Evaluating the micro-economic implications of sanctions in Russia

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Evaluating the Micro-Economic Implications of Sanctions in Russia

A sanction is an action taken by a country or countries against another country or other countries for political motives (Rourke, 2011). These reasons can be either multilateral or unilateral. There are several different forms of sanctions that can be imposed on the country, which include economic, diplomatic, sport and military sanctions. This paper looks economic sanctions, which include a ban on trade, limitation to sectors such as armaments, and there are exceptions provided on items such as medicine and food. This paper will delve into the micro-economic consequences of sanctions on Russia.

In the world today, many countries have shifted from planned to free market economies. The former economic system in Russia was based on communist ideology, and it has changed over time to the capitalist system of economy. The recent developments in economic sanctions imposed on Russia are considered a significant signal that America and its allies in Europe are acting. However, this is considered a risk even in their economies (Nicholson, 2010). The sanctions are to punish Moscow for instigating the current state of instability in Ukraine and arming the separatists.

According to Armendariz and Morduch (2010), an economic system that uses capitalism is characterized by a free market that does not experience interference from the government. In this case, the prices of goods and services in the market are guided by demand and supply to achieving equilibrium. Most economists prefer a free market because of the several benefits that is attached to such market such as there is free entry and exit of organizations that want to operate in such a market. In addition, some barriers such as trade tariffs are not present, therefore encouraging exports and import of goods, which in turn boosts the economy of the country.

However, Armendariz and Morduch (2010) argue that the change from one economy to another is very complex and most economies would get help from the government in order implement the changes. In the case of Russia, the transition to a free market economy from a planned economy began at the time when the Soviet Union had collapsed in the early 1991. During this time, most industries were privatized in order to make them more productive. With the change to a free market system in Russia, the sanctions have had various implications to the economy (Columbus, 2013).

The first implication is on trade barriers, which affects the trade between Russia with international communities. The sanctions have led to an economic slump of 3% compared to the previous years. The United States and its closest European allies have imposed sanctions on Russia and it is now having trouble trading with its neighbouring countries and the international community. This has affected its growth domestic product, which has dropped from the previous years, bringing the economy to a standstill. No growth has been registered in the economy as a result of the sanctions. The sanctions that have been established by the international community have restricted imports of goods into Russia and some businesses have been driven out of the market. For example, some sanctions include import quotas, which block the importation of goods. The quotas include subsidies, total ban, tariffs, and import duties (Rourke, 2011).

The next implication of micro-economic sanctions in Russia is that the quotas restrict particular type of goods from entering the Russia, which might result to dumping. As a precaution to this menace, the government can implement anti-dumping tariffs in order to prevent the market from unworthy goods. That is because the government would be working to fight cheap imported goods than those that have been manufactured locally. In addition, import quotas play a crucial role protecting the new and upcoming industries in Russia since imported goods and products are usually of high value and can sometimes be a threat to new and developing industries in the country.

Economic sanctions affect social variables, such as income distribution, poverty and -public health. The income distribution is one way through which the country’s economy can record a growth in GDP. However, with the sanctions in Russia, the country’s income distribution is greatly affected and the poor are continuing to suffer more as the rich grow. The gap between the rich and the poor is expanding by the day, which makes it hard for the nation’s GDP to grow. Income distribution is one factor that contributes to an increase in poverty levels in a country. Russia’s poverty index has been on the rise as a result of the imposed sanctions in the country. Most people have been rendered jobless because of the cut down on employees, which end up increasing the rate of poverty in the country. The two social factors affect the health care sector. When a country‘s development drops, the health care system is affected negatively. Since most people are below the poverty line, it affects their ability to access better health care.

Amongst the affected sectors by the sanctions in Russia is the banking and finance sector. The sanctions have dealt a big blow to the banking industry in Russia, where VTB bank was the most affected. VTB bank is the nation’s gateway for international investments in the banking business. The bank was set up in the in the wake of the 2008 financial crisis after the exit of the Western investment bank of the country. The sanctions make it hard for the VTB bank to operate in the international markets since countries or organizations are willing to do businesses with the bank. These sanctions are used to push Russia into economic hardship and to make change its position about the Ukrainian civil unrest. The sanction has created a 1.1% slump in the growth rate of the banking sector while the value of the Russian Rubble has depreciated steadily against the US Dollar, thus affecting Russian companies that pay their debt with the dollar as the main currency. According to forecasts by the Central Bank of Russia, it was revealed that the performance of the banking sector would be slow for at least 6 months before it stabilizes after the sanctions are withdrawn. This is a long duration that will affect the performance of the overall economy of the country (Columbus, 2013).

