[SOFT GUITAR MUSIC] ANDREW KAROLYI: Good afternoon, everyone. I'm Andrew Karolyi, Charles Field Knight Dean of the Cornell SC Johnson College of Business. And I'm really grateful that you're joining us today. At the same time, I'm terribly disheartened about what's bringing us together, Russia's invasion of the sovereign nation of Ukraine.
We're, of course, affected by this needless bloodshed and destruction. And with hundreds, hundreds literally, of international students, staff, and faculty on our campuses, as well as thousands of alumni worldwide, we're truly a global community.
Just last week, I reached out via email to eight of our alumni currently living in Ukraine. I heard back from several of them. I thought I'd share with you just one piece of one reply from an alumna who is living in Kiev. At least she was until February 24. She and her three kids are now staying with their family in [INAUDIBLE]. It's about 120 kilometers from the capital.
She was writing with, honestly, a clarity and aplomb that we're starting to expect from Ukrainians. This is what she said to me. Quote, "It's difficult to state that we are safe here. But this is the best choice at the moment.
The situation at the moment"-- she pauses-- "we have a house with the basement, which we use as a bomb shelter. We're doing sport day and night to the basement and back"-- then she had a smiley face. "We do have gas, electricity, and food and are grateful to God for this."
Ladies and gentlemen, our hearts go out to this woman and her family in such peril, and just knowing that hers is not the worst experience in her country. As this conflict unfolds and we collectively witness leaders who are brutal, senseless, as well as leaders who are unselfish and committed, we must join together in support of our community members who are in danger now, those in the Ukraine and those in Russia.
So what must we do? Well, what should we do? As individuals, we have to express our thoughts as we feel what we feel, and we should, and also contribute however we are able and willing. But you know, we're also educators in this community. And we must commit to learning more and to contributing more to the greater understanding of the underlying causes and broader implications of this Russian aggression and the world's response to it, as well.
This is our focus in our discussion today. The current conflict bears some quaking echoes of World War II, other wars, revolutions-- 1956, 1968, '79, '91, 2014. But in other ways, it's a much more modern war and with uniquely potent weapons, including those, let's call them, financial and economic ones, that relate to our own areas of expertise in Cornell and our college.
So economic sanctions are not new. But they have changed. Perhaps they were initially intended to be clean, tactically precise only in harming the intended recipients. But we now know that in an integrated, interconnected world, the effects are going to be felt farther than we'd like, perhaps even by ourselves.
And the current slate of economic sanctions is actually unlike any financial warfare we've seen before, using a powerful variety of instruments, initially limiting banks and tech exports, and then access to the SWIFT network, seizing of oligarch wealth, freezing most Russian overseas central bank reserves, in addition to financial sanctions.
There's international technology, cyber actions all in play, some in the hands of non-state actors, some of whom are global firms simply shutting down their enterprises in or around Russia. The moves, the dynamics that are being set in motion really bring big, big, big, important questions, not all of which we'll be able to address today.
But we're going to do our best to start with some clear, shared understandings of these actions and their intended and unintended consequences, and perhaps other tactics not even yet being employed. So what I am so pleased to tell you is we have three incredible experts to bring their perspectives to all of these questions.
Ladies and gentlemen, Eswar Prasad. He's the Nandlal Tolani senior professor of international trade policy here in the Charles H. Dyson School of Applied Economics and Management at Cornell SC Johnson College of Business. His most recent book, The Future of Money-- How the Digital Revolution is Transforming Currencies and Finance examines the accelerating changes in financial tools and behaviors and how they'll affect the economies going forward.
Sarah Kreps is the John Wetherill Professor in the Department of Government and is the director of the Cornell Tech Policy Lab here at Cornell University. Her teaching and research focuses on the intersection of international politics, technology, and national security. And I'm also pleased to say she's a veteran. She served our country as an active duty officer in the United States Air Force, 1999-2003.
And Erica Groshen is a senior economics advisor at the Cornell University School of Industrial and Labor Relations. She's also a research fellow at the Upjohn Institute for Employment Research. Erica served as the commissioner of the US BLS-- we call it-- the Bureau of Labor Statistics in President Obama's second term and, prior to that, was the vice president of research and statistics of the New York Federal Reserve.
Thank you, all three, for being here. So what I'm going to do is pose some questions to our panelists. I'm welcoming them to comment on each other's answers, of course. We will have time for the audience to submit some questions. So please submit them through the Q&A function when they arise for you during the discussion.
And so let's get started. Eswar, we'll start with you. It's going to be a question about financial sanctions that the US and other countries have instituted so far. So if you might start, just tell us what it means to block access to SWIFT, the international payment system. What does it mean that we are imposing on investors by announcing that we are freezing access to or cutting positions that they may have vis-á-vis Russia?
