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Why a trade embargo could stop the war in Ukraine

Economic theory suggests that the likelihood of conflict is higher between countries that are more open to the international market. Cutting off Russia could therefore help put an end to the futile conflict

Russian invasion
Maravillas Delgado

For just over two weeks now, with the start of the invasion of Ukraine, many of us have been wondering why the conflict could not have been prevented. The first war in Europe in the 21st century is definitely different from the wars of the past, due to the vast interconnections that link our economies digitally and through international trade in goods and services and through global value chains. However, although trade has promoted peace and prosperity throughout history, this does not always work. This is the case for Russia, where democracy is absent, leaders are irrational and lust for power blinds them to the disastrous consequences of war.

Economic theory tells us that the process of globalization has changed the nature of conflicts. This conclusion was reached in 2008 by Philippe Martin, professor of economics at the Paris Institute of Political Studies, and his two co-authors. In their work, the researchers analyzed the aforementioned interconnections between trade and conflict, pointing out that wars can occur due to the existence of asymmetric information, i.e. when one of the potential opponents has more or better information than the other. In this case, the likelihood of conflict is higher between countries that do little bilateral trade, since the opportunity cost associated with trade losses is small. Nevertheless, in assessing the likelihood of conflict, what matters is not only the bilateral trade between the two countries involved, but also their trade openness to the rest of the world. For instance, greater external openness, measured in terms of trade as a percentage of gross domestic product (GDP), reduces bilateral dependence and thus the cost of a bilateral conflict. Therefore, the authors conclude that external openness may increase the likelihood of bilateral conflicts with neighboring countries.

What can we draw from this theory if we apply it to the bilateral conflict between Russia and Ukraine? First, Russian President Vladimir Putin had more geostrategic information given the superiority of his military. Second, bilateral trade data indicates that Ukraine’s exports to Russia have gone from 25% of total exports in 2012 to around 8% in 2020. This has been accompanied by an increase in trade with the European Union, which has almost doubled its weight in Ukrainian exports in less than a decade. A similar trend can be observed in Ukrainian imports from Russia, which have halved in the same period. Moreover, the geographical reorientation has not been due to a change in the sectoral structure of trade, as Ukraine still has a comparative advantage in the same products as it did 10 years ago.

In addition, if we look at Russia’s trade openness, its foreign trade accounted for 46% of GDP in 2020, higher than that of other large emerging economies such as India (37%) or Brazil (25%). In short, low bilateral trade and the aggressor’s non-negligible trade openness would have led us to conclude that the likelihood of conflict was already very high in 2020. Unfortunately, unlike US President Joe Biden, European leaders did not believe it would happen.

Clearly, the consequences of war for the economy and trade are dire, not only in terms of the massive destruction of both physical and technological infrastructure, but also in terms of human capital. The most immediate consequences are already evident in the fall of the rouble and the rise in oil and commodity prices, which is affecting the global economy.

Finally, to return to the initial question and apply the theory in reverse, we could ask ourselves whether once war has broken out, would it be possible to stop the aggressor by refusing to buy and sell goods and services on a massive scale? Although many companies and governments have already implemented these initiatives, including Shell and Zara, it is far from clear to what extent they will be able to strangle the Russian economy. It should not be forgotten that Russia continues to export fossil fuels to Europe, and that China continues trading with Russia, as do the former Soviet republics of Central Asia, among others. But could a trade embargo stop Putin? If the current trade cuts with Russia are extended to energy products – something which is unlikely in the short term –, Russian trade openness would likely plummet, meaning that if the theory works in reverse, this futile war will soon cease.

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