The State of Trade: Sanctions & Supply Chains
The State of Trade_ Sanctions and Supply Chains _ Flexport Webinar
Chris Rogers: In today's webinar, The State of Trade, Sanctions and Supply chains. My name is Chris Rogers. I'm the Principal Supply Chain Economist here at Flexport, and I'll be hosting today in the absence of Phil Levy. He's having technical problems, but will try to join us a little bit later on. But before we begin, let's cover a few housekeeping items. On your screen, you'll see a sidebar to the right of the main stage. If at any time you need assistance during the live webinar, please message us in the help chat located on that sidebar.
You'll also be able to ask questions through the Q & A tab throughout the webinar. Your questions will only be visible to you and our Flexport team. And we will do our best to answer as many questions as time allows during our hour together today. You'll also be able to get a copy of the presentation slides, which will drop into the chat. And we'll also be publishing research based on this webinar in the next few days, and you'll be able to see that at flexport.com/research.
There will also be an on demand version of this webinar, which will be available shortly after it concludes. And you can access that through the same link that you were sent earlier on today.
We'd also like to invite you to register for our next webinar, Logistics Rewired, Driving Fashion Forward for good. Our.org team will discuss sustainable supply chain practices within the apparel industry, and there'll be a link in the chat for that as well. Okay, let's go to the next slide, please.
Before we go any further, let's just cover the main legal points that we need to make. Please keep in mind that all information provided in today's session is based on the situation at this current time, and it may not be customized to your specific business requirements. We always recommend reaching out to a Flexport expert to discuss your particular situation.
Now with all that said, let's do some introductions. We're very fortunate to have with us today, Professor Daniel Drezner, of Tufts Fletcher School of Law and Diplomacy. Dan is a Professor of International Politics and non-resident Senior Fellow at the Brookings Institution, a contributing Editor at the Washington Post.
Prior to joining the Fletcher School at Tufts, he taught at the University of Chicago and University of Colorado at Boulder. He's written five books, including All politics is Global, and theories of international politics and zombies, both of which are great reads and should take a look at them. He received his BA in Political Economy from Williams College, and an MA in Economics and a PhD in Political Science from Stanford, where he first met Phil.
His blog for Foreign Policy magazine was named by Time Magazine as one of the 25 best blogs of 2012. And he currently writes this spoiler alerts blog for The Washington Post. As I mentioned, Phil Levy, our Chief Economist, sends his apologies, and should be joining us a little bit later on subject to the technology allowing. So welcome aboard Daniel. Thanks for joining us.
Daniel Drezner: Thanks for having me.
Chris Rogers: So let's get started with today's agenda, it's not hard to see why we'd be talking about sanctions today. Sanctions are really popping up regularly in a number of different foreign policy spheres. And it's really been the principal Western response to the crisis in Ukraine. And even this week, as President Biden heads to Europe, we might see another round of sanctions on top of all of those that we've talked about so far. We're going to give you a bit of an overview of what sanctions are, in broad terms, we know a lot of you are generalists, and not as steeped in the topic as Dan is.
We'll then talk a little bit about how we judge sanctions effectiveness. And you know, whether they prove effective or not. We'll then dig a little bit more detail into the Ukraine conflict specifically, and some of the sanctions that are being used there. And then we'll leave some time at the end, hopefully, for Q & A.
Now, before we start, let's have a little poll. So bring the poll up please. So let's hear what you think about sanctions broadly. And do you firstly consider them to be an effective or important tool of foreign policy? Do you see them as being a tool that might work under the right conditions? Do you think they're ineffective, and they're adopted, really just to make the country imposing them feel better? Or you just don't know and that's why you're here. So please take a second to click on the polling, and we'll grab your answers as they come in.
So again, A- you think they're effective and important, B-tool that might work under the right conditions, C, the broadly ineffective or D- you just want to know some more. Okay, I think we've got some, we got plenty of results in there. So we'll take a look at those. So Dan, I think you can see the results. Well, what do you think? It looks like we've got 40% think they're difficult to use but effective, but less only around the fifth thing. They're effective. Do you agree with the majority there?
Daniel Drezner: I mean, part of the issue here and again, I apologize because it's the academic in me, but the answer about whether or not economic sanctions work, the answer is always it depends.
There are circumstances under which they can be a remarkably effective tool. And indeed, there is even the Biden administration has acknowledged, they're now a policy tool, first resort for the United States. But there are also lots of instances in which they're not terrifically effective, but they are used because they might be more effective than all of the other available alternatives. And so that's something else that you have to consider. Frankly, I'm just delighted that at least 22% of the respondents want to know more about this topic.
Chris Rogers: Absolutely plenty of candidates for your book and blog. So that's good to know. Right, let's go to the next slide, please.
So let's talk a little bit about what sanctions are. And you know a little bit about how they work. So we'll just go to the next slide, please.
Types of Sanctions
Now, we've gathered together these kind of four broad buckets of sanctions, kind of ranging from in many regards, some of them are, you know, comprehensive, they'll cover you know, as we're seeing in the Ukraine conflicts at the moment, a very broad range of trade topics. Sometimes they're just very targeted. We've used the word smart. I know some people would question whether they are smart or not, altogether. But you know, targeted on specific individuals. Financial sanctions, so things like access to payments, networks, banks, and so on. And then, of course, this broader section of secondary sanctions. So not necessarily directly sanctioning a given country or given person, but preventing others from working with them as well. And those are very broad buckets. I think, you know, if we missed anything, there Dan, are there particular areas you think get more use than others?