Maybe a few definitions to get us started of some of these financial tools that many maybe outside the world of finance have not yet been introduced to, so SWIFT, American depository receipts, other payment settlement systems. So what are these? How are they part of these sanctions that are imposed in support of Ukraine?
ESWAR PRASAD: Thank you, Andrew, for convening this panel. And it's quite an honor to be on a panel with such distinguished colleagues. What the Western world has done with remarkable alacrity and remarkable unity is put the Russian economy in a real vise grip through both financial and technology sanctions.
Now, Russia has an economy that relies to a large extent on export revenues from its sales of natural gas in particular. But in addition, Russian businesses, Russian households have benefited a great deal from their easy access to international financial markets. And also, many international firms, including financial services providers, operate in Russia.
So in fact, a lot of payments are conducted through institutions that are managed by Western companies. So Russia has gotten quite intricately linked into global finance. And in fact, its domestic financial system also relies on those connections. So what the West has done is really a crippling blow.
Now, one of the things that you mentioned, Andrew, is lack of access to the SWIFT system. Now, SWIFT is not actually a payment system. But it is a messaging system. So it was set up basically to get around the old telex system, to get around the fact that different countries have different technological platforms, different regulatory jurisdictions, and also differences in language.
So all that SWIFT does really is provide an easy way for messaging that allows payments to flow smoothly across national borders, across banks in different countries. It turns out that SWIFT is dominant in terms of international messaging. And it is managed largely by the G10 economies, the large economies of the world.
So the US and the West essentially have control over it. So losing access to that basically means losing access to the ability to move money easily across Russia's borders, either into or out of the country. So this creates a huge problem for Russian corporations, households that want to be able to move money across the borders, and basically makes it very difficult to stay connected with the international financial system.
It's not that alternatives and not developing. China's developing its own cross-border interbank payment system, the CIPS, which could one day perhaps conduct direct payments between China and Russia, perhaps act as an alternative messaging system. But this is a ways down the road.
So losing access to SWIFT basically is a problem. Likewise, losing access to the warchest of foreign exchange reserves that the central bank of Russia has built up is another problem, because the whole point of a warchest is basically having access to hard currency reserves, such as the dollar and the euro, that can be deployed at a time like this to protect the ruble from falling in value, because when you have an economy as open as Russia is, a huge fall in the ruble-- and it's fallen in value by about 40% or more relative to the dollar already-- that's a big blow to the wealth of Russian households and, again, could feed into domestic inflation in Russia in addition to the crippling economic effects.
So by freezing the ability of the Russian central bank to access those funds and use those dollars and euros to protect the ruble, we've seen the consequences in terms of a sharply falling ruble. So Russia is feeling the pain. And ultimately it's going to affect how investors can potentially get access to Russia's markets.
But of course, when it comes to specific things, like ADRs, American depository receipts, we have, too, an expert on this panel, of course, which is our dear moderator, Andrew. So maybe, Andrew, you have something to say about ADRs and how international investors should be looking at how they should think about Russia as an investment destination now.
ANDREW KAROLYI: Yeah, well, thank you for throwing it back to me. This is a system that I've studied for about 25 years. And this is the primary mechanism by institutional investors to actually create a position that buys them exposure to markets overseas, like to Russia. And there are a number of securities that are listed on the major stock exchanges here at the New York Stock Exchange and NASDAQ, that are listed and traded in the form of ADRs, American depository receipts.
There are also, of course, a series of global depository receipts of Russian securities listed and trading in London, as well. And the same issues are there as they are here.
These trading mechanisms have been suspended. And that is a problem. If you want to actually act on this and, let's say, to sell down a position now that the ruble is depreciated, the prospective future cash flows that you would have been able to secure by an owner of the security is no longer. And so it's just much more difficult to transact more so than ever before.
The fact that they are in a depository receipt form does not make it any easier. All that is is a back-door payment system and settlement system between the trading systems in Russia, as well as the New York exchanges. And basically that's just all frozen up right now. And it's just impossible for investors to be able to take action with respect to those securities.
But thank you for that, Eswar. Let's turn to Erica. So, Erica, what do you see as the likely immediate effects of these sanctions on the Russian economy? And I'm thinking about, Eswar mentioned inflation, perhaps industry impacts. Talk about the energy sector, investment, economic growth, maybe potential monetary and fiscal responses that they can muster.
They do have access to some of their central bank reserves, but not all of them. As Eswar said, they've lost access to a significant fraction of them. So if you can, can you please pivot to the implications also, then, not just for Russia and the Russian economy, but how about for the US and the global economy? And I'm thinking about the implications here for global supply chain risks, energy markets, the stressors there, acute inflationary pressures that are mounting, other things.
