Select economists on Ukraine crisis

Peterson Institute economists on the Ukraine crisis:

With the situation in Ukraine changing rapidly, we decided to ask PIIE senior fellows for their thoughts. Below are their responses, edited lightly for clarity.

What has surprised you most about the response to Russia’s invasion of Ukraine?

Martin Chorzempa: The US has struggled for years to get allies on board with controls on China, but there has been a surprising degree of consensus about cutting off Russia’s access to high technology products through export controls, not only from the US and EU, but countries like Japan and Korea. The coordination here has both made the controls much more likely to be effective than unilateral action and created a foundation for new export controls that will likely be aimed next at China.

Monica de Bolle: The rapid, concerted, and unprecedented measures taken against the Central Bank of Russia—freezing assets, liabilities, and all possible transactions. The action is draconian and prevents the central bank from intervening in currency markets to prop up the ruble or even in stemming bank runs if the population wishes to exchange their ruble deposits for hard currency. I was also surprised by the coordination aspect of this measure, with all major central banks participating. Such coordination and multilateral cooperation have not been seen for a long time, and that was probably one of the reasons the action may have caught Putin completely off guard.

Jason Furman: I learned that extremely competent macroeconomic management—which Russia has had for over two decades now—is no match for a powerful and well-coordinated effort on the part of much of the global economy to punish a country economically. When even Switzerland is joining in, a country must know it has done something epically bad and cannot do much to shield itself from the economic consequences.

Patrick Honohan: First, the sharp change in German military spending plans (though these will have no immediate impact on the ground). Second, strange sequencing of very leaky financial sanctions. (Why so slow with high profile cut off of SWIFT [the Society for Worldwide Interbank Financial Telecommunication, the global cooperative that facilitates international financial transactions]; why so many banks not yet excluded; why emphasize the central bank?) By the way, it occurs to me that the central bank may not be displeased with the sanctioning to the extent that it may help distance them from much that will happen in Russian government action over the next weeks: They can just say “we can’t because we are blocked.” If/when there is regime change, they may exit with cleaner hands than would otherwise be possible.

Gary Clyde Hufbauer: If President Biden and European leaders had declared, in advance, in public, and in detail, the harsh and pathbreaking sanctions now imposed on Russia, Putin might have reconsidered. But advanced threats were fuzzy and deterrence failed, possibly because Putin grossly underestimated the punishment his invasion would evoke.

Mary E. Lovely: We learned this week that an information bubble surrounds not only Vladimir Putin, but also Xi Jinping. Whether he knew that Russia would invade Ukraine or not, and despite US intelligence warnings, China seems to have been caught off guard by the timing of the military operation. Chinese diplomats repeated admonitions that an impending invasion was an American fantasy even as tanks rolled, while thousands of Chinese nationals were caught inside an emerging war zone. East-West communication has deteriorated in dangerous ways over the past five years.

Jacob Funk Kirkegaard: The strength and unity of the Western response has been a huge positive surprise. First, it has significantly and negatively affected the Russian economy already, despite the Russian government’s preparations since 2014. Second, the accelerated delivery of weapons into western Ukraine remains unopposed by a Russian military, showing that the Russians did not foresee this outcome either. And lastly, the firm political commitment to treat Russia as an aggressive expansionist empire will rapidly lead to rising defense budgets across Europe and the likely expansion of NATO with Finland and Sweden.

Jeffrey J. Schott: Most surprised and disappointed that US and EU officials didn’t “go big” before Russian troops crossed the Ukraine border on February 24. The Russian invasion should have been anticipated by a detailed preview of comprehensive financial sanctions, beyond threatening to remove access to SWIFT and adding inevitable sanctions against Russia’s central bank and top ten banks. Unfortunately, it took several days after the shock of military action to get Western political leaders to enact strong and clear signals that Russia would pay heavily for its aggression in Ukraine.

Nicolas Véron: The freezing of the Russian central bank’s international reserves by a broad group of countries, including those in the G7 and the EU. There have been similar actions in the past, e.g. against Iran or Venezuela, but never against a fully paid-up member of the inner circle of central banks that are, for example, members of the Bank for International Settlements and all the related key global committees. I suspect few if any people in Moscow saw it coming. I for one certainly did not.


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