The Quid Pro Quo for Peace in Ukraine

President Trump promises a rapprochement with Russia to end the war in Ukraine. Before we dismiss this as a pipedream, we should understand the options that Trump has in dealing with President Putin. What will be the quid pro quo for peace in Ukraine?

Many economists predicted that the end of World War Two would be followed by another Great Depression. But, after a short recession, global trade and financial markets recovered, launching a new era of economic growth and prosperity. As Friedman argued, markets are remarkably resilient in recovering from even the most disastrous events.

The U.S. provided leadership in restoring the global economy after World War Two. After the fall of the Soviet Union the U.S. and its allies worked to reintegrate Russia into the global economy. By the end of the 20^th century, it appeared that Russia was well on its way toward integration into Western Europe. The Russian invasion of Ukraine ended this rapprochement.

When Russia invaded Ukraine in 2022 the U.S. imposed sanctions designed to deny Russia access to the global economy. The sanctions included freezing Russian Central Bank assets in the U.S., and imposing restrictions on the Russian Direct Investment Fund. The U.S. banned Russia from withdrawing funds held in U.S. banks to meet debt obligations and banned the purchase of Russian debt. The outcome was Russian default on its foreign debt.

The sanctions imposed on Russia, like most sanctions, have failed. The U.S. has imposed sanctions on Russia since 2014 when they annexed Crimea. There is no evidence that these sanctions have influenced Russian behavior; they have clearly not deterred Russia from continuing its invasion of Ukraine.

Sanctions targeting Russian individuals and firms were easily circumvented. European sanctions on Russian energy exports have also largely failed. Russia has found other buyers for its energy exports. Europe continues to depend on Russian energy exports, and Russia continues to depend on revenue from those exports.

President Trump must find a new quid pro quo in negotiating with Russia to end the war in Ukraine. The most effective deal would lift sanctions that the U.S. has imposed on Russian financial institutions. The U.S. should restore the property rights of Russia in assets held in U.S. financial institutions and allow them access to their dollar assets needed to meet debt obligations. There is a precedent for such negotiations; after World War Two, at the height of the Cold War, the Soviet Union negotiated a settlement of prior debt with bondholders to gain access to international bond markets.

Sanctions on Russian energy and other exports should also be lifted. It is conceivable that the U.S. could negotiate a trade agreement with Russia calling for reciprocal reductions in tariffs and other restrictions on trade with the U.S. 

Critics will argue that President Trump should not negotiate with dictators such as Putin. But the U.S. has a long history of negotiating with dictatorships throughout the world. Perhaps the most successful of these negotiations was with the Chilean dictator Augusto Pinochet.  Milton Friedman was widely criticized by many of my colleagues for collaborating with Pinochet. When Pinochet staged a military coup de’ tat the Chileans had defaulted on their debt and the economy was on the ropes. The only economists not tainted by affiliation with the Allende regime were the ‘Chicago Boys’, some of whom were Friedman’s students. Pinochet enacted the free-market reforms proposed by the ‘Chicago Boys’, and in the 1980s Chile recovered to become an economic powerhouse. Pinochet held elections, anticipating that Chilean citizens would reward him for this economic miracle; but they booted him out of office, and introduced the strongest democratic institutions in Latin America. The lesson from Chile is that economic prosperity can set the stage for political reform, and as in the case of Chile, replace a dictatorship with democratic institutions.

Russia today is much like the Chilean economy in the 1970s. Russia has defaulted on its debt and is now experiencing inflation and retardation in economic growth, reflecting sanctions and other policies pursued by the U.S. and its allies designed to close Russian access to global trade and finance. Nonetheless, since the fall of the Soviet Union Putin has gained greater control over the economy to support the military and his expansionist foreign policies. Friedman warned that we should not underestimate the power of dictators to repress their citizens and remain in power.

Ludvig von Mises argued that property rights and peace are the pillars of prosperity. President Trump should pursue rapprochement with President Putin. The quid pro quo for peace in Ukraine should be restoration of Russian property rights, and reintegration of Russia into global trade and capital markets. This is a prerequisite for economic recovery and prosperity in Russia.

Barry W. Poulson is professor emeritus at the University of Colorado, Boulder Colorado, and on the Board of the Prosperity for US Foundation