ERICA GROSHEN: So to start with Russia, I'll be brief. They're being hit, in macroeconomic senses, with very strong inflationary pressures because the value of the ruble has gone through the floor, right? So anything they want to buy from abroad costs a lot, if they can get it at all.
Their business activity slowed because any number of foreign companies have stopped operating there. So people are losing their jobs and losing their sources of income. Many people don't have access to their savings. So they can't spend money the way they would like to. And when they do have access to that, the prices are very high for what they want to buy.
So this is a real problem for the everyday Russian citizen and is likely to really contract their economy substantially and have higher inflation. And that's the definition of stagflation, which is high inflation and falling economic activity at the same time.
Now, for us, for the US and, in general, for most of the rest of the developed world, the two influences, in some ways in a very broad sense, are similar-- higher inflation and lower economic activity, but not nearly as extreme. So this is another costly event for us coming after the pandemic, which is a costly event, right?
We should never think that we are going to be able to get out of the pandemic without having higher budget deficits and/or higher taxes, right? That's just when something's costly, you have to pay for it, right?
The same thing with this conflict with the war in Ukraine. Now, we could have decided to, of course, engage in a traditional war. And that would have cost us lives and money for that. We, for many good reasons, have chosen to take a different approach to keep this from being a world war conflagration and to, of course, save lives. But that doesn't mean it has no cost at all.
And so instead of putting our troops in harm's way, we are going to be paying an economic cost. And it will have some inflationary influences on us and some depressing impacts on our economic activity. So shortages of the things that Russia and Ukraine produce-- oil, gas, wheat. And we keep hearing about new things along the way-- nickel, neon, whatever.
So those goods lead to relative price increases that can help fuel wider spread price increases. And we already had some of those coming out of the pandemic. Less in terms of business activity. Less travel, particularly international, as a result of this than we would have had coming out of the pandemic.
Military and defense spending is likely to rise. So this is one industry that may actually benefit, all right? Then there's also a tremendous amount of churn and uncertainty that's being caused by this on our supply chains, in financial markets.
And in many, many industries, there are now new uncertainties. That is costly in terms of reducing investment usually. You get more hesitance to make investments when you don't know what the future is and you have less certainty about that.
And trade is certainly disrupted, if not reduced. So all of these things will tend to suppress economic activities. Oh, and the global cities, in particular, may lose out because they no longer have the benefit of travel that comes to them. And also, the investment and the activity the spending of the oligarchs over their engaged.
So this is going to be a more challenging time than it already was for our policymakers, more fraught and more complex. And this is why it's going to be their job to make some tough decisions. But we have the institutions, I think, that are in place to handle them. And it will be a complicated and challenging time. But we have the benefits of the solid institutions that will be dealing with them.
ANDREW KAROLYI: Thank you. Thank you, Erica. People are sending questions forward. I'm really gratified to see that. There's some themes coming forward. We'll come to them very shortly. But keep them coming, everybody.
Let's turn to you, Sarah. So picking up, where Erica is focused on the global macroeconomic considerations and their impact for the intermediate future, I know you think a lot in your research about the implications of that for the international relationships that are out there.
So how do you see, I guess, especially some of the already politically fraught relationships for the US and how this may change? I point to this morning's Financial Times featuring a story about the rising cost of China's friendship with Russia.
They're describing it as a new threat to China's economic system that could lead to a diplomatic backlash over this tacit support for Russia. But you're welcome to talk about this as any translation of the macroeconomic consequences for international political relations and arrangements.
SARAH KREPS: Yeah, thank you. And thanks again for convening this panel. I was looking at some of the questions in the chat and hoping we could have an entire session on digital currencies, but maybe a future discussion. And hopefully we'll get there in this panel.
So there are a few things I'm looking at as someone who follows the intersection of international politics and technology. And clearly this has been a watershed event in all respects. And so I'll just touch on a couple of aspects of it that I think are worth putting on the table as part of the consequences that we're looking at.
One of the things, I think, that's worth addressing is something that hasn't really been a feature thus far, which is the absence of cyber attacks. I think a lot of military people thought that this would be a rapid invasion, a decisive invasion of Russia in Ukraine. And that didn't happen.
Cyber experts thought that Moscow would combine its military invasion with a cyber attack. And that didn't really happen either. And so that's been very interesting. There certainly were malware attacks leading up to the invasion. But it's been interesting to see that there's been apparent restraint on that side. And it's a question as to why.
