| Prabhat Patnaik Venezuelanalysis | MR Online Prabhat Patnaik (Venezuelanalysis)

Sanctions and the World Economic Order: a conversation with Prabhat Patnaik

Originally published: Venezuelanalysis.com on April 1, 2022 (more by Venezuelanalysis.com)  |

Prabhat Patnaik, professor emeritus at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in New Delhi, is a Marxist economist and political commentator. From June 2006 to May 2011, he served as the vice-chairman of the Kerala State Planning Board. Following the crisis of 2008, he was part of a Joseph-Stiglitz-chaired task force of the United Nations (UN) aimed at recommending reform measures for the global financial system. In this interview for Venezuelanalysis, we learn about the sometimes unanticipated effects of sanctions on Venezuela and other countries.

Cira Pascual Marquina: Why have sanctions become such an important weapon in the imperialist hybrid war against countries that refuse to follow the mandates of Western powers?

Prabhat Patnaik: The international economic order that prevails today is what makes it possible to use sanctions as a weapon against countries that defy imperialism. Imperialism has imposed this order on the world, and by doing so it has also opened up the world to imperialist arm-twisting through sanctions. Ironically, however, this is precisely what also undermines the prevailing world economic order. In other words, the very economic order that makes sanctions potent, also gets undermined by these sanctions. Let me explain.

After the Second World War, many Third World countries newly liberated from colonialism, semi-colonialism, and dependency, sought to delink themselves from the international economy, into which they had been integrated by the colonial order as primary commodity producers. They protected themselves against manufacturing imports from the metropolis, and pursued import-substituting industrialization as a means of diversifying their economies. And there was a Socialist Bloc of countries that was not part of the imperialist-dominated economic order and was willing to help these Third World countries assert their independence by diversifying their economies.

The imperialist-dominated order at that time, therefore, was not all-encompassing. Countries were attempting to diversify their economies, to become self-reliant, and to acquire control over their raw material resources from the clutches of metropolitan capital. Imperialism, still suffering from the debilitating impact of the Second World War, and having been forced to yield to the demand for decolonization (which arch-imperialist politicians like Winston Churchill were strongly opposed to), was not yet powerful enough to impose any economic order on the world.

The Bretton Woods System, under which countries could impose trade restrictions and capital controls, was too permissive to serve the purpose of imperialist domination. Imperialism of course sought to prevent “economic decolonization,” but not through the imposition of an economic order, which it could not; it sought to do so through coups such as those against Jacobo Arbenz in Guatemala and Mohammad Mossadegh in Iran.

In such a situation the imposition of sanctions could mean very little. If any country imposes sanctions against another, the latter would scarcely be inconvenienced by them because it could and would enter into all kinds of arrangements with other countries. Since there was no imperialist-dominated world economic order, a multiplicity of arrangements was possible. Hence no country could impose sanctions that would really bite.

But with the imposition of the neoliberal economic order under the aegis of international finance capital, which has meant relatively free movement of goods, services, and capital, including finance, across country borders, things have changed. The import dependence of countries has grown significantly. Likewise the reliance of countries, especially in the Third World, on direct foreign investment, has increased greatly, as has their reliance on financial inflows to sustain current account deficits on the balance of payments. Sanctions in this situation can really bite, and have become a powerful instrument. Import dependence, and dependence on capital inflows, make sanctions effective.

Let me give you an example. India has been under tremendous pressure from the United States through the World Trade Organization to abandon its food self-sufficiency and to shift land-use away from producing food crops toward producing those other agricultural goods that are demanded by the metropolis. India has resisted this pressure until now. But if India had actually succumbed to it, then it would have been extremely vulnerable to sanctions from the West. Many countries in Africa did succumb to this pressure and became dependent on imperialism for the import of even such an essential commodity as foodgrains; not surprisingly they became vulnerable to imperialist arm-twisting.

