Council on Foreign Relations Global Economics Monthly
Issue 11 | April 2014

Global Economics Monthly

The Sanctions Dilemma

Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics

Bottom Line: Sanctioning Russia requires a tougher response and a willingness from the West to accept pain, too.

The sanctions put in place on Russia to date have been limited and largely symbolic. Travel bans and asset freezes have been placed on a small number of businessmen and officials, as well as one Russian bank thought to be closely associated with the Kremlin. A decision has been made to suspend the Group of Eight (G8) process, and the Group of Seven (G7), which excludes Russia, will fill the gap. Trade and financial negotiations already underway with Russia have been suspended. Together, the economic effects of these measures appear minimal.

The muted response reflects caution, particularly in Europe, over the risks to regional and global growth from sanctions and the potential for retaliatory moves from Russia. There is fear of provoking what the sanctions are intended to deter—Russian movement into eastern Ukraine. It may also reflect the desire to have a tiered response, preserving "off ramps"—strategies that allow both the G7 and Russia to step back from confrontation—and holding tougher measures in reserve in case Russia takes further destabilizing actions. There is a reported consensus that, should Russia move into eastern Ukraine, the G7 would move to more far-reaching sanctions aimed at specific companies and industries.

I have argued elsewhere that markets may be underpricing the risk of an escalation of the crisis. Nonetheless, Russia has already paid a price measured in a 9 percent decline in its stock market, a roughly 10 percent decline in the ruble (despite a sharp rise in interest rates by the central bank to defend the currency), and estimates of $60 billion to $70 billion in capital flight in the first quarter of this year alone. There has been little if any effect on global markets more broadly, including German equities (an oft-cited proxy for concerns about retaliation given Germany's substantial exports to Russia). Still, Russia's low growth and oil dependence make it particularly vulnerable to serious sanctions.

Would a further ratcheting up of sanctions work? That depends a lot on what is meant by "work." Read more »

Looking Ahead: Kahn's take on the news on the horizon

Spring Meetings

The IMF–World Bank Spring Meetings will feature an upbeat global forecast, but the discussion will be on sanctions and recession risks. It is global growth and domestic policy imbalances, not the taper, that poses the primary threat to emerging markets.

The Role of Congress

Congress looks unlikely to approve a renewal of extended unemployment benefits. Meanwhile, important IMF legislation was put aside to get Ukraine aid approved, undermining the institutions long-run ability to encourage market-oriented reforms.

Opposition Rising

Look for more polls showing rising support for opposition parties ahead of European parliamentary elections.

From the Macro and Markets Blog

Ukraine and IMF: Step Forward Now

Robert Kahn

Given the extraordinary political and economic uncertainty, the two-year IMF program with Ukraine is more of a wish than a forecast. Here are my comments on the program details. Read more »

Sanctions: What’s Next?

Robert Kahn

The stage is set for sanctions to intensify. Deep economic ties have the potential to make sanctions effective, but also raise risks. Read more »

IMF Reform and the Ukraine Package

Robert Kahn

The IMF reform is not only about expanding the lending. The legistlation includes significant governance changes that will ensure stronger support for the Fund. Read more »

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