Bear trapped: the sanctions on Russia

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Hello and welcome to the Intelligence from the Economist. Today from London, I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. A democratic west facing country with a big bully of a neighbor. The island of Taiwan has every reason to watch what's happening in Ukraine. Our correspondent gets a feel for the political winds in Taiwan and in the broader region. And a hundred years ago this week, Pier Paolo Pasolini was born, an author, a playwright, a journalist and novelist, but most prominently an audacious film director. We look at the dark commentary in his films and the dark circumstances of his death. But first, The range of economic weapons pointed at Russia in the wake of its invasion of Ukraine has been nothing short of astonishing, perhaps even to Russia.

A powerful coalition representing some of the world's biggest democracies announced it would block some Russian banks from swift President Biden.

Targeting a new group of oligarchs today, as well as some of their relatives and close associates.

Russia faces a massive corporate global boycott under severe Western sanctions.

Now a truly devastating weapon is on the table, choking off imports of Russian oil, the biggest source of the regime's cash flow. America's Secretary of State Antony Blinken confirmed to NBC that the country is gathering up support among its allies, sending oil prices to a 13 year high today.

We are now in very active discussions with our European partners about banning the import of Russian oil to our countries, while of course, at the same time maintaining a steady global supply of oil.

American officials reportedly traveled to Venezuela over the weekend to discuss shoring up supply from there. It would be a bold economic move on the back of a great many bold moves that together have elevated sanctions from a kind of finger wagging to a chokehold.

Well, we've had a huge proliferation of sanctions over the last 20 years, but they've often been used very ineffectively.

Patrick Fowles is The Economist's Business affairs editor.

What's changed here is the bazooka has been brought out on Russia with every type of sanction really on the agenda. And the results so far for Russia's economy have been devastating.

And if we can pick that apart a little bit, which of the sanctions have been the most impactful?

Well, you can put it into several buckets. I mean, Western banks and investors have been prevented from dealing with some, but not all Russian financial institutions. And that is painful and makes trade difficult. But really the killer blow has been the decision to freeze the $600 billion of foreign reserves that Russia's central bank holds abroad. Without that, the economy lacks a kind of safety net or a backstop. And a sovereign debt default is possible. Without access to those central bank reserves of foreign currency held abroad and possibly with less access to the dollar earnings from oil and gas exports, Russia is not going to have the foreign funds available to pay down all of its debt, or at least that's, that's a possibility. And on top of the banks and the central bank, there are also measures to impede the flow of some high tech exports from the west to Russia which are really designed to impair its economic capability over time. For example, high end engineering gear used in the oil and gas industry.

And we've been hearing talk of potential sanctions on oil. How big a deal would that be?

Well, that's right. And in fact, this morning in trading in Asia, the oil price came close to $140. So really a huge event in global markets now taking place. And the Americans have signaled they may try to sanction the export of ore from Russia. It exports roughly 7 million barrels a day and it's possible the European Union might follow. Now that makes sense from the point of view of what hurts Russia the most. Oil exports are very, very important, far more important to Russia than gas, for example. So the west is reaching now for, I think, the ultimate tool which is blocking Russia's role as a very powerful energy exporter. And financial markets and the economy more broadly is now facing a really wrenching adjustment to that.

And we're increasingly hearing about all of the companies that are pulling out of Russia or stopping their business with Russia. How much difference will that make?

Well, yes, there's a flood of Western companies who are kind of self sanctioning. They're not actually legally obliged to, but are choosing to withdraw. Important to separate those out a bit. There are some companies, for example, consumer goods businesses, where really it's a kind of symbolic gesture, possibly designed to please customers in the west rather than really make much difference to what happens on the ground in Ukraine or Russia. There are, however, some areas where that private sector withdrawal will have quite deep implications. Energy companies, bp, Shell and others are withdrawing from Russian projects which could deprive Russia of some technological capabilities. Shipping companies, for example, have cut back on doing business with Russia, which has really quite large implications for Russia getting exports out of the country. And there are some interesting networks which have a very powerful role in the economy, for example, credit cards or even some of the big American tech platforms where partial withdrawals or full withdrawals are underway. So the private sector withdrawal, part of its virtue, signaling part of it actually will bite too.

