Thread by @CarlaNorrlof

Written 3 weeks before the Russian invasion, my piece on the “new economic containment” is FINALLY out @ForeignAffairs

A 🧵 on financial deterrence, isolation and signalling

foreignaffairs.com/articles/ukrai…

The immediate goal of the sanctions is to end the war effort by raising the price of financing the war and the overall cost of not reaching a peace settlement. Lowering the net gains of conquest presents Russia with a guns-butter trap

The long-term goal is containing Russian expansionism, deterring future encroachments by punishing Russia for great power transgressions.

Degrading the Russian economy reinforces the prevailing great power hierarchy and signals commitment to the international order

US dollar and financial dominance is what makes this signalling effect so potent, and capable of working both horizontally & vertically

Thanks @segoddard & @ejgraff for @monkeycageblog @washingtonpost

washingtonpost.com/politics/2022/…

Sanctions have been used to deter and end war in the past, and great powers have faced sanctions before, but this is the first time a great power has been targeted on a massive scale to achieve extreme isolation

The most significant measures are the central bank asset freeze, disconnecting major banks from SWIFT, restricting access to high-tech content in defence, aerospace, and maritime shipping and the tightening of loopholes for illicit finance

The devastating effects include rouble and stock market selloffs, corporate pullouts including suspensions by big container lines, flipped CDS quotes and the prospect of sovereign default. See this important thread on Russia's default past

https://twitter.com/ProfPaulPoast/status/1504795796700545024

Threatening to blast a great power with sanctions, and then implementing the threat, carries uncertain prospects in several respects

The first risk is deterrence failure. Expecting a great power to reverse course after mobilizing to invade a country it has already invaded is to expect too much.

More could have been done to communicate sanctions severity and backstop w/ threat of military intervention

Committing not to intervene was a tactical mistake, the US should have left some ambiguity about U.S. troop deployment

Reassurances were likely designed to avoid great power war, including the possibility of nuclear war. But playing soft hardly eliminates the risk

... bringing me to the second risk, which is that using sanctions against countries who cannot respond economically incentivizes them to respond by using their best shot, military threats and instruments. North Korea did this before. Russia is doing it now.

The third risk is with the unraveling of economic interdependence, as security motivations start to dominate economic motivations as a basis for economic engagement

Both the security and economic risks of the new geoeconomic order are discussed in my fall 2021 report @ACGeoEcon @AtlanticCouncil atlanticcouncil.org/in-depth-resea…

There are also risks to US dollar dominance in the form of blowback as a result of overusing sanctions, see @ProfPaulPoast @Bree_Croteau @khanna_aash @daniel_mcdowell @whinecough, Hongying Wang & Jerry Cohen

academic.oup.com/isp/article-ab…

How important are these risks today?

... today, the risk of dethroning the $ are overblown b/c defending the territorial integrity of a small state against great power aggression is a principle most countries find worthwhile defending.

'Don’t invade other countries or risk economic calamity' is not a hard sell

Completely different from when the US abandoned the Iran nuclear deal and Europeans sought alternatives to the dollar system.

Today, large-scale diversification is unlikely b/c none of the reserve majors have incentives to participate & digital alternatives are unripe

The US has a powerful cost-effective tool for defending the fundamental norms of the international order on a continuum between diplomacy & military intervention. Ambiguity about when to travel down the end spectrum enhances the deterrent and constraining effect of sanctions /