Economic Impacts: On April 8, 2022, President Joe Biden signed the Act Suspending Normal Trade Relations with Russia and Belarus and the Act Ending Importation of Russian Oil into law.
These rules revoke Russia‘s privileged trade status, allowing the US to levy higher taxes on Russian commodities and prohibiting the entry of Russian energy into the US.
According to The New York Times, both proposals already cleared Congress with strong bipartisan support on April 7, 2022. According to a BBC article, the United States and numerous European countries have previously restricted the transfer of military goods, planes, and luxury goods to Russia. Sanctions have also been imposed on a number of Russian government officials and their families.
The Herald spoke with various University of Michigan academic members from the Watson Institute for International and Public Affairs and the economics department about how these laws, as well as the broader Russia-Ukraine crisis, may impact the American economy and global economic trends.
When a country has preferential trade ties, “you normally apply the lowest tariff schedule to that country’s imports,” according to Mark Blyth, director of the William R. Rhodes Center for International Economics and Finance. After this new legislation was signed earlier this month, Russia lost its special status.
According to David Weil ’82, a professor of economics, the US and its “European allies… (are) embargoing imports and exports of various items” from Russia. “They’re telling their companies that sending a boatload of machine tools to Russia is prohibited, and importing various items from Russia is illegal.”
Weil argues that both the US and Russia will suffer economic effects because “trade is, in general, mutually beneficial.” However, he stressed, that “pain” in American households will be insignificant compared to that experienced by Ukrainians who are directly affected by the conflict.
“Even partially removing Russia out of the world market will push up the price of oil,” Weil added because Russia is a major energy exporter. “That’ll help feed inflation at a very inconvenient moment when we’re already dealing with growing inflation.”
“The European Union receives the majority of Russia’s oil and gas,” Heidi Peltier, a senior research associate in international and public affairs, stated. “However, anytime there is an oil or gas scarcity somewhere on the planet, prices rise everywhere.” That’s what we’re witnessing at the (gas) pump in the United States.”
Weil also stated that, as with previous embargoes, some workers will be laid off by various companies that export items to Russian markets.
Russia and Ukraine are both significant grain exporters. According to The New York Times, the two countries together account for more than a quarter of global wheat exports and are “also significant providers of barley, sunflower seed oil, and corn, among other products.”
While food prices are projected to rise around the world, the United States will be spared the brunt of the effects because it is also a significant food exporter, “and hence they’re competitive rather than complementary” with Russian goods, according to Blyth.
While locally produced and consumed goods will be mostly untouched by rising food prices, Peltier pointed out that all products that require considerable transportation, whether food or other goods, will be affected by the aforementioned increase in gas prices.
Peltier, on the other hand, is aware that Americans will be affected differently depending on their income group. She claims that “upper-income folks can more readily bear minor price hikes” for these things. Poverty and lower-income people “are hurt (the greatest) since most of their household budget goes to buying energy and food,” according to the report.
According to Blyth, Russia’s economy will not be harmed only by the United States’ exit from the oil and grain trade because of the limited tie between the two countries in terms of hydrocarbon and food exports.
“In terms of sanctions, what the US is actually doing is working on the financial route,” Blyth noted. The US is “basically freezing central bank reserves and kicking certain Russian banks and individuals out” of the Society for Worldwide International Financial Telecommunications, a popular financial system that allows banks to safely exchange financial signals.
According to Weil, trade embargoes have been in place for hundreds of years, but the ability to cut off Russian financial institutions’ access to such complex global financial systems is a more modern “special superpower” of the US.
According to Blyth, these banking sanctions are still flawed because of the “Correspondent Bank Problem.” According to Blyth, a sanctioned Russian citizen may open an account with a Russian bank and move their assets to an unsanctioned Belarusian bank, which could then send the money to a Chinese bank, which could then invest it in US shares.
“There are going to be ways around” limits when “you’re not punishing the full network of banks,” he noted. “There are a lot of holes in these sanctions, some of them by design, and others of them because it’s very difficult to sanction everything properly in a contemporary, integrated, global economy.”
According to Texas analysts, divesting from Russian assets would have a minimal impact on the state’s economy.
Economic analyst Ray Perryman told a statehouse committee on international relations meeting on Wednesday that because Russia’s imports and exports account for a small portion of the overall state economy, lawmakers can make decisions they believe are appropriate without fear of negative consequences for Texas.
Speaker of the House Dan Phelan entrusted the committee, which was formed in the interim, with studying the impact of trade with Russia on the Texas economy and manufacturing, among other things.
“Anything with Russia and Ukraine, those trade shares are so little,” Perryman said, “that it would have no substantial impact on the health or strength of our export industry’s growth in Texas.”
Last year, Texas imported $5 billion in Russian goods and exported $650 million in goods to Russia, the majority of which was in the energy and coal sectors, according to Perryman. According to him, trade with Russia made up less than 1% of total trade in Texas’ $2 trillion economies.