“Mariupol. As things have worsened the escape routes, already dangerous, have become more deadly. Oleksandr Horbachenko, a welder, says that when he left on March 18th the city was in a state of collapse, with no municipal services, no drinkable water and no food. He says at least 80% of buildings are bombed out. ‘The whole of the centre is in ruins, with wires and glass everywhere. The worst thing is seeing the corpses strewn across the street. There are hundreds of them rotting away near the central market.’” The Economist: An uncertain outlook”
All wars are terrible, especially when seen up close. Those who recklessly urge them are almost always viewing them safely from afar. Russia’s war on Ukraine has become tangible to us because the Internet brings it visually to us in our living rooms almost instantly and because Russia’s poor planning and poor excursion on the ground have pushed it to launch rocket attacks on civilian locations. Anatol Lieven: Why the Russians are losing their military gambit in Ukraine”
In an in-person interview of Ukraine President Volodymyr Zelensky in his compound in Kyiv, The Economist staff asked the President how he would define victory.
“’Victory is being able to save as many lives as possible…because without this nothing would make sense. Our land is important, yes, but ultimately, it’s just territory.’ To save everyone, defend all interests while protecting people and not giving up territory is probably an impossible task, he concedes.”
Why then, asked The Economist, hasn’t the President agreed with Putin on the terms of a peace?
Zelensky replied that: “Everyone has varied interests. There are those in the West who don’t mind a long war because it would mean exhausting Russia, even if this means the demise of Ukraine and comes at the cost of Ukrainian lives. This is definitely in the interests of some countries. For other countries, it would be better if the war ended quickly, because Russia’s market is a big one that their economies are suffering as a result of the war. They would like to see Russia keep certain markets” The Economist: Volodymyr Zelensky in his own words
This should give you pause. The severe economic sanctions being imposed on Russia (leaving aside the legally questionable confiscation of the private property of Russian oligarchs living in England and elsewhere) seem designed to flatten and isolate the Russian economy. Why? To what end? That certainly doesn’t benefit me or my country. Presumably they are meant to bring an end to the fighting, but what conditions must Russia satisfy to have them lifted? I have heard none stated.
Why hasn’t the U.S. pressed harder for negotiations? Who benefits financially from prolonging this war? Who besides the usual profiters of war (Military Industrial Congressional Media Complex)?
Russia’s attack on Ukraine has rightly outraged most of us. Leaving aside the history that brought us to this present conflict, Russia’s attack is totally unjustified. Our natural instincts are to help Ukraine resist its aggressor. As we watch the destruction of lives and property, it is natural to want to send in our boys or planes to help. Surely, we can stop this by using the might of our military and advanced weapons. Wars tend to look like that in the beginning. Vietnam, Afghanistan, Iraq (I still can’t sort out what Bush/Cheney thought was America’s interest in attacking Iraq) looked like slam dunks going in. The realities were invariably very different by the end. How should we help Ukraine?
The U.S. and Ukraine’s NATO neighbors have been supplying Ukraine with weapons but left them to fight on their own. This was my assessment a month ago: “Ukraine-Russia-NATO” As much as it strains against our impulse to help, President Biden is absolutely correct in ruling out our joining the war. For most of us, war, and the incredible pain it inflicts on those directly involved, is fought elsewhere by others. It is far too easy to say “sure, lets go to war.” “Ukraine-how should we help?”
But wars can be fought economically as well as militarily. Much of the West (the designation seems relevant again) has joined together to impose severe economic sanctions on Russia. But the objectives of these sanctions are not clear. They are too late to deter Russia from its invasion of Ukraine, though perhaps they provide an example of the potential cost to China if it decides to invade Taiwan. Are they meant to pressure Russia to come to the negotiating table? But it takes two to tango–Zelensky must be there as well. I have heard no statement of what Russia must do for the sanctions to be lifted.
The sanctions seem designed to cripple the Russian economy. Sadly, the pain will fall mainly on the Russia people rather than its government. Considerable pain will also fall on those imposing the sanctions. “The war in Ukraine and globalization”
Supply chains and financial channels will be disrupted for many years. But like military wars, the collateral damage an economic war is hard to predict. China and Russia and maybe India and much of Africa are being driven together to establish new trading relationships and non-dollar payment channels that don’t seem to serve American interests. If they are not explicitly linked to accelerating a negotiated peace, what are the sanctions for? I don’t necessarily believe that our military industrial complex deliberately promotes the perpetuation of war, but as an economist I can’t ignore the fact that they have an economic incentive to do so.
Missing from all of this seems to be the skillful deployment of diplomacy. The first priority, of course, is to end the fighting in Ukraine. But any peace agreement must look beyond the immediate war to the conditions that will promote peace and prosperity for Ukraine, Russia, Europe, and the world well into the future. As is often the case Chas Freeman says it best: https://www.youtube.com/watch?v=0vxufUeqnuc
We will cripple the Russian economy by cutting off their access to world markets. They will have to buy Russian.
We will strengthen the American economy by cutting off our own access to world markets. Buy American!
Both sentiments are circulating in the U.S. at the same time. If you don’t see the contradiction, you should probably stop reading. Cutting Russia off from external markets will definitely make it poorer but it will also hurt its former trading partners.
