The West and the rest
13.06.22, 22:47
22 May 2022
The West and the rest
!e world's economic inter-dependencies are manifold and
mutual. Sanctions have large network e"ects.
By Wolfgang Münchau
T
he pandemic and the war taught me something I sort of knew, but not
really. It is a one thing to say that the world is interconnected, as a cliché.
It is quite another to observe what actually happens on the ground when those
connections get torn apart.
!e western sanctions were based on a formally correct but misleading
premise, one that I believed myself at least up to a point: !at Russia is more
dependent on us than we are on Russia. Russia has more wheat than it can eat,
and more oil than it can burn. Russia is a provider of primary and secondary
commodities, on which the world has become dependent. Oil and gas are the
biggest sources of Russian export revenues. But our dependency is most acute
in other areas: food and also rare metals and rare earths. Russia is not a
https://www.eurointelligence.com/column/the-west-and-the-rest
Page 1 of 3
The West and the rest
13.06.22, 22:47
monopolist in any of the categories. But when the largest exporters of those
commodities disappears, the rest of the world experiences physical shortages
and rising prices.
Russia is the world largest exporter of gas, accounting for just under 20% of
global exports. Russia is the largest exporter of oil, after Saudi Arabia, and
accounts for 11% of world exports. It the largest exporter of fertilisers, and of
wheat. Russia and Ukraine together account for almost a third of global wheat
exports. Russia is the world’s largest exporter of palladium, a metal that is
critical in the production of catalytic converters and fuel cells. Russia is also the
largest world exporter of nickel, which is used in batteries, and in the
production for hybrid cars. German industry is warning that it is reliant not
only on Russian gas, but on other critical supplies from Russia.
Did we think this through? Did the foreign ministries that drew up the
sanctions discuss at any point what we would do if Russia were to blockade the
Black Sea and not allow Ukrainian wheat to leave the ports? Did we develop an
agreed-upon response to Russian food blackmail? Or did we think we can
adequately address a global starvation crisis by pointing the #nger at Putin?
!e lockdown taught us a lot about our vulnerability to supply chain shocks.
It has reminded Europeans that there have only two routes to ship goods en
masse to Asia and back: either by container, or by rail through Russia. We had
no plan for a pandemic, no plan for a war, and no plan for when both are
happening at the same time. !e containers are stuck in Shanghai. !e railways
closed because of the war.
Economics sanctions work when the target is small: South Africa in the
1980s, Iran, North Korea. Russia is much larger. !e relevant size indicator is
not GDP. In terms of GDP, Russia is the size of the Benelux countries, or
Spain. !e GDP metric ignores network e"ects.
!ose networks e"ects are su$ciently large to render the instrument of
economic sanctions unsustainable. Alternative sources exist for each and every
one of those Russian commodities, but if you cut world supply by a permanent
10, 20 or 40%, depending on the commodity, you cannot physically generate
the same output that we generate now at the same prices. !e economy reacts
through higher prices and falling demand and supply.
I have concluded that we are all too connected to be able to impose sanctions
on each other without incurring massive self-harm. You may argue that it is
worth it. If you do, you sound like the tenured economics professor who argues
that a rise in unemployment is a price worth paying.
Putin is dependent on western supplies too. !e rise in oil and gas prices, and
the fall in Russian imports from the rest of the world, has brought a windfall
dollar gain to his economy, but he cannot easily spend the money. !e Russian
economy will su"er a severe slump. !at is not in doubt. !e direct impact of
the sanctions on Russia will be bigger than on us. But that comparison, too, is a
false metric. What counts is the di"erence between the impact and our
respective pain thresholds. Putin’s is much higher.
I can only see a single scenario in which the imposition of economic
sanctions would work to our advantage: if we managed to get rid of Putin, and
he is replaced by a pro-western democratic leader. !at may well be the
https://www.eurointelligence.com/column/the-west-and-the-rest
Page 2 of 3
The West and the rest
13.06.22, 22:47
US administration's ultimate war aim, but it is a long shot. Even a military
defeat of Russia would not necessary trigger a new Russian revolution. !e
broken network problem would persist.
Unless we cut a deal with Putin, with the removal of sanctions as a
component, I see a danger of the world becoming subject to two trading
blocs: the west and the rest. Supply chains will be reorganised to stay within
them. Russia’s energy, wheat, metals, and rare earths will still be consumed, but
not here. We keep the Big Macs.
I am not sure the west is ready to confront the consequences of its actions:
persistent in%ation, reduced industrial output, lower growth, and higher
unemployment. To me, economic sanctions look like the last hurrah of
a dysfunctional concept known as the west. !e Ukraine war is a catalyst of
massive de-globalisation.
If you would like us to notify you when a new column appears, please #ll out
this form.
Firstname
Lastname
Email
https://www.eurointelligence.com/column/the-west-and-the-rest
Send
Page 3 of 3