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Opinion How to win the economic war against Russia

A refinery in Gelsenkirchen, Germany, on April 5. (Martin Meissner/AP)

Fiona Hill, a distinguished Russia expert, has argued that the West’s confrontation with Russia over Ukraine has brought us into World War III. That is dangerous hyperbole. What made the two world wars so devastating was that the major powers of the day got into direct and protracted military conflict with one another. We are not in that kind of battle today, and with nuclear weapons, one shudders to even think about the trajectory of a great-power war.

But she is right in one sense: The West is collectively waging economic war on Russia on a global scale that would have been unimaginable just a year ago. The consequences of that are likely to be with us for decades. This new Cold War marks the end of the era of globalization and integration that has shaped the international system since 1989. We are now living in a world of great-power competition, economic nationalism and technological decoupling. The risks of this new economic war might not be nuclear, but they are sky-high, including for the United States.

The sanctions against Russia have been more far-reaching than anyone had previously predicted. They have included extraordinary measures, such as freezing Russia’s central bank reserves and cutting banks off from Swift, the financial messaging system that is a vital part of the global economic infrastructure. They have targeted the key vulnerabilities of countries in a world of globalized supply chains by denying Russia access to advanced technology. Author Chris Miller writes that “among the worst affected sectors have been cars, trucks, locomotives, and fiber optic cables, each of which has seen production fall by over half.” Russia’s imports have also collapsed.

As the Economist points out, when you look at some of Russia’s broad economic indicators, they are holding up better than expected. The International Monetary Fund had predicted that Russia’s economy would contract by about 8.5 percent this year. It has since revised its forecast to a contraction of 3.4 percent. Inflation spiked initially but is easing now.

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The reasons for Russia’s economic resilience are varied. Russia is actually not that globalized of an economy, and the state has a large footprint within it, both of which cushion the population from external blows. But the biggest explanation by far is that Russia is a resource economy, a country whose wealth depends heavily on its export of oil, gas, nickel, aluminum and other commodities. And those have been largely shielded from sanctions because the West realizes that the world relies on these inputs and banning them would cause as much pain to consumers as to the producer.

Washington’s sanctions have been well planned and well executed with one exception: energy. If the goal is to reduce Moscow’s oil revenue, the sensible strategy — assuming you can’t cut off all Russian oil supplies — would be to allow petroleum to flow unrestricted while working on a long-term plan to reduce Western dependence on Russian energy. That way, supply would stay plentiful and prices would stay low. Instead, Western countries announced an embargo on Russian oil.

The proposed price cap on Russian oil is an effort to correct these mistakes and essentially negate the effect of the oil embargo. So were the efforts to get Saudi Arabia and other Persian Gulf states to pump more oil, which have failed. The Saudis miscalculated how badly their decision would go down in Washington, and it will cause a rupture in the relations between the two countries. But the larger problem is the West’s incoherent energy strategy. It has underinvested in the energy it uses today (fossil fuels) based on magical thinking about the energy of tomorrow (renewables) — which will really arrive in scale the day after tomorrow.

The greatest danger to the United States is that much of this global economic war is being waged by America alone, using the unique status of the dollar as its weapon. Because countries need to use the one truly global currency, the threat to cut them off from it allows for extensive sanctions that can touch on goods and services that are not produced in America. The dollar hit a two-decade high last month because of the lack of alternatives. At the same time, many major countries — Saudi Arabia, the other gulf states, India, Turkey, Indonesia and China above all — are searching for ways to shake off the hold of the U.S. currency and to escape the long reach of Washington’s economic power.

As I’ve suggested before, President Biden needs to make a speech in which he explains that it is only because of the unprecedented nature of Russia’s challenge to the rules-based international order that Washington is wielding these weapons and that they will never be used in normal circumstances or for purely parochial interests. Wherever possible, Biden should be trying to forge the broadest possible coalition. Otherwise, even if the United States were to win this struggle with Russia, future historians might remember this as the moment when countries around the world began to reduce their dependence on America, and when Washington began to lose what a French president once called the “exorbitant privilege” of holding the world’s reserve currency.