Artículo Ukraine Today, 10.08.2022 Jeffrey Sonnenfeld (Yale School of Management) y Steven Tian (Yale Leadership Institute)
Three steps for exerting maximum economic pressure on Putin
Cynics have been quick to sound off over the supposed inefficacy of multinational business retreats and global government sanctions in changing the behavior of brutal autocrats such as Russian President Vladimir Putin, pointing to ineffective examples such as Cuba, Iran, Venezuela, Syria, and North Korea. French politician Marine Le Pen recently called for an end to “useless” sanctions on Russia in response to its invasion of Ukraine, echoing a Guardian columnist who declared that “Western sanctions against Russia are the most ill-conceived and counterproductive policy in recent international history.” The New York Times’ Paul Krugman, too, selectively listed examples of ineffective economic embargoes reaching far back into the 19th century in a recent op-ed.
However, our 42-person research team, which includes teams of researchers on the ground in Russia and across Eurasia, and with crucial contributions from Franek Sokolowski and Michal Wyrebkowski, found in a comprehensive analysis that the Russian economy is already under serious strain. Yet we continue to hear that an authoritarian regime can always simply ignore the economic distress and outlast Western liberal democracies in a “war of attrition.”
That economic pressure cannot change or even end authoritarian regimes is a contention simply not supported by the evidence. In fact, our research highlights that over the past several decades alone, there are at least 10 prominent examples reaffirming that when civil society crumbled through externally induced economic implosion, autocratic leaders were overthrown abruptly. In each of these cases—which include Muammar al-Qaddafi of Libya, Slobodan Milosevic of Yugoslavia, Augusto Pinochet of Chile, Wojciech Jaruzelski of Poland, Erich Honecker of East Germany, Nicolae Ceausescu of Romania, P.W. Botha of South Africa, the military junta of 1980s Argentina, Ian Smith of Rhodesia, and British colonial rule in India—autocrats lost legitimacy when economic collapse preceded internal revolution.
Every regime collapse is obviously caused by a confluence of factors, as other experts have explored. Yet, at the same time, some patterns are readily apparent from analyzing the cases where economic implosion preceded collapse, revealing at least three crucial, transferable lessons of how economic pressure can be most effective.
Isolate the sanctioned nation as completely as possible.
The vexing survival of sanctioned nations, such as North Korea and Cuba, is regularly invoked by those skeptical of economic blockades. North Korea is completely economically dependent on China, which represents over 90 percent of its total trade, including most food and energy imports. Despite some limited admonitions to cool its bellicosity in the region, China has avoided any actions that would imperil North Korea’s leadership regime by weakening its economic lifeline.
Of course, North Korea is a strategic defense asset for an increasingly expansionism-minded China. Some experts even believe that China may rely on North Korea’s offensive strike capability to disable the U.S. early warning system, enhancing China’s surprise capabilities.
The situation in Cuba echoes that of North Korea. Cuba and the Soviet Union, and later Russia, enjoyed a deep economic and military partnership since Fidel Castro’s 1959 revolution. The United States imposed a naval and economic blockade of Cuba following the 1962 installation of Soviet nuclear missiles in Cuba. While tensions have subsided since that nuclear brinkmanship, U.S. sanctions against Cuba did not topple its government thanks, in part, to Soviet and Russian support. Russian-Cuban relations waned over time but intensified this year as Cuba has hosted high-level recent visits from Russian officials, showing support for Russia’s assault on Ukraine while benefitting from increased humanitarian assistance from Russia—as well as Russia’s newfound willingness to accept delays in Cuban repayment of billions of dollars of debt for infrastructure projects.
It is not as clear that Russia would forge a vassal state relationship with China along the lines of Cuba’s and North Korea’s relationships with the two larger powers. Russia has long been a vital source of oil, gas, and other raw materials that have fueled China’s growth, allowing it to become the world’s second-largest economy. And just weeks in advance of Russia’s February attack on Ukraine and on the eve of the Winter Olympics in Beijing, Russia and China signed an agreement expressing “no limits” to this friendship while criticizing NATO. In a phone call with Putin four months later, Chinese President Xi Jinping reaffirmed his country’s renewed support for Russian sovereignty and security.
However, in recent weeks, Russia arrested three of its own top scientists, charging them with treason for conspiring with China’s security services. Moreover, while China avoided condemning the Russian invasion of Ukraine and attempted to remain neutral regarding the faltering Russian economy, it has not moved to make up for an apparent significant drop in imports into Russia in recent months.
In fact, as shown by the most recent monthly releases from the Chinese General Administration of Customs, Chinese exports to Russia also plummeted by more than 50 percent for the first four months of this year, falling from over $8.1 billion monthly to $3.8 billion in April with only a slight rebound since. A studied neutrality is in China’s strategic interest given it exports seven times more to the United States than it does to Russia.
