Putin’s war of choice has forced the West to confront questions that it has long avoided about its economic relationship with Russia. Decisions that would have been unthinkable before February the 24th have been made at a dizzying speed and scale. The Western sanctions that have been imposed are the harshest ever imposed against a state of Russia’s size and power.

In my interview with Nicholas Mulder, assistant professor in the history department of Cornell University in New York and author of the superb recent book “The Economic Weapon: The Rise of Sanctions as a Tool of Modern War”, we explored the use of economic sanctions as a form of war and their unintended consequences.

Here are the key insights from our conversation:

Historically, sanctions were the essence of war

Today, economic sanctions are regarded as an alternative to war. However, as Mulder shows in ‘The Economic Weapon’, for politicians in the interwar period, “the economic weapon was the very essence of total war.” U.S. President Woodrow Wilson said that if “thoughtful men have . . . thought, and thought truly, that war is barbarous, . . . the boycott is an infinitely more terrible instrument of war.” By deliberately spelling out the horror of enforced deprivation, he hoped to dissuade the losers of the first world war from even thinking about challenging the Versailles settlement. Fear of being blockaded would keep the peace. As Mulder demonstrates, sanctions were a form of deterrence, prefiguring nuclear strategy during the Cold War.

A “geoeconomic turning point”.

The scale and size of the sanctions the West has imposed on Russia have not been previously applied to an economy of this size and importance. It is not just the depth and breadth of the measures, but the size of the coalition imposing them. Countries that were not previously keen to get involved in economic sanctions like Switzerland and Japan have come on board with remarkable speed and decisiveness.

What does the West want from economic war?

There has been much discussion about Russia’s shifting war aims as the conflict plays out. However, we have heard little about the aims of the West’s economic war. The debate about what outcome we are seeking in Ukraine and what economic measures would be best suited to achieving that has not taken place. As Mulder argues, within the Western coalition, there is a wide spectrum of opinions from those seeking to destroy Russia’s economy to more pragmatic voices. As the war plays out, those voices seeking intensification of the economic war should also be expected to outline the ultimate objective of any new sanctions.

Sanctions relief and peace

The West cannot wage economic war on Russia forever – no more than Russia can maintain indefinite hostilities against Ukraine. Keeping the current sanctions regime in place after the war has ended may sow the seeds of the next conflict. Mulder references the maintenance of the economic blockade against Germany long after formal hostilities ended in the first world war as a lesson from history that we should pay heed to. Ending sanctions may prove to be more challenging than imposing them in the first place.

Un-hedgeable confiscation risks

The most remarkable aspect of the sanctions regime has been the freezing by the West of nearly half of Russia’s foreign exchange reserves. Zoltan Pozsar of Credit Suisse argues that this will lead to “Un-Hedgeable confiscation risks” for sovereign states. Mulder believes that we may end up in a world of regional currency blocs for trade, with the dollar as “first among equals.” The more significant change may be that countries move away from having large foreign reserves, which has the potential to cause a major disruption akin to 2008 in the global treasury and repo markets.

No law of economic war

China has taken a strong stance against the Western sanctions, claiming that they have no basis in international law and that the abuse of sanctions will bring catastrophic consequences for the entire world. Unlike other global questions, there is no governing framework or law on the use of sanctions as a weapon of war. In the aftermath of Ukraine, Mulder believes we will need an instrument stronger than diplomacy to govern the use of sanctions. A Geneva Convention for economic war would give greater legitimacy to the use of sanctions and also address vital questions like the limits of their use for humanitarian reasons.

The privatisation of sanctions

A remarkable feature of the current sanctions regime has been the extent to which companies have pulled out of Russia even though they are not obliged to. Mulder argues that this risk of over-compliance by the private sector will endure even after the war, with companies reluctant to invest in Russia even if sanctions are lifted. This has troubling implications for Russia’s future economic and political stability.

It seems inevitable that companies will also be looking more broadly at their dependencies on other nations. However, a full decoupling of the US and China would lead to a global recession. The risk is not deglobalisation, but the formation of separate economic blocs. The countries that will be under the greatest pressure will be those like the UK and Japan which are highly globalised but do not fall into any existing blocs.

Compensatory policies

The impact of the sanctions on people’s livelihoods in western countries is starting to bite. We only have to look at the centrality of the cost of living to the political debate here. Mulder argues that unless the material well-being of households is protected through compensatory policies, political support for sanctions will crumble. However, there is real doubt about the ability of individual governments to respond at the necessary scale. In Europe to date, there has been a marked reluctance by northern countries in particular to discuss the kind of solidarity policies that would be necessary to mitigate the impact of sanctions.

For a long war, Europe needs fiscal union

Mulder referred to a private analysis carried out for European Commission President Von der Leyen on the impact on the European economy of a full trade boycott of Russia. The economic shock was so great that the Commission decided not to publish its estimates. The problem of managing the fallout of the economic war is particularly acute in Europe because the export-focused economic model most of its states follow is ill-suited to the prolonged imposition of trade-reducing sanctions. From Mulder’s perspective, there is no sustainable way for the EU to maintain a long-term sanctions regime without a fiscal union that would counteract the economic shock. However, the current politics of the EU seem decidedly ill-suited to grapple with what this implies.

The politics of sacrifice

As the war persists, sanctions fatigue may become a growing political factor in the West. Already, we see a limited political appetite for an immediate boycott of Russian hydrocarbons, which can be explained in part as a response to shifting public opinion. Polls indicate that while support for Ukraine remains strong among European citizens, their willingness to tolerate material sacrifices in pursuit of this is weakening. In this context, it is understandable, if somewhat demoralising, that politicians are reluctant to ask much of their citizens, whether it is driving less or turning the heat down.