Sanctions and values-based globalization |

By David Skilling*

Horrific footage of war crimes committed this week in Ukraine by Russian forces has intensified calls for tougher economic sanctions, ranging from oil and gas bans to the complete withdrawal of Russian banks from SWIFT. Moral outrage intersects with economic decision-making.

Previous remarks argued that the Russian invasion and accompanying sanctions will accelerate global economic fragmentation. The behaviors of Western-aligned governments and corporations in recent weeks show that there is a strong political motivation for these dynamics, as ties with Russia are cut in response to violations of international law.

Sanctions as symbols

Compared to initial expectations, the economic sanctions imposed on Russia have been strong and wide-ranging – although oil and gas exports to Europe remain a significant hole.

There are a few motivations for imposing sanctions on Russia: bringing Mr. Putin to the negotiating table by imposing economic costs; impose sanctions and signal condemnation of Russian actions; and to credibly show future aggressors that economic sanctions will be imposed for violations of international law or other norms.

Economic sanctions are unlikely to significantly alter Mr. Putin’s decision-making (especially when they exclude oil and gas exports). Perhaps over the next few months sanctions will limit options and prevent the Russian war machine from working. But changing the short-term balance on the battlefield requires more military support than economic sanctions.

Indeed, economic sanctions have a very mixed history in terms of results (see this piece by Nicholas Mulderauthor of a very good recent book on economic sanctions).

Instead, the primary motivation for economic sanctions appears to be a combination of punishing Russia for its barbarism and violations of international law, as well as bolstering the credibility of threats to use economic sanctions in the future.

The message is that Russia’s flagrant violation of the rules-based system will result in its ejection from the global economic and financial system, even if it does not immediately shape Russia’s short-term behavior. Indeed, the conditions to be met for these sanctions to be lifted are not clear; sanctions are highly unlikely to be eased without a fundamental political change in Russia.

Thus, although they impose substantial economic costs on Russia, the sanctions are as much symbolic as instrumental in nature.

And of course, national interests still matter. Many European countries remain wary of rising energy costs that would result from new sanctions. But countries have been more willing to impose and absorb the economic costs than expected before the invasion.

From economic commitment to competition

The sanctions imposed by the West on Russia also reflect a reversal of the belief that economic engagement will lead to the convergence of political systems and behaviors. Germany has discovered the limits of the benefits of economic engagement with Russia (embodied by Nord Stream 2), as has the United States with regard to its China Engagement Policy over the past decades.

No engagement approach has led to meaningful rapprochement. Instead, there are now high levels of conflict and strategic rivalry. Indeed, some political voices argue that this engagement approach has strengthened strategic competitors. Germany has admitted its naivety, and the German president recently apologized for ignoring warnings from countries that criticized Germany’s Russian policies. In Washington, a hawkish economic stance on China is one of the few areas of bipartisan agreement.

There is a shift underway to a more stubborn approach. Whereas Western governments previously tried to use economic engagement to shape the political values ​​of their economic partners, differences in political values ​​now shape economic flows as Western countries increasingly engage with countries that comply with the rules-based system.

The experience of recent weeks suggests that minimal adherence to the rules-based system (including respect for territorial integrity) is now necessary to fully participate in the Western-led global economic and financial system.

This greater focus on rules and values ​​does not imply the universalism of Western values ​​where every trading partner must be a liberal democracy. Indeed, there are many imperfect democracies in the West; and the West doesn’t have clean hands after Iraq, Afghanistan and its lukewarm response to Russia’s 2014 invasion of Ukraine. But a brutal invasion by a UNSC/G20 member is dealt with like a red line.

In any case, Western opinions on human rights are far from being universally shared. Yesterday’s UNGA vote to withdraw Russia from the Human Rights Council passed, but with 24 votes against and 58 abstentions (including Singapore, which sanctioned Russia for violating international law).

Stakeholder pressure

The growing importance of values ​​is also reflected in corporate behavior. More than 600 largely Western multinationals have now pulled out of Russia. On the contrary, corporations have been more forceful than governments in imposing costs on Russia.

There are several reasons for leaving the Russian market: the impact of official sanctions; supply chain disruptions that have limited Russian operations; stakeholder pressure; and, for some, taking a position of principle.

For many companies, stakeholder pressure was the main contributor to the decision to pull out. The barbaric Russian invasion – bolstered by Ukraine’s success in information wars – created an environment in which companies came under enormous pressure from staff, customers and public opinion to leave Russia. Companies, like Nestlé, that tried to justify a continued presence were punished.

“We found ourselves immersed in global politics like no other time in recent history,” Mark Schneider, CEO of Nestlé

For many companies, leaving Russia was a painful but relatively simple choice to make – it represented only a small proportion of the profits. But as geopolitical relations deteriorate between China and the West and stakeholder concerns over issues such as human rights and Taiwan grow, pressure from stakeholders can make a presence in China more problematic for Western companies.

At the enterprise level, the extent of the decoupling with China is partly driven by economic logic – reducing geopolitical risk exposures and building supply chain resilience, offset by the large market and competitive advantages available in China. But values-based stakeholder pressure adds another dimension to this decision-making.

In effect, some companies are already struggling to satisfy stakeholders both in China and in their domestic market. These pressures are likely to intensify.

Looking forward

The experience of recent weeks shows that economic and trade relations are not a domain without values. Violations of international law have been met with aggressive responses from governments and corporations. These behaviors will shape the future of globalization.

Part of the ongoing economic decoupling is due to strategic competition between great powers as they vie for dominance in areas ranging from technology to finance. This will be reinforced by values-based behaviors on the part of governments and companies, as countries that break international law and standards are sanctioned. The blocs that form in the global economic system are likely to be organized around shared values ​​as well as common strategic interests.

There will be practical limits to this values-driven decoupling. It is much cheaper to aggressively sanction Russia than China, an important and central part of the global system. But expect differences in political values ​​to become an important driver of global flows, as governments and businesses respond to pressure from citizens and stakeholders.

*David Skilling (@dskilling) is director of economic consultancy Landfall Strategy Group. You can sign up to receive David Skilling’s notes by email here.

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