PEORIA MAGAZINE April 2022

Dr. Cleeton: We should be aware that Ukraine and Russia are very significant exporters of wheat and other grains, which are shipped via the Black Sea. The supply chain bottleneck will be severe for an extended period of time, and crop production and yields are also likely to be significantly impacted, resulting in substantial price increases in these commodity markets. Russia is also a major exporter of a number of rare metals – nickel, for example. There have been very rapid price increases in the global markets for those metals, but once again the supply responsiveness in the short run is very limited, so those costs will be passed forward. The key issue is what proportion of a product’s total cost is associated with these more expensive inputs, and what if any hedging have the producers taken via futures markets to limit their price exposure. Airlines in general have approximately 35 percent of their operating costs composed of fuel expenses, but the

prices for some time. In the longer run, higher oil and gas prices will induce more domestic production, which can come online in a year or two and provide some price relief. We can expect that consumers will react to higher prices by shifting expenditures to alternative modes of transportation, as well as reducing driving. It may lead some consumers to give more consideration to making a purchase of an electric vehicle, which has a positive payoff in terms of climate goals. In addition, there will be pass-throughs of higher fuel prices across the transportation sectors to raise prices in general for commodities and services, which make use of trucking, rail and air services. Competitive forces and demand factors will limit the degree to which the full cost increases can be passed forward. PM: The United States and its allies have leveled some of the harshest economic sanctions against Russia since the Cold War. What’s your opinion of sanctions in general as a foreign policy tool? Are or can they be effective in influencing behavior? Do they punish the intended targets or are they more likely to produce unintended victims, including back here in the U.S.? Dr. Cleeton: There is a long history of using economic sanctions, including import restrictions and higher tariffs, as policy levers. Given that trade is typically arranged because it is a good bargain for both sides, it should be clear that interfering in trade imposes losses to both parties in the transaction. So, the effectiveness of sanctions should be looked at in a benefit-cost framework. We have many examples of the failure of sanctions to influence and change behavior when the sanctioned parties appear to be willing to bear the costs. Take our longstanding sanctions against Venezuela, North Korea and Cuba as examples. In this century, the United States has ratcheted up the use of economic sanctions and we currently have more than 10,000 countries, organizations, companies and individuals on the list. How the benefits and costs break

out depend as well on the volume of trade and transactions involved. Western European countries, with the exception of North Sea production by Norway and Britain, are not significant producers of oil and gas. That means they are dependent on imports, and Russia is their main supplier. Limited availability of short-run alternative supplies, particularly in natural gas, means that the costs of banning those Russian supplies is too high for them. The European Union has taken the alternative policy of a longer-run solution of targeting a two-thirds reduction through alternative suppliers going forward. However, the current situation with Russia clearly stands out as the most wide-ranging and comprehensive set of financial and economic sanctions implemented on an advanced economy. We will see how the impacts evolve and, just as importantly, if the policy works, how it will be unwound. Once you undertake a strategy, the opponent will respond and youmust be willing to work going forward with an adaptable plan that hopefully has a resolution. The disputes with Iran over the past four decades have demonstrated many twists and turns, and the nuclear control treaty, which we ourselves abrogated, is now being renegotiated. However, that is being held up with Russia as a signatory holding out for a clause to allow unrestricted trade with Iran, perhaps to funnel oil to the global market. PM: What other sectors besides energy do you expect to be hardest hit if the war and the sanctions drag on, and how soon before consumers here start to notice the difference? The food and auto industries reportedly may be up next, and perhaps other products due to further disruption to the global supply chain.

“WE WILL BE FACED WITH HIGHER OIL AND GAS PRICES FOR SOME TIME ... CONSUMERS WILL REACT”

Dr. David Cleeton

range of hedging to control that exposure varies from 60 percent to 0 percent across the industry. That will lead to very different impacts in profitability for the carriers, who are operating in an environment where they are battling back from a huge drop in demand from the COVID crisis and will be reluctant to fully pass forward the higher costs.

Dr. David Cleeton , Chairman of the Department of Economics at Illinois State University

APRIL 2022 PEORIA MAGAZINE 73