No earthly power, short of nuclear annihilation, can stop Russia and China from trading. The countries share a 4.3 thousand kilometer long border over which bulk commodities like oil can be exchanged for precious commodities like gold. Physical currencies, including dollars, euro, renminbi (CN¥), and rubles (₽) can also flow across the border, by plane, train, automobile or, if necessary, camelback.
Physical means of payment need to be safeguarded from third-party bandits, which adds to expenses, but the counterparties need not fear expropriation so long as Putin and Xi remain allied, for each retains incentives to enforce the foreign contracts of the companies in their respective countries. Given the likely size and profitability of current and future trade, private contracts will largely be self-enforcing anyway because the costs of reneging on a deal, loss of future dealings, will exceed the expected benefits of future trade. That is why hundreds of billions of dollars can exchange hands in foreign exchange deals daily with nary a default.
For transactions requiring more speed, or some sort of collateral, Bitcoin or other cryptoassets could be used, and probably already are.
The cheapest and fastest method to make payments, though, is simply bank to bank, CN¥ for ₽ deposits and vice versa. To thwart such transactions, U.S. officials have imposed secondary sanctions, i.e., sanctions on foreign banks and other financial intermediaries engaged in sanctioned transactions.
The U.S. officials who imposed secondary sanctions are either daft or engaged in vote mongering. Hopefully, it is the latter because the former continues down a road more costly to the U.S. than to Russia.
Some segment of U.S. voters blames Russia for the invasion of Ukraine and wants the American government to do whatever it can to defeat Putin. Some would even support direct military intervention but most appear content with what is termed “virtue signaling.” In other words, they want to think that U.S. policymakers are actually inflicting harm on Russia’s military capabilities by thwarting its trade. Such voters do not understand even their own domestic finances much less international ones and are easily swayed by headlines and pundits telling them that sanctions have been “strengthened” or “tightened” or other impressive sounding words. Most such people will not vote for Trump but they might also abstain from voting at all unless they can be made more enthusiastic about Biden.
U.S. policymakers, though, might actually believe that their secondary sanctions will prove effective although they simply move the core issue to another level. Much like the internet itself, financial systems are networks and highly malleable ones at that. Information/cash flows that hit nodes (financial institutions) that are blocked due to sanctions or other causes simply reroute to active nodes. Moreover, new nodes can be created at any time to “launder” the money, or in other words to hide its “dirty” origins. Despite decades of effort, U.S. officials have been unable to stop the laundering of illicit drug money by domestic agents and hence stand no chance against foreign launderers, whose transaction data can be altered or hidden from prying eyes.
Policymakers could take more extreme measures but again they can only increase transaction costs, not interdict mutually beneficial trade. Moreover, at some point, they risk their actions hurting an already troubled domestic U.S. economy by making U.S. companies fearful of doing business abroad, which appears to be the main effect of the secondary sanctions so far. In the limit, their actions could be seen as an act of war, like a physical blockade of Russian ports certainly would be.
Extending sanctions to tertiary transactors and beyond threatens a return to a bipolar world, like that of the Cold War era, with two competing spheres or “worlds” that trade in limited quantities and only with government approval. Such an outcome would decrease world output by limiting the gains from trade to those available within the two blocs and also increase the probability of the outbreak of a major war by decreasing economic ties.
The “Free World,” led by the U.S., prevailed in the Cold War but the same outcome is not assured should global trade again be divided. America’s free enterprise system proved more productive relative to the command economies of the two major communist foes, the USSR and China. The economies of the EU and the U.S. today, however, are much more controlled than they were then and the economies of Russia and China are now more fascist, and hence flexible and productive, than the economies of their communist forebears.
Moreover, how the world would divide remains unclear. After decades of invasions and occupations of foreign countries, as well as numerous documented instances of interfering with foreign nations’ sovereignty, the U.S. has lost the moral high ground it possessed after World War II. The Anglosphere, the EU, and India would likely remain within the U.S. bloc but much of the rest of the world could fall into the Sinosphere, creating a rough economic parity that never really existed during the Cold War. Undoubtedly, some countries would play off the two blocs, much as India did for decades, for their own gains.
In sum, the latest round of U.S. sanctions against Russia and those doing open business with Russia might raise transaction costs but cannot stop trade between Russia and China. Hopefully, U.S. policymakers cynically attempt to increase votes to Biden knowing full well that their efforts are too miniscule to affect Russia’s war machine more than at the margin. If they actually believe that sanctions can work if only further tightened, their miscalculation may lead to much higher costs for Americans while actually bolstering China and Russia.