Daniel Drezner: I think there's two things that might be missed in this sort of element. The first is that, frankly, we're seeing a lot more sanctions now that don't look like comprehensive embargoes or trade embargoes, those are rarer now than they used to be for reasons that I think we'll probably get to, and I think the next slide.
The other thing is, there is a category of sanction that I think actually does apply to the Russian-Ukraine case that you often see, which is sort of not exactly smarter targeted, but it's also not exactly comprehensive. And here, we're talking about sectoral sanctions, where very often, sanctions will be imposed against what is seen as a vital export sector, usually, or a vital import sector for the targeted actor. And those are trade based and can have significant effects on an economy. But at the same time, they're not as comprehensive as let's say the Iraq embargo was during the 1990s.
The other thing I would add, excellent, sorry, one other thing I would add, which is, has been the evolution of secondary sanctions, which is that it used to be that, you know, particularly the United States would, in theory sanction third parties with the idea of enforcing even more sanctions against direct target. A suddenly trenchant example, this would be in the early 1980s, when the Reagan administration tried to sanction various Western European countries for agreeing to participate in the construction of a gas pipeline from the Soviet Union to Western Europe.
Those sanctions by and large failed. What is happened more recently, is that the United States has gotten much better at using secondary sanctions, because it doesn't use it through the trade channel. It uses it through the financial channel. And here the example would be in 2019, I'm sorry, 2018, when the Trump administration decided to reimpose sanctions against Iran and withdrawal from the JCPOA, among other things, it ordered that swift D list Iran Central Bank and others, banks in Iran to sort of reimpose those sanctions, European countries oppose this vociferously. And yet, in the end, it didn't matter. Swift complied with the United States, demonstrating that the secondary sanctions element has become more potent, I think over the last 30 or 40 years.
Chris Rogers: Sure, yeah. Thank you for that press just to address one of the basics for the people who are watching and maybe not as familiar with it. What is swift and what is its importance for these financial sanctions?
Daniel Drezner: Alright. Swift is and I apologize, like I'm gonna mangle the acronym so I'm not even going to try to say what it stands for. It is essentially an information exchange network. It is the means through which banks can exchange information about transfers and relationships between correspondent banking accounts.
So if let's say a bank based in Russia wanted to do business with a bank, based in Stuttgart, and the exchange was in dollars. Then among other things, they would have to contact, you know, to communicate with each other. They would also have to make sure their correspondent banking accounts in the United States had to communicate with each other, because if you're doing this through dollars, it then has to route through the US financial system.
So in theory, if a bank is delisted from Swift, it can still conduct financial transactions. But the problem is that it's thrown back into a situation much like the 1980s or actually pre 1980s, to be able to do this. I mean, you would actually have to contact the other bank through something like a fax or something in order to be able to make the transaction take place. So it's incredibly inconvenient, and incredibly costly, not to use Swift.
And Swift has become the dominant messaging system. There are a few others out there, China has tried to create one, the China international payment system, Russia has tried to create one as well, though it's only domestic. These other networks are a fraction of the size of Swift and do not matter all that much.
Chris Rogers: Okay, yeah. Thank you for that. Yeah, I think it's important to remember the, I guess, the devil is always in the details with sanctions. And, you know, that's something we'll touch on when we talk about effectiveness a little bit later on. Perhaps if we move on to the next slide.
Sanctions Through History
You know, sanctions aren't, I guess, a new thing. But they seem to be becoming increasingly popular, but they've kind of changed characteristics a little bit. We've kind of set out these three buckets of kind of, you know, what was going on between the First and Second World Wars? What happened during the Cold War? And what's happened since perhaps, Dan talks a little bit through kind of how sanctions have evolved and you know, why they, as you mentioned earlier, they become a primary foreign policy tool. How did we end up at this point?
Daniel Drezner: Sure, it's worth remembering that in some ways, sanctions the sort of modern history of sanctions begins with the First World War, when particularly Great Britain and France decided they wanted to impose comprehensive embargoes and blockades on Germany and the other central powers.
In the aftermath of World War One. In the Versailles peace conference, Woodrow Wilson, in particular, was a big fan of the idea of sanctions not as a compliment to war, but as a substitute for war. Very famously declared that sanctions were the peaceful, silent deadly remedy, which if you think about it as a bit of an oxymoron, but we'll put that to one side, that would take the place of the use of force as a way of deterring actors from engaging in militarized disputes.
And in point of fact, the League of Nations sanctions are actually somewhat effective at times in preventing some actors from acting in a bellicose manner. But the interwar period ended, with the League of Nations trying to impose sanctions on Italy after they invaded Ethiopia in 1935. And also outside of the League of Nations, the United Nations, or sorry, the United States, imposing an oil embargo on Japan in the summer of 1941. These sanctions failed, ironically, not because they were too weak, but because they were too strong.
The sanctions against Italy nearly brought Italy's economy to its knees and convinced the Axis powers that they would not be able to rely on trade as a means of importing vital raw materials and therefore decided that they needed to use force to do so.
