Opinion: The West should launch a new economic Cold War against Russia

Russian President Vladimir Putin is trying to revive the Soviet Union, but two can play this game. To complete the Kremlin’s grotesque historical reenactment, the West should launch a new economic Cold War in response.

In addition to the war of aggression waged against the civilians and cities of Ukraine, Russia has also waged an asymmetrical economic war against the global economy and the international trade system that underpins it.

Russia’s weaponization of trade, particularly of energy supplies, has caused massive disruptions in international markets and triggered a cascade of economic setbacks globally. Although the worst of the 2021-2022 energy crisis may be behind us, dozens of energy companies and utilities went bankrupt in the wake of Russia’s reduction in gas supplies before the September 2022 destruction of Nord Stream.

Many European governments, especially Germany and the U.K., were forced to spend billions on emergency subsidies and seaborne gas import infrastructure to keep families warm, houses lit, and strategic industries running. The ensuing inflation – over 20% in some places – nearly achieved Putin’s goal of topping Western governments opposed to his illegal invasion.

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However, the fact that Putin was able to temporarily subvert the international trade system in the summer of 2022 belies Russia’s dependency on it. Just like the Soviet Union, with its dependence on oil and grain exports, Russia’s economy remains intricately woven into the globalized world. That is a conspicuous vulnerability in Putin’s perspective and one that the collective West needs to exploit in new and imaginative ways.

In confronting the complex challenge posed by Russia’s pervasive aggressions, a renewal of Ronald Reagan’s commitment to “peace through strength” is required to navigate us through this intricate quagmire. Reagan avowed, “War comes not when the forces of freedom are strong, but when they are weak.”

A rejuvenation of Reagan’s doctrine of “peace through strength,” sculpted to fit our globalized world, is imperative not only to contend with Russia’s military might but to strategically disrupt its economic engines and global ambitions.

Current discussions around sanctions, despite their escalated global intensity during active conflict phases, have been insufficient in crippling Russia’s economy or stalling its military production. Sanctions on the Russian banking sector, an oil price cap, and the withdrawal of thousands of Western businesses from the Russian economy have currently failed to cripple Putin’s war machine.

World Bank forecasts of Russia’s GDP growth have recently been revised upward to over 2.5%, with inflation running at a manageable 7%. In 2023, the Kremlin received record receipts from the sale of oil, including, shockingly, some 181 billion euros ($196.5 billion) between February 2022 and December 2023 from the European Union, Russia’s biggest energy customer over that period.

A targeted disruption to Russia's $2 trillion GDP, even by $50-100 billion annually, could severely impact its military capability and perhaps nudge the country toward regime change without causing significant global economic destabilization. Here are some ideas that can help achieve this goal.

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Western governments should mandate their regulators to introduce the disclosure of Russia’s exposure for all publicly traded companies. A few simple line items added to investor reports will achieve this – the disclosure of taxes paid to Russia, total revenue from Russian sources, and the quantity of procurement from Russia would suffice. These transparent corporate disclosures will go a long way toward ensuring public firms can take more aggressive steps toward reducing or limiting Russian exposure due to informed pressure from their investor base.

Second, a 5% surcharge on all remaining trade with Russia, the proceeds of which go to Western-managed Ukraine reparations funds, should be introduced and persist until all damages from Russian aggression are paid in full.

Obviously, a complete ban on dual-use exports to Russia should persist, augmented with heavy fines (up to 20 times the value of goods sold) imposed on countries and corporations, enabling the subversion of sanctions regimes. The proceeds of these fines should also go to the reparations fund. Given the amount of trade remaining between G7 countries and Russia, this can gain up to $10 billion annually in sustainable revenue.

This money can be used to give procurement contracts to Western corporates to do projects that benefit Ukraine, like building modern roads and high-speed railways and reconstructing destroyed buildings and infrastructure. Giving contracts directly to Western companies alleviates the agency problem of giving the funds to the Ukrainian government.

This mechanism can also be used to deploy some of the $300 billion in frozen Russian state assets, which undoubtedly will be confiscated. Knowing that the bulk of the money will be deployed by Western corporates should make the political decision of actually seizing the assets much easier to enact.

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A structure should also be devised to allow Western businesses to quantify and claim reparations for losses incurred due to Russia’s aggression against Ukraine and illegal takeovers of foreign-owned businesses by Kremlin-affiliated entities. Legal claims for these losses could easily reach tens of billions of dollars. The New York Times recently put the amount of losses at $103 billion – a staggering figure.

Critically, these corporate reparations should be queued behind national and individual reparations, but corporates can secure immediate relief by selling these claims to longer-term financial players, like hedge funds. By engaging aggressive lawyers, hedge funds will ensure that mechanisms forcing Russia to pay for its crimes are durable, even at the tail end of a lengthy queue.

These measures, rapidly implementable and sustainable over decades, could serve as robust models to deter and penalize aggressive global actors in the future.

As we stand in solidarity with Ukraine, witnessing its brave defiance against an aggressor, an essential truth needs to be reasserted: freedom is indeed not free. It is incumbent upon global leaders and citizens alike to fortify their efforts, ensuring that economic and diplomatic fronts are optimally mobilized.

Dwight D. Eisenhower’s acknowledgment that “history does not long entrust the care of freedom to the weak or the timid” echoes a timeless truth. We need to harness the power of our globalized world economy to ensure that it works for the cause of freedom and against those who seek to subvert both democracy and fundamental economic mechanisms on which the prosperity of the free world is founded.

Editor’s Note: The opinions expressed in the op-ed section are those of the authors and do not purport to reflect the views of the Kyiv Independent.

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