Mar 4, 2022 - Economy & Business

Economic warfare's collateral damage

Illustration of a domino with the Russian flag starting to topple a line of dominoes.
Illustration: Shoshana Gordon/Axios

Ripping Russia, the world's 11th largest economy, out of the global financial system is bound to cause collateral damage for other countries, people and systems.

Why it matters: Even the most targeted bombing campaign can strike bystanders, and an economic war is perhaps more indiscriminate — and harder to control.

  • “War has unintended casualties. Economic war is the same,” said Aaron Klein, a senior fellow in economic studies at Brookings.

Case in point: Already, oil and gas prices have skyrocketed even though energy was purposefully carved out of sanctions. And shares of Sberbank are trading for pennies perhaps surprising since Russia's largest bank wasn't cut off from the SWIFT global payments network (though it is subject to other sanctions).

Catch up quick: Since Russia invaded Ukraine last week, the U.S. and its European allies moved fast to levy some of the harshest sanctions ever imposed.

  • The strikes were targeted. The West tried to keep the energy sector — a massive part of the Russian economy — out of the most severe penalties, so European countries could continue to buy oil and gas.

The big picture: Broad shifts in the way the world financial system works could take years to emerge.

  • "The fallout for global trade and finance is enormous," said Justine Walker, the global head of sanctions, compliance and risk at ACAMS.
  • "It will essentially spur conflicts in other regions," on top of food insecurity, she said, if countries can't get the resources they need.

And, once you put sanctions in place, it's hard to go back to the before-times.

  • Russia will start to operate in different ways, carving out an alternate financial system to work in, for example — much like Iran has done after being cut off from SWIFT by the Trump administration.

What we're watching: The consequences for the rest of the world are only starting to shake out.

  • After the first Gulf War, the rise in oil prices helped create a recession, Klein at Brookings pointed out. He ruled out the possibility that this would happen now in the U.S., but Europe will feel rising energy costs more acutely.
  • The bigger unforeseen consequence could come in the payments arena, Klein and others have warned. The sanctions against Russia "weaponize payments," and that could push Russia and other countries into alternate systems — making it harder to wage economic war the next time around.
  • There's also the possibility of a Russian economic collapse hurting some other financial institutions or markets. Back in 1998, the collapse of the Russian economy toppled a hedge fund that wound up threatening the entire financial system.

The bottom line: "One thing I've learned is you don't know what you don't know," Klein said.

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