President Joe Biden signed the Suspending Normal Trade Relations with Russia and Belarus Act and the Ending Importation of Russian Oil Act into law on April 8, 2022. These laws strip Russia of its preferential trade status — allowing the United States to impose higher tariffs on Russian goods — and ban the importation of Russian energy into the United States.
Both bills previously passed in Congress on April 7, 2022 with overwhelming bipartisan support, according to The New York Times. The United States and several European nations have previously banned the export of military goods, flights and luxury goods to Russia, according to an article from the BBC. Certain Russian government officials and their family members have also been sanctioned.
The Herald spoke with several University faculty members at the Watson Institute for International and Public Affairs and the economics department about how these laws — and the broader Russia-Ukraine conflict — will affect the American economy and economic trends across the globe.
With preferential trade relations, “you typically apply the lowest schedule of tariffs towards the imports of that country,” said Mark Blyth, director of the William R. Rhodes Center for International Economics and Finance. Russia lost this preferential status after these new acts were signed earlier in the month.
The United States and its “European allies … (are) embargoing imports and exports of various goods” from Russia, said David Weil ’82, professor of economics. “They’re saying to their firms, ‘it is illegal for you to send a boatload of machine tools to Russia, or it’s illegal for you to import various things from Russia.’”
Weil believes that economic consequences are inevitable for both the United States and Russia, as “trade is, in general, mutually beneficial.” But the “suffering” in American households will be incomparable to that faced by Ukrainians who are directly impacted by the war, he added.
Because Russia is a major energy exporter, “even partially taking Russia out of the world market is going to drive up the price of the oil,” Weil said. “That’s going to help feed inflation at a very unfortunate time when we (are) already having problems with rising inflation.”
“Most of Russia’s oil and gas (goes) to the European Union,” said Heidi Peltier, senior research associate in international and public affairs. “But of course whenever there’s an oil or gas shortage anywhere in the world, prices go up everywhere in the world. We’re seeing that at the (gas) pump in the U.S.”
Weil also noted that, as is the case with most embargos, various firms that export goods to Russian markets will inevitably lay off some workers.
Both Russia and Ukraine are also major grain exporters. Together, the two countries make up more than a quarter of the world’s wheat export, according to a report by The New York Times, and are “also key suppliers of barley, sunflower seed oil and corn, among other products.”
While food prices around the world are expected to rise, the United States will not feel the worst of these effects because it is similarly a major exporter for food, “and therefore they’re competing rather than complementary” with Russian goods, Blyth said.
While locally produced and consumed products will remain largely unaffected by the rising food prices, Peltier noted that all products requiring extensive transportation — whether food or other merchandise — will be affected by the aforementioned rise in gas prices.
But Peltier remains cognizant that Americans will be affected differently based on their income bracket. “Upper-income people can more easily withstand some increases in prices” for these products, she said. It’s the people living in poverty and lower-income brackets who “are hit (the most) because more of their household budget goes to buying energy and food.”
Because of the limited relationship between the United States and Russia in terms of hydrocarbon and food exports, Russia’s economy will not be crippled solely by the United States’ withdrawal from the oil and grain trade, according to Blyth.
“What the United States is really doing in terms of sanctions is work on the financial channel,” Blyth added. The United States is “essentially freezing the central bank reserves and knocking certain Russian banks and individuals out of” the Society for Worldwide International Financial Telecommunications, a popular financial system used by banks to securely exchange financial messages.
Trade embargoes have existed for hundreds of years, according to Weil, but the ability to cut off Russian financial firms’ access to such intricate world finance systems is a more recent “special superpower” of the United States.
Because of the “Correspondent Bank Problem,” however, these banking sanctions are still flawed, according to Blyth. Hypothetically, a sanctioned Russian individual can open an account with a Russian bank and transfer their assets to an unsanctioned Belarusian bank, which can then transfer the money to a Chinese bank, which can then invest this money in U.S. equities, Blyth explained.