Similarly, Japan, recognizing that they desperately needed US oil, decided to launch a surprise attack on Pearl Harbor, knowing that in all likelihood, they would lose the war, because they recognize that otherwise, the choice was death through economic strangulation.
When we transitioned to the Cold War, you saw the use of sanctions mostly in the form of strategic embargo. So the most important of which is something called Co-Com was the Coordinating Committee, involving mostly NATO countries, but also countries like Japan and Sweden, essentially create a detailed list of commodities and products that could not be exported to the Soviet Union or other Warsaw Pact countries, because those countries will use those goods for military purposes.
There had always been some inherent tension in the history of Co-Com, which will probably become newly relevant again, between the United States and European countries about what goods should be on the Co-Com list, with the United States being much more hawkish, and the Europeans being more opposed to various dual use technologies or dual use goods being put on the Co-Com list.
The postcode the other sort of prominent examples of Cold War sanctions, I would add, would be probably the best example of a sanction success would be when the United States used pressure on the pound to force Great Britain to withdraw during the Suez Crisis of 1956. Also the sanctions against the Apartheid regime in South Africa, which eventually does, you know, contribute to the fall of that regime in 1990.
With the end of the Cold War, and in particular Iraq's invasion of Kuwait, you saw a much more sort of enhanced use of sanctions, first through the United Nations Security Council, but also with the United States unilaterally and other great powers unilaterally.
And that said, one of the things that happened was that the sanctions against Iraq were, in some ways, the most devastating economic sanctions that were imposed. By some estimates, Iraq's GDP was cut in half, from the sanctions that were imposed in August 1990. And yet they failed to work, they failed to deter Saddam Hussein, or they failed to force Saddam Hussein from withdrawing from Kuwait. And then the sanctions that endured after the Gulf War, led to massive humanitarian suffering, and also the ability of Saddam Hussein's regime to shift the blame in terms of the humanitarian impact of those sanctions from his own government, to the United States, the United Kingdom and the United Nations.
And so that was when you saw the evolution of what you were talking about before in terms of the idea of smart sanctions or targeted sanctions. And the idea behind these sanctions is that rather than use a broad based comprehensive trade embargo, you would try to narrowly tailor the sanctions so that they would hurt target elites, rather than the broader population.
And so this came about through things like travel bans, or arms embargoes, or the bands of luxury goods, or what eventually was hit upon was the idea of financial sanctions. Because if you could target a country's financial sector, yes, you were hurting the target population, but the people you were really hurting, were the ones with bank accounts. And so if you could freeze the assets of those people who held, you know, bank accounts, potentially, in theory, those people would then pressure the target leadership to change their position.
And these sanctions became incredibly popular within the United States in particular, primarily because the United States being the epicenter of global capital markets was able to impose these sanctions at minimal cost to itself and also with the minimum need for multilateral cooperation.
The United States has imposed some of these financial sanctions with significant buy-in from whether it's either the European Union or Japan, or what have you think about the sanctions that led to the JCPOA Agreement in 2015. At the same time, as I said before, the reimposition of those sanctions in 2018, was wildly opposed by all the JCPOA signatories, and most other US allies, and yet the sanctions were put in place anyway.
And so the other thing to realize about financial sanctions and the attraction for them, in contrast to trade sanctions is that, to put it bluntly, when you impose a trade sanction, you are outlawing what would otherwise be ordinary market activity, which means you're incentivizing corruption, incentivizing black market activity, and over the long term, really increasing not just corruption within the targeted economy, but corruption within all the neighboring economies as well.
And so if you take a look at any sort of list of like the most corrupt countries on Earth, I guarantee you they've been sanctioned for significant periods of time during the post Cold War period.
On the other hand, if you impose financial sanctions, financial sanctions in the language of economic sanctions are a force multiplier, because while there might be some incentive for financial actors to get crosswise of the sanctions. The truth is, the United States has imposed significant enough fines on financial actors that have been caught evading sanctions, think fines upwards of billions or tens of billions of dollars for some banks like HSBC that have violated the sanctions.
Most financial actors will engage in de-risking, and therefore wind up actually imposing sanctions that are to some extent, larger than what the law would necessarily require. They want to stay very safely on the legal side of not violating the sanctions. And so as a result, the economic sanctions that we have now is almost like turning the amplifier up the you know, to quote, spinal tap, the amp now goes to 11 in a way that it did not during the sort of traditional manner trade sanctions, and I think that's definitely one source of popularity, at least on the US side.
The other element of this that explains US popularity, in particular, is just as sanctions have become more potent, both public and political support for policy alternatives have gone down.
So one of the reasons that you see sanctions often imposed is that invoke is that the US appetite for the use of military force after, you know, a decade of, 15 years of war in Iraq, and after 20 years of war in Afghanistan, have obviously gone down. And then the other alternative in terms of sort of a significant policy instrument is not to use the stick but to use the carrot. The idea is that, you know, potentially you can bring countries on board through trade agreements like the TransPacific Partnership or other similar bilateral free trade agreements.
Unfortunately, the political climate in the United States has also shifted dramatically against that kind of use of economic inducements. And there is very little support within the American political establishment for increasing things like foreign aid. So if you eliminate all other policy alternatives, this explains in part why sanctions have become the tool of first resort.
Chris Rogers: Cool, thank you. We apologize to anyone who's getting drop ins and outs from audio. Phil's not the only one who's having technology issues today. But yes, thank you for that Dan.