Without specialization and trade, we would all (the 99% of us) be poorer than dirt. See my very elementary explanation: “Econ-101-Trade in Very Simple Terms” This is why reducing Russia’s access to trade beyond Russia’s borders (cross border trade) will punish Russia and make it poorer. But this is often not properly understood even by very smart people: “Tony Judt on trade”
Trade is win-win, meaning that both the seller and buyer are better off as a result of their trades (assuming that their transactions are voluntary). Obviously then, restricting trade is lose-lose. Both sellers and buys are worse off as a result of restricting trade. I note this fact in my discussion of restricting trade with Russia: “How to Stop Russia in Ukraine” However, the rest of the world will have to scramble to replace Russian oil, gas, Ukrainian wheat, etc, and will pay higher prices for the substitutes.
Countries that impose trade restrictions on themselves (e.g., via tariffs) are often indulging in a form of corruption by enriching (“protecting”) favored industries or firms by reducing the competition they face from abroad (so called cheap Chinese labor, etc.). But trade policies and decisions can be more complicated than that.
Trade creates interdependencies. If a truck strike, or bad weather, or a cow disease, prevents the yogurt you no longer produce yourself from reaching your market (the local Safeway), you will go without it for a while. If semiconductors produced in Taiwan can’t reach American auto manufacturers on time and in sufficient numbers, car production is slowed. In short, supply chains that generally lower the cost of producing whatever, thus benefiting consumers, also increase the risks of supply chain interruptions. Businesses must (and do) evaluate the cost-risk trade off seeking a reasonable (profit maximizing) balance.
Some products, e.g., those related to our national defense, are sufficiently critical that the government forces producers to forgo the economic efficiencies of importing them in order to minimize the risks of supply interruptions, especially in war time. While this is often justified, the line between risk reduction for national defense and corruption to buy votes or benefit friends is sometimes fuzzy. But no one can believe that buying steel from Canada is a national security risk as Trump claimed and as I note here: “Econ-101- Trade Deficits”Buy American policies are more often in the corruption rather than the national interest category.
There is also an interesting political dimension to trade currently in our faces. The dramatic growth in trade in goods and services (from $63 billion in 1950 to $17,249 billion in 2020 “Worldwide export volume in trade since 1950”), has produced a dramatic reduction in poverty around the world (from 76% of the global population in extreme poverty in 1820 to 10% in 2018 “Extreme poverty in brief”’). It has also created significant interdependence between countries. This has positive and potentially negative aspects. While depending on Russia, China, Mexico, etc. for many of the things we enjoy (and sometimes even need) creates economic incentives to retain peaceful relationships, it also (the other side of the same coin) creates vulnerabilities and thus economic weapons to punish bad behavior. If the trade didn’t exist in the first place, cutting it off couldn’t be used to punish Russia. While we can inflict economic pain on Russia for its war on Ukraine by cutting off its access to our goods and services, Russia can and is inflicting pain on those of us who invested in Russia and who depend on Russian oil and enjoy Russian caviar.
The pain some in the West have inflected on themselves (and the rest of us) out of their anger at Putin by canceling our enjoyment of Russia’s rich culture, is beyond comprehension coming from so called adults. “Russian musicians, artists, athletes and other cultural figures are facing broad backlash as Russian President Vladimir Putin has continued to press his relentless and increasingly brutal invasion of Ukraine.” “Ukraine war-be careful canceling Russia”
Among the tragedies of the physical and human losses in Ukraine, and the disruption of the lives of millions of Ukrainian refugees, are the damage to trading relationships and the global order. See my commons in: “Ukraine-Russia-Nato” We failed to deal properly with Russia and its concerns the first time around after the USSR was dissolved. It will take a long time to repair the damage done to the international order by Russia’s attack on Ukraine. We need to do a better job next time around. “Western sanctions on Russia are like none the world has seen” We also need to better address the costs to those who must seek out new jobs and skills as a result of new technology and greater labor productivity, to which trade contributes. “Our Social Safety Net”
In violation of international law, Russia has invaded Ukraine and the world is rightly outraged. Countermeasures to stop the fighting and punish Russia’s aggression do not include sending NATO armies against Russia for the very good reasons that it would significantly increase the risk of a devastating nuclear war and because our experiences with such wars in the last half century are not encouraging. What countermeasures might we (and are we) use(ing)?
Our primary tools are to economically and culturally isolate Russia in order to damage their economic ability to continue waging their war and to hurt their pride. What might that include within the limits of our commitment to the rule of law?
Each of us as individuals, companies, and governments have the right to decide who we trade and deal with. Refusing to sell to or buy from Russia can have a powerful impact on the Russian economy. Examples of companies that have ended or restricted their sales to and/or operations in Russia include Ford, GM, Toyota, VW, Volvo, Nissan, Honda, Subaru, Harley Davidson, Apple, BP, Equinor, Shell, ExxonMobil, Visa, Mastercard, Google, and Netflix. And the list continues to grow by the hour.
“Ikea, the world’s largest furniture company, is closing its 17 stores in Russia. The company said the conflict is having a “huge human impact” and “resulting in serious disruptions to supply chain and trading conditions.” In addition to pausing its retail and manufacturing operations in Russia, it will suspend all trade with the country and its ally, Belarus.” “CNN: Companies pulling back from Russia”
Sports and entertainment organizations certainly have the right to determine their members and kicking Russian teams or performers out of competitions, etc. can usefully demonstrate disapproval of Russia’s behavior.
