Despite Ukraine’s surprisingly effective fight against the invading forces, most military experts seem to believe that Russia’s sheer advantage in firepower will eventually win out. Having no relevant expertise, I see no reason to question their judgment.
Yet it is clear that Vladimir Putin made a huge miscalculation. Russia began the invasion with a dash to Kiev and Kharkiv by small, lightly armed forces, obviously expecting a quick victory as resistance from the defenders crumbled. Instead, the initial attack was repelled and the follow-up with tanks and artillery bogged down – in some cases literally, as it is still mud season in much of the country. Ukraine.
And that wasn’t his only miscalculation. Putin evidently believed that Russia could easily weather the economic fallout from its war. Oh, the West could impose a few sanctions, but Europe needed Russian gas and oil, and he had built up a massive war chest of foreign currency reserves that was supposed to tide him over until things got better. calm down.
His political judgment was not entirely wrong. Western economic sanctions have visibly and ostensibly exempted sales of fossil fuels, which make up most Russian exports. Instead, the sanctions have been primarily financial, excluding Russia’s big banks from the international payments system and freezing the assets of Russia’s central bank – in effect, seizing much of Putin’s vaunted war chest.
How much does it matter? Historically, economic sanctions have tended to be porous: countries find workarounds, which significantly reduce their effectiveness.
But a funny thing happened in this case. So far, the economic pressure against Russia seems to be very effective, hampering Russian trade even for goods that have not been officially subject to sanctions. The financial restrictions that have already been imposed have made dealing with Russia — even the purchase of oil — difficult; fears of future sanctions, along with the general feeling that any Western institution perceived as helping Putin’s regime will face harsh treatment from regulators, has led to widespread self-sanction, even cutting off trade that is formally permitted.
We don’t yet know how this plays out, but if we see the kinds of mass civilian casualties and reign of terror that seem all too likely in the weeks to come, the effect could be to largely isolate Russia from the rest of the world economy. .
Economists have a rather obscure term for this type of isolation: “autarky”. And it is likely to be extremely damaging.
One might think that autarky is just a strong form of protectionism, which also tends to reduce trade. But it’s actually much worse.
The dirty little secret of international economics is that while economists love to sing the praises of free trade, the economic costs of tariffs – even fairly high tariffs – tend to be modest. Why? Because the private sector reacts to tariffs by removing only the least essential imports. Impose, say, a 20% tariff on imports, and we will stop importing only goods that can be produced here at a slightly higher cost or for which there are reasonably good domestic substitutes. If an imported good is really needed — for example, if it’s a crucial manufacturing input that we can’t start manufacturing here quickly — companies will simply pay the tariff and continue to buy from foreigner.
However, if events cut off a large portion of a country’s international trade, this type of prioritization will not be possible. The national economy will lose access not only to cheap products, but also to goods which it finds it very difficult to do without.
Do we have historical examples of what happens when a trading nation is forced into autarky? Not many, precisely because it’s such an extreme event. You could say that something like this happened to Japan during World War II, especially after America captured Saipan and Guam in 1944. Japan’s most crucial, close enough to bombard its ports, effectively isolating the Japanese economy. from the rest of the world. Effectively, Japan’s war economy imploded.
But what about self-sufficiency in a nation that has not come under direct military assault? Well, there is a surprising – and surprisingly old – example from the history of the United States.
America did not participate directly in the Napoleonic Wars, a huge conflict that, among other things, led Britain to run up remarkable government debt:
But America was hardly immune to the effects of these wars, particularly because both sides engaged in economic warfare, trying to cripple their adversary with economic blockades that also harmed American commerce. Britain also had a habit of stopping American trading ships and impressing their sailors, i.e. kidnapping them and forcing them to serve in the British Navy.
In response, Thomas Jefferson’s administration attempted to retaliate by cutting off all international shipping. Yes, we tried to obtain concessions from Great Britain and France by imposing autarky on us… on ourselves.
Unsurprisingly, it didn’t work. But it imposed significant costs on the US economy. The data for the early 19th century is, as you might guess, sketchy, but economist and historian Douglas Irwin has attempted to estimate the cost of Jefferson’s embargo, which he puts at around 8% of product US gross domestic.
How might the effects of Russian isolation compare to this experience? Russia in 2022 is much more exposed to foreign trade than America in 1807: American exports then represented only 13% of GDP, while Russian exports on the eve of the invasion represented approximately double.
I would also point out that economies are much more complex than they were two centuries ago. Back then, production didn’t depend on elaborate supply chains that could come to a screeching halt for lack of a few crucial components, like silicon chips and spare parts. Today, this is the case, even in countries like Russia that mainly export raw materials rather than manufactured goods. Thus, the consequences of near-autarky could be even worse than Russia’s heavy reliance on trade suggests.
For the moment, in other words, it seems that Putin has made a double miscalculation. Its short planned victorious war turns into a bloody drudgery that has outraged the world, and its vaunted economic stronghold, Russia, appears to be heading for depression-level collapse.