In a recent TV interview I have given the Swiss channel Tele Z, I had a chance to discuss with my host Claudia Steinmann the implications of sanctions for the Russian and western economies. We also talked about whether or not China is going to benefit from the situation. In this post, I follow up on my interview and elaborate a little more on whether sanctions will work or not. In the next post, I plan to write a little more on how I see the role of China.
Will sanctions work, then? I think, it is important to answer that question at three levels: macroeconomic, political, military-strategic. And at the three levels the respective answer is “yes”, “it depends” and “probably not”. But then there is another level — bear with me….
- Take the macroeconomic level first. Sanctions are already having a devastating effect on the Russian economy. The bulk of foreign currency reserves has been seized, the ruble has tumbled, domestic inflation is soaring, trade has collapsed, production come to a standstill in many parts of the economy. This is hurting the regime, but it is hurting the average Russian even more. While “oligarchs” have been targeted by the seizure of their overseas assets, the overall effect of the sanctions is clearly much smaller for oligarchs than for the average Russian household. Oligarchs are people with international networks and globally diversified asset portfolios, including access to countries that do not implement any sanctions (the yachts are starting to show up in Turkey already…). Such asset shifting is not really an option for the average Russian, though. Hence, if anything the West should work harder on actually implementing and extending the sanctions on the oligarchs. Actually seizing their assets would be a start, implementation in many countries (including Switzerland, Germany…) is patchy at best so far.
In a couple of interviews on Swiss Italian language radio RSI this weekend (here (from minute 18), here (from minute 8) and here), I argued that the SWIFT sanctions were the right thing to do and we already see their short-term impact in the form of a de-facto collapse of the Russian banking system: people are hoarding cash (credit cards have stopped working, they are ultimately based on the US infrastructure and the SWIFT payment systems) bringing the banking sector to crumble. And the firepower of the Russian central bank in terms of currency stabilization has been severely curtailed because its foreign-currency reserves (which of course are not sitting as dollar cash piles in its vaults but on foreign bank accounts) have effectively been seized. The effect has been a collapse of the rouble and will be high domestic inflation, coupled with the collapse of many small private firms which will no longer have access to bank credit.
Even though there is a risk that some of this will also spill over to western banks who are heavily exposed to Russia, I would argue that this can be dealt with. In fact, some political willingness to also accept some economic disruption in the west will be needed to make the sanctions develop their full impact.
The paper By a Silken Thread: regional banking integration and credit reallocation during Japan’s lost decade (with Toshihiro Okubo), has been accepted by the Journal of International Economics.
We show how the geographical reallocation of credit dampened regional heterogeneity in business cycles during Japan’s lost decade. Even though large, country-wide (“integrated”) banks were most affected by the property crisis in the major cities, they reduced their lending less in areas where they had many bank-dependent SME customers all while reducing credit to big corporates who increasingly turned to bond issuance.
A short policy piece by Mathias Hoffmann and his co-authors Bent Sorensen, Egor Maslov and Iryna Stewen on how to ensure that risk sharing in EMU becomes resilient to systemic banking shocks has just appeared in a new CEPR e-book edited by my colleagues Jan-Egbert Sturm and Nauro Campos entitled
In this piece we build on some of our earlier and on ongoing current research to compare the state of banking integration in the EMU today to that in the U.S. prior to state-level banking deregulation in the 1980s. As in the U.S. then, EMU today is essentially an integrated interbank market. But— as was the case among states in the U.S. prior to 1980— there is little direct cross-border lending of banks to firms or cross-border branching in the EMU. This makes macroeconomic risk sharing susceptible to systemic crisis as well as to country-specific banking sector shocks. We conclude that a proper banking union will have to encourage the cross-border consolidation and branching of banks and that this has to be complemented by a proper capital market union that encourages the cross-border ownership of equity. Just focusing on one of the two unions —as is currently advocated by some policymakers—will not be enough. A pre-publication version of the piece can also be downloaded here.
The book was launched ahead of the June 25th EU summit with some presentations by the authors across Europe, including two by Mathias Hoffmann at the Bank of Finland on June 19th and at ETH Zürich on June 22nd.