More problematic are the announcements by Boeing and Airbus that they have suspended support services to Russian airlines flying their planes. Airbus stated that “it has ‘suspended support services to Russian airlines, as well as the supply of spare parts to the country.’” These are problematic because they might be breaking provisions in contracts these companies have with Russian airlines. However, such contracts often provide for suspension in the event of war or other unusual circumstances. Moreover, if Russia withdraws from Ukraine in the next few weeks and the more severe sanctions are withdrawn, these reservations may become mute.
While social media platforms and entertainment companies (Disney, DirectTV, and WarnerMedia) also have the right to cut off Russian users, I am not convinced that it is always wise to do so. In my view we should all be able to view the propaganda disseminated by, for example, RT. While I am sure that WarnerMedia’s decision to “pause the release of ‘The Batman’ in Russia,” will be devastating for many Russians, they do have more challenging issues to worry about at the moment.
A rather different category of sanctions are those taken by and/or imposed on others by governments. For example, all Russian airline flights are now banned from EU, U.S., and Canadian airspace. As a result, or perhaps for other reasons, the Russian delegation to the World Telecommunication Standardization Assembly (WTSA-20) of the International Telecommunications Union now underway in Geneva didn’t come. This important meeting is held every four years to allocate spectrum and set other global telecom standards. By its absence Russia has lost all opportunities to nominate and elect chairmanships of any study groups and task forces for the next four years.
Most payments in dollars, Euros and most other currencies have been forbidden by the issuers of those currencies with specific exception. Russia has been blocked from using S.W.I.F.T. for sending payment instructions. The most important economic exception is that Russia may continue to sell oil and gas to Europe and to receive payment for them. Another is that Russia may continue to make debt service payments on Russian debt securities held abroad. The assets of all Russian banks outside of Russia, including its central bank, have been frozen. I am not sure how these two are reconciled. “BBC News”
The approach of blocking economic activity by blocking payments for them is a bit similar in spirit to Anti Money Laundering (AML/CFT) restrictions, which attempt to stop illegal activities by stopping the use of the proceeds of “crimes” that haven’t been proven, rather than stopping the illegal activities themselves. The effectiveness of blocking payments in key currencies depends on how widely they are supported. A UN resolution condemning Russia’s invasion of Ukraine was supported by 141 members. Only 5 countries voted against (Russia, Belarus, Eritrea, North Korea, and Syria). China and India and 33 other members (including, surprisingly, Cuba) abstained. Germany completely reversed earlier policies and is sending serious weapons to Ukraine and is increasing its military expenditures above NATO recommended minimums. While the extent of support is impressive, the abstainers open sufficient holes to undermine the impact of financial sanctions. None the less, the dramatic shrinkage of trade and real economic interactions will be devastating. Russia will be flattened and isolated.
More recently some countries have seized the assets of private Russian citizens.
The Russian Oligarch Igor Sechin’s yacht was seized Thursday by French Authorities while docked for repairs in La Ciotat, near Marseille. On the same day “Germany seized the Russian billionaire Alisher Usmanov’s 512-foot mega yacht Dilbar, which is valued at $600m, which was moored in Hamburg.” “Russia sanctions superyacht seizures”. To my knowledge, neither of these Russians committed any crimes in France or Germany or anywhere else outside of Russia. The legal basis for these seizures, unless they are being held temporarily pending a court determination of whether crimes have been committee, is very questionable.
Imposing harm on Russia and Russians of the types discussed above, will have costs to us as well. This by no means suggests that we should not use them. Properties and businesses abandoned in Russia and goods and services no longer sold there or purchased from there will impose costs on the western companies involved. Western owners of Russian securities are likely to incur losses. Some Russian debt will default. But Russia’s aggression must be stopped, and future aggression strongly discouraged. Watching the Soviet tanks crush Hungarian and Czech demonstrators in 1968 without our military intervention to help them was very painful but was the right thing to do, just as our nonmilitary approach now is the right approach, as long as we apply sanctions lawfully.
Putin’s reckless war in Ukraine is destroying Russia. Let’s hope that the good and long-suffering people of Russia will not allow him to also destroy the whole world.
It is impossible not to admire the bravery of the people of Ukraine as they fight for their independence and freedom. Without help, Russian troops are almost certain to capture Kyiv and other key cities. The EU and many other countries have pulled together as never before to impose serious sanctions and provide military and humanitarian supplies. See: “Sanctions” Putin’s failure to prepare the Russian people for a military attack on their fellow Russians and cousins in Ukraine is provoking protests in Russia against this war. But these may not be enough to save Ukraine and it is tempting to think we should provide boots on the ground to insure a Russian defeat. President Biden is right to believe that this would be a grave mistake.
Military interventions always look more compelling at the start, while going through the front door. Sure, our army can squash whoever. Years later, as we leave or are pushed out the back door (Vietnam, Afghanistan, Iraq, Libya, etc.), they are revealed as foolish endeavors from the beginning. While Vietnam has prospered after our withdrawal and Iraq’s development is promising, they might well have reached these achievements sooner if we had stayed out. Why is this so? Why can’t we just take over countries under attack and make them better?