| Countries sanctioned by the US Afghanistan Belarus Burundi Central African Republic China PR Côte d | MR Online'Ivoire, Crimea Region, Cuba, Cyprus, Democratic Republic of the Congo, Eritrea, Fiji, Haiti, Iran, Iraq, Kyrgyzstan, Laos, Lebanon, Liberia, Libya, Myanmar, North Korea, Palestinian Territories, Russia, Rwanda, Somalia, South Sudan, Sri Lanka, Sudan, Syria, Venezuela, Yemen, Zimbabwe. (SanctionsKill.org)

Countries sanctioned by the U.S.: Afghanistan, Belarus, Burundi, Central African Republic, China (PR), Côte d’Ivoire, Crimea Region, Cuba, Cyprus, Democratic Republic of the Congo, Eritrea, Fiji, Haiti, Iran, Iraq, Kyrgyzstan, Laos, Lebanon, Liberia, Libya, Myanmar, North Korea, Palestinian Territories, Russia, Rwanda, Somalia, South Sudan, Sri Lanka, Sudan, Syria, Venezuela, Yemen, Zimbabwe. (SanctionsKill.org)

Thus, the vulnerability to sanctions, and hence the potency of sanctions has increased with the institution of the neo-liberal order.

CPM: Could sanctions be a way to impose a new world order that replaces “free trade” with channelled and controlled trade?

PP: Such replacement of “free trade” by “channelled and controlled trade” will not amount to the imposition of a new world economic order. In other words, the frequent use of sanctions will only push the world economy away from the neo-liberal order, not to some new order, but to a host of ad hoc arrangements, as had been the case in the fifties and the sixties. An “order” under capitalism necessarily entails domination by imperialism. I believe that the frequent use of sanctions by imperialism will push countries out of not just the neo-liberal order but from any imperialist-dominated arrangement altogether.

Sanctions imposed by imperialism undermine the imperialist-dominated order altogether. Let me give an example. Before India adopted neo-liberal policies, it had an arrangement with the Soviet Union and other Eastern European socialist countries called the “rupee payment arrangement” under which the main international reserve currency, the U.S. dollar, was used neither for settling transactions, nor even as the unit of account in terms of which the trade-related transactions were denominated. The dollar, in short, was used neither as the means of circulation, nor even as the unit of account under these “rupee payment arrangements.” Instead, bilateral trade was denoted in terms of Indian rupees (or Russian rubles whose exchange rate against the rupee was fixed); and the balances in trade that got built up in favour of one country against the other were not immediately settled. Further, the dollar did not even enter into the settlement of these balances, they got carried over and were bilaterally settled over a period of time.

The whole idea was to ensure that neither country’s export to the other was constrained by the absence of dollars. It was an eminently sensible arrangement. If country A has goods that country B needs, and vice-versa, then it seems absurd that each of them remains deprived of this mutually-beneficial exchange, simply because each has not made enough exports to country C to earn the needed dollars; that is, they do not have enough dollars through exports to the metropolis or to countries from which they can obtain dollars.

Neo-liberalism however is totally opposed to all such arrangements and insists on a “unified” exchange rate. It invariably favors a single price in any market including in the foreign exchange market. Accordingly, it put an end to all such arrangements once a country had adopted a neo-liberal regime. Of late, however, with the imposition of sanctions against countries that defy the dictates of the Western powers, such bilateral trade agreements have once again appeared on the scene as a way of by-passing sanctions.

The sanctions imposed against Iran led to their revival as Iran entered into such arrangements with some countries. And now with severe sanctions being imposed on Russia in the wake of the Russian invasion of Ukraine they are likely to assume a pervasiveness that they never had earlier. Putin’s warning that the U.S. and the Western powers did not constitute the entire world but only a small part of it suggests that, if pushed into a corner, Russia will enter into bilateral trade agreements with a large number of countries to beat Western sanctions.

The most biting of the sanctions imposed against Russia is the freezing of Russia’s foreign exchange reserves held in the West. This has immediately led to a depreciation of the rouble since Russia can now no longer defend the rouble’s exchange rate by using its foreign exchange reserves; and depreciation will obviously accelerate inflation in the Russian economy. Sooner or later therefore, if these sanctions continue, Russia will have to suspend the convertibility of the ruble, learn to do without foreign portfolio and direct investment, diversify its import sources, enter into bilateral payments arrangements, and take urgent steps towards technological self-reliance.

