Economist Tomáš Sedláček: I am proud of how fast the West agreed on sanctions

Tomáš Sedláček

The democratic world is exerting unprecedented economic pressure on Russia to try to stop the country’s aggression in Ukraine. How effective have the sanctions been so far and will they be enough to stop Putin? And how is the crisis in Ukraine going to impact the global and European economy? Those are some of the questions I put to Tomáš Sedláček, a leading Czech economist, university lecturer and a former member of the National Economic Council.

“Well, I must say that the sanctions against Russia have been immensely successful. Just the fact that Putin is trying to threaten the world with nuclear weapons is a sign that this has really not been without any pain on his side. In fact I think the sanctions have worked better than he -and we -expected. Sanctions don’t usually much bother the ruling dictator and they take time – if they are successful at all, which is rare because they work in one fifth of cases, and it usually takes years before the discontent bubbles up all the way to the top.

"But in the case of Russia, we are seeing the Russian economy collapse almost on all sides: there is the collapse of the ruble, there is talk of sovereign default –the Russian economy might default standing up, so to speak, because although they have an extremely low level of debt that does not prevent them from going bankrupt because they are unable to pay their obligations. There is that, there are people on the streets, there are runs on banks –there is uncertainty surrounding almost every feature of the Russian economy.

"So without any hesitation, I can say that the sanctions worked very well, very quickly and also, most  fundamentally, it is a symbolic message that the whole world, the advanced Western world is ready and united and ready to attack with economic weapons because that is how civilized nations wage war –if they must. They do not kill each other but wage economic warfare and this economic warfare is playing to our advantage now.”

Photo: Luděk Peřina,  ČTK

Well, some Russian oligarchs have already called for an end to the war – but will it be enough to stop Putin?

“That is another piece of good news, that the oligarchs have started rebelling against Putin, that’s not something we hear very often. People are protesting against him on the streets and he is losing in many areas. The last area, where a rebellion would be most important, is the army – if there is a putsch in the army our job is done.”

Is Russia’s exclusion from the international payment system SWIFT still crucial for the sanctions to work?

“Yes, I think it is very crucial, but what is even more impressive is the freezing of Russian foreign reserves –this is a huge part of the Russian “cushioning” system, it is 38 percent of their GDP, a really huge sum that Putin and his comrades had been saving in the years leading up to the war, during which time they lied to the world pretending that they had peaceful intensions. They left 38 percent of their reserves in euros, which means that they really did not expect the West to react so strongly, so quickly and unanimously. If they had expected this they would have shifted their reserves to a safe shore of Chinese yen or gold –but they didn’t, so clearly the sanctions took Putin by surprise. Now he has his hands full dealing with the consequences–there is a crisis in every single aspect of the Russian economy. This surely will derail him and distract him from the mass-slaughter war he is trying to wage against Ukraine.”

Clearly these sanctions needed to be taken, despite the fact that the democratic world will pay a high price for them as well. How will the sanctions affect Europe – in terms of crude oil, gas or the Green Deal?

Vladimir Putin | Photo: Francois Walschaerts,  ČTK/AP

“I am very proud of Western economists, of my colleagues across the EU in banks and advisory positions and businesses, because this was really a painful decision that we took. We took it very quickly and it will hurt a lot of European businesses but it is a sign that we are standing by the people of Ukraine and I think we have reached a point where we feel that not only Ukraine has been attacked but the whole free world. So we will pay with loss of revenue and there might be certain areas in Europe that will have to reduce heat consumption, but not in a crucial way. We have enough reserves. This winter has not been very cold and we have the whole summer to rebuild our economy around other energy sources than Russian oil and gas.

"So that is another level of sanctions. We could proclaim an embargo on Russian energy. I think this will either happen from our side or from the side of Russia. Either way, the sanctions will hurt the Russian economy much more than they will hurt the Western economy. You can actually see that very nicely in numbers. While the Russian stock exchange fell by 50 percent on one day and now it is still down by 30 percent compared to its pre-war standard, the European and American stock markets have taken hits of much smaller proportions –two to three percentage points. So that is the picture of asymmetry of economic pain in this economic war that we are waging.”

We have seen the Russian-owned Sberbank fall in the Czech Republic, Skoda Auto has reportedly had to restrict production because of a lack of spare parts. What problems do you foresee on the horizon and do you see problems in any given sector of the Czech economy?

“Sberbank will go down, that is without question. In a time of crisis it is enough for someone to merely point at a bank and express concern and the bank goes down. So that is what happened with the Russian government-owed state bank Sberbank.  Of course, people’s money is insured up to about 100,000 euros, which is about 2.5 million crowns, above that, with some exceptions, it is pretty much everybody’s risk of having placed their money in a bank owned by Russian oligarchs.”

How has this Russian aggression in Ukraine changed Europe and the world?

Kyiv,  Ukraine | Photo: Vadim Ghirda,  ČTK/AP

“That’s a good question, because, in my subjective opinion, I think it has suddenly become easier to breathe here because things have become so crystal clear. Looking with the benefit of hindsight at all the cowardly activities that the Russians have been doing not only in the Czech Republic, but across the European Union and also meddling in the American elections. If they are not afraid to meddle militarily with Ukraine it is now easy to see that they have been meddling with malicious intent in European affairs, meddling in our internal affairs, in our politics, in our businesses and using disinformation campaigns.

“So if Putin achieved one thing –it is a complete unification of NATO. NATO has never been this strong and it has never been this attractive to countries like Finland or Sweden. And the same thing could be said about the European Union. The EU is now having talks – and I am proud to say that the Czech Republic was one of the initiators along with other states – to let’s say, skip the bureaucracy and admit Ukraine into the EU. That’s also something that we haven’t seen in the EU for a very long time – the last news from Europe was news of the United Kingdom leaving the EU and now we have a country that is really anxious to get in and we can see that this would help Ukraine very much.  Thirty-three years after the collapse of the Soviet Union Ukraine should be allowed to exit from no-man’s land in which it has been dwelling too long for Russia to leave it alone.”

And how has it changed the political situation here in the Czech Republic? The country’s future foreign policy and indeed people’s thinking?

“We are united across the whole Parliament, which again is something that hasn’t happened in this country for a very long time –it is the same thing as in the US where the Republicans are voting together with the Democrats. We know without a shadow of doubt that we are doing the right thing. This has been such malevolent evil and such unprovoked aggression that all over the political spectrum, all over the business spectrum we know that we must stand by Ukraine.  Because if we let Ukraine go – who knows – we might be next in line.”