One hypothesis is that the Russians have held back and they're keeping this in reserve. Another possibility is that they tried and failed. But what's been interesting in this space is the combination of non-state actors, ranging from criminal syndicates to cyber militias to hacker collectives like Anonymous have stepped in to conduct attacks on Russia. And so that's been a surprising feature of this.
One of the other parts of the international political space here that's very interesting is that there had been a lot of ambivalence within the US-European relationship, US-NATO about the mission, about the aspects of those relationships. I think that all of that's gone. There's little daylight among these North Atlantic countries, a lot of galvanized cohesion within the US and Europe fighting a common enemy.
And in that way, we see a lot of resemblance with the Cold War. And that comes back to what you were talking about, these key dates, 1956, 1968, and how this does start to take on the flavor of a new Cold War.
And then, third, I might just say that in terms of the way these relationships are playing out in oil markets is also fascinating to look at, that we seem to be replacing the US energy reliance on one dictatorship, Russia, with three others, Venezuela, Saudi Arabia, and Iran, which seems like something of a Faustian bargain in a lot of ways because in the Saudi case, they are looking at the possibility of a quid pro quo.
They, Saudi Arabia, will release more oil if the US supports their war in Yemen against the Iranian-backed Houthis. That's not necessarily a war that the US wants to actively be part of.
Iran wants us to end sanctions and approve a nuclear deal in exchange. And Venezuela is still an autocratic country. We had a policy of maximum pressure on Venezuela and sanctions on Venezuela. And so that's a way in which this invasion has really upended so many of these relationships in international politics and then the commensurate economic relations within those countries.
ANDREW KAROLYI: So can I just follow up on that? Because it's not one Faustian bargain but almost like a portfolio of these Faustian bargains. And I don't know how one rationalizes among them to think through where would be the least painful to take action, right?
SARAH KREPS: Well, right. And I think that brings in another tricky aspect of this, which is the Biden administration came into office prioritizing climate change. And that seems to now be very much at odds with this goal of releasing more oil.
And I think what that really just comes down to is almost a triage and what's the most near-term, immediate concern and the most visible to Americans, because we have a political landscape that this all plays against the backdrop of. And the media story is about the $6-a-gallon gas. And Biden is in his first term. And so it almost forces that hand of having to make these Faustian bargains with pretty unsavory regimes.
ANDREW KAROLYI: So can I just pick up on one more thing, Sarah, before we move on? And it relates to the earlier comments you're making about, and it's very close to your research, about the cyber attacks and especially Russia's cracking down on media and social media channels. I wonder if you can tie them together for me with the implications of these financial sanctions?
I'm sure you've thought about this a little bit, what role those play. Are they connected? One of the questions in the chat is actually on this matter. So I figured I'd try and test you to see if you can put these connections together for us.
SARAH KREPS: Yeah, it's really interesting because, of course, Russia is at the vanguard of disinformation campaigns in general. And so it's no surprise that they've engaged in that here in this context. So Western media outlets have left Russia. But also, there is widespread disinformation about why Russia undertook this intervention.
But what's interesting to watch is that it's clear from these that they can try to shape a certain narrative in which they can shift the blame for sanctions through disinformation. But they can't shift the evidence. And the evidence is becoming very clear about the effect of sanctions.
It's hard to hide that the ruble has lost 64% of its value in recent months and that the ruble that people hold as currency in Russia is not worth as much as it was a month ago. And so other examples of that, I think they will start to become even more clear.
So these sanctions have cut off supply for-- there was a great piece in The Wall Street Journal about this yesterday, I think-- Lada, the Russian-made car, where 20% of its parts come from outside Russia. And Renault, a French company, owns a stake. And so if people are unable to buy items that they have become accustomed to, that's a hard narrative to counter even with disinformation.
ANDREW KAROLYI: Yeah, it's just, again, you're giving a beautiful example of this interconnected world and with just the inevitability that the reality comes to the fore. Can I turn back? I know I counted at least four questions coming forward on this. So if you don't mind, let's go back to Eswar on this.
As I mentioned off the top, Eswar's book came out last fall, called The Future of Money. And among the many favorite parts I have, my most favorite-ist of favorite is chapter 4, which is called "Cryptomania." And there's a section in there that talks about crime and illegal payments that are made through cryptocurrencies.
And by the way, anybody can comment on this. But let's give Eswar the first shot. Last week, it was Senator Elizabeth Warren and I think three other lawmakers wrote a letter urging Treasury Secretary Janet Yellen to ensure that the cryptocurrency industry is complying with the sanctions that are being imposed on Russia. They're basically expressing concern that the digital assets could somehow be used to undermine the foreign policy goals that are being done.
So I guess I just want to ask you, Eswar, can you see this being an effective approach? Is it benign? Is it something that's realistic? And I think, Sarah, you'd probably like to jump in on this, as well. So, Eswar, you first.