You mentioned kind of turning the sanctions volume up to 11. It feels like very much in, you know, during the Ukraine conflict, it's been turned up higher than the 11 and in fact, a whole bunch of new amplifiers have been bought, as well. I guess if we move on to the next slide,
One of the issues with the current round of sanctions that are going on, and we'll detail those in a minute is saying, right, a reaction with a bigger group of sanctions with more countries being involved should mean a, again, to use your phrase, a force multiplied effect.
But you know, we still need to judge whether the sanctions are effective, and for our customers who are trying to plan their supply chains, they maybe want to look at these and say, okay, are they going to work or not? What is working look like? And therefore, you know, how do I plan in the future? We'll talk about kind of future planning later on. But, you know, as we go to the next slide.
How to Judge The Efficacy of Sanctions
There are a lot of ways to judge whether sanctions are effective or not. A lot of the history has been of maybe more focused sanctions and we're seeing now. When we're thinking about kind of criteria for judging them, it's you mentioned some of these already, in terms of the human humanitarian impact, you know, whether they're going to act as a deterrent, whether they're going to change behavior or not, whether there's something that the, the applier or the sender of the sanctions actually wants to use. Do we have mechanisms by which we can actually grade sanctions? Is that something that exists in the economic literature? Is it very easy to say? Well, you know, these sanctions are meant to lead to a very specific behavior, but sometimes they're more nebulous than that.
Daniel Drezner: So I think there are a few things to think about this. The first is that sanctions sometimes serve multiple purposes, the traditional way, we often think about sanctions as well. Okay, we are sanctioning the target actor, and unless the target actor does something, you know, it's a quid pro quo, we will lift sanctions, if you know the target state, stop the war in Ukraine or withdraw from Crimea or improve your human rights or what have you. And that's sort of a compelling logic. That's one way in which sanctions can work.
But there are other ways in which sanctions can be designed to work. For example, in the case of Russia, for example, what I would say is that, in the imposition of sanctions, you might think, okay, we're dealing with Vladimir Putin, who's presumably a rational actor, even if he has different preferences from us. So if we increase the costs of what he is doing, will he recalculate and back down? That's one logic through which sanctions can work.
Another logic through which sanctions can work is the by imposing incredibly costly sanctions, the people around Putin feel severe economic pain. So they then go to Putin, and say, listen, you need to change your policies, because this is killing us, and we will drop our support for you otherwise, and that forces Putin to change his behavior.
An even more ambitious possible mechanism is that by imposing the sanctions that are costly, you wind up with some sort of coterie of Putin supporters deciding we've had enough of this, we are going to force you out and create a new leader, or install a new leader that will be more willing to negotiate. Or even further than that, you might be trying to foment a social revolution of some kind. We've already seen significant protests in a lot of Russian cities, and a lot of Russian jails filled with protesters, if this were to actually go on a mass level, because of the economic difficulties. Maybe you have a social revolution there, much like you had the Maidan revolution in 2014 in Ukraine.
These are different causal mechanisms, and to be blunt, very often the country imposing the sanctions is not entirely sure which mechanism they think is going to work. They hope that one of them does. But the other thing I would add is that there are other reasons why sanctions are imposed beyond just simple coercion and compellence.
Another reason which is very often underestimated is deterrence. Which is to say, you have to think about the US and NATO led sanctions against Russia, not just within the context of Russia, but also within the context of let's say other great powers China, considering whether or not they want to engage in irredentist territorial claims.
So one of the bigger effects of the sanctions on Russia right now is not just whether Russia decides to stop the war, or whether Russia backs down. It's also to what extent do other actors contemplating similar territorial land grabs, look at this and think, wow, the cost of this would be much higher than what I previously thought, which means the bar for this for action is going to be also that much higher.
And there is some limited evidence that in other instances in which economic sanctions have been imposed, whether we're looking at nuclear non proliferation, or human rights, the consistent application of sanctions by the United States has likely had a deterrence effect. Of course, this is also fantastically difficult to measure, because you're looking at counterfactuals, you have to demonstrate that an actor would have gone one way, but instead they go the other. So this is very hotly debated.
Within just the coercion examples, there are a couple of data sets out there in terms of sanctions that measure the effectiveness of it. The Peterson Institute for International Economics has collected one data set, there is another scholarly collective called the ties, which is the threatened imposition of economic sanctions. And depending upon the data set, you use. Sanctions are either thought to be basically about effective 1/3 of the time and producing concessions, or up to one, you know, one half.
The reason the ties dataset is a little more optimistic than the Peterson Institute dataset is that the Peterson Institute almost exclusively looks at cases where sanctions are actually imposed. And the truth is that sanctions are most likely to work to some extent at the threat stage. Because of the threat stage, particularly if that threat is communicated quietly, you can actually engage in the course of bargaining without anyone necessarily having to back down.
Once sanctions are actually imposed, you've automatically reduced the likelihood of them working, because suddenly everything is very public. Whereas the Ty's dataset includes examples of threats and so on. Surprisingly, it has a somewhat more promising track record in that respect.
The five percent I would add probably comes from one scholar Robert Pape, who claimed back in the late 90s, that they only work 5% of the time, I would vigorously dispute Bob's assessment of that, as someone who was his colleague for seven years. And he's a sanction skeptic, and there are reason that number is often trotted out to demonstrate that they never work. To get to that figure, Bob had to do some manipulation of the data that I would say, actually overlooks the number of times where they actually were effective.