Generally, the countries we attack are engaged in civil wars (Vietnam, Afghanistan, Libya). Even Russia’s attack on Ukraine has elements of a civil war. We almost never understand the nuances of such battles nor have sufficient military and diplomatic officials who speak their languages and know their histories as they rotate in for two years then out. We can never be sure which side or sides we should support.
Putting aside that we don’t really have the resources to fully police the world, we have rarely achieved our objectives in the wars we have undertaken since WWII even if those objectives seemed reasonable at the outset. Iraq is an example where we did not have a good reason (or any reason at all except feeding our military industrial complex) to begin with. Part of the reason is that we have never invested in the training needed to be successful imperialists. We are bad at running other countries. You can read some of my firsthand experiences with just how bad we were at running Iraq in my book: “My travels to Baghdad”
If we send in the American Army to defend Ukraine against Russia, even if no escalation in fighting results (which is by no means certain), we will be forced to remain there for X number of years to keep the peace. Which factions would we support or favor? Why do we imagine that it would be different than our experiences in Afghanistan or Iraq? While it is emotionally hard not to walk through that front door with our troops, we must remember what the back door feels like, not to mention the X years in between. President Biden is right not to do so. “Reflections from the netherworld”
Most Americans are good hearted and want to help those in need. However, I am hard pressed to think of a time when we successfully did so with our Army.
About 5 days ago, on February 24, Russia illegally and without provocation and cause attacked the sovereign country of Ukraine. It is in everyone’s interest (with the exception of the military industrial complex) to end the fighting and establish a sustainable peace as quickly as possible. I explored options in my blog Saturday. “Ukraine-Russia-NATO”
Sanctions are being piled on as the main counter weapon of choice around the globe, along with supplying Ukraine with military equipment. But which sanctions of what activities (use of SWIFT, banning access of Russian airlines, banning any travel across Russian borders, banning trade in military products, banning all trade, etc.) should be imposed? If all or almost all countries joined together to shut down all trade, travel, and financial flows between Russia and the rest of the world until Russia ends this war and fully withdraws it troops, the impact on Russia (and hopefully to a lesser extent the rest of the world) would be devastating. While it is hard to predict whether the Russian people would primarily blame the U.S. and the West or Putin’s government for the hardships imposed—it is unlikely that Russia would withstand such isolation for long. Russia seems well on its way to such isolation.
While sanctions have historically not been a very effective tool for changing a country’s behavior, such total isolation, if it can be achieved, would almost certainly be more effective than the more limited sanctions normally imposed. “A new history of sanctions has unsettling lessons for today” Putin will have to back down or escalate. Putin would indeed be boxed into a very difficult position and there is no knowing how he might react. It is hard to imagine Russian military escalation beyond Ukraine’s borders, but it is possible, especially in the ambiguous ways often favored by Moscow (e.g., cyber-attacks). If Putin is squeezed too hard, the risk of nuclear war could no longer be ignored. This is a dangerous period. “Just short of nuclear–the latest financial sanctions will cripple Russia’s economy” Such comprehensive sanctions should be largely removed as soon as Russian troops are withdrawn from Ukraine territory.
But while it is foolish (i.e., contrary to American interests) to keep Russia as an enemy in the long run, and it was foolish to have made it one in the first place, the Kremlin should pay a price for its attack on Ukraine.
Sanctions impose a cost on their target but also on those imposing the sanctions. If, for example, Russia is denied access to western products, the sellers are also denied the sales. Moreover, for many if not most economic sanctions, the people of the sanctioned country tend to suffer more than the government that is the real target. For post conflict sanctions, thought should be given to the most effective ways to sanction Putin and his friends specifically with minimal damage to the Russian economy. The borders and trade should be reopened to all but a small list of Kremlin officials including Putin. Putin’s properties and other assets abroad should be frozen or confiscated to contribute to Russian reparations for damage now being inflicted on Ukraine. “Russia’s military attack on Ukraine will have consequences for Putin”
Yesterday (2/27.22 6:37 PM), Edward Luttwak tweeted: “Putin’s agreement to talks with Zelensky’s reps is an abject surrender: by now the Russians should have been in control in Kiev and across the Ukraine with Zelensky dead or exiled. Frantic to divert attention, Putin has placed Russia’s nuclear forces on high alert. Meaning: zero”
Let’s hope that he is correct.
Every action should be carefully measured against is costs and benefits both short term and long term. Another protracted cold war would be a costly mistake for everyone. All measures should ultimately contribute to peaceful and secure relations between all countries. Greenwald–War propaganda about Ukraine
What does the press coverage of the Canadian trucker strike and Russia’s threatened attack on Ukraine have in common? Matt Taibbi’s column on the “The Great International Convoy Fiasco” will tell you. For good measure, he added that “On February 4th, 2004, the Wall Street Journal published, ‘A Historian’s Take on Islam Steers U.S. in Terrorism Fight’, about the influence of a Princeton Scholar named Bernard Lewis on George W. Bush’s Iraq policy. The ‘Lewis Doctrine’ was simple. The good professor believed there was no point to asking, Why do they hate us?”