“When you’re not sanctioning the entire network of banks, there’s going to be ways around” restrictions, he added. “There’s a lot of holes in these sanctions, some of them by design and some of them because it’s very difficult in a modern, integrated, global economy to sanction everything effectively.”
China’s continued political alignment with Russia also lessens the effect of sanctions, according to Peltier. “As long as they continue to trade with Russia, … that makes anything the West does watered down,” she said.
While Weil would not describe the current economic situation in Russia as a “recession,” he expects there will be an “extremely sharp contraction in income, both because they’re not managing to export as much energy as they used to and less money is coming in.”
Other than its advanced military and energy prowess, the Russian economy is not very good at producing goods and services, according to Weil. “If you take away all the energy exports and important goods, that’s going to mean a decrease in the standard of living, particularly for middle-class households,” he said. “They’re not going to freeze and they’re not going to starve, but it would certainly be a big step backward.”
“Sanctions are more likely to hurt the Russian people than the Putin administration or the oligarchs in charge of the Russian economy,” Peltier said. Most of the politicians in power “don’t care about the Russian people, and so sanctions … won’t lead to any kind of change unless there’s a massive uprising against Putin.”
Instead of eliciting political reform, sanctions have had a “secondary effect” of Russian “voluntary disengagement (from) lots and lots of Western American corporations,” Blyth said. “For example, all of the McDonald’s have now become Uncle Vanya's, … and that’s very much an isolationist strategy in Russia, using this as a way to isolate the domestic economy and (say) ‘Who needs a McDonald’s? We have Uncle Vanya.’”
J. Nicholas Ziegler, professor of international and public affairs, believes these sanctions will have a more long-term effect on the Russian economy rather than effectively stopping the current military conflict.
For Weil, sanctions are a way to dissuade other global players from going against the United States’ wishes. “We said before the invasion that if you’re going to do this thing, we’re going to inflict this pain on you,” he said. If the United States did not follow through, this “would not be an effective threat. … You’re investing in your credibility.”
While the United States and Russia may withstand the economic consequences of the conflict, smaller, highly-industrialized countries that are not directly involved in the conflict may face worse effects, according to Ziegler.
“The decline in food trade may be the most serious consequence of the war for those countries that are not directly affected,” Ziegler said. Ukraine’s disengagement from the agricultural economy will have “severe consequences in major parts of the Middle East and Africa.”
The conflict has also created an unprecedented refugee crisis in which more than five million Ukrainians have fled the country since Russia’s invasion. Poland has felt the brunt of the effects of this crisis, currently housing more than 2.8 million Ukrainian refugees.
Ukraine’s economy was not prosperous before the invasion, according to Weil. “Its trajectory was below that of practically everybody in Europe. Endemic corruption was absolutely correct, they had terrible land reform policies, … they’re not in good shape,” he said. “Given the collapse of the economy, you’re gonna see many more Ukrainians in European countries. … It’s not clear how that’s going to work out.”
The refugee crisis is both an asset and a burden for the receiving countries, Peltier said. “If it’s a more long-term situation where (Ukrainians) end up relocating and working, it can actually be beneficial to the host country,” she said. “In the short term, it can put a strain on resources.”
While more European countries are stepping up to accept refugees, they are unwilling to more actively sanction Russia’s oil exports, according to Peltier. This is because European nations are much more dependent on Russia for their energy supplies than the United States.
As a result of the conflict, western European nations have become more conscious of the threat that comes with relying so heavily on Russian exports, Weil said. There have been active European efforts to diversify their energy mix, particularly their sources of natural gas, “which may greatly diminish” Russia’s energy resources economy over time, he added.
“On the eve of the invasion, the world economy was globalized in ways that it had never been globalized before. … We had reached a point of highly articulate, cross-border connections,” Ziegler said. “That degree of interconnectedness is being decisively changed as different countries pull back and realize that there are certain products and processes that they can’t allow to only exist in certain countries.”