So one thing I like to waste a lot of time
doing while I should be making videos is watching nature documentaries. There is one in particular that I have been
thinking about a lot recently which is a story about a colony of honey bees defending their
hive from a hornet. Since these particular bees didnât have
stingers or any other kind of offensive weaponry they came up with an ingenious solution to
deal with the unwanted guest. They swarmed the hornet and started jiggling
their little bee bodies to create heat. The genius came from the fact that the bees
could survive in temperatures up to 47 degrees celsius, whereas the hornet could only survive
up to 45 degrees so if the little bee ball could generate temperatures of 46 degrees
they could slowly cook the hornet alive while narrowly avoiding death themselves. Nature is pretty metal. Now I promise I have a point here, which is
that these bees couldnât use offensive weaponry, so instead they inflicted pain upon themselves
because they knew it would inflict more pain upon the hostile invader. This is the same logic that countries use
when they impose sanctions on other countries that they see as hostile belligerents. There has obviously been a lot of talk in
the news about sanctions recently, and even before the hostile Russian invasion of Ukraine,
sanctions are often cited as the reason economies like, North Korea, Venezuela, or Cuba have
struggled to prosper economically. This all begs the question though, what are
sanctions? Short of being a bad thing that one country
does to another country, not many people stop to consider the detail of what these sanctions
involve, or how theyâre any different from something like basic trade restrictions. These economic hostilities may be seen as
more palatable alternatives to military hostilities, especially when dealing with nuclear power,
but will they be as effective? And could this all just push a cornered nation
into the arms of systems that undermine the global status quo? To find out, we as always need to understand
the answers to some very important questions. First and foremost What are sanctions? How are they used to inflict damage on countries? And more pressingly,
How do they hurt the economies doing the sanctioning? Alright, every time we cover a current issue
I have to give the big disclaimer, which is that nobody can predict the future, least
of all economists. It is entirely possible that sanctions work
exactly as intended and Russian leadership simply shrugs off the suffering of their economy
and continues with their hostilities. But with that out of the way. Sanctions are simply diplomatic actions taken
by governments or multilateral organizations against other states in order to protect international
law and safeguard against security threats, be they real or perceived. Sanctions can take many forms. There are military sanctions that can range
anywhere from a country kicking another country's foreign military base off their soil, all
the way to banning the international travel of military personnel. There are diplomatic sanctions, usually involving
the expulsion of foreign dignitaries and embassies. There are even things like sports sanctions
where sovereign nations are barred from recognition in international sporting events like the
Olympics. But of course, the one you are all interested
in are the economic sanctions. Economic sanctions normally involve a restriction
outright ban on either trade, currency flows, investments, corporate governance, or some
combination of all of these things. We mostly think of trade restrictions but
these other limitations are often much more appropriate. For example, a foreign businessman might be
barred from being an executive in a company if they are a citizen of a restricted country
like North Korea. Itâs also important to note that not all
sanctions are absolute. Some sanctions simply target specific industries
or perhaps even specific groups or individuals, for example, the USA has no sanctions against
the country of Bangladesh, but it does have sanctions against individuals associated with
a specific paramilitary force within the country itself. Now you might ask what is the difference between
economic sanctions and regular old trade restrictions? Australia taxes the import of American-made
cars, but obviously, Australia is not sanctioning the United States. Well the difference really comes from the
motivation, Australia taxes the import of foreign cars because it wants to protect its
local car industry, unfortunately, nobody has told our politicians that we donât have
a local car industry anymore but you know, let them believe they are putting up the good
fight I guess. The world trade organization's primary function
is actually to combat restrictions like this that are levied for economic benefit. The reasoning is that international trade
is almost always a net positive on countries that embrace it, but it does require trusting
your trading partners. If a country gives up food security to focus
on manufacturing it wants to be sure that its trading partners hold up their end of
the bargain to buy their manufactured goods and sell them food without any restrictions. The World Trade Organisation is basically
the global kindergarten teacher telling all of the world's economies to share their toys
so that everybody can have fun. They will intervene if a country stops trading
for economic reasons, but they will not intervene if a country stops trading for political or
militaristic reasons, in other words, they wonât intervene in sanctions. Sanctions can have exactly the same net result