For many weeks the American press (I apologize for lumping our somewhat diverse collection of newspapers into one camp) have been shouting that Russia might invade Ukraine any day now. Volodymyr Zelensky, the President of Ukraine, says that that is nonsense and to please stop saying it. I am inclined to believe him over our newspapers.
Something similar is going on with the striking Canadian truck drivers. The message in both cases is that we need to be tough. Arrest them and remove their trucks that are blocking the border with the U.S. Beef up our troops in Europe and tell Putin all the nasty things we will do to him if Russian troops cross the border. The mindset that reacts in these ways is not in our national interest.
Why are the truckers striking and why is Putin demanding a rethink of European defense architecture? While Putin has told us explicitly what he wants, to my knowledge no meetings have occurred between the Canadian truckers and the Canadian government. We may or may not sympathize with some of the Trucker’s concerns, but the proper (dare I say adult) starting point is to sit down with them and understand what they want. At least the Biden administration is talking with the Russians, but it would be healthier if more were said in the Press about these talks and the issues that Russia has raised, and less about the potential for, if not eminence of, war. Such discussion of the pros and cons of mutually acceptable options are out there, but you need to search for them.
The role of diplomacy (the first intergovernmental tool of civilized nations) is to understand the concerns and desires of the other side. That is the essential first step in seeking out areas of common ground that each side can live with. War is (or should be) a last resort. I am sure that Lockheed Martin, Raytheon Technologies, General Dynamics, Northrop Grumman, etc. can figure out other uses for their manufacturing and technical capabilities. “National Defense”
The world is rightly looking for ways to help Afghans without helping the Taliban (until or unless the Taliban forms a government the world is willing to recognize). Washington Post: “How to help Afghans without aiding Taliban” In this Post article Anthony Faiola states that “The biggest problem isn’t a lack of food. Rather, it’s the disappearance of what had been the lifeblood of the Afghan economy — Western cash.” This mischaracterizes the problems of Afghans thus confusing our understanding. In this note I attempt to clarify the “cash” aspect of Afghanistan’s problems.
But first there is no escaping the fact that the cut back of foreign aid is reducing the income (and the goods that income buys) available to Afghans. Mention is often made of the approximately 10 billion US dollars of the Afghan government’s funds frozen in deposits abroad. These funds cannot be used until a new Afghan government is recognized with the authority to claim them. But these funds are not part of the lost revenue to the Afghan government. They are the wealth–the previous income saved–of the government (whoever that will turn out to be). The savings that we accumulate from our incomes for retirement or whatever is our wealth not our current income (though it can be drawn on to augment current income).
In recent years (prior to the Taliban take over) the Afghan government’s operating expenditures were 16 to 18% of Afghanistan’s GDP while its domestic revenue was 12 to 14% of GDP. The balance of its financing plus all development expenditures were from donors. The hope is that squeezing the Taliban “government” financially will add to the incentives for them to quickly form an inclusive government meeting international norms of human rights. Unfortunately, it is not possible to shut off the flow of funds to the government without also starving the Afghan people.
While the Ghani government has been replaced (temporarily) by Taliban leaders, the institutions (ministries and agencies) of government remain, but with new management. Of the government’s operating expenditures roughly 80% was for wages and salaries. Thus, the government could more or less finance its wage and salary expenses from its own domestic revenue without donor support. Indeed, all salaries have been and continue to be paid in the central bank (Da Afghanistan Bank — DAB) and presumably in the other government ministries as well, albeit with delays. However, the real value of these incomes is being reduced because of increased inflation (an indirect form of taxation). DAB and other government agencies have largely stopped providing economic and financial data since the Taliban take over. IMF First-Review-Under-the-Under-the-Extended-Credit-Facility
None the less, freezing Afghanistan’s deposits abroad (DAB’s foreign exchange reserves held abroad) has created monetary problems within Afghanistan because of the inability to import the cash (dollar banknotes) on which the economy depends. Afghanistan remains a largely cash economy. Most payments are made in cash. Though inflation has been low in recent years (generally 2-4%), inflation in earlier decades was relatively high and thus Afghans held and transacted in US dollars quite extensively. Around 70% of bank deposits are in dollars. The availability of USD banknotes for local payments is thus very important. These were mostly supplied by the New York Federal Reserve Bank from the dollar deposits that DAB maintains there (and now frozen).
Prior to the Taliban takeover, the normal operation of DAB’s monetary policy consisted of receiving US dollars from the government (largely from donor grants) and depositing the equivalent value of Afghani in the government’s accounts. The government disbursed these Afghani to its employees in wage and salary payments (generally by electronic deposits to employee bank accounts). Without offset, the resulting creation and injection of these Afghani would be inflationary. DAB drains (buys back) this excess base money by auctioning some of the dollars it received from the government (sufficient to stabilize the dollar exchange rate) and capital notes of DAB. The government’s deposits of dollars with DAB took the form of credits to DAB’s dollar account with the New York Fed. From these deposits DAB pays the Federal Reserve to fly USD banknotes to Kabul as needed for DAB’s dollar auctions.