In short, it will have to move toward the kind of economic policy (not of course the kind of ownership pattern of assets) that the Soviet Union had, which will mean an end of the world economic order that prevailed until now in the neo-liberal era. This will no doubt cause inconvenience to Russia for some time, but it will be a major setback for imperialism, as it will smash the world order over which it presides at present, without substituting it with anything else under its domination.

The collapse of the existing economic order and its replacement by a plethora of regional, local and bilateral arrangements is not something that one should regret. The existing order is loaded against the working people of the Third World; and it is clearly discriminatory between the North and the South.

During the pandemic, for instance, while the advanced capitalist countries ran up large fiscal deficits to finance substantial relief-cum-rescue packages, the Third World was kept tied to fiscal austerity. Because of this, the packages provided to the people by Third World governments were minuscule. While the U.S., even under Donald Trump, had a package amounting to ten percent of its Gross Domestic Product, the package in India was less than two percent of GDP. For other Third World countries that wanted a roll-over of their external debt during the pandemic, matters were even worse, since the IMF insisted upon very tight fiscal austerity in their cases.

The institutionalization of such an international economic order is repugnant to me. I would not, therefore, shed any tears over its collapse; and any other “order” that succeeds it will be equally repugnant, as it too would be dominated by imperialism. In conditions of capitalism, the term “international economic order” necessarily means subservience to imperialism for the working people of the Third World. This is why I would welcome a multiplicity of local and bilateral arrangements, providing for “managed trade,” rather than any new international economic order.

| People queue up outside of a bank to get cash Caracas November 2019 Sanctions and the ensuing liberalization of the economy triggered hyperinflation Getting cash for cash only payments such as transportation has become an ordeal for working class Venezuelans AP | MR Online

People queue up outside of a bank to get cash, Caracas, November 2019. Sanctions and the ensuing liberalization of the economy triggered hyperinflation. Getting cash for cash-only payments such as transportation has become an ordeal for working-class Venezuelans. (AP)

Also, in a situation where there is no “international order,” the nation-state will have some autonomy in pursuing economic policies of its choice (rather than policies that please globalized capital), so that if the working people capture state power in some Third World country, they can use it for making real progress towards their liberation.

CPM: In Venezuela’s case–as in most sanctioned countries–the sanctions haven’t succeeded at toppling the government, but they have brought about a de facto liberalization of the economy. If we look at the Cuban case, it is also obvious that more radical socialist policies were not pursued because of the sanctions, and sanctions may have even triggered the more recent reforms. Could “capitalist normalization” of an economy be the true objective (or one among others) of sanctions?

PP: We must draw a distinction here between countries like Venezuela and Cuba, on the one hand, and Russia, on the other. The former are socialist countries or countries moving in a socialist direction, but Russia is a country developing capitalism. At the same time, Venezuela and Cuba are small countries highly dependent on imports, while Russia is not only large but has also experienced over seven decades of substantial socialist development in order to build up its self-reliance in the face of encirclement and aggression. The difference in size between the two cases is supplemented also by the difference in the legacies they have inherited.

Sanctions against small relatively undiversified economies can have a devastating effect upon them, not just immediately but even over a period of time. It is not as if in response to sanctions they can, after an initial period of hardship, build up an adequate defence through import substitution. Their size rules it out. In their case, therefore, some amount of compromise, some degree of holding back in the movement towards socialism may become necessary, though, having said that, I must add that one cannot help admiring the resilience they have shown till now.

In the case of Russia, however, which was a socialist super-power until yesterday, matters are altogether different. Even if there is temporary inconvenience, this will be followed by a diversification of the production structure which the Russian economy is perfectly capable of undertaking. Such a diversification would require reintroducing some of the measures that characterized the Soviet Union. In other words, precisely because Russia is a capitalist economy, sanctions against it will have the effect of pushing it, if anything, in a socialist direction.

Let me give an example. Many foreign companies are leaving Russia in the wake of the Western sanctions against it. Russia will soon have to decide what to do with these companies’ assets. If a company leaves Russia, then immediately there may be no other alternative but to nationalize its assets. Now, nationalization is a patently socialist measure and the Russian ruling establishment may not have the faintest desire to nationalize anything; indeed it has been keen on privatizing the Russian economy. Yet circumstances may well force it to adopt, for some time at least, such a socialist measure.

