If Russians Panic, Putin Could Be Forced To Back Down

Russians have endured economic suffering many times. But if this time spirals into panic and foreign exchange reserves are frozen, Putin’s hand may be forced.

A leaflet reading "No war" at a railway station in Moscow on March 7. (Konstantin Zavrazhin/Getty Images)

Ernesto Zedillo was president of Mexico from 1994 to 2000. He is the director of the Yale Center for the Study of Globalization.

James Levinsohn is the director of the Jackson Institute for Global Affairs at Yale University.

Skeptics and adversaries of globalization are beginning to flag how useless Russia’s insertion into the global economy since the end of the Cold War has been in preventing the tragedy of the war in Ukraine. They say this disproves the old Kantian purported association between economic interdependence and peace. However, those commentators should be reminded that the Kantian notion of perpetual peace was supported on three pillars: not just the one of economic interdependence, but also on the ones (in modern parlance) of democracy and international organizations. 

In today’s language, Kant’s theory was that economically interdependent, democratically governed nations abiding by international law and institutions would be less likely to fall into military conflict. Obviously, two of the Kantian pillars, democracy and obedience to international law, are missing on the part of the aggressor in the current war. Therefore, Russia, being simultaneously both an active participant in economic interdependence and a bellicose international outlaw aggressor, provides no proof of a failure of the Kantian proposition in the way the critics of globalization would like.

In fact, the Kantian association between peace and economic interdependence appears even stronger in the present circumstances. Consider the strategy of the coalition of countries actively seeking to stop Russia’s aggression. Their economic sanctions on Russia are intended to rectify the country’s behavior by disrupting or interrupting Russia’s economic relations with the rest of the world. If Russia cannot trade, receive and move out capital, nor have its citizens travel abroad, the economic pain will be so severe as to force the Russian government to retreat from its bellicose position and be amenable to restoring peace with its neighbor. The presumption is that the sooner and more massively the Russian state and its citizens are castigated economically, the more likely a peaceful solution to this crisis can be achieved. 

This possible avenue to peace exists only because Russia is economically entwined with the rest of the world. Were Russia as autarkic as the Soviet Union was, the instrument of sanctions to pursue peace would be hollow. Therefore, although Russia’s economic interdependence did not prevent war, the globalization of the Russian economy is now providing the most significant opportunity to achieve peace. Indeed, the resolute use by the international community of the opportunities offered by globalization to respond to Russia’s aggression is what can save the international legal order. 

“The Kantian association between peace and economic interdependence appears even stronger in the present circumstances.”

This outcome, however, is not a given. Although the economic consequences for Russia of the sanctions being put in place will be enormous, they may not be sufficiently harsh or timely to end the conflict before Russia succeeds in taking over Ukraine. Available estimates of the combined repercussions of war and sanctions point to a contraction of around 10% of Russia’s GDP and a spike of inflation to 15% in 2022; in January the IMF was predicting GDP growth of 2.8% for this year. As crushing as such a loss of GDP may appear — with its associated effects on unemployment, poverty and other social indicators — it is far from certain that it will induce a rectification from the Russian government.

On the one hand, this shock to the Russian economy was preceded by prudent macroeconomic policy management, including in 2020 during the worst of the pandemic. Thus, reasonably strong fundamentals in the Russian economy will provide some space for policy maneuvering within limits to deal with sanctions. Furthermore, the Russian people historically have shown great tolerance to economic pain and suffering. Just in the last quarter-century, Russian GDP growth fell into the very negative in four years (1998, 2009, 2015 and 2020).

If the Russian people perceive the economic misfortunes that are only now starting as just one more hardship from which they will surely rebound, it is doubtful that their government will significantly change its course. It would take more extreme circumstances to change the sentiment of the Russian public to force a radical rectification by the government.

Conceivably, nothing short of financial and economic panic among Russians will suffice to compel the country’s leadership to give up its aggressive territorial expansionism. Panic could be triggered if Russians fear that sooner rather than later they will be unable to withdraw and use, partially or fully, their cash balances and other savings in the banking system. Such fear could be stimulated, among many factors, by the capital controls and higher interest rates that are beginning to be implemented by the Russian authorities. Rising inflation and capital controls could induce Russians to try to exchange rubles into other stores of value, like foreign currencies available on black markets if not in the banking system. This behavior, if generalized, could become a run on Russian banks that would threaten their solvency. 

“Conceivably, nothing short of financial and economic panic among Russians will suffice to compel the country’s leadership to give up its aggressive territorial expansionism.”

In the short term, of course, the authorities could decide to inject as much liquidity as needed by banks to honor their liabilities. Yet, the liquidity thus provided would further devalue the ruble in the non-official market, accelerating its debasing. The latter could stop only if the central bank could supply foreign exchange to stabilize the ruble exchange rate. But this is where some of the sanctions could become lethal. Freezing the Russian central bank’s foreign exchange reserves, interrupting the country’s access to international capital markets and shrinking the inflow of foreign exchange stemming from Russia’s exports of oil and gas will immensely limit the central bank’s capacity to provide liquidity to banks while avoiding worsening expectations of an inevitable debasing of the ruble. Without this capacity, it is unlikely that a spiral of panic can be avoided. 

Conceivably the central bank could still provide massive liquidity to banks without attempting to stabilize the ruble exchange rate. Yet the uncontrolled devaluation that would follow in the non-official market would worsen the public’s urgency to withdraw their rubles and dispose of them either by converting them into foreign currency irrespective of the price, and/or expending them in whatever goods can be found in the market, before inflation further destroys their money’s value.  At this point, the injection of liquidity would only worsen the problem and may force the temporary closure of banks to stop the bleeding. 

At this juncture, in all likelihood, the payments system of the Russian economy would have become disabled, a circumstance that would also interrupt the country’s productive capacity sooner rather than later. By then, Russians would confront a situation where not only are their savings vanishing, but also their jobs disappearing — along with the goods that used to be accessible in markets for their sustenance. This tragic situation, caused in the first place by Vladimir Putin’s delusional, reckless and aggressive behavior, is one that could coerce the Russian government to stop its war against Ukraine and seek a diplomatic exit from the quagmire.

In short, it is the globalization — engagement and interdependence — of the Russian economy in post-Soviet times, which provides a non-military opportunity to force a rectification of the behavior of the country’s government. Sadly, however, the materialization of this opportunity will not happen unless the disruption caused by the sanctions imposed on Russia are sufficient to trigger financial panic and a short-term collapse of its payments and productive infrastructure, circumstances that obviously would inflict enormous suffering on the Russian people. This misfortune would be tragic but just one among many brought about by Putin’s folly manifested in his felonious and murderous assault on Ukraine.