ESWAR PRASAD: Andrew, it certainly sounds plausible that cryptocurrencies, which are essentially non-state currencies, could be used to evade sanctions that are largely imposed through the regulatory jurisdiction over the formal parts of the financial system. After all, it's very difficult to move money without involving banks.
Now, at the scale of an economy, however, I think it is very difficult to evade sanctions using cryptocurrencies. The reality is that market is not big enough or liquid enough to be able to effectively get around the sanctions.
In fact, I think, for Russia, there are some real concerns. What we've seen in many countries, not just Russia recently but even in Turkey, when the Turkish lira was collapsing, is that people in the country with a collapsing currency realized that even though Bitcoin, for instance, might be a very volatile asset to hold, it might be regarded as more safe than the domestic currency.
So if you think about Russian citizens worried about the safety of their ruble-denominated deposits, whose value, as Sarah pointed out, has been plunging, and especially about ruble-denominated deposits in Russian banks that are now being severely constricted, they might actually find that cryptocurrencies provide a way to get around those problems which might lead to even more pressure on Russia's financial system from the inside and potentially also serve as a channel for flight of capital out of Russia.
Now, none of this is trivial to execute, because, after all, while Bitcoin is supposed to provide anonymity, the reality is that you have a remarkable degree of what I think of as radical transparency with all transactions and the digital identities of the transacting parties being posted on these public digital ledgers, the blockchain. And it's possible to unravel the identities of the transacting parties.
But when there is so much at stake in terms of personal wealth, people might decide that this is worth doing. So I think cryptocurrencies, if anything, could be a problem rather than a boon for the Russian economy.
ANDREW KAROLYI: OK, that's a perspective we're not hearing. Sarah, Erica, do you want to add anything to that? Perspectives?
SARAH KREPS: Yeah, I think this has been a fascinating aspect of the conflict to watch because we have these cryptocurrencies that are explicitly not tied to a government. And that's been part of the appeal.
And the crypto exchanges have indicated generally that they are not going to block customers from using their platforms. But at the same time, these exchanges do have a physical location, which does mean that they, at some point-- there is a mechanism for being regulated.
And I think there is this-- I can see evidence that they out of self-preservation, are trying to thread this needle, where they're looking like they're being responsible and accountable so they won't have the Senator Warren, Senator Graham coalition then step in and overregulate. And even in the European Union, they're talking about how these digital assets are part of a sanctions regime.
And I think Eswar's point is a really good one, though, on the other hand, which is that these transactions are public. And in some senses, that can be easier to crack down on illicit accounts.
But it's also, I think, where these exchanges, I think, are really torn, is that they seek to be agnostic and very decentralized. And blocking Russian customers from using their platforms, I think, would be very antithetical to what they stand for.
ANDREW KAROLYI: Yeah, I can't help but turn this to you, Erica, and maybe reflecting back on your New York Fed experience. People are wondering-- there's certainly one question here that's specifically asking about, just how vulnerable is our banking system and our infrastructure to some of these potential hacks?
But I'm willing to extend that to the extent to which they're exploring exposing themselves to the crypto asset space. And we're seeing that as a possible vehicle for end-arounds for the sanctions. Just, do you have a sense of this? Are we resilient? That's, I think, what people are wondering. Are we resilient?
ERICA GROSHEN: If there's one thing we learned from the financial crisis is that it's often not the size of a market but its interconnectedness that poses the risks. And I think at this point, the cryptocurrency's certainly gotten large. But I'm not sure that they're all that interconnected yet, partly because they are outside most of the regulatory apparatus. So it may turn out that the war in Ukraine will turn out to have been a bit of a turning point that the cryptocurrency world and the non-cryptocurrency world realize that they have to grow up. The cryptocurrency world has to grow up. And the rest of the system has to find the right place for it. And so I think that I don't see that it's, from my point of view, probably not going to be a very big player in either how this affects or doesn't affect the outcome. But for the world of cryptocurrency, this could well be an inflection point.
ANDREW KAROLYI: Yeah. How interesting is that? So it's the other way, the tail wagging the dog, as opposed to-- speaking of, we have a fourth panelist joining us. It's fantastic.
ERICA GROSHEN: Oh, yes--
ANDREW KAROLYI: So do you mind if we turn now maybe to some of these questions? And they're just coming in fast and furious. You may have seen them. I'm going to have to choose among them.
So this one's back to you, Sarah. And it asks, "Do you have a personal assessment, if Russia's failure to successfully execute convergence with multi-domain operations is a competency failure or due to believing the narrative that Ukraine was waiting for liberation or something else?" So there's a lot to unpack there. Personal assessment asking you, your professional, your scholarly viewpoint on Russia's failure to execute with multi-domain operations-- I'm not sure I know what that means-- as a competency failure. That's the question. Is that something you can get around?