Chris Rogers: Fair enough, we'll invite both of you along for a punch up at a later stage, where would your percentage be?
Daniel Drezner: My percentage would probably be close to 30, you know, basically I would be the Peterson Institute level, I think part of this also, in some ways, the way you have to think about sanctions, and I apologize for those people who aren't baseball fans, but it's almost like a sports analogy, which is, when the conditions are very ripe, you're putting someone like Mike Trout at bat, which means, he's much more likely to get a hit than a lot almost any other ballplayer, he's also more than half often going to get out. And so, even the best sort of circumstances are ones in which, you know, the success rate might be 50%. And then there are other instances in which, you know, it's like putting a pitcher up at bat, they are extremely unlikely to work. And we'll get to the sort of conditions that increase or decrease the likelihood of success.
I mean, I think the, I probably on the more optimistic side, but also, and we'll get to this, I think a little bit part of the issue is, is that as the United States has embraced financial sanctions, and as there's been this new appreciation for weaponized interdependence, what I would say is that, as governments have realized the potency of economic sanctions, they have also become more willing to use it indiscriminately, which means, that yes, the sanctions cause more economic pain, it also doesn't mean they're more likely to work, unfortunately, because they're being applied in a much wider variety of instances in which the odds of success are low. Economic sanctions against a great power trying to force that great power to relinquish territory, it is expended blood and treasure to secure is almost never going to work.
Chris Rogers: Well, you might have answered one of our later on questions right there. But let's dig into a bit more detail, specifically into the Ukraine conflict and the sanctions situation there. If we skip ahead a couple of slides and bring up the next poll, please. So let's ask the audience, with regards to the specific new financial and trade sanctions on Russia, which we'll go through some of the details in a minute. Do you think that they're the right response to the Ukraine conflict? And by that we mean the right economic response rather than the right moral response, where we're not trying to run down the moral maze here. B, do you think they're necessary, but not sufficient as a response to extract the right outcome. Are they a distraction from other policies that perhaps should be used, particularly other foreign policy actions, or do you think they're an unnecessary commercial burden that won't help much.
So we've got four answers there. While you're considering your answers, I'll also just remind you that we have the Q&A widget on your screen. If you want to ask any questions of myself or Dan before the end of the call, please register them there. Looks like we've got a pretty clear answer coming through there, with two thirds nearly of respondents saying they're necessary but not sufficient, we'll get to, I think we've got a sense of your views already Dan, but we'll get to that in more detail a little bit later on. Let's bring up the next slide and let's talk about kind of the history of the sanctions that we've had so far.
U.S. Sanctions in Place Before the Conflict
So, just a little bit of background specifically on US sanctions around Russia, and I'll probably mangle some of these. So Dan, please feel free to correct me as we go along. Between 2014 and the start of this year, it's worth bearing in mind that this isn't the first military action by Russia. In Ukraine, we had the annexation of Crimea, that led successive US governments to apply a wide range of these more targeted sanctions of over 700 entities, a ban on some operations in Crimea, restrictions on working with energy finance and defense companies, also to acts of Congress were passed, I will need to get into the details there. Now, it wasn't just sanctions in relation to Crimea of course, there's also been sanctions applied in relation to Russia's cyber activities, and allegations of influence in the most recent set of US elections.
And then of course, there's a wider range of sanctions have been used with relation to chemical weapons, human rights and energy exports. So, there's already a lot of sanctions on the books before the conflict even started. We then, you know, even before the conflict actually started on February 24, we had an executive order from the Biden administration covering trade with the Hanscom, Donetsk regions, the Treasury Department applied some sanctions on state owned banks. And we saw similar measures applied by the G7 allies, the United States as well. And we can talk a little bit in a minute about whether getting your allies involved helps or not, you'd hope it would help but question, is it transformative? I think there’s an important point to make though the chart on the right it shows movements in global commodity prices.
Now, as we've talked about in previous state of trade webinars, supply chains have been under duress because of accelerated consumer demand during the pandemic, demand for goods means demand for materials, demand for materials means demand for commodities. And so, some of these commodity prices were already moving up. The red line in the chart on the right though is natural gas prices. And those started accelerating significantly last autumn or last fall, I should say, for our US listeners. The elevation in those commodity prices perhaps, a sign that markets and supply chain planners were expecting significant sanctions to be put in place. Now, if we go to the next slide.
U.S. Sanctions Since the Start of the Conflict
The sanctions that have been put in place so far, we mentioned swift already, limitations on the operations of the financial sector. There's been a ban or pseudo ban on exports of technology products that's subject to licensing, access to air space over Russia, and also Russian retaliation with access to airspace else, ah excuse me, blocking of access of Russian airlines to international airspace, and Russia blocking access to airspace to international air companies. We've also had now limitations on energy imports, and also exports of energy equipment. The chart on the right provides a sense of US imports from Russia, the red bar is showing you the Russia share of US imports of a specific products around one-fifth of refined oil, around a third pig iron, just over a quarter of nickel. And then the green is the share of those products in US imports from Russia.
