The United States and European Union have led the way in imposing economic sanctions on Russian businesses, government and citizens in response to the intensifying crisis in Ukraine.
This was necessary, but it comes at a time when economic growth in the U.S. and Europe remains sluggish and deflationary pressures threaten the European region with becoming the next Japan of the 1990s. Is the precarious position in which the western world faces itself grounds for a more circumspect and targeted approach to incentivizing Russian action?
Sanctions, emanating largely from the U.S. and the European Union began in March, targeting the restriction of international travel for select Russian officials and high-powered business leaders.
Further sanctions, seeking to limit Russia’s global economic reach, have expanded to include market transactions with Russian firms, international arms deals, energy policy and, most recently, partial bans on Russian-owned and operated bank activity.
EU officials have released statements declaring their sanctions as “non-punitive” aimed at “changing (Russian) policy,” referring, to the annexation of Crimea and further interventionist actions in the region by the Russian Federation.
Though a means to an end from the western perspective, the economic sanctions have repeatedly been viewed as innocuous by Russian president Vladimir Putin.
In turn, Russia has imposed reciprocal sanctions by banning food and agricultural imports from the U.S., EU and other nations such as Norway, Canada and Australia.
Retaliation from Russia, along with the threat of further action on energy policy, is likely to impact the U.S. and EU asymmetrically. The 28 countries in the EU rely more heavily on international trade and financial interdependence with Russian markets than the U.S. does.
For instance, the EU
imports roughly one third of its total crude oil from Russia, its largest trading partner in this respect, while 10 percent of all EU food exports are Russian bound. And six EU countries rely entirely on Russia for natural gas.
This should come with concern for EU economies as the region struggles to emerge from years of recession, failed austerity measures and threats of further downward pressure on wages and other prices. Inflation has dropped to just 0.4 percent.
That is not to say the Russian embargo on U.S. food exports will have no effect.
The U.S., to a lesser extent than the EU, grapples with jittery financial markets, hampered economic growth and glimpses of deflationary price pressures stemming from inadequate demand for goods and services.
Compounding matters, food and energy prices — the two areas whereby Russia may impart their greatest damage on the western world through constraining supply — are precisely the most volatile components of the overall price level.
Russian sanctions on U.S. food imports will impact the poultry, nut and fish industries the most. The United States exported roughly one billion dollars of food to Russia last year, with poultry, nuts and fish constituting the largest shares.
About seven percent of all poultry exports go to Russia, not an insignificant amount. Some nuts, such as pistachios, are on the banned food list, but peanuts are not. The ban implies that American producers will have to find alternative export markets or risk falling prices domestically, which cut into profit margins.
Western financial markets, too, are not impervious to sanctions imposed on Russian-owned banking enterprises. One need only think back to the Russian bond crisis of 1998 to see how a drop in appetite for emerging market sovereign debt can spread to other regions of the world — just ask Argentina.
With total trade of $16 billion with Russia in 2013, the U.S. ranks second only to Germany, placing it on a slippery economic slope. It is not clear how to incentivize Russian activity on the policy front in their relationship with Ukraine, a country itself appearing unsure of its territorial identity.
The western world may not be in a financially and economically stable enough position to curtail business with a leader convinced of his impenetrable economic armor.
Nicholas J. Mangee is an assistant professor of economics at Armstrong State University and can be reached at Nicholas.mangee@armstrong.edu.