SARAH KREPS: Yeah, absolutely. So that, I think, speaks to what I was talking about at the outset, which is that people who study the military space, the cyberspace, I think have been sort of stunned at the incompetence and the seeming lack of preparation.
It's sort of bizarre. If you start a war, you're doing it, by definition, on your own terms. And yet, they have been obstructed at every step of the way. And so again, you've seen that across different contexts, even, for example, the use of these Turkish-made drones in combat. It's sort of surprising how effective those have been against Russian assets. And it's this question, where are their anti-air systems?
Again, you choose to invade a country. You would think that you would do that with the proper air defenses in place. And they didn't do that either. So it's hard to see that this is anything other than incompetence.
ANDREW KAROLYI: Yeah. So this is another question. It says, all panel. So this is for anybody. Happy to have you start, Erica.
So it says, "When you think of, how the business community will shift from a measured approach to a whole society effort to impose costs on Russia"-- and I guess the question is thinking about Starbucks, McDonald's, and the kinds of announcements that we've seen-- "and that they are providing outright condemnation of Russia, others are using softer language and looking for ways to maybe invest in Russia."
So I think the question is trying to get at some of the strategic aspects of how business is approaching the new set of opportunities that lie before them. Do you have a thought or reaction to the posturing that different companies are taking with respect to the opportunities that are presented here?
ERICA GROSHEN: Hm, well, I'll start off by saying I think that anybody involved in the defense industry is probably looking forward to good times. We talked about different industry effects. I think that defense, aerospace, there's definitely-- they're looking forward to better times.
The pandemic and then this event, I think, is really going to inform supply chain decisions going forward. So how to manage risk and supply chains is going to be a big deal.
And the easy answers are to expect more diversification and maybe more local purchasing of inputs and possibly changes in corporate structure as a result. So what do we need to bring inside in order to protect our access to something that could otherwise destroy our ability to make the product that we need? So I think that's an impact.
Another impact-- I think this event calls for a rethinking of how it is that large, multinational corporations discuss their relationship to foreign policy like this, right, because-- and what I think I'm hearing is that they are saying, well, we have a united interest in stability and a certain level of following the rules.
And even though we don't want to be "political," we will take a stance against things that we can all agree is kind of necessary for the common good and that will help our bottom line in the long run. So interesting effects.
You have a company saying, OK, we're going to shut down operations. But we are going to continue paying our employees, right, which is an interesting response. I mean, that does soften the blow on Russia. But it does say, well, we care about people. And we expect continuity in the long run.
So there will be a lot of study of these different approaches going forward. And I think it's a very interesting time from that point of view. But from what I can see, the momentum is increasing. And I expect more and more steps in that direction as long as the war goes on.
ANDREW KAROLYI: Yeah, companies withdrawing. That's a fresh perspective I haven't seen. I'm reading everything I can like a sponge. But I haven't heard anyone talk about this reframing of the whole concept of multinationalization and this being a catalyst towards that rethinking.
We were talking a lot about offshoring and then reshoring and onshoring. And just the whole proposition of multinationals are maybe being reframed and challenged with this current environment in ways we hadn't anticipated before. Eswar or Sarah, do you want to jump in on that?
ESWAR PRASAD: Andrew, this episode harks back to a fantastic framework for thinking about risk in emerging markets that was in a book that appeared a few years ago written, of course, by you. I think that gives us a great way to think about how businesses may be evaluating the risks. And of course, it's a huge escalation of the traditional economic and business risk, given that China is an economy that has taken a body blow.
But in addition, I think there are some specific aspects here. It's reputational risks that have increased for these firms as well as the policy-related risks within Russia.
So it's layering on top of the risks of investing in emerging markets already. So even from a pure business point of view, even if these are not necessarily high-minded corporations, I think the risk-benefit calculus has shifted very significantly, which, again, points to the effectiveness of the sanctions imposed by the West because they have imposed costs on the Russian economy.
The one complicating aspect in all of this, of course, is that while the sanctions have managed to hit practically the entire range of the economic spectrum, from the poor people on the streets all the way to the oligarchs, the reality is that, as our Cornell colleague Nicholas Mulder points out in his recent book on economic sanctions, the efficacy of this in effecting regime change, which I think is what all of us, including perhaps many Russian people, might want, that is far from clear.
So we might end up in a situation where, in fact, we have another potentially rogue state. And certainly, destabilizing governments may not work to the advantage of either the 11 countries themselves or to the world economy. And recent history is replete with examples of this sort. So right now we're in a very tough spot. And it could get tougher in some ways.