So effectively, one of the biggest import areas is refined oil. So effectively the share of Russia's sales to the US. We have of course also had additional sanctions applied on ruling individuals and most recently, the proposal that's in flight to apply or to remove I should say, withhold most favored nation status under WTO rules from Russia. Now, there's an awful lot there Dan, firstly, have I missed any second, are there any that stand out as being particularly kind of new or unusual or things that you might think could prove to be particularly effective?
Daniel Drezner: So I think a couple of other things I would add, the first is, and this is genuinely been unprecedented was the freezing of assets of the Russian Central Bank, particularly their foreign exchange reserves. And I think this was the thing that caught both the Russians, and frankly financial actors and everyone else by surprise. The belief prior to the invasion of Ukraine was that, well, you know, Putin has spent the last eight years amassing foreign exchange reserves to prevent a replay of what happened in 2014. So his foreign exchange reserves went from something like $200 billion to over $600 billion dollars, that would be how he could withstand the sanctions this time.
As it turned out, two thirds of those foreign exchange reserves by the Russian Central Bank were held overseas. And so now they can't get access to them. And that was a significant blow and that, I think, was one of the major causes for why you saw the ruble collapse in value, at least in the initial phase of the war. The other, two other things I would say that are, three other things I guess I would say that are worth noting. The first has been the unprecedented degree of multilateral cooperation, you know, when Switzerland and Monaco are sanctioning you, you've done wrong, is the way I would put it. These are not countries that are normally very eager to sanction, particularly actors that have significant amounts of liquid wealth to move. So the fact that you've seen those countries sanction is I think, also surprising to Russia and other actors.
The second thing is, pay very close attention if you're trying to game out what the future of sanctions look like, not just to the executive orders, but to what extent Congress and other legislatures pass things, because if something happens, the executive order it can also be reversed the executive order. Sanctions that wind up getting enacted by congress are notoriously difficult to reverse. So if in fact, there is a move to remove most favored nation status from Russia, that is unlikely to be reversed no matter how this war ends, it is worth remembering that the sanctions that were passed, the Jackson Vanik sanctions that were impassed on the Soviet Union, because of discrimination against Soviet Jewry, were not removed until close to 20 years after the Cold War ended. That is how long it sometimes takes to reverse sanctions passed by Congress. And so, that's why congressional action matters a great deal.
The last thing I would say, and I think this is important is, to realize that in some ways, the most important and most impactful sanctions on Russia at this point, are not those imposed by any government, but rather the actions taken by 400 different corporations to withdraw activity from Russia. So the fact that Boeing and Airbus have said, we are not going to be servicing Russian planes, the fact that Maersk and MSC and I think five of the six major commercial shipping lines have said, we are not going to dock at Russian ports, also imposes a stranglehold on Russia's ability to trade and exchange. The really interesting question is, this has all happened I think, in some ways in a more, sort of social contagion a way than anyone would have expected. The question is, will it sustain or will you then see a reverse? Or will you see the United States and other official actors try to coordinate with the private sector to either sustain or sort of modulate the degree of sanctions?
Chris Rogers: Yeah, I think that's an interesting point. If we go to the next slide.
Today’s Sanctions vs. Past Experience
We did, one of the questions that came in is, okay, you know, what are some of the commercial impacts, particularly for the logistics industry? We've published about this repeatedly, and you can see that all at flexport.com/research. And there's been kind of, you've mentioned the shipping lines already, some of the express package companies have stopped operations in Russia as well. What we've been seeing in terms of air freight, you know, I mentioned in a somewhat ham-fisted way, a few minutes ago the closure of airspace, so closure of Russian airspace to international airlines, or not all international airlines excluding some notable exceptions, like China for example. And the closure of international airspace by a lot of countries to Russia, that led, I think initially to some re routings having to be done. So effectively, flights coming into Europe and also some flights into the Eastern US that went over Russian airspace have had to be rerouted. We ran some numbers on that, and it adds around five to 10% to flight times more at the lower end of that range, typically around 6%.
But again, you're talking about half an hour or so on a flight, what we haven't seen yet is kind of a knock on effect to air freight networks, more broadly, our air timeliness indicator, if anything has actually been coming down. So effectively, transit times from when cargo is picked up to when it's been delivered on Asia, Europe like is actually, if anything improved over the past few weeks, rather than worsened.
The impact from the shipping industry clearly, again, as you mentioned Dan, the some of the big shipping companies aren't going into Russia, they're talking about selling assets that they do have there. But from a global perspective, the impact on the shipping industry, or certainly the container shipping industry has been more moderate. And in fact, it's been issues like COVID related closures of factories and so on, in Shenzhen that are proven to have a somewhat more significant impact on where freight rates are going. Where we are seeing a significant impact though, is on fuel prices. And the chart on the right here, the white line is crude oil, the dotted line is ULS diesel that's used by trucks, the red line is jet kerosene used by planes, and the green line is the fuel oil that's used by ships.
Those have all gone up, they've clearly been trending up over time anyway, but this is kind of supercharged the process and you know, unfortunately logistics cost more money already, and that's an unfortunate side effect is, that those premiums are going to have to be included as well. I guess Dan, the question of, if you like economic blowback, do you think that's something that's generally properly considered when sanctions are set, particularly ones that are as broad as those being put in place for the Ukraine conflict?