In mid-April 2021, when the U.S. announced its intention to withdraw the rest of its military personnel by September, an increased outflow of dollars by Afghans wanting to protect their wealth put the Afghani exchange rate under pressure. Acting DAB Governor Ajmal Ahmady (his appointment was never approved by Parliament) increased dollar auctions to stabilize the exchange rate. “Afghan central bank drained dollar stockpile before Kabul fell” As the amount of dollars in its vaults ran down, it used USD banknotes that it held on behalf of banks (approximately $700 million USD). The delivery of additional cash from New York expected in July never arrived and DAB’s balances at the New York Fed are now frozen until a new government is recognized so that no more dollar cash can be purchased from the Federal Reserve by DAB.
As an aside, I was surprised during a 2009 visit to Zimbabwe—as part of an IMF team following Zimbabwe’s dramatic hyperinflation during which it dollarized—to learn that there was an active private market in dollar banknotes supplying Zimbabwe from South Africa: “Hyperinflation in Zimbabwe”
In the days just before and after the American evacuation in August 2021 public demands to withdraw dollar cash intensified but DAB had largely used up the dollars in its vaults (both its own and those held for banks). In response, on August 14 DAB imposed limits on the amounts that could be withdrawn each day. This fed public concern that their banks were running out of dollar banknotes and triggered runs on the banks. DAB was even running low on Afghani banknotes, which might have replaced dollars. Without access to its deposits abroad DAB is unable to purchase additional dollar cash nor pay for printing additional Afghani. For a largely cash and heavily dollarized economy this drying up of cash liquidity is very disruptive and the basis of the statement that people can’t buy the food that might be available.
In addition to the cash shortage, Afghans are also lining up to withdraw their deposits out of concern for a possible bank failure. Aid cut offs and civil strife have damaged many firms resulting in arrears on their bank loan payments. This threatens to push bank illiquidity into insolvency. Even if DAB had USD and AFN cash to lend or sell to banks with fully performing loans, DAB is currently unable to buy or lend against these illiquid bank assets. Moreover, the Office of Foreign Assets Control (OFAC) of the U.S. Treasury has sanctioned payments to many Afghan entities and activities blocking many payments to and from abroad by Afghan banks and uncertainly about the application of the sanctions regime has made banks overly cautious about executing payments for their customers.
UN and other aid organizations have experience in other countries with delivering wages and other payments to targeted recipiences (teachers, healthcare workers and potentially even government employees) without the funds passing through the government’s hands. This approach is needed and is being developed for use in Afghanistan. OFAC sanctions are being modestly relaxed and UN and other aid agencies have begun funding the importation of dollar cash for humanitarian assistance projects. The use of digital mobile phone payments, such as M-Paisa and HesabPay, should be promoted and exploitation to the extent possible. “Use of mobile phone payments” The United States needs to and has been gradually relaxing its payment restrictions to make this possible.
The Taliban leadership needs to take urgent steps to establish a new inclusive government that can and will be recognized internationally thus unfreezing Afghanistan’s (and DAB’s) deposits abroad and eliminating its cash shortage and restoring development assistance. In the meantime, in addition to the urgent need for humanitarian assistance that bypasses the Taliban, the New York Federal Reserve, or any other doners, should consider a loan to DAB to finance immediate shipments of dollar banknotes to Kabul. Da Afghanistan Bank Law adequately protects the central bank from government interference in its conduct of monetary policy and bank supervision. As a condition for restoring USD currency shipments to DAB, the Federal Reserve (and the UN) should obtain an agreement from the Taliban government to fully respect that law and appoint qualified people to its Supreme Council and Executive Board.
Until Afghanistan has a proper government, and its economic development can resume, Afghans, many of whom are very poor to begin with, will suffer unnecessarily depressed incomes. The lack of cash is adding a further, tragic, and quite unnecessary disruption to the lives of a long-suffering people. This can be and should be fixed urgently. Any such assistance will somewhat reduce the financial pressure on the Taliban, but a total financial squeeze on the government will fall on the people of Afghanistan as well.
________________________________________
I worked in Afghanistan as a member of the IMF program and technical assistant teams from January 2002 until mid 2015. I am grateful to Syed Ishaq Alavi for his insights and comments on this article. Mr. Alavi was Advisor to the governor of DAB from 2010 to early 2013, Director General Monetary Policy Department of DAB from early 2013 to mid 2018, and advisor to the Executive Director of the International Monetary Fund for Afghanistan, Algeria, Ghana, Iran, Libya, Morocco, Pakistan, and Tunisia from June 2018 to August 2020. For the sake of their security, I am not naming those who helped me with this article who remain in Afghanistan.
On this 20th anniversary of the 9/11 attack on America, many of us are saying “NEVER AGAIN”. What those saying it mean will determine the future of our country.
If “never again” means to you that we will never allow attacks on our homeland again, you are saying that out of your fear you chose safety over liberty. You support the authoritarian, repressive measures of the so-called Patriot Act and the related government intrusions in our privacy and liberties in the name of greater security. This is not the spirit of those Americans who continue to get into their cars to drive to work or wherever despite automobile accidents killing ten times more Americans every year as American soldiers who have died in Afghanistan in the past 20 years.