ANDREW KAROLYI: Right. Unintended consequences yet again. Sarah, do you have a take on all that? Regime change--
SARAH KREPS: Yeah, I mean--
ANDREW KAROLYI: --as it relates to all-- please.
SARAH KREPS: Absolutely. So the State of the Union was fascinating for those of you who watched it or looked at the transcript. I mean, so much of the message is, make it in America. More cars in America. More semiconductors in America.
And I think this is a movement that was starting before, in part as a result of facing China. And then COVID really accelerated it with the supply chain-- these exogenous shocks to the supply chain and the access issues, availability issues of semiconductors.
And I think that now this will further accelerate that move to try to bring everything home. And I think there are some pretty significant economic consequences of those policy shifts.
ANDREW KAROLYI: Well, we're going to move into our final thoughts here in a few minutes. But I wanted to take one more question from the audience that's come in. And of course, I apologize to everybody who's sending them. There is now, I think, three pages on our Google Doc of questions that are coming forward.
So I guess the question here that I'm going to pose to you-- maybe this, we can start with you, Sarah-- it says, "How much time is Russia going to tolerate this level of pressure?" It's kind of a forward-looking question.
I'm going to open it up to all three of you. But I guess it's sort of a forward-looking perspective on how much of this burden that they're assuming through the imposition of these sanctions, how much will they be able to tolerate? How long can they go? And they offer some date lines here. But do you have any thoughts on timeline and resilience.
SARAH KREPS: Well, I--
ANDREW KAROLYI: I think is resilience.
SARAH KREPS: --I would pessimistically agree with what I understood Eswar to be saying just now, which is, I would think it's a long time because I think-- this is an autocratic regime. And the leader is quite insulated from people around him and surrounded by people who are reaffirming his beliefs. So I think we could see a lot of pain and suffering for a long time that he would not be responsive to in a bottom-up way at all.
ANDREW KAROLYI: Yeah, Erica, any thoughts on this?
ERICA GROSHEN: Russia itself, well, I mean, I think one of the open questions is, how much can the information bubble to the Russian people be breached? And maybe not. But that's a role the private sector can possibly play.
Just today, I heard the thing to do is to go to Airbnb or something like that and put a comment in on some product and [AUDIO OUT] information about what's really going on in the real world, right? So people are looking for ways to try and breach the information bubble. If that information bubble can't be breached, then Sarah understands the implications well. I am a congenital optimist. But sometimes you get the bad outcome.
ESWAR PRASAD: Sadly, the reality is that authoritarian regimes have proven highly persistent. And the human tolerance for the extreme suffering does seem to be large enough that it's not obvious that the population will rise up and get Putin out of office. And it's not obvious either that the circle around him is in position to do so. So it's not obvious that regime change is coming.
ANDREW KAROLYI: Yeah, well, let's pivot to this last question we agreed we'd take. So I'm almost asking you each to close your eyes and take yourselves forward one year. I think we agreed one year forward. And I ask you to paint a picture of what you see, what the landscape will look like, and how different it might be.
And you can take that question any way you want. It may be the most salient things that you're reading about, seeing, thinking about, that you're seeing right now and imagining that forward. So each of you can take your own angle on this. Sarah, do you want to go first?
SARAH KREPS: Sure, yeah, I would focus on two key countries here-- Russia, of course. And I think it would be really hard to walk back the opprobrium and the sort of violation of trust that it now has because I think what Putin has shown is that he won't stop really at anything.
And I think as these sanctions take hold, and, again, the longer this goes on, I just don't think that these multinationals are going to be racing in if and when this does end because one of the-- I think some kind of, whatever, equivalent executive order today about expropriating foreign companies. So I think it will be a long time.
And I think Russia will sort of be stepping out of this international globalized economy. But I think the real wildcard here is China. So China has been playing a delicate dance here.
So a couple of weeks ago, they said there was, quote, "No limits to their loyalty in the relationship with Russia." But that's really coming under a test because Russia is taking actions that I think China did not foresee. And China has this value and norm that it embraces of sovereignty and non-intervention. And obviously what Russia has done has been a clear violation of that.
And so far, there has continued to be a kind of tacit siding with Russia. But the longer this goes on, I think that will become less tenable for China. So it will be interesting to see whether they can navigate that or whether they do gently tilt to one side or the other. But again, in terms of international economic consequences, I think those are significant.
ANDREW KAROLYI: Eswar, one year hence.
ESWAR PRASAD: So I have two themes, Andrew. One, multilateralism is blossoming. We've seen the West come together very quickly in a remarkable fashion. There are countries like Germany that seem to be sitting on the fence in terms of sanction, limiting natural gas exports from Russia, and so on. But they have come together very solidly.