Daniel Drezner: I think that's where these sanctions are legitimately an outlier compared to past experience. Most US led sanctions, even during the post Cold War period have not frankly had systemic effects on the global economy. These will, you know, we're already seeing in the form of rising energy prices, I would actually say the more disconcerting and probably more immediate effect is not just going to be on rising energy prices, but on rising food prices. This isn't just due to the sanctions, but it's also due to the fact that Russia's invasion of Ukraine, essentially eliminate Ukraine as a provider of wheat and other vital commodities to a variety of importers that rely on that. And it is worth remembering that one of the triggers behind the Arab Spring, in 2011, was the skyrocketing increase in bread prices in places like Egypt and elsewhere. So the possibility that food prices start to go up, and they were already on the rise, because as you mentioned that global supply chain issues, a further spike in, you know, food prices has the potential to increase domestic instability across the board. And you've already seen sort of hostility in the United States to rising levels of inflation as well.
So this is, you know, a lot of times people like to talk about how Russia isn't that big of an economy, it's smaller than Spain, it's smaller than Middle East, it's only the 11th largest economy. That's still a pretty big friggin economy, and it also is one that is more tied into the global economy than I think Americans appreciate, while US-Russian trade is not all that great. European-Russian trade is more significant. And, you know, Russia does, and Ukraine has, you know, have important export markets. I think that the big question to ask is the degree to which the sanctions redirect trade rather than generate deadweight loss. In other words, to what extent is Russia just decide, where to what extent is Russia able to simply redirect their exports from Europe to China, and to countries and India, the other countries willing to do business with them, which then frees up other sources for Europe and elsewhere. My hunch is that it's going to be a much bigger imposition than I think people realize, however the current moment.
Chris Rogers: Yeah, and I guess that will affect the popularity of sanctions and the kind of political sustainability of them. Let's, before we take a look ahead to the future, let's run off the poll, please. So looking ahead, and you know, audience, please dive in here. Looking ahead, do you expect that the financial and trade sanctions on Russia that have been applied are gonna, A, achieve their goal, so that they can be successful and be removed fairly swiftly. B, they'll achieve their goal, but only after a prolonged period of time. C, are they largely going to fail to achieve their goal and perhaps have to remain in time, remain in place for quite a long time. D, are they gonna fail to achieve their goal and be removed fairly quickly. And E, are they just going to be counterproductive, for example, you might diminish the role of the dollar, might draw other countries closer to Russia, and so on.
We've only given you one option here. I know, some people may want to check more than one box. So you know, are they gonna achieve their goal? Are they going to fail? Are they going to move quickly, or not? Those are your options. So just give you another second or two to vote. Okay, so it looks down like we've got a bit of a balance. Clearly, you know, a long period, we're here for a while, this isn't something it's gonna disappear before the end of the webinar, or sadly even before the end of this week. Few people, a few more people expecting them to be successful or not. Where do you stand on this? Are they gonna, the sanctions gonna work? Or is it, or are we here for the long run?
Daniel Drezner: Because there's this other category of what I would describe as a yacht question, by which I mean, that if I actually knew the answer to it, I would not be speaking to you, I would be on my yacht somewhere, earning 6% interest. Honestly, I can sketch to you a scenario of all of these. I would say that in some ways, it is a function of how the war in Ukraine plays out, and the degree to which the war is sustainable. And I've seen arguments that suggests that either Ukraine, you know that once mount of Opal falls, for example, Russia will really be able to impose severe terms on Ukraine. I've also seen reporting suggesting that Russia has lost the ability to mount offensive operations, because their logistics train is so god awful. And then over time, as the sanctions continue to buy, they're literally going to be unable to, you know, make or manufacture defensive equipment to replace that.
If the sanction, you know, unfortunately, I suspect the most likely outcome is essentially a frozen conflict, that you're going to see Russian forces unable to take Kiev or Kharkiv, but maybe put more pressure on Mariupol, but at the same time, Putin will feel like he cannot back down and he can absorb massive losses while he's doing so. In which case the sanctions will likely be in place as long as the war continues. And over time, it's going to be tough, I think the really interesting question is going to be whether the Russian economy can adapt to sanctions on this scale. And I think, it is a legitimate question whether that is the case. But in some ways, what we are seeing is an almost scary reversal of what we saw between 1989 and the early 90s, which is, Russia is now going from being a somewhat open global economy to becoming much more like the Soviet Union where the only thing it exports is oil. And the problem is, is that Russia proper is much smaller than the Soviet Union was. And the other question becomes, to what extent is China willing to bypass or subvert the sanctions to assist its geopolitical friend. And here, while frankly, the Chinese government might be willing to do this. The truth is, Chinese banks have by and large complied with the sanctions, they really don't want to run crosswise the US Treasury Department. And that'll make it very complicated for China to actually assist Russia.
Chris Rogers: Yeah, that makes a lot of sense. I think we had a couple of questions on the, you mentioned yachts, so you raised the topics along with it. The pressure that's been put on oligarchs financially, including the various sanctions have been put in place in terms of their ability to move financial assets around. And we've all seen in the news, these huge great yachts that either can't fill up with fuel or have been formally impounded. Have you seen, I mean, we talked right back at the beginning about smart sanctions on individuals making a difference. Is your sense that in very gross terms, sanctioning the oligarchs, is that gonna change the power balance within Russia and therefore lead to change? Or is it the broader economic aspects that are going to be more effective, if at all?