For me and thankfully for many other Americans, it means that we will never again surrender to the fear that blinded us to the tragic mistakes of American aggression in Afghanistan, Iraq, Libya, Somalia, Syria, and Uganda. Lawrence Wilkerson explains our self-destructive behavior in the following interview. COL Wilkerson was a senior official in the Bush administration when it launched the Iraq invasion. Now he calls it a mistake born of rage and fear. https://www.cnn.com/videos/tv/2021/09/10/amanpour-wilkerson-9-11.cnn
We have the most powerful military in the world. No military force could protect us at home (to the extent that our safety depends on military force) better. When it comes to its effectiveness in offensive attacks on other countries, its effectiveness is less clear and its effectiveness in efforts to rebuild the countries it has occupied…… well this fantastic three hour discussion reveals it as worse than zero https://www.youtube.com/watch?v=GkjsjBknWfo
We once revered and defended our liberty above all else and we were respected and envied around the world. We prospered. Over the last twenty years we have gradually, year by year, squandered our cherished traditions and our standing and respect in the world has declined as a result. Former President Trump signed an agreement with the Taliban promising to remove all American troops from Afghanistan by May 1 of this year. It was a bad agreement, but our departure was many years overdue. President Biden extended our stay for a few more months but has now honored Trump’s commitment. Why our military was unable to prepare properly for our withdrawal from Afghanistan with this two-year notice is a mystery we need to investigate.
The lesson of Afghanistan is not that the US is washed up as a great power. The lesson is that the US is such a great power, militarily and economically, that it is continually tempted to try hopeless things that nobody else on earth – including China – would ever attempt.David Frum
On July 8, 2021, President Biden said that: “the United States did what we went to do in Afghanistan: to get the terrorists who attacked us on 9/11 and to deliver justice to Osama Bin Laden, and to degrade the terrorist threat to keep Afghanistan from becoming a base from which attacks could be continued against the United States. We achieved those objectives. That’s why we went. We did not go to Afghanistan to nation-build.” “Remarks by President Biden on the drawdown of U.S. forces in Afghanistan”
In fact, except for killing Osama Bin Laden, we had achieved those objectives before I arrived with an IMF team in January 2002 to contribute to building a more effective government. Finding and killing Bin Laden was delayed until May 2, 2011, because of the redirection of American efforts to the ill-advised and illegal war in Iraq. So why were American troops still occupying Afghanistan until August 30, 2021?
In an August 18, 2021, interview with George Stephanopoulos, President Biden explained what happened asking: “Then what happened? Began to morph into the notion that, instead of having a counterterrorism capability to have small forces there in — or in the region to be able to take on al-Qaeda if it tried to reconstitute, we decided to engage in nation-building. In nation-building. That never made any sense to me.”“Biden’s claim that nation building Afghanistan never made any sense”
George W Bush opposed nation building in his 2000 presidential campaign. In his memoir, Decision Points, he states that “After 9/11, I changed my mind.” Already by April 2002, he stated that “We know that true peace will only be achieved when we give the Afghan people the means to achieve their own aspirations. Peace will be achieved by helping Afghanistan develop its own stable government.” He was right. However, as he noted: “Our government was not prepared for nation building.” He was right about that as well. “Bush on nation building and Afghanistan”
The U.S. officials responsible for “nation building” in Afghanistan knew little about its history and culture. They foolishly imposed an alien Western style government dropped on a diverse people as if from a drone. The US military is an excellent machinery of war. The best in the world. However, it does not have the skills required for “nation building.” Our military couldn’t even recruit the right solders or provide the training they needed to fight on their own, much less build a proper military organization. “Afghanistan combat interpreter Baktash Ahadi: U.S. cultural illiteracy” And attempting nation building at the point of a gun is bound to fail.
And why did the Afghan soldiers that Americans trained for decades not fight to defend the existing government? “Afghan forces were demoralized by neglect, corruption and ethnic bias among their superiors. Often they went without pay and ammunition, and sometimes without rations…. ‘The why is corruption, the why is poor leadership,’ John Sopko, told The Washington Post in 2017, ‘If leadership is poor, the people below don’t care, and they wonder why they have to die.’” “Afghanistan U.S. troop withdrawal”
On Sunday August 15, 2021, Taliban forces walked into Kabul and took over the government without a shot. “The Band of Brothers and Afghanistan” But what did they take over or replace? And did 20 years of so-called nation building make any difference. “Nation building” is often given a bad name because it has too often been associated with the imposition of a “government” by an occupying military force as with imperialism. Afghanistan is a very different place than it was 20 years ago. Both the nation and its government and its institutions have changed considerably. We can hope that the Taliban has changed as well.
Governments consist of ruler/decision makers, and the institutions that administer whatever it is that the government does. A nation extends beyond its government to include civil society, and social and cultural norms. The Taliban have displaced Afghanistan’s President Ashraf Ghani, who fled to Uzbekistan then to the UAE rather than step aside for a transition period as had been agreed. Afghanistan’s Chief Executive Officer, Abdullah Abdullah, remained and with former President Karzai is discussing the composition of a new government with Taliban leaders.
“Taliban co-founder Mullah Abdul Ghani Baradar will lead a new Afghan government…. Haibatullah Akhundzada, the Taliban’s supreme religious leader, will focus on religious matters and governance within the framework of Islam.
“While the Taliban have spoken of their desire to form a consensus government, a source close to the Islamist militant movement said the interim government now being formed would consist solely of Taliban members. It would comprise 25 ministries, with a consultative council, or shura, of 12 Muslim scholars, the source added.
