13/10/2015

AreSanctionsSavingRussia?byRichardA.WernerandVladimirI.YakuninProjectSyndicate

ECONOMICS
RICHARDA.WERNER
RichardA.WernerisChairinInternationalBankingattheUniversityof
SouthamptonandauthorofNewParadigminMacroeconomics.

VLADIMIRI.YAKUNIN
YakuninisChairinStatePolicyatLomonosovMoscowStateUniversity,Founding
PresidentoftheWorldPublicForum,andformerChairmanofRussianRailways.

OCT13,2015

AreSanctionsSavingRussia?
MOSCOWTheeconomicsanctionsimposedonRussiabytheWestinMarch2014
haveundoubtedlybeenpainful.Buttheyhavesofarfailedtoachievetheirgoalof
weakeningRussianPresidentVladimirPutinsposition.Infact,theymayhavehadthe
oppositeeffect,leavingRussiaanditspresidentevenstrongerthanbefore.
Tobesure,RussianGDP,whichgrewmodestlyin2014,contractedby4.6%inannual
termsinthesecondquarterofthisyear.TherublelostmorethanhalfofitsUSdollar
valueinthesecondhalfoflastyear,fuelinginflation,whichincreasedby15.6%year
onyearinJuly.AndRussiahaslostabout$100billionintradewithEuropeanUnion
countries.
Butinflationnowseemstohavepeaked,andtheeffectsofthedropinoilandgas
pricesweremitigatedbytheUSdollarsappreciation,sothatthevalueofRussias
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foreignreservesactuallyincreased,reaching$362billioninJune(13%ofwhichisin
gold).ThetradelosseswiththeEUhavehitthelikesofBavariandairyfarmersand
Germanindustrialexportersparticularlyhard.Anddespitesomebelttighteningin
Russia,Putinismorepopularthanever.
Therationalebehindeconomicsanctionsisstraightforward:freetradeandfree
marketsdelivergrowth(andthuspoliticalsupportforthegovernment),whereas
restrictionschokeoffgrowth(andthuserodesupportforthegovernment).This
emphasisonfreetradeandfreemarketswasacentraltenetofnineteenthcentury
Britishclassicaleconomics.Itremainsacoremessageoftodaysdominantneoclassical
schoolembodiedinthesocalledWashingtonConsensus,adoptedacrosstheworld
undertheInternationalMonetaryFundsadvicewhichclaimsthatthekeyto
economicdevelopmentistoopenup,deregulate,liberalize,andprivatize.
Butthetheoryisfundamentallyflawed.Noeconomicpowerhasdevelopedbased
solelyonlaissezfairepolicies.TheeconomicriseoftheUnitedKingdom,forexample,
washeavilydependentonstrategicprotection,industrialpolicy,tariffs,andnontariff
tradebarriers.
TheUKsindustrialprowessoriginatedwiththetextileindustry.Thecountrysleaders
realizedthattheexportofrawmaterials,mainlywool,wouldbeinadequatetospur
economicdevelopment.Forthat,Englandwouldhavetomoveupthevalueadded
ladder,byimportingrawmaterialsandexportingfinishedgoods.
SoEnglandsleadersdevisedanindustrialpolicy,whichentailedbringinginFlemish
textileweaverstoprovideknowhowtoBritishfirms.Moreover,theyerectedtrade
barriers:Bybanningtheexportofrawwoolandtheimportoffinishedwoolproducts,
Indiantextiles,whichwereoftensuperiorandcheaper,couldnotcompetewith
domesticoutput.Theyadoptednavigationlawsthatrestrictedforeignshipsaccessto
Britishports,andevenenactedademandboostinglawrequiringthedeadtobeburied
inawoolshroud.Ultimately,themechanizationofthetextileindustryusheredinthe
IndustrialRevolution,andmassproductionandexportsunderpinnedthedevelopment
oftheworldslargestmaritimefleet.
Inthemidnineteenthcentury,theGermanAmericaneconomistFriedrichList
highlightedtherolethatsuchpoliciesplayedintheUKsdevelopment.Inlinewithhis
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advice,theUnitedStates,Germany,andJapanemployedjudicioustradeprotectionand
industrialpolicies,whileworkingactivelytosupportnascentsectorsastrategythat
enabledthemtodeveloprapidlyandevenovertakeBritain.
Restrictionsalsoprovedeffectivetospureconomicdevelopment:In1812,whenthe
UKdeclaredwarandimposedatradeembargoontheUS,importsubstitutioncaused
Americanmanufacturingtoflourish.Whentheembargowasliftedandtradetariffs
werereduced,USmanufacturingfloundereduntil1828,whennewBritishtariffs
boostedUSmanufacturingagain.Likewise,duringWorldWarI,aBritishtrade
embargofueledthecreationofhightechindustriesinGermanytodevelop
alternatives.
Ofcourse,embargoescanhaveadevastatingeffectwhenacountrylackstheresources
neededforimportsubstitution.Thatiswhyeconomicsanctionsweresodamagingfor
Iran.
But,foracountrylikeRussia,withitsabundantnaturalresources,technological
expertise,andskilledworkforce,sanctionscanhavetheoppositeeffect.TheSoviet
Unionstruggledtocapitalizeonthesefactors,owingtocommunismsweakincentive
structure.Today,bycontrast,Russiahasacapitalistsystemthatoffersconsiderable
benefitstothosewhoadaptbesttocurrentconstraints.
Inshort,Russiahasallitneedstothrive,despiteorbecauseofthesanctions.But
turningopportunityintorealityrequiresRussiatopursueaneconomic
transformation.
Neoclassicaltradetheoryisbasedontheconceptofcomparativeadvantage:countries
shouldcapitalizeontheirrelativestrengths,fromtechnologicalprowesstoresource
endowments.But,asEnglishleadersknew,andastheexperienceofmanyAfricanand
LatinAmericancountrieshasshown,simplyexportingrawmaterialsisinadequateto
propeldevelopment.Historically,themosteffectivedevelopmentpolicyhascentered
ongovernmentinterventiontoestablishhighervalueaddeddomesticindustries.In
previousdecades,Japan,Taiwan,SouthKorea,andChinahavealltakenthispath.
ForRussia,movingupthevalueaddedladdershouldnotbedifficult;ithaseverything
itneedstomanufacturethefinishedproductsthatitpreviouslyimported.Infact,
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importsubstitutionhasalreadyincreasedproductivityinseveralkeysectors:
engineering,petrochemicals,lightindustry,pharmaceuticals,andagriculture.Annual
exportsofhighvalueaddedgoodsroseby6%inthefirstquarterofthisyear.
Furthermore,RussiahasacceleratedcooperationwiththeotherBRICSeconomies
(Brazil,India,China,andSouthAfrica),andPutinrecentlyannouncedambitiousplans
toboostdomesticdemand.
TheWestssanctionsagainstRussiamaynotonlyfailtochangetheUkrainesituation;
theymaywellspurthecountryslongawaitedstructuraltransformation.IfRussia
successfullyreplicatesthecreditguidanceregimeusedbyEastAsiaseconomies,while
increasingmanagerialefficiency,anothereconomicmiracleispossible.
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richardawernerandvladimiriyakunin201510
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