Pair government sanctions with voluntary private sector action
When businesses exit countries voluntarily beyond what is required by government sanctions, they make independent decisions based on moral, financial, and business risk reasons, often facing pressure from key stakeholders; as one of our studies found, the stocks of companies that exited Russia were strongly rewarded by investors.
There are some instances, such as on toppling apartheid in South Africa, when governments and businesses have directly strengthened the other’s positioning. In the 1980s, over 100 multinational companies agreed to a voluntary code of conduct relating to business activity in South Africa known as the Sullivan Principles.
The apartheid regime’s refusal to allow businesses to adhere to the Sullivan Principles provoked widespread backlash, which spurred Congress to pass the Comprehensive Anti-Apartheid Act of 1986, then mirrored by other nations. Although then-U.S. President Ronald Reagan initially vetoed the sanctions package, a bipartisan 78-member Senate majority overrode the veto, with even Reagan’s fellow Republicans—such as current Senate Minority Leader Mitch McConnell—saying, “I think he is ill-advised. I think he is wrong. We have waited long enough for him to come on board.”
At the same time, 200 companies, including GM, IBM, Ford, GE, Kodak, and Coca-Cola, all announced their complete withdrawal from South Africa beyond sanctions compliance, hollowing out the South African economy within a few short years. There was massive private capital outflow of over $10 billion in the late 1980s, and $2 billion of trade was lost annually preceding the fall of the tyrannical Botha regime.
Not all successful instances of embargoes feature such overt convergence between government mandates and business withdrawals. That’s in part because there are many forms of business withdrawal from a country short of a full, trumpeted exit. Still, these are no less consequential and, in fact, often more important than government mandates, in eroding a country’s economic productivity and innovation base.
For example, in confronting the military junta autocrats of Argentina in the 1980s, international sanctions applied in the immediate aftermath of the Falklands War soon rolled off as the immediate crisis passed, but multinational businesses, and particularly financial institutions, rattled by the regime’s capriciousness, quietly looked for the exits, exacerbating an already-challenging inflationary debt crisis. Over the ensuing months and years, there was massive capital flight equivalent to nearly 10 percent of Argentine GDP and a 91 percent drop in stock prices. The feedback loop created by the loss of revenue soon resulted in a balance-of-payments crisis, as Argentina was saddled with $40 billion in foreign debt equivalent to around half of GDP. The country, too, was forced to devalue its currency by 93 percent—but not before spending down 83 percent of its foreign reserves amid hyperinflation of 5,000 percent, persistent rioting, and even more dramatic capital flight.
The private sector’s ability to withhold and withdraw capital was also felt keenly by Augusto Pinochet of Chile. Long a controversial figure in diplomatic circles, Pinochet was accustomed to staring down periodic bouts of government sanctions, implemented with varying levels of intensity, starting from the 1970s; it was not until the rapid “hot money” private capital outflow from the 1982 debt crisis onward, equivalent to 40 percent of GDP, and associated curtailment of Western private lending in Chile that Pinochet began to feel the economic squeeze. Unemployment reached 33 percent; real wages dropped 10 percent annually, per our calculations; and foreign exchange reserves fell by 53 percent while Chile worked off foreign debt levels equivalent to 145 percent of GDP.
Given the important economic role of the private sector, multinational business leaders have sometimes assumed the thankless but vital position of counseling truth to holed-up autocrats detached from reality. Take Wojciech Jaruzelski’s Poland. After the Solidarity union movement was born from with a strike of 17,000 shipbuilders in 1980, farming boycotts and a general countrywide strike followed. This in turn created the Eastern Bloc’s first independent trade union, which grew to include a quarter of Poland’s population.
When the government targeted the democratic opposition, foreign businesses took it as a cue to flee en masse—even before the government declared martial law in 1981 and international sanctions were quickly implemented—with rapid capital outflows exacerbating Poland’s deficits. Isolated from global capital markets, Poland struggled to service its massive foreign debt of $23 billion while refusing to declare official default. The ensuing economic chaos led to drastic rationing, food shortages, and the imposition of draconian martial law.
By the late 1980s, Jaruzelski, indebted and economically isolated, was forced to come back to the negotiating table with Western creditors. Under pressure from business leaders such as David Rockefeller to soften his political oppression, ultimately Jaruzelski was forced in 1989 to negotiate a power-sharing agreement with the democratic opposition led by Lech Walesa, which quickly led to a peaceful transfer of power and democratization of the country. Walesa replaced the discredited and isolated Jaruzelski as president in 1990.
