Letter to the FT’s editors (May 26, 2022)

This is a short version of the letter, which was composed with a 300-word limit in mind

Your recent Op-Ed, “Now is the time to help Ukraine by stepping up sanctions on Russia,” by Andriy Yermak, Chief of Staff to Ukraine’s President Volodymyr Zelensky, prompted me to respond as follows.

He correctly claims that “the world must move faster to deploy effective sanctions against Russia.” So far sanctions, which have been mounting since 2014, have not discouraged the Kremlin from escalating its war on Ukraine. Why?

Sanctions rely on standard theory which states that any economy works as such: (1) savings finance private investments while taxes finance public expenditures; (2) a convertible currency attracts foreign savings and trade. If a country becomes a bad actor, then banning its foreign trade and cutting its access to foreign savings will stop the country’s ability to finance its destructive actions.

The issue is that such a theory misleads. A more sober economic theory must instead recognize a reversed sequence in which: (1) private investments create savings, and public expenditures take place ahead of taxes; and (2) nonconvertible currency fits in with international trade and finance. This is essentially MMT (modern money theory). If applied to Russia’s war on Ukraine, this theory helps illuminate that Russia has been shifting from a convertible to nonconvertible ruble since 2013. Hence, Russia’s capacity to “finance” its war is not going away anytime soon even if current sanctions mount further. Its current constraints are on the domestic availability of real (not financial) resources such as food, metal and labor. And they are there.

That is why to defeat malign Russia — today in Ukraine and elsewhere in the future — we must embrace the proper theory and provide Ukraine’s army with real resource, which is proper defense arsenal. The priority is to push Russian invaders out of Ukraine. Then, let’s deal with Russia’s main trouble, domestic inequality.

Alexander Valchyshen
University of Missouri Kansas City