Putin May Eventually Beat Ukraine-- But He Has A New Enemy He Might Not Beat: Autarky

Did you notice that Venezuela was not among the 4 countries-- Belarus, North Korea, Eritrea and Syria-- that voted against the UN resolution tell Russia to get out of Ukraine at once. That seemed strange, since Venezuela has been treated as an enemy by the U.S.-- and with immense hostility and threats of violence-- and had been befriended by Russia. Yesterday, a trio of NY Times reporters wrote that senior American officials-- the most senior since the U.S. shut down the embassy in 2019-- went to Venezuela Saturday to meet with officials of Nicolás Maduro's government which the U.S. doesn't recognize as legitimate and, under Trump, has tried to overthrow.

Trump tried to topple Maduro by sanctioning all his top officials, sanctioning Venezuelan oil and encouraging Juan Guaidó, an opposition leader, to pretend to be president. What all that did was force Venezuela into the arms of Russia, China and Iran. "Russian energy companies and banks," they reported, "have been instrumental in allowing Venezuela to continue exporting oil, the country’s biggest source of foreign currency, despite the sanctions, according to U.S. officials, Venezuelan officials and businessmen." Now Biden wants to lure Maduro-- and other pro-Russian leaders in Latin America-- away from Russia. "Washington believes could become security threats if the standoff with Russia deepens, according to current and former U.S. officials... As Russia’s economy craters, the U.S. is seizing on an opportunity to advance its agenda among Latin American autocracies that might start seeing Putin as an increasingly weak ally."

The U.S. would like to start buying Venezuelan oil again, to make up for Russian oil. "Well-connected Republicans, they wrote, "have been involved in talks about restarting the oil trade, including Scott Taylor, a former Republican congressman from Virginia who is working with Robert Stryk, a Washington lobbyist who briefly registered to represent Maduro’s regime in 2020 and remains in contact with people around it." Taylor says Maduro is "eager to re-engage with the United States."

On Friday, Paul Krugman, noted that Putin made a gigantic miscalculation about the West's ability and willingness to utterly tank Russia's economy. "Putin," he wrote, "evidently believed that Russia could easily weather the economic fallout from his war. Oh, the West might slap on a few sanctions, but Europe needed Russian gas and oil, and he had built up a huge war chest of foreign currency reserves that was supposed to tide him over until things settled down. His political judgment wasn’t entirely wrong. Western economic sanctions have conspicuously and pointedly exempted sales of fossil fuels, which make up most Russian exports. Instead, the sanctions have mainly been financial, excluding major Russian banks from the international payments system and freezing the assets of the Russian central bank-- in effect, impounding a large fraction of Putin’s vaunted war chest."

Krugman posed the question: "How much does this matter? Historically, economic sanctions have tended to be porous: Countries find workarounds, greatly reducing their effectiveness. But a funny thing"-- albeit not funny in Moscow-- "has happened in this case. So far, economic pressure against Russia appears to be highly effective, crimping Russian trade even in goods that haven’t officially been placed under sanctions. The financial restrictions that have already been imposed have made transactions with Russia-- even the purchase of oil-- difficult; fears of future sanctions, plus the general sense that any Western institutions perceived as helping the Putin regime will face harsh treatment from regulators, have led to widespread self-sanctioning, cutting off even trade that is formally permitted."

We don’t know yet how this plays out, but if we see the kinds of mass civilian casualties and reign of terror that seem all too likely in the weeks ahead, the effect may be to largely isolate Russia from the rest of the world economy.

Economists have a rather arcane term for this kind of isolation: “autarky.” And it’s likely to be extremely damaging.

You might think that autarky is just a strong form of protectionism, which also tends to reduce trade. But it’s actually a lot worse.

The dirty little secret of international economics is that while economists love to sing the praises of free trade, the economic costs of tariffs-- even fairly high tariffs-- tend to be modest. Why? Because the private sector responds to tariffs by cutting off only the least essential imports. Impose, say, a 20 percent tariff on imports, and we will stop importing only goods that can be produced at home at a modestly higher cost or for which there are reasonably good domestic substitutes. If an imported good is really needed-- for example, if it’s a crucial input for manufacturing that we can’t quickly start making here-- companies will simply pay the tariff and continue buying abroad.

If events cut off a large fraction of a nation’s international trade, however, that kind of prioritization won’t be possible. The domestic economy will lose access not just to cheap stuff but also to goods it has a very hard time doing without.

Do we have historical examples of what happens when a trading nation is forced into autarky? Not many, precisely because it’s such an extreme event. You could say that something like this happened to Japan during World War II, especially after America captured Saipan and Guam in 1944. This put the U.S. submarine bases near Japan’s most crucial shipping routes and airfields close enough to bomb its ports, effectively isolating Japan’s economy from the rest of the world. Sure enough, Japan’s war economy imploded.

... [I]t looks as if Putin made a double miscalculation. His planned short victorious war is turning into a bloody slog that has outraged the world, and his vaunted economic Fortress Russia appears to be headed for a Depression-level slump.