Chris Rogers: Honestly, I'm skeptical that the sanctioning of the oligarchs, and some ways I think, even the use of the word oligarchs is something of a misnomer. And the reason I say that is that if this was 25 years ago, the term oligarchs would have been appropriate. And even in the early 2000s, I think they would have been, it would have been appropriate. But essentially, you know, beginning about the mid 2000s, Putin demonstrated a willingness to frankly arrest and or imprison the oligarchs who got in his way politically. So as a result, this isn't necessarily an independent power center within Russia, almost all of the remaining oligarchs need Putin in order to be able to continue doing what they're doing. So the relationship is not Putin needing them so much as vice versa. And this actually got accelerated after the 2014 annexation of the Crimea and the incursions into the Donbas, in which point Putin sort of told the oligarchs, told the plutocrats, you need to take your money and move it back from, you know, London and the United States and Monaco or Cyprus, and bring it back into Russia.
So, I don't think they're going to be, I mean, it's not like they're thrilled about the sanctions, but I also don't think they're necessarily going to be able to put independent political pressure on Putin to actually change anything. So, you know, it doesn't surprise me that in some ways the US sanctions are sort of putting bets on all of these different multiple channels through which in theory, Putin feels pressure, both the sort of rational cost benefit analysis, and pressuring you know, the Solovki, and then pressuring ordinary citizens in the hope that they will rise up, although there's no guarantee that that will be the case. Because unfortunately, one of the characteristics of target regimes that face severe economic pressures, they usually excel at shifting the blame onto the countries that are imposing the sanctions.
Chris Rogers: Yeah, it's interesting. Yeah, that, you know, clearly there's that kind of international interplay as well. Let's move on. We've got about five minutes to go. We'll move on to some Q&A. So, just move on to the next slide.
Ukraine Crisis: How You Can Help
Yeah, great. Thank you. So before we get to that, and just a reminder, there's a Q&A widget on the right where you can ask us your questions. We've been asked a few times, you know, what can be done from a practical perspective with regards to the crisis in Ukraine, our colleagues at flexport.org are organizing shipments of relief supplies to the refugee sites in Poland, Romania, Hungary, Slovakia and Moldova. Hopefully contributing aids to these shipments is the most direct way to help out. Flexport as a freight forwarder is helping move disaster relief with partnering with no profit, with agencies like UNICEF, Project HOPE and Airlink. If you'd like to help out, please consider heading over to flexport.org/donate and help us ship life saving aid to Ukrainian refugees and other people in need.
So let's move on to some Q&A. Question here saying, what a deal JCPOA, a new JCPOA deal with Iran changed the picture. I guess that's probably a reference to the availability of oil supplies. Do you think that there's, you know, we've heard discussions of potential discussions between the US and Venezuela as well. Do you think that's a red herring? Do you think there's any deals to be done that could alleviate the impact from an energy perspective? Is a deal with Iran even possible?
Daniel Drezner: In my understanding is that actually, I mean, it was interesting that when the war started, it seemed like Russia had suddenly thrown sand into the gears of the JCPOA, because up until then there had seemed like there had been some momentum towards both the United States and Iran rejoining the deal. My understanding actually is that Russia in the end wound up backing down from that, probably no small part because they annoyed the Iran, the Iranians in making this move. That said, I don't know how much, you know, it's always worth remembering that even after the original JCPOA was signed, around want up being disappointed by how much the benefit they got from the sanctions removal, that there wasn't necessarily all that much of an increase in terms of what they were able to do. So I'm not sure if their effect will be all that significant.
As for Venezuela, if that were to happen, in theory that would benefit the United States. But it's also worth remembering that Venezuelan oil is not the same as either Russian or Urainian, that Venezuelan oil requires a very different kind of refining. It's not, with one that is actually more energy intensive, so even though Venezuela has a lot of proven reserves, those reserves are not as good as let's say, the Saudis or the Russians. And by the way, that actually is the other interesting wildcard on this, I think something that might have surprised some people is the degree to which the Gulf states have been more Russia friendly perhaps, than many might have expected. You know, the Saudis not necessarily signing on to increasing oil outputs. And that's something else where even if Iran and Venezuela were to come back on the market, it's possible the Saudis decide to restrict their production further.
Chris Rogers: Interesting. Final question, and hopefully, actually I doubt there's a rapid answer, but we'll see what we can get. President Biden is due to make some announcements on more sanctions tomorrow. You're sat in the White House, well, you're sat on Air Force One with the President, what's your advice? What should you do next with sanctions?
Daniel Drezner: I would caution him against any actions that require an act of Congress, because again, for sanctions to work, you need to have two credible commitments. The first is that you will sanction, if the target crosses a red line. But the other thing you have to make it clear is that if the target changes its behavior, you will then lift the sanctions. The United States is really, really good at imposing sanctions, and we really, really bad at lifting them. And so the danger is, is that whatever measures you see announced now, wind up being a prominent part of the new normal, regardless of what Russia does in Ukraine.
Chris Rogers: Thank you. Succinct, and hopefully advice that may be heeded. We'll wrap it up there. Thank you, Professor Daniel Drezner, for sharing your insights with us today. For all of you, an on demand version of the webinar will be available shortly after, and can be accessed using the same link that we did sent to you. So thanks very much, Dan. And thank you all for listening, and please stay safe. Thanks very much and goodbye.
Daniel Drezner: Thanks.