And how have all of these sanctions, all of these different facets of this story affected Russians so far? What's it like on the ground?

Well, based on the reports of queues outside banks, I think people are probably worrying about the stability of the financial sector. They'll see that the access to some Western services and goods is now impaired. But really, I think the full cost both to Russia and to its people will become evident over the next two, three, four months as the economy contracts very significantly. We're talking about 10% declines in GDP and then this oil embargo is imposed. You're going to see Russia's access to foreign earnings collapse as well. So all of it paints a picture of Russia's economic capacity as a kind of military actor and geopolitical actor being significantly impaired. The flip side of that is also a huge drop in living standards for ordinary Russians and a lot of economic suffering there too, which is the inevitable collateral damage of a sanctions program of this kind.

And there's always some chance that sanctions have a cost to the parties enacting the sanctions. What do you think the risk is to the west here with this bazooka as you describe it?

Well, it's interesting. The initial two, three days after the really big sanctions on the central bank and banks were announced were actually fairly calm in the west in the sense the financial system globally absorbed the shock reasonably well. What's become clearer, I think if Western sanctions are imposed directly on oil exports, you do have really potentially quite substantial economic shock heading the west way in terms of higher oil prices, more inflation, lower growth, and also some people, poor people, especially in the west, having problems paying bills. So I think we've moved from a terrain where sanctions seemed, at least economically, a relatively cost free tool for the west to impose that crippled Russia without really hurting Western economies. We're now in slightly different terrain as the concerns over oil intensify. And that is going to mean that the economic cost to the west of, of these sanctions is higher. The Americans at least seem likely to go ahead nonetheless. And let's see if Europe follows.

And how sustainable is that, though with this much effect already on the ground, as you say, all of these threats on the horizon, how do you see this playing out?

Well, I think it's unrealistic to expect sanctions in their own right to prompt a withdrawal from Ukraine or some u turn on Mr. Putin's plan. But what it will do is, I think, impair the economy over a 12 year timeframe such that his sort of capacities to cause trouble elsewhere are really very significantly diminished. The other element of Russia's ability to survive is whether it can pivot to China, with China acting as a buyer of some of its exports, including oil, and possibly also as a kind of plan B provider of some of these services, like, for example, cross border banking, that could also prolong the ability of the regime to withstand this. But the bottom line here is that, you know, any normal country with an even vaguely representative form of government would face a kind of crushing crisis, which led to a reversal. Of course, the difficulty here is in an autocracy where the people at the top don't really suffer much, but are able to inflict a policy on everyone else, it's tricky to know whether such tough sanctions really ultimately change the course of the autocrats at the top.

Thanks very much for joining us, Patrick.

Thanks for having me, Jason.

For more on the breathtaking scope of sanctions on Russia and the risks they represent to the countries imposing them, listen to the latest episode of Money Talks, our show about business, finance and economics. Find it wherever you listen. And if you're like me, you've got lots more questions about the war in Ukraine, about no fly zones, how the war looks to ordinary Russians, or how tire maintenance figures into Russia's chances in Kyiv. So send them to us. The email address is podcastseconomist.com we'll gather up listener questions and answer as many as we can on Friday's show. On instructions from President Joe Biden, an American delegation of former senior defense and security officials visited Taiwan last week. Among them former Chairman of the Joint Chiefs of Staff Mike Mullen.

I do hope by being here with you, we can reassure you and your people as well as our allies and partners in the region, that the United States stands firm behind its commitments.

The visit was intended as a sign of support for the island in the wake of Russia's invasion of Ukraine. Taiwan has a menacing neighbor too, and is closely watching the international response to the war. On the country's social media, a slogan has taken hold. Ukraine today, Taiwan tomorrow. At the annual opening of China's parliament on Saturday, Premier Li Keqiang once again referred to the reunification of the motherland, saying China firmly opposed separatism on Taiwan's part and foreign interference. Taiwan isn't the only country in the region fixated on what's happening thousands of miles away.

Ukraine may be a long way away from Asia, but it doesn't feel that in a lot of capitals in the region.

Dominic Ziegler is the Economist's senior Asia correspondent and writes Banyan our column on Asian politics and culture.