Sanctions, therefore, do not always have the effect of producing “capitalist normalization.” They may have this effect in a country moving toward socialism, but if they are employed against a capitalist economy, then they may have the opposite effect of pushing it in a direction away from “capitalist normalization,” toward the adoption of more radical and even socialist measures.

Of course, so far sanctions have been generally employed against economies that are either moving toward socialism or are at least heterodox, like Iran. They have not been employed against a full-fledged capitalist economy. The Russian case is the first of its kind, where the imperialist countries are employing sanctions against a full-fledged and powerful capitalist country. There is no question of “capitalist normalization” here; but to what extent it gets pushed toward the adoption of heterodox measures, radical measures, and even socialist measures, remains to be seen. Its measures against the Western sanctions, however, will have to be in that general direction.

Of course, I am not suggesting that Russia’s capitalist development trajectory will necessarily come to an end. Socialism comes only through a revolutionary struggle of the working people, and not through the policy choices of the ruling establishment of a capitalist country. So when I am talking about possible socialist measures here, I am not at all suggesting that socialism would be coming back to Russia through the actions of a Putin who is facing some compulsions because of the sanctions; I am only talking about some measures reminiscent of its socialist past being introduced in Russia in the wake of the sanctions. What follows this introduction and how the situation evolves will depend on class struggle within Russia.

| A gas line in Caracas January 2021 Lines at the pump are less prevalent now the Iran Venezuela agreement has stabilized fuel production in Venezuela El Universal | MR Online

A gas line in Caracas, January 2021. Lines at the pump are less prevalent now: the Iran-Venezuela agreement has stabilized fuel production in Venezuela. (El Universal)

The point here is simply this: the impact of imperialist sanctions on different countries is by no means uniform; it varies across countries depending on their sizes and histories.

CPM: Western sanctions may inadvertently push sanctioned nations outside of the loop. In Venezuela’s case, there is no doubt that the U.S. sanctions have pushed the Caribbean nation closer to Turkey, China, Russia, and Iran. Now, with sanctions being imposed on Russia, this may drive it closer to China, and it may end up taking sanctioned countries outside the domain of the dollar and help peripheral financial systems grow. Can you talk about this further?

PP: What you are saying is in my view absolutely correct. I mentioned above that, because of sanctions, regional, local, and bilateral arrangements are coming into vogue which undermine the “world order” imposed by imperialism. In addition, a recent move by Russia that I have not yet talked about poses an even greater threat to this “world order,” and that is Russia’s proposed insistence to be paid in roubles for its oil exports.

This is way beyond anything proposed till now and has profound significance. The rouble has collapsed by as much as 40 percent against the dollar because of the Western impounding of Russia’s foreign exchange reserves. In this context, Russia’s proposal acquires significance, because it would force buying countries to demand roubles to pay for what they buy, which would reverse the steep fall in the price of the rouble.

The normal response would have been to acquire dollars against oil exports and then use these dollars to shore up the rouble. However, given the removal of Russian banks from the SWIFT system and the impounding of Russia’s foreign exchange reserves, it is not clear if the dollars earned against oil exports even in the coming days can be used at all for stabilizing the rouble. The insistence on being paid in roubles for Russia’s oil exports puts the onus of increasing the demand for roubles in exchange for Western currencies–and hence of shoring up the rouble’s exchange rate on countries importing oil from Russia rather than on the Russian Central Bank.

But this move has a significance beyond the immediate issue of rouble depreciation. It amounts to providing a commodity backing for the rouble, in the form of oil. Because Russia is a major oil producer and exporter–and because the European Union simply cannot do without Russian oil in the foreseeable future, upon which it is heavily dependent at present–oil can play the same role for the rouble as gold used to do for the pound sterling under the Gold Standard. A currency’s convertibility to gold at a fixed price under that system is what instilled confidence in that currency in the minds of wealth-holders.