The economic sanctions have a great implication on entrepreneurship, business, and Small and Medium Entrepreneurships in the country. Doing business in Russia has become very difficult and most investors are shifting base and moving to other nations. Entrepreneurs are failing to invest in the country as they are afraid of what could happen to their investments in case the economic sanctions continue. The sanctions have created a very negative investment environment that has left the country relying on local entrepreneurs. Small and Medium Entrepreneurships are also affected by the imposed sanctions and business is not as usual.

The economic sanctions affect the whole population in a very diverse manner. For instance, a great number of people will lose their jobs. The unemployment rate will rise drastically as most companies would retrench their members in order cut down the cost of labour. Since the companies are already hit by the dollar rate when making their payments and it is for that reason that the companies are trying to cut down on the wage pay given to the workers. The amount saved is used to run the companies so that they do not become bankrupt.

Unemployment is one of the main causes of insecurity in most countries and this is what has affected the Russia economy. Crime rate has increased since the sanctions were imposed. The exchange between input and output leads to a natural interest rate. Because the interest rates are natural, it is easier for different stakeholders to operate in openness and trust. To attain macro-economic stability, the prices of commodities must be stable. Employment opportunities must be available and growth must be rapid. However, experts agree that monetary policy has the capacity to “produce real effects on output and employment only if some prices are rigid.” The economy runs on a multiplier effect that incorporates many monetary outputs and inputs (Columbus, 2013).

The pulp and paper production is a great part of the economy of Russia. The country’s capacity to produce and manufacture paper products is considered one of the key pillars of the economy. However, with the sanctions that have been imposed on the country, the paper industry is collapsing and the country’s GDP is falling steadily. Bardhan and Udry (2013) ascertain that America ought to intervene in the crisis that Russia has put itself in order to salvage the production of consumable products. The main aim in doing this is to ensure that Russia learns a lesson and it promotes democracy and transforms into a world economy.

There are negative impacts of sanctions on companies and organizations. Russian companies and organizations have not been left behind. These parties have been affected by the inflation and interest rates that have been increasing since the slapping of sanctions on Russia. Inflation affects the performance of businesses as a budget is made at the beginning of a financial year. In fact, companies end up spending more than they had planned due to inflation (Rourke, 2011). The increased interest rates also affect the performance of these companies and organizations. As a result, the overall performance is also affected as well as the country’s economy.

Despite the sanctions imposed by the international community, Russia is still on the verge of getting the country back on track. In the past years, the Russian economy has undergone an economic transformation, which led to a significant growth in its GDP, especially in 2009. In order to maintain this growth, Russia is trying to play an important role to ensure that the industries are developed. This is because these industries act as the backbone of the country, especially in terms of employment opportunities and without them the economic performance will be affected (Nicholson, 2010). The government has also tried its best to attract foreign direct investment (FDI) into the country, especially in the oil and gas sector, which is the industry that is considered to provide the largest exports in Russia.

In the move to improve the economy, Russia has introduced trade barriers that are aimed at safeguarding the economy and promoting development and growth of different sectors within the country. These measures are aimed at improving the role the country plays in the world economy. This improvement of the economy is hoped to have an impact on alleviating poverty. Poverty mitigation is among the key factors that Russia has considered in the new economic plan it has drawn for its development (Bardhan and Udry, 2013). When poverty is eradicated, there would be affordable products in the market and the production levels would also increase, which will ultimately have a positive effect on the country’s GDP.

In conclusion, with the imposition of economic sanctions on Russia, there are certain factors that are affected in the country that are essential to run a progressing nation, including international partners, investors, and trade barriers among others. However, the government of Russian needs to put in places a central governing bank for it to gain independence and stability in the financial sector, which is one of the most important sectors in a country. In addition, the government should be cautious when implementing its foreign relations policy vis-à-vis its economic policies in order to avoid situations that would attract economic sanctions from the international community.

References

Armendariz, B., & Morduch, J. (2010). The economics of microfinance. Cambridge, Mass, MIT Press.

Rourke, J. T. (2011). International politics on the world stage: John T. Rourke. Guilford, McGraw-Hill/Dushkin.

Columbus, F. H. (2003). Russia in transition: The Economic Challengees. New York, Nova Science Pub.

Nicholson, W. (2010). Intermediate microeconomics and its application. (New Edition). Fort Worth, Tex, Dryden.

Bardhan, P., & Udry, C. (2013). Micro-theory. The Concept of Economics and Sanctions. Cambridge, Mass. [u.a.], MIT Press.