as trade restrictions with the only difference being that the motivation behind the restrictions
is political not economic. This starts to expose the first big problem
with sanctions. There is a reason that countries take trade
deals so seriously, which is that if they fall apart they can do a lot of damage to
the participants, and the global economy as a whole. Normally sanctions are going to be far more
severe than trade restrictions which means their side effects will be more severe too. The sanctions imposed on Russia in the last
month are the most aggressive ever placed on a major global economy, this is what they
did. They blocked Russia from purchasing high-tech
goods, like computers and machinery from participating nations. They blocked the purchase of military equipment
from participating nations. They froze the assets and put travel restrictions
on ten individuals who were identified as the primary beneficiaries of Putin's regime. These are the guys that are having their yachts
seized all over the world. And the big one was that they blocked major
Russian banks from international transfers to and from participating nations. This was later followed up with restrictions
placed on their access to the SWIFT network. The SWIFT network is easiest to think of as
the internet of banking, it's a cooperative network of hundreds of banks that makes passing
money around the globe as simple and standardized as sending an email. Just like the internet, there are alternatives,
but just like the internet, itâs very hard to do business without. Russian companies are going to find it extremely
difficult to do business under these circumstances, which is going to be bad for them, but also
bad for the rest of the world. So itâs probably best to start with caution
and consider What can go wrong with sanctions Russia is a major supplier of food and energy
in Europe, Asia, and the Middle East sanctions limiting trade means that these countries
will go without. Russia and Ukraine account for over 30% of
the world's wheat supply. Ukrainian farmers are too busy harvesting
Russian tanks to tend to their crops right now and banking restrictions are cutting off
Russian farmers from the financial services they need to receive payment for selling their
crops internationally. This is threatening to hit vulnerable nations
like Egypt, Kazakhstan, and Turkey particularly hard because they have grown dependent on
these grain exports to feed their populations. These nations had nothing to do with the invasion,
most of them didnât even participate in imposing sanctions, but they are going to
be real victims here. Itâs important to remember that a lot of
these countries werenât in the best economic shape even before this got kicked off. Just like the bees sanctions are going to
hurt everyone in the hope of hurting the hornet more. Another example of this explains why Europe
was so apprehensive about cutting off Russian banking connections. Europe has billions of dollars in Russian
debt which now canât be repaid because Russian financial institutions have no way of sending
the money to them. There is another major issue that probably
isnât getting enough attention either, and thatâs asset seizures, and no I donât
mean the superyachts that are making headlines, I mean the stuff that Russia is seizing from
the west. The world's largest airline company is the
Dublin-based AerCap which owns and operates over 1,000 jets around the world, never heard
of it? Well, thatâs because they just rent the
planes out to regular airline companies who donât have the capital or the desire to
buy their own planes. There are a lot of airlines in operation today
that do not own any of their own planes and rely exclusively on companies like AerCap
to lease them their fleets. One of the biggest of such airlines is the
Russian-based Aeroflot. Aeroflot and other Russian-based airlines
have no practical way of paying the leases on the planes in their possession which would
normally mean that these companies would just take back their planes, but you know, good
luck taking an airplane from a Russian airport at the moment. Russia is set to effectively steal over 10
billion dollars worth of foreign-owned planes. In the short term, this might give Russian
airlines a boost to their balance sheet, but nobody is ever going to lend them planes again,
and that effectively puts a time limit on how long these companies can continue to operate. It also means that companies like AerCap are
now facing bankruptcy after having billions of dollars in assets wiped out overnight. This could have knock-on implications for
the entire airline industry, especially budget carriers, because if these rental companies
go out of business then so too do the airlines that utilize their planes, so if you were
planning a post lockdown holiday you might want to get on it sooner rather than later. Now if you werenât planning an overseas
trip it might have been because you blew your entire holiday budget filling up your car
at multi-year high prices. Following the invasion of Ukraine, oil prices
spiked on anticipation of disrupted supplies. Despite being a net oil-producing nation the
united states still imports a lot of crude, primarily to refine and resell all over the
world. Russia is a major oil producer which has historically
fueled very thirsty developing nations like China. If they canât get their oil from Russia,
they are going to get it from somewhere else which can start a bidding war, pushing up
the price of oil in international markets. Ironically prior to these sanctions, Russian
