Introduction:
In 1980, I had the privilege of asking Nobel Prize laureate Milton Friedman a question.
I asked why it was appropriate to prohibit virtually all trade with Communist countries while allowing substantial trade with non-communist authoritarian regimes.
His response — that political change was possible in some authoritarian countries but impossible in countries that controlled the means or production — must be reconsidered.
The Russian aggression in Ukraine teaches us that combatting communism is not the only reason for broad prohibitions against trade.
Sanctions targeted towards the Russian elite is a grossly insufficient response to the current aggression.
Money is fungible. All funds obtained by Russia from exports, foreign direct investment, and tourism fuel for this invasion.
Analysis:
The Russian economy despite the size of the country is relatively small
- GDP $1.48 trillion
- Exports around $332 billion, around 22 percent of GDP.
- Around $10.8 billion of these exports are purchased by the United States.
A decision by all countries sympathetic to Ukraine to put a 100 percent tariff on all exports from Russia would have a major impact on the Russian economy. The tariffs can be phased in by some countries that are dependent on Russian oil and gas but countries that are not dependent on Russia for energy can implement the tariffs immediately.
Russia entered the World Trade Organization on August of 2012 and was not expelled because of the 2014 invasion of Crimea.
Ironically, WTO advocates claim that the WTO helps promote peace. Seriously, this was listed as the number one benefit of the WTO. This time around Russia should be expelled from the WTO.
The Russian economy is still receiving positive net foreign direct investment from the rest of the world. Interestingly, the United States is tied with China as the third largest source of foreign direct investment into China.
Several restrictions on foreign direct investment could be implemented. President Biden can probably immediately prohibit all foreign direct investment to Russia from the United States without legislation from Congress. The President has broad authority with respect to foreign affairs and national security.
Sanctions could be imposed on countries that continue investing in Russia.
Around 24.6 million foreigners visited Russia in 2018. Foreign visitors contributed 3.8 percent to Russian Gross Value (GVA) added. The Trump Administration imposed several restrictions on travel to Cuba. The Biden Administration and America’s allies should now do the same for Russia.
Concluding Remarks: Putin has prepared for the case of targeted sanctions by building up international reserves. He has not prepared for large tariffs on all exports from Russia, the elimination of most foreign direct investment, the eviction of Russia from the WTO and the loss of funds from tourism.