The reverse is also true: When the private sector works at cross-purposes to government pressure campaigns, the economic effect can be diluted, helping authoritarian regimes stay in power. In one of the most egregious cases, Occidental Petroleum under its longtime leader Armand Hammer—the same Armand Hammer who frequently skirted U.S. embargoes of the Soviet Union—played a role in shielding Muammar al-Qaddafi from challenges to his dictatorial rule of Libya during his early reign, interceding with officials from various governments on Qaddafi’s behalf (and his own), as Libya’s rich oil fields were a crucial component of his empire.
It was only when Hammer had substantively lost his grasp over Occidental in old age that it finally acceded to U.S. government pressure and suspended operations in Libya. The loss of Western exploration and production upstream technology in the years afterward, combined with international sanctions, steadily eroded Libya’s oil production and growth capabilities and, by extension, its domestic economy, through periodic fits and starts, for years prior to Qaddafi’s ultimate fall in 2011.
Make government sanctions comprehensive, across sectors and between countries
Sanctions experts are generally much more comfortable with precise, limited measures—what they refer to as “smart sanctions”—aimed at transforming a blunt macroeconomic hammer into surgical strikes. These target only a few presumed key industries in order to limit unintended spillover.
But the playbook of prior business retreats and consumer boycotts of international consequence embraced the opposite ethos: comprehensiveness across sectors, aimed at disrupting civil society. The Swadeshi movement, with Mahatma Gandhi’s leadership, encouraged millions of Indians to stop buying all British goods—everything including textiles, tea, and steel. This had the effect of drastically cutting the value of British exports in these key industries prior to Indian independence in 1947. Similarly, the anti-apartheid movement began as an organic grassroots boycott movement, organized in 1959 by consumers around the world answering Albert Luthuli’s call for an international boycott of all South African products until the abolition of apartheid. These consumer boycotts proved remarkably persistent and resonant for decades, well before the development of the Sullivan Principles and government sanctions, and cost South Africa up to a billion dollars a year in lost trade by expert estimates.
Likewise, many prior government mandates followed the same logic of comprehensiveness between countries. For example, during the Cold War, the Coordinating Committee for Multilateral Export Controls placed a blanket embargo on trade across all sensitive technologies with all countries in the communist trade organization Comecon, including East Germany, Romania, and Poland. The export controls were so tight that, as one example, even East Germany, the strongest economy of the Eastern Bloc, fell several generations behind in semiconductor design and manufacturing. At the same time as Erich Honecker was boasting about the development of a 1-megabit semiconductor chip, Japan and the United States were already manufacturing 4-megabit semiconductors many generations more advanced, with some types of chips costing 130 times less to import than to manufacture in East Germany, reflecting the comprehensive and effective sanctions regimen which degraded Comecon access to technology.
By contrast, even though the United Nations Security Council passed obligatory comprehensive economic embargo resolutions against Rhodesia (now Zimbabwe) in the mid-1960s, it took nearly 15 years for these sanctions to flow through, as, by the admission of top officials, they willingly ignored significant shortcomings in sanctions enforcement. Some major trade partners such as Portugal and South Africa outright refused to recognize the validity of the sanctions regime, while others such as France and Switzerland were chronic violators until increased enforcement finally stemmed the flow of illicit goods into and out of Rhodesia.
Clearly, these partial diplomatic compromises targeting only a few presumed key industries with significant leakages end up diluting the efficacy of economic pressure, in stark contrast to a more comprehensive approach—across sectors and with broad buy-in.
These lessons suggest that at a minimum, economic pressure is only maximally effective if it combines the full force of government mandates with massive voluntary private sector exits, and if it consists not only of partial targeting of a few perceived strategic industries but of a more comprehensive approach, matched with a proactive communications effort. This is quite the opposite approach to what many sanctions experts advocate for, but as Walesa reminds us, “The fall of the Berlin Wall makes for nice pictures. But it all started in the shipyards.”
Sanctions must not be understood as a fragmented default option when diplomacy dissolves or when military action is stalemated through sequential cease-fire violations and negotiation collapses. Instead, they must be seen as a primary strategic alternative to war as they degrade aspiring totalitarians, forcing them to surrender total control of civil society. In this way, through these steps, Putin will be revealed to be the true enemy of the Russian people, and the courageous opposition voices will be joined by disgruntled masses concealed by sham public opinion polls.
Given Putin’s open saber-rattling of the prospect of thermonuclear war and drawn-down but nevertheless ample cash cushion, some military leaders consider him to be the most dangerous person on Earth. Around 90 percent the world’s 12,700 nuclear warheads are held by Russia and the United States, with a significant portion ready for military use.
Eroding Putin’s internal legitimacy is a safer path than attempting to disarm him in permanent direct battle—or ignoring his bloody imperial agenda and falling victim to the cowardly self-defeating path of appeasement. And this can only be done by broadening economic pressure toward comprehensiveness, working hand in hand with business.