There doesn't seem to be a break in the wall. Even Switzerland seems to be shedding its neutrality to some extent to support these effects. So this is all very good.
The second theme, multilateralism is on the rocks because when you start looking at the rest of the world, and Sarah referred to this, China is sitting on the other side of the fence. And even many emerging market countries that you would think would be much more aligned with the West, including India and perhaps some African economies, including South Africa, have not been as vociferous in condemning Russian hostility against Ukraine.
One of the lessons I think China is going to take from this episode is that military power by itself is not enough. Russia has a $1.7 trillion economy. And it's less than 2% of global GDP. They can be squeezed economically. China already has what it calls a dual circulation policy, which is basically to increase the internal resilience of the economy and reduce dependence on the rest of the world as an export market, as a source of technology, as a source of innovation.
So I think the lesson that China is taking from this is probably that it wants to insulate itself from pressures of this sort. And ultimately, countries might end up being forced to choose sides because I don't think we've seen the last of these sorts of interventionist actions by certain powers. So it's going to be a much more united world in terms of these two camps, but with more of a cleavage between the two of them.
ANDREW KAROLYI: Oh, interesting, yeah. Erica?
ERICA GROSHEN: OK, so a few things about the year to come, fairly simple things. I think we are going to see a wave of immigration out of Russia, particularly, I would think, the most highly-skilled people. They're most likely to be critical and informed, et cetera. So a brain drain from Russia, some of it landing on our shores.
The other broad point is that I think as I look forward into the next year, the thing that just jumps out at me more than anything is how important good policy is going to be for these outcomes. Policy and the choice of how we deal with the sanctions, how we deal with our allies. So that's going to be key.
Monetary and fiscal policy. The Federal Reserve is facing pressures both towards inflation and the recession. After energy shocks, we usually have a recession in 6 to 12 months. Maybe not this time because it's unusual. But every time is different, and yet we've had them.
So this is a time where they are going to be hanging on the data and looking at it really hard. And in terms of fiscal policy, how do we manage the costs of this? How do we do that wisely?
The third way that policy is really going to matter in the coming year are decisions that are going to determine the longer run, all right? So how much we use this crisis to move us towards what we need to do in terms of climate change versus undoing it, how much it moves us towards better international relationships versus the alternative.
And one more thing that I would end with, because it underlies so much of what we're talking about, do we use this as another opportunity to understand how important it is for us to have the data on which good policy and business decisions are made? Do we use this as the opportunity just to say, well, we really need to make sure that our official statistics are 21st century official statistics, that they are as timely and as granular and as trustworthy as they need to be so that in these crazy times, we make the best possible decisions?
And parenthetically, we have been starving our statistical agencies. And it's not going to serve us well going into a bright future.
ANDREW KAROLYI: Wow. "Wow" is what I'm saying. You know, Eswar, Sarah, and Erica, you three make Cornell University so proud. We have authoritative voices speaking on an issue that is clearly of our times.
And you know, what we say and do as scholars, students, staff, alumni who are listening in, our dear friends of Cornell University, it matters because we all are-- well, this is the mission statement of our College of Business. I think there's a lot in it for-- it's true to Cornell's authentic values, which is that we are dedicating ourselves to future leaders, in our case future business leaders who are principled and who think and act responsibly and as good global citizens.
We certainly believe in leadership with empathy, with respect for the individual, and we understand there's strength in unity and weakness in inherent isolation and divisiveness. So ladies and gentlemen, in closing, if you don't mind, I want to return to our dear alumna's email to me. It's at the end of her note, somewhat incredibly.
She goes on to specifically praise Cornell University, quote, "I'm not young, almost 48, and can sincerely confess Cornell years were the best part of my life. I'm grateful not only for the chance to study from the best but mostly for the chance to live in a society full of love, respect, and freedom."
She says further, "This was a completely new world for a girl coming from the former USSR. Thank you once more for the support. I'm deeply touched with love and hope for peace." And then she signed her name.
Let's all take courage from our friend. Let's go forward and contribute to a shared understanding of what's happening and what our roles can and should be leading the way forward. Thank you, everyone, for listening in.
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As the invasion of Ukraine weighs heavily on our minds, we seek to understand the international financial sanctions imposed in response. This panel of Cornell faculty experts shared insight and expertise on the financial, economic, and technological sanctions, and their potentials for efficacy and risk.
Panelists: Erica Groshen (ILR), Sarah Kreps (A&S), Eswar Prasad (Business) Moderator: Andrew Karolyi, Charles F. Knight Dean, Cornell SC Johnson College of Business