Former Reserve Bank of India Raghuram Rajan said economic sanctions imposed on Russia, such as barring several Russian banks from SWIFT messaging system, is equivalent to economic weapons of mass destruction. Even though Russia’s provoked attack on Ukraine undoubtedly had to be opposed, these economic weapons can create risks that must not be underplayed, Rajan said in an essay.
“When fully unleashed, sanctions, too, are weapons of mass destruction. They may not topple buildings or collapse bridges, but they destroy firms, financial institutions, livelihoods, and even lives. Like military WMDs (weapons of mass destruction), they inflict pain indiscriminately, striking both the culpable and the innocent. And if they are used too widely, they could reverse the process of globalization that has allowed the modern world to prosper,” Rajan said in an essay published last week.
Earlier this month, Russia’s rouble collapsed by nearly 50% of its value against the greenback after various governments imposed sweeping sanctions on Moscow. Over 400 multinationals have announced their withdrawal from Russia so far, according to Yale School of Management. The list ranges from oil giant BP Plc to financial firm BlackRock, from retailer Adidas to fast food chain McDonalds.
Rajan, who currently teaches finance at the University of Chicago Booth School of Business, said global political order has been disturbed by the war, adding that Russia’s military attack on Ukraine may even expand post the sanctions. But “if Russian President Vladimir Putin’s aggression were to go unpunished, more international provocations like his war in Ukraine would become inevitable,” he said. He however added that unlike military attack, where one sees damage is more visible and upfront, economic sanctions will reduce economic growth in Russia, lead to unemployment and will even cause deaths.
Rajan however said these sanctions, if not governed properly, could lead to overuse, and eventually cause ripples in global financial orders and reverse all the progress made through globalisation. He said corporations might be pressured to stop doing businesses in certain countries, central banks may avoid maintaining foreign exchange reserves or nations may start exploring alternatives to globally-accepted SWIFT financial messaging network.
Advanced economies should recognize that a balkanized global economy would hurt everyone, Rajan said. “Moreover, holding talks on “economic arms control” could be a first step toward fixing the broken global order. Peaceful coexistence is always better than war, no matter how it is waged,” he added.