, the trade war has steeply escalated with China, begging once again the question, What is the role of trade in international conflict?

Dridi begins the conversation by asking how the Central Bank of Russia is handling these recent sanctions. Martin acknowledges that these sanctions are the “nuclear option of sanctions”, and an unprecedented and unexpected shock to the Russian economy. He clarifies that the core objective of such sanctions is to increase the economic cost of war and disincentivize Russia’s invasion. Leading up to the war, Russia has accumulated $600 billion of reserves, about half of which reside in the European Central Bank and the Federal Reserve. By freezing these reserves, the Western countries are quasi defaulting on a liability. On one hand, the sanctions present a challenge to the exchange rate of the ruble. Without a strong exchange rate Russia will experience inflation and a run on cash, leading to recession. On the other hand, the freeze is also a threat to the security of assets held in Europe and the United States. This threat has the potential to undermine the role of the dollar as the lapse in security represented by the freeze is felt by the international financial system. In the context of the trade war with China, this threat to the role of the dollar is a prominent challenge. Martin finishes his response to the question by remarking that while this freeze is in place, there is still money circulating to the Russian Central Bank as long as Europe continues to trade oil and gas.

Dridi shifts the conversation to Greer’s trade expert advice for American and European clients during these sanctions. Greer describes that for clients with monetary interests in Russia, these sanctions pose legal, business, and reputational risks. He highlights that there are no comprehensive sanctions on Russia at the moment, and it is important for clients to understand the nuances of the sanctions. While all companies comply with the sanctions, and some have left Russia entirely, not all have deserted the country. Concerns that arise for American and European companies in Russia are counter sanctions and nationalization of assets. “Western companies are trying to balance ‘I want to comply, I want to be on a good moral basis, but I also want to take care of my Russian employees who have been working for me for 25 years,” Greer says.

What is unique, however, is the unified approach Western countries have taken towards the financial punishment. “Democracies are weak against small shocks coming from dictatorships. But when democracy itself and freedom is at stake, we become much stronger than dictatorships expect,” says Martin.

Dridi asks whether China will potentially play a role in helping Russia evade the sanctions. “One of the conversations happening in the U.S. Congress right now with respect to Russia, which may have some application to China in the future, is this idea of removing permanent normal trade relations,” Greer says. He says that the unified action of the United States and Europe towards Russia gives hope that this avenue may be a future approach towards China if deemed necessary.

Dridi then brings up the risks of the sanctions on the European economy. The impact of the sanctions is much heavier in Europe than in the United States because of the trade of gas and oil. While there is a discussion around a potential embargo on oil, the economic shock of this embargo could mirror that of the COVID-19 pandemic. Because poor households spend more money on energy than richer households, this economic shock would also be felt unequally, necessitating large fiscal transfers. The concept of increasing energy prices as a challenge to Russia in a period when energy is at high costs poses a dilemma to political economy, especially in light of the upcoming French presidential election. “The paradox is that some countries, which economically would pay an enormous cost... are the ones that for obvious geopolitical reasons would support the embargo,” says Martin.

“At the end of the day, the Russian people are the ones who suffer from this. They’re the ones who are going to have less access to consumer goods,” says Greer. “They’re the ones who are going to lose their jobs. Unfortunately, because of Putin’s war of choice, you have the Russian people who are going to bear a lot of the grunt.”

Watch the webinar When Trade is a Weapon of War?