There's a web of concerns that Asian countries have about the conflict, firstly because of concern about a widening conflict and the economic consequences, but also because of the lessons that China might be drawing and how those lessons might be applied to Taiwan, the island off its coast which it claims as its own.

So what responses have you seen so far among Asian countries to the conflict in Ukraine?

There's been a wide and varied response and I think the main reason for that is the Asia Pacific region's political systems vary enormously. You have a free and liberal democracy in Australia or Japan, you have a Stalinist hermit like dictatorship in North Korea, and you have a military junta destroying the country in Myanmar. So the reactions have really depended or flowed from the political systems in Myanmar. For instance, the generals who attempt to rule the country actually praised Russia for the invasion of Ukraine. At the other end of the spectrum, Singapore, Australia, Japan, South Korea, Taiwan, all democracies in one way or another roundly criticised Russia for its aggression. And then there's a great swathe in the middle, particularly those who buy arms from Russia, but also those for whom it's not convenient strategically to be in the western camp or the anti western camp. And I would name India as maybe the most significant country in that third, as it were, non aligned camp.

And I suppose one of the most pointed great power calculations falls on Taiwan, which must be watching what's going on.

In Ukraine quite closely.

Taiwan is watching what's going on very closely indeed. It for years has felt, as Ukraine has done, a small, relatively defenseless country next to a big bully. And China claims Taiwan as its own. There's definitely been a groundswell of popular empathy for the plight of the Ukrainians. And indeed, you know, there have been demonstrations in support of Ukraine. In Taipei, the capital buildings have been lit up with the blue and yellow of the Ukrainian national flag. So at that level, yes, there's a great sense of solidarity. The government, policymakers, military planners, are also attempting to draw lessons from the conflict in Ukraine, because they know that China is doing that too. Xi Jinping is a partner of President Vladimir Putin, and certainly China will be looking to learn lessons from how Russia is conducting its war in Ukraine. And one of the lessons would be how it applies hybrid warfare, using misinformation, using cyber attacks, and using ways to demoralize a population and thinking how that can be applied to Taiwan. But of course, it's not going very well for President Putin at the moment. And certainly Taiwanese are drawing some comfort from that.

Clearly, there's a parallel with a big bully neighbor and a relatively small, relatively defenseless state. But is it fair to compare these situations politically, geopolitically?

Well, it is fair, but some of the differences, I think, are more illuminating than the similarities. One very major issue for President Xi Jinping of China is that if he were to attempt a military takeover of Taiwan, which is 90 miles across the Taiwan Strait, he would have to succeed, and he would have to be seen to succeed very quickly. It's very widely assumed, and I think correctly, that not just his own political survival, but the legitimacy of the Communist Party of China really rests on that being a success. So he may himself be a risk taker. He's not a gambler, and he would certainly think very carefully before launching an invasion. And there's no suggestion that anything like that is in the offing.

And it's not just Taiwan and China, though presumably others would be dragged in, too.

For decades, since the end of the Second World War, the American military presence in Asia has underpinned the region's security. And although it's never been articulated in direct terms, American security also underpins Taiwan's security. The assumption is if there were an unprovoked attack on Taiwan, America would come to Taiwan's rescue. And it's become clear as China's geopolitical clout has increased in recent years, that other of America's allies would also come to help. That would include Japan, which is the US's chief friend and ally in the region. And for Japan, Taiwan is of existential value because geographically it acts as a buffer, protecting Japan to a certain degree from any aggression that might emanate from China.

So given all of that, what do.

You think Taiwan and the Taiwanese are taking away from what they see unfolding in Ukraine?

I get the impression from some of the political debates and pronouncements in recent days from Taiwan that President Tsai Ing Wen and her colleagues understands that really Taiwan has to be able to use its own weight, show that it's readier, to defend itself, to make it clear to America that it won't do anything provocative to anger China, and above all, not to declare formal independence, which China has said would be the pretext for an invasion, and to counter a sense that has grown over a number of years in America that the Taiwanese are not really ready for a hard and possibly very bloody fight. And lastly in this regard, and I think there's a Ukraine connection here, and I think one directly with President Zelensky of Ukraine, his very visible presence on social media, his very powerful and convincing leadership is, I think, something that has been impressed upon President Tsai Ing Wen by nature. President Tsai Ing Wen is inclined to be rather low key, but she and her advisors have been signalling that they've learned a lesson from President Zelensky's approach on social media. And I think we're going to be seeing a much more visible President Tsai in the coming weeks and months ahead.

