Leibowitz on Trade: Russia Strong Now, Long Game Favors the West

As I write, there is a battle for control of Kyiv. Because of the “fog of war,” we don’t know in detail where that battle stands and who will win it—the odds favor the stronger power (Russia) in the short term.

But that brings Einstein into play—how long will Russia remain the “stronger” power? What the U.S. and its allies, in NATO and the European Union (let’s call them “the West”), and others around the world, do in the next weeks, months and years may have more to say about that.

At this juncture, the West has decided not to intervene militarily in the war between Russia and Ukraine, but to take economic and diplomatic action to punish Russia (and Vladimir Putin and his inner circle). Will that be enough to save Ukraine from occupation and oppression? Maybe not—frankly, probably not.

Critics always abound in situations like this. There are complaints from many quarters (especially journalists) who complain that sanctions should have been imposed before the invasion; that when imposed they were not sufficient to turn Russia away from war; and that the most effective sanctions have not been leveled against Putin and Russia.

Because this column generally deals with international trade issues, my focus will be on that aspect of trying to convince Russia and Putin to change course. In the short term, anything less than brute force is most unlikely to do that. But what will happen in the course of time?

First, Russia’s strength lies in the size and skill of its armed forces—they are proficient and well-equipped (at least now). Second, Russia’s huge nuclear arsenal means that the West is most unlikely to insist on “unconditional surrender” of Russia to the West’s superior forces (if they ever become superior, which will take a while).

But third, Russia’s military strength over the long term depends on its economic strength. The economic strength of Russia is anemic and is getting weaker. Look at the facts—the Russian economy, measured by total output of goods and services (GDP or “gross domestic product”), is about 1% of the global economy. Russia’s economy is smaller than the state of Texas.

In terms of global trade, Russia accounts for between 1% and 2% of the world economy—and most of what Russia exports is oil and gas. Revenues from oil and gas exports alone, according to recent reports, equal half of the Russian government’s entire budget. Metals (mostly steel and aluminum) account for an additional 10% of Russian exports. Total Russian exports in 2021 were about $378 billion, according to reports. This puts Russia in 20th place among global exporters, between Spain and Poland.

In a long struggle, Russia is tough to bet on. So the key to prevailing is to make sure the West can stay the course. Russia has tried, and will continue to try, to divide the West into quarreling about self-interest. Energy is their best card to play.

On Tuesday, Germany announced the suspension of approval for the Nord Stream 2 pipeline from Russia to Germany. That pipeline is a big deal but is not the only card in the deck for the West. If this is a long game, Europe must wean itself from dependence on Russian energy. An immediate embargo on imports of oil and natural gas from Russia could have ruptured the NATO alliance. But that does not mean Europe will always be dependent on Russia.

The West collectively can rearrange energy commerce, putting Europe in a better position to keep pressure on Russia. First, large oil and gas producing countries can divert current trade flows toward Europe and away from their more traditional markets. Think Saudi Arabia (oil) and Qatar (natural gas).

In addition, other countries can, over a relatively short period of time, increase production of energy for Europe. The United States is already the third largest exporter of natural gas in the world and could export more with the completion of LNG export terminals already planned or under construction.

Let’s assume that Russia would, if its energy exports are restricted by the West, divert its energy exports from Europe to China, which is the world’s largest importer of energy (nearly a quarter of total imports of oil alone, far larger now than the U.S.). But if the West could rearrange trade flows for energy, it would be able to keep pressure on Russia much longer. Add in an increase in European nuclear energy (in retrospect, Germany made a mistake in swearing off nuclear power in 2011), and Europe could be independent of Russia for energy in a few years.

After early hesitation, the West also imposed the most severe financial sanctions on Russia, expelling certain Russian banks from the SWIFT system of international payments.

In short, the West has many more cards to play than Russia—the economic strength and staying power of the West literally dwarfs that of Russia. A long struggle, as long as the cards are played skillfully, favors the West.

I am not saying this will be easy. It will not. Already many people, innocent people, are being needlessly killed, injured and forced from their homes. The world must do what it can to restore the only world order that truly works for most people—to make the use of force to air grievances unacceptable. We learned this lesson 80 years ago, and too many have forgotten it. The strong must not attack the weak.

My own country, unfortunately, has had to learn this lesson the hard way—in retrospect, the wars in Vietnam and Iraq (2003, not 1991) were mistakes, in part because they can be cited by bad actors as precedent.

Now, both in our own country and with our Allies, we need to come together and support the patient exercise of power. That power can include restricting access to financial systems, as well as exports to and imports from Russia and other bad actors. But first we need to make sure those additional sanctions don’t hurt our friends more than our adversaries. Issues that divide us domestically as well as internationally need to occupy the back burner for a while. Preserving the global order is more urgent than anything else. Our freedom and our very lives may depend on it.

Lewis Leibowitz

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