oil imports to the united states were at all-time highs accounting for around 10% of all imported
oil, up from less than 4% in 2008. The primary driver of this increased demand
for Russian oil was the fact that America could no longer import oil from Venezuela
because they put sanctions on them. Itâs important to point out that Russia
can still technically sell oil and gas internationally because of what is known as a carve-out. A carve-out is just an exception to sanctions
that are normally reserved for humanitarian goods, or goods that are identified as essential. Conveniently enough the west has deemed Russian
oil and gas essential, but there is still massive social pressure in place for western
oil companies to pull out of Russia anyway. Itâs pretty clear to see that sanctions
really are a double-edged sword, and in the long term, if countries think there is a chance
they could be the next victim of, or even collateral damage from these types of sanctions,
they will be more inclined to pursue policies of self-sustainability rather than mutually
beneficial free trade. Obviously, this isnât going to make for
any flashy headlines right now because it could take decades to play out, but global
free trade has been the primary driver of wealth creation in the last century, moving
away from it could do more damage than any of us realise. So with such great costs, the question needs
to be asked, Will these sanctions work Well, that depends on what these sanctions
are trying to do in the first place. Sanctions have been placed on countries with
one of three goals in mind. To stop international crimes, like human rights
abuses in China, and 1960s South Africa. To stop the development of weapons of mass
destruction, like the nuclear programs of North Korea and Iran. Or in the most severe cases, sanctions can
be imposed with the intention to cause regime change, this was first used in Zimbabwe in
the 1960s in an attempt to force out the ruling party and enable fair elections. This was eventually achieved more than a decade
later, but it came at a staggering human cost. Nobody will say it out but a regime change
is probably the desired outcome of these current sanctions on Russia. Now If the desired result of these sanctions
was simply to stop the Russian invasion dead in its tracks, make it pack up, and head back
home, Iâm sorry they are just not going to do that. Political situations within Russia aside,
thatâs just not really what sanctions do. The first issue is that, Russia probably already
knew this was coming. Sanctions impact different countries differently. In general, countries that are more isolated,
less democratic, and have had less time to prepare are going to be most susceptible to
sanctions than countries that are the exact opposite of these things. Russia can feed and power its own population,
the experience of the people doesnât mean much to leadership, and they had time to prepare. When Russia invaded Crimea in 2014, they had
a series of sanctions imposed on them that were really just heavily watered-down versions
of what is being imposed on them today. Since then they have made a visible effort
to bulk up on foreign currency reserves, as well as hard assets like gold. Now, being isolated from the global banking
system has meant that a lot of those foreign assets are now more or less useless as they
are frozen in banks that canât interact with the global economy, but even still the
dream of bankrupting Russia into submission is probably nothing more than wishful thinking. History has shown that sanctions are better
used as a threat than as a weapon. There are countries in the world today that
have been sanctioned for years that still possess a very threatening military, Iran
and North Korea being the obvious examples. If Russia continues down a path of hostility
itâs going to prioritize military spending over all other spending meaning its citizens
will suffer and perversely this could make it harder to back out of the conflict. Iraq was one of the worst sanction failures
of all time and the parallels between it and Russia today are quite frightening. In 1990, President Saddam Husseinâs invaded
Kuwait and triggered the same kind of international condemnation visible today over Putinâs
invasion of Ukraine. Of course, Iraq did turn into an active warzone,
and Iraqi forces were forced out of Kuwait by American troops, but Saddam Hussein refused
to comply with the conditions of surrender and so sanctions dragged on. By the end of the decade, a third of Iraqâs
children were malnourished, and poverty was rife in what used to be one of the wealthiest
most prosperous countries in the middle east. Saddam's rule did eventually come to an end
but it was a second war that did that, not the sanctions. Iraq demonstrated that if dictators are willing
to isolate their countries and starve their people sanctions can simply be ignored. There is the very real possibility that the
coming decades will see the eleventh largest economy in the world, home to more than 140
million people, and the largest nuclear arsenal in the world effectively cut off from the
global economy. Now while itâs hard I do want to end this
video on a positive note, which is that the world has seen firsthand how quickly blatant
acts of aggression will be punished by the global community. Any country with aggressive ambitions will
surely be watching this and thinking to itself that maybe taking an otherwise worthless piece
of land is not worth jeopardizing their entire economy. For everyone's sake, we can only hope that
they make the right choice.
Why is Zelenskyy pictured with all of those losers?