Dominic, thank you very much for your time.

Thank you, Jason.

If you know anything about the Italian film director Pier Paolo Pasolini, the chances are it is going to be his last film.

John Bleasdale writes about film for the Economist.

Salah or the 120 days of Sodom is a film which is still today banned in many countries. On its release caused outrage across the political spectrum. The film represents a descent into hell, as four functionaries of the fascist government kidnap, torture and rape very young teenagers. However, on the occasion of the centenary of his birth, it's worth considering the true breadth of Pasolini's career. Born in 1922 in Bologna, Pier Paolo Pasolini was a writer, an intellectual, a playwright, an actor, a a novelist and a political commentator. Although outside of Italy, he's largely known for his movies, he was politically a communist, a devoted communist, of course. One of the most important and defining aspects of Pasolini's life was the fact that he was openly gay in a country in which that was still illegal. His first love in terms of art was poetry, and his first collection was published when he was only 18. His interest in film started professionally when he was hired by Federico Fellini, his slightly older colleague, to rewrite some of the parts of Le Notte di Cabiria, which tells the story of a life of a Roman prostitute. It wasn't long before he was writing and directing his own films, which gave his own distinctive vision of neorealism for the new generation. Perhaps his most audacious choice was to film an adaptation of the gospel According to St. Matthew, the life of Jesus, in 1962. In some ways, this looks like an odd choice for a communist atheist, but Pasolini approached it much as he had done his earlier films, that this was another story of people on the margins of life, about poverty and about rising up from your circumstances. The film has acquired a reputation since its release as a favorite amongst Christians and amongst Catholics and the Vatican, despite their suspicion of. The director, lauded the film on its release. He would say quite openly that he didn't want to destroy myths, but remake them. This can be most clearly seen in his celebrated trilogy of life, three collections of stories from the Middle Ages, the Decameron, the Canterbury Tales by Chaucer and the Arabian Night. And turned them each into brilliant films which depict the bawdy, dirty, slapstick, comic life of people just getting by at the very edge of their survival.

I came here to speak to you, Jenkin. Speak well, Jenkin. You have bewitched me. It's useless to deny it.

This had the unintended effect of spawning a whole sub genre of soft porn, or frankly, hard porn, based in historical context. Pasolini was so distressed by this that he decided to make an opposing trilogy. The Trilogy of Death and Salah would be the first film of that three film cycle. This movie is loosely based on the novel by the Marquis de Sade, and as you would expect from such a controversial source, it is shocking and explicit. Some of the scenes of torture and humiliation are really upsetting. Pasolini was making a film which was criticizing not only the Fascist period of the moment in which the film is set, but contemporary Italy in which consumerism and commodification knew no bounds. And he wanted to draw our attention to the fact that these young bodies were being used time and again in advertising and in porn for purely commercial purposes. That's why it's so distressing to watch, because the people who are being accused are not just the Fascist torturers, but also us, the audience. To add to the legend of Pierpaolo Pasolini, we have to also talk about the way he died shortly before Salo was released into cinemas. His death on the beach in Ostia outside Rome, was initially thought to be the result of a sexual encounter gone wrong. However, evidence would come to light, specifically the injuries that he had sustained, which showed that the idea of a lone murderer, the man who was arrested and confessed to the crime, was highly improbable. Even today, thinking about his murder, many people in Italy still think of it much more as an assassination because he was producing work which was politically challenging. The people at the top. But in the end, Pier Paolo Pasolini is not all darkness. That was one film. And the rest of his work is, if anything, a celebration of life. And he deserves a reputation today far in excess of what he actually has.

That's all for this episode of the Intelligence. Don't forget to send us your questions on Ukraine or just let us know what you think of the show by sending an email. The address is podcastseconomist.com. we'll see you back here tomorrow.