US and allies move to further isolate Russia from global economy
By Ana Swanson
President Joe Biden and other Western leaders moved late last week to further isolate Russia from the global trading system, saying they would strip the country of normal trade relations and take other steps to sever its links to the world economy in response to President Vladimir Putin’s invasion of Ukraine.
The measures, which were announced jointly with the European Union and other Group of 7 leading industrial countries, would allow countries to impose higher tariffs on Russian goods and would prevent Russia from borrowing funds from multilateral institutions like the International Monetary Fund and the World Bank.
Biden also moved to cut off additional avenues of trade between the United States and Russia, barring lucrative imports like seafood, vodka and certain diamonds, which the White House estimated would cost Russia more than $1 billion in export revenues per year.
The United States will also restrict exports to Russia and Belarus of luxury items like high-end watches, vehicles, alcohol, jewelry and apparel. The European Union announced its own set of bans, including barring imports of Russian iron and steel.
The restrictions add to a growing list of economic barriers that much of the developed world has put in place on Russia, whose economy is already suffering as a result. The ruble has lost nearly half its value over the past month, food prices are soaring, and Russia is in danger of defaulting on its sovereign debt. Its stock market has remained closed since the war began.
Biden said Friday that the moves “will be another crushing blow to the Russian economy.” He said Russia was “already suffering very badly” from the sanctions, adding that the West’s economic pressure was a reason the Russian stock market had not reopened.
“It’ll blow up” once it opens, Biden predicted.
The White House has been under pressure in recent days to respond to Russian attacks in Ukraine, including the shelling of hospitals, other buildings and civilian evacuation routes. The White House has warned that Russia may also use chemical weapons against Ukrainians, but it has repeatedly said that Biden will not send U.S. troops into the fray.
Instead, the administration has focused on ratcheting up economic pressure. Earlier in the week, Biden banned imports of Russian oil, gas and coal and imposed restrictions on U.S. energy investments in Russia.
The move to strip Russia of its preferential trade status would allow some of its biggest trading partners to impose higher tariffs on Russian goods. The G-7 countries, which also include Canada, Britain, France, Germany, Italy and Japan, purchased about half of Russia’s exports in 2019.
Russia’s preferential trade status is conveyed by its membership in the World Trade Organization, whose rules require that all members grant each other “most favored nation” trading status in which goods can flow between countries at lower tariff rates.
Taking away that status — which the United States calls “permanent normal trade relations” — would most likely have a much larger effect for the European Union, which is Russia’s largest trading partner and a major importer of Russian fuel, minerals, wood, steel and fertilizer.
In the United States, the move would carry heavy symbolism, but it could have a limited economic effect compared with other sanctions that have already been imposed, according to trade experts.
Chad Bown, a senior fellow at the Peterson Institute for International Economics, said the measure would raise U.S. tariffs on Russian products to an average of about 32% from 3%.
“However, the trade impact on Russia of such a tariff hike would be small, as the United States is not a particularly sizable export destination for Russian products,” he said. Russia was the 20th-largest supplier of goods to the United States in 2019, sending mainly energy products and minerals.
And many of those goods would be subject to far lower tariffs — in some cases, none at all — as a result of a decades-old trade law that would kick into place if the preferential trade status were revoked.
Each country will follow its own domestic process to make this change, the Biden administration said. The European Union has begun to pave the way for higher tariffs on Russian goods, but the bloc’s 27 member countries must agree on how to carry that out. Canada announced last week that it would withdraw most favored nation tariffs for both Russia and Belarus, a close Russian ally.
In the United States, the task falls to Congress, which had been pressuring the administration to consider such a move.
House Democrats proposed two weeks ago to strip Russia of its trading status and begin a process to expel the country from the World Trade Organization. This week, top Democratic and Republican lawmakers said they would include the measures in a bill to penalize Russia, but at the White House’s request, Democrats ultimately stripped out the provision to remove Russia’s special trading status. The bill passed the House on Wednesday but has yet to pass the Senate.
If approved, the measure would add to an array of harsh sanctions already announced by the United States and its allies. Western governments have reduced their energy trade with Russia, frozen the assets of Russian officials and oligarchs, and cut off the country from the dollar-denominated global financial system.
Governments have also banned exports of advanced technology and transactions with Russia’s central bank. On Friday, the Bank for International Settlements, which provides banking services to the world’s central banks, said it was no longer conducting transactions with Russia. And the Treasury Department placed new economic sanctions on three immediate family members of Putin’s spokesperson, along with 12 members of the Russian Duma and the management board of VTB Bank, which has already been sanctioned.
The Treasury Department said it was specifically targeting a plane and a yacht of Russian billionaire Viktor Vekselberg, which together are worth an estimated $180 million. Vekselberg is an ally of Putin, the department said.
The Russian government has fired back by announcing it would place its own restrictions on its exports, including of raw materials.
The White House said Friday that Biden had spoken with President Volodymyr Zelenskyy of Ukraine and told him about the measures, saying they would put further pressure on Russia.
The economic effect of revoking Russia’s preferential trade status depends on how the measures are carried out, and particularly if they affect oil and gas sales to Europe.
In an analysis released Friday, trade experts at the University of St. Gallen in Switzerland and the University of California, San Diego, found that if the G-7 countries imposed a 35% tariff on Russian products — as Canada has already done — Russia’s gross domestic product would shrink by 0.9%, a loss of more than $13 billion.
The researchers also calculated that Europe’s actions would have a far more significant effect on the Russian economy than those of the United States.