“Also being planned within six to eight months is a loya jirga, or grand assembly, bringing together elders and representatives across Afghan society to discuss a constitution and the structure of the future government, the source said.” “Taliban co-founder Baradar will lead new Afghanistan govt”
Prior to the fall of Kabul, the government of Afghanistan consisted of the cabinet of ministers, provincial governors and the national assembly, with a democratically elected president serving as the head of state, head of government and commander-in-chief of the Afghan Armed Forces. It appears that the new government will retain the same administrative units. In addition to the central bank (DAB), which I advised, these would include functions such as Foreign Affairs, Internal Affairs, Finance, Economy, Agriculture, Energy and Water, Justice, Information and Culture, Education, Industry and Commerce, Transportation, Women’s Affairs, Public Health, Mines, and of course, National Defense. Though the U.S. did a poor job developing Afghanistan’s National Defense institutions, more experienced international agencies made considerable progress in developing more efficient and effective agencies in many other areas. Of at least equal importance, a generation of Afghan men and women have grown up expecting their place in the world to reflect their skills and accomplishments (merit) rather than who they knew.
I have written earlier about the dramatic progress in modernizing the central bank’s operations. It was achieved in the proper, traditional way of “nation” and institution building. We explained best practice for central banks derived from the experiences of established central bank and the approaches we thought would fit best with Afghanistan’s existing central bank and economy. But DAB’s management and staff made the decisions of what to embrace and how to move forward and we offered guidance on designing and implementing those decisions. “BearingPoint Afghans”
But one institution can’t develop independently of what is happening in the rest of the country. In particular, developing the rule of law is critical and difficult. An example was provided by DAB’s (the banking supervisor) confrontation with a corrupt President and Attorney General over the resolution of the insolvent and criminal Kabulbank in 2010-12. The founders and owners of Kabulbank (President Karzai’s brother Mahmood was the third largest shareholder) had rapidly grown this newly licensed local bank into the country’s largest depository and had lent almost all of its deposits to themselves. During the global financial crisis of 2008, many of Kabulbank’s owners’ investments failed and they were unable to repay their depositors. DAB’s banking supervisors were blamed for weak supervision and even arrested and jailed in disregard of the provisions of the central bank law. The scandal revealed considerable corruption, but the supervisory resolution of the bank somewhat strengthened (modestly) the rule of law in the process. “Afghan President Ghani’s attack on corruption”“The Kabul Bank Scandal”
Another huge set back to the impressive development of DAB resulted from President Ghani appointing an unqualified friend, Ajmal Ahmady, as Acting Governor of the central bank. He fired many of the best of the BearingPoint Afghans and brought in his own small group of cronies. Mr. Ahmady’s appointment was rejected by the Parliament, but he illegally remained in his post. The Taliban (???) have now appointed Haji Mohammad Idris as the Acting Governor of the central bank. “Mr. Idris was head of the Tabliban‘s finance section, but he has no formal financial training or higher education.” “Haji Mohammad Idris”
These examples are meant to illustrate the distinction between a government’s leaders and its administrators. Time will tell whether our “nation building” efforts with DAB survive the attacks on it from Afghanistan’s leaders (current and past). But as a result of the nation building efforts of many international bodies, Afghanistan is a very different and better place, and its young population has very different expectations, than twenty years ago. I hope that the Taliban leaders that have taken over the government are also very different than their repressive and brutal forebearers of twenty years ago.
While the new government will no doubt leave many of the institutional structures in place that have been developed over the last two decades, from which they and the country have benefitted, the big question is what policies and rules they will establish under the name of Sharia law, especially with regard to the rights of women. The Taliban have their own internal factions that need to be sorted out and their earlier version of Sharia was an extremely harsh interpretation not shared by most Muslims. The Taliban has pledged to treat women and others fairly, within the dictates of Sharia Law. Other Muslims will need to convince the Taliban to moderate their earlier interpretations of what that means. The United States, the EU “EU sets five conditions for future operational engagement with Taliban”, China, Russia, and the international organizations, have enormous financial and diplomatic leverage with which to encourage the Taliban government’s better behavior. They should be used vigorously to help build a better Afghanistan. Early signs are not encouraging, but these are early days. One Afghan friend changes locations every night in the hopes of not being found. Other friends are afraid to leave their homes at all.
The idea that we should refuse to cooperate with the new government and should oppose it at every turn from the outset is bone headed. Just ponder the alternatives for a second. Do not think that it is easy for me to sit here in my comfortable Bethesda home and urge us to give the Taliban a try. My days begin with heart wrenching pleas for help from Afghan friends and strangers. I challenge you to read the following account of dashed hopes without weeping: “After a university falls in Afghanistan a DC organization scrambles to keep students safe and still learning”
Efforts to achieve a better Taliban government this time around may be a long shot, but the alternatives of a return to civil war and worse yet the return of American and NATO troops are not pretty either. The U.S. intention to cooperate with the new government in countering ISIS-K is encouraging, but, like anything else in life, not without risks. “US may coordinate with Taliban to take on ISIS-K” Nation building by everyone but the U.S. government over the last 20 years has not been a waste of time. Now is not the time to give it up.
Nation building is unlikely to be successful when coerced, i.e., when it is part of a military intervention. It does not follow that nation building–sharing best practice in the design and operation of institutions public and private–is an unworthy objective and undertaking.
Warren's space 