Under the Bretton Woods system, only the dollar was backed by gold, while other currencies’ exchange rate vis-à-vis gold or dollar could in principle be altered (though, in the case of metropolitan currencies, their exchange rates against the dollar were generally maintained through the appropriate management of their macroeconomies). Even under this system, the key to its successful functioning lay in the wealth-holders’ confidence in the stability of the value of the leading currencies, notably the dollar.

At present, of course, we have a flexible exchange rate regime. However, such a regime is viable only because of wealth-holders’ confidence that the value of the leading currency (and to a lesser extent the values of other Western currencies) in terms of commodities will remain relatively stable. Central to this confidence is the belief that the price of oil will remain relatively stable in terms of the dollar, in the sense that notwithstanding fluctuations there would be no rapid secular increase in the dollar price of oil; this is because oil, being a universal intermediary, is a major determinant of the overall price level.

Money wage rates are also kept relatively stable by having a suitably large reserve army of labour. And the insistence on “inflation targeting” ensures that in case there is an inflationary episode, it is suppressed very rapidly. In short, the idea is to maintain the dollar as a currency that is “as good as gold,” so that it remains a stable medium for holding wealth. And other advanced country currencies seek to maintain parity vis-à-vis the dollar through pursuing appropriate macroeconomic policies.

Russia’s insistence on rouble payments by oil importers amounts to a suggestion that the rouble can play this role even more convincingly; it poses a threat to the hegemony of the dollar. If the price of the rouble in terms of oil (and hence by implication in terms of other commodities) is fixed then the world’s wealth-holders, at least some of them, will be tempted to hold their wealth in roubles instead of dollars, which would be a setback for the dollar.

The Chief of the European Commission, Ursula von der Leyen, has simply announced that this insistence by Russia would not be allowed to prevail, but the European Commission is in no position to do anything about it. It can scarcely reduce Europe’s purchase of Russian oil, if Russia insists that such purchase is paid for by roubles.

In fact, ironically, since the imposition of sanctions, Europe’s import of Russian oil has actually increased. This is because the anticipation of an oil-shortage has pushed up spot prices of crude oil in the international market, making Russian crude much cheaper; Europe obviously wants to take advantage of this situation. Biden’s efforts to widen the sanctions to cover Russia’s crude exports to Europe (so far only Russian oil exports to the U.S. are prohibited) have come a cropper. European countries are neither going to do without oil nor pay through their noses for oil imports; hence they will be loath to boycott Russian oil. In fact Biden’s recent European trip, which was meant to achieve progress towards such a boycott, turned out to be an utter failure.

At the same time the U.S. is trying to persuade Venezuela and Iran, countries which it has been targeting through sanctions, to increase their oil production and exports (as it has been trying to pressure Saudi Arabia), so that the world can do without Russian oil and not experience any shortage. But, to achieve this, if at all, the U.S. has to pay a political price; in the case of Venezuela, for instance, it has been trying to prop up Juan Guiado as the president in place of the duly-elected president, Nicolás Maduro. It will have to forego all such machinations as a pre-condition for negotiating with Venezuela. Likewise, it will have to backtrack on its manoeuvres on the Iran Nuclear Deal as a condition for negotiating with Iran. The political price it will have to pay will amount therefore to its eating humble pie vis-à-vis those countries which it was attacking just yesterday.

At a deeper level, therefore, what we are witnessing today is the end of U.S. hegemony in world affairs. Its desperate attempts to preserve that hegemony underlies the Ukraine crisis (since it wants to drive a wedge between Western Europe and Russia and for that reason wants to keep “provoking the bear” so that Western Europe is forced to fall in line behind the U.S. in response to the resulting Russian aggression); but its measures in the wake of that crisis, namely the sanctions it has imposed on Russia, undermine that hegemony, both in terms of economics and also politics.

To say this does not mean that some other country is going to exercise this hegemony in lieu of the United States. Rather, it means a period during which hegemony as we have known it till now will not be exercised by anybody. We are soon going to witness a period of disarray in world imperialism, which will no doubt open up opportunities for revolutionary praxis that the grip of the neo-liberal order has hitherto foreclosed. The working people of the Third World must take advantage of these opportunities that are being opened up.