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How Does US’s Economic Sanctions Against Russia Will Benefit them but Harm the EU – IMPRI Impact and Policy Research Institute

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How Does US’s Economic Sanctions Against Russia Will Benefit them but Harm the EU - IMPRI Impact and Policy Research Institute

Nilanjan Banik and Guido Cozzi

In-State of the Union address, President Joe Biden made it clear that the US is not planning to send troops to Ukraine. On earlier occasions, Bill Clinton sent troops to Yugoslavia; George W. Bush to Iraq and Afghanistan; and Barack Obama to Libya.

As history would have it, on all these occasions, the US gained little except for spending trillions of dollars. In Afghanistan, for instance, the US spent close to $2.2 trillion, only to see the country getting back to the Taliban.   

Rather than a direct war, the list of sanctions imposed on Russia is going to work in favor of the US. More than before, there will be an increasing urge on part of many other countries in Europe, namely, Ukraine, Finland, Sweden, Moldova, Kosovo, etc., all beelining to become members of NATO. Without a single shot being fired, the US action will ensure a geopolitical victory.

The present circumstance will lead the united EU to ramp up military spending, long-deferred until a month ago, despite repeated pressures by the US, especially by the former President Mr. Donald Trump. Like during the period of the cold war, a militarily weak and emotionally scarred Europe suddenly has become Washington’s most loyal ally on all emerging issues. The US seems to regain its lost sheen.

Additionally, there is a financial benefit too. The attack sent into a panic the global financial markets, with investors scouting for a safe place to invest. Despite the US incurring a deficit of $3.1 trillion in 2020, the largest in history, demand for the US treasury notes and bonds are on the rise.

Higher bond prices generate reduced interest rates, which was unexpected in the present inflationary and tapering climate. With the start of the war in Ukraine, the yield on 10- a year Treasury note and a 30-year Treasury bond fell by 11 and 7 basis points, respectively. 

The price of crude oil prices rose over $120 per barrel, and that is good news for the ‘high-cost’ US-based shale gas and oil businesses. Some of these companies incurred huge losses at the time of COVID-19 when crude oil prices tanked, and a defiant Russia continued supplying oil at a cheaper rate than what was suggested by OPEC.

Now with a sanction in place and Russian gas supply to Germany, France, and other parts of Europe getting affected, it means a ‘good time’ for the US oil business. Indirectly, it is also going to encourage energy diversification (green energy) and infrastructure investment innovation, which the Biden administration had previously strived to achieve against a reluctant Congress.

The greater demand for military hardware and modern warfare support is likely to propel the demand for the US military and technology firms. The US has already sent Patriot surface-to-air missile system to Poland.

Germany has ordered fighter jets from the US. According to a report titled, “The case for EU defense,” published by the Center for American Progress,

“Europe lacks the critical capabilities for modern warfare, including so-called enabling capabilities – such as air-refueling to support fighter jets, transport aircraft to move troops to the fight, and the high-end reconnaissance and surveillance drones essential for modern combat.”

 It is no surprise why NATO rejected Ukrainian calls for a no-fly zone. Ukraine is now asking for fighter jets and an air defense system. In a way, the US is poised for an economic boom, like what happened during the aftermath of World War II.

On the contrary, the Ukrainian refugee inflow (2 million and more), and higher military and energy costs, will significantly strain the public finances of the European countries. The European Central Bank (ECB) will have to halt any future interest rate hike program. This is at a time when inflationary pressure is high, and many economies in Europe are suffering from post-COVID 19 syndromes.

It may lead to stagflation (a combination of higher inflation and unemployment rates) in the EU like the world witnessed post-Yom Kippur war of 1973. In 1973, OPEC imposed an embargo against the US and Europe, as these economies were supporting Israel in the war against Egypt. This embargo caused the price of crude oil to jump from $ 3 per barrel in 1973 to $ 12 by 1974.

A sanction on Russia, in particular, access to SWIFT payments system and suspending VISA and Mastercard operation, may backfire. Russia is also a large economy, with real GDP similar to that of Germany. However, Russia has a much larger population (145 million) with a lower median age (38 years) in comparison to the EU (44 years).

The young demography will continue to aid Russia complementing its working and military population. On the contrary, Europe’s aging population is likely to increase further in the future. To maintain a stable population, 2.1 children should be born to each woman in an economy, assuming an average death rate applicable to the world’s population. In contrast, the figures for some Euro-Zone economies are much lower: 1.38 for Greece, 1.39 for Spain, 1.41 for Italy, and 1.94 for the UK.

For Spain and Greece, the over-65-year population will increase from around 17 percent now to 25 percent by 2030. The bottom line: Europe has fewer younger people to work, to pay for the expensive welfare program, and manage a rising budgetary deficit. A flexible labor immigration clause is expected to resolve issues related to the dearth of a young skilled labor force in the EU. But that is not the case. The brain drain from developing countries such as India and China has helped fuel economic growth in the US, but not in Europe. Sanctions affecting Russia may punish their EU counterparts too.

This article was first published in the Times of India as Why America gains from sanctions, not intervention: How West’s economic warfare against Russia will help the US but not the EU on 14th March 2022

About the Author

Prof Nilanjan Banik, Professor, and Program Director (BA, Economics and Finance), School of Management, Mahindra University, Hyderabad

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Guido Cozzi is a Professor at the University of St. Gallen, Switzerland

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