"Sanctions don't work!" (That's bollocks!)

.

Certain people on the intertubes are claiming that sanctions on Russia don't work, that sanctions circumventing renders them moot. It appears to be fashionable to cite trade statistics with Central Asian countries to provide supposed evidence for this assertion.

I'm not going to publicly guess why these people do so, or what their sources of income are. Instead, the economist in me found the topic a bit interesting from an analytical point of view:

 

Suppose you want to buy a used car. You spend time looking at offers on the internet, you drive to car sellers, discuss with friends, finally you travel to a specific seller and actually buy a used car from him for 10,000 currency units.

What was the cost of this purchase? I suppose the average economics layman will say it was 10,000 currency units. The average economist should be ashamed if he/she/it gave such a reply. Economists know about the concept of transaction costs. All those other activities around the used car purchase deal caused transaction costs; currency units and time were spent on that deal beyond the purchase price.

Now let's look at a hypothetical case of a 250,000 CU machine being purchased from a Western company by a Russian company through a middleman in some Stan-country. That purchase has a long rat's tail of additional transaction costs; middlemen, briberies, additional transport costs, a greater time delay, additional risks.

So we know for sure that circumventing sanctions like that imposes extra economic burdens on Russia(ns).

Furthermore, economists know a concept called price elasticity of demand. The usual case is that less goods will be purchased if the price increases. The opposite is so super rare that these freak cases have their own name (Giffen goods).

Imagine a 10 € spare part for a 250,000 € machine. Its price could triple and it would be purchased just as often. Imagine the machine's price increased from 250,000 € to 750,000 € and the quantity sold will plummet.

So what's the effect of additional transaction costs on products that Russia(ns) want to import from the West? The quantity will be reduced by this change, as many of the import goods have a price elasticity of demand that means less purchases at higher costs of purchase. Moreover, Russia(ns) not only get less, but they pay more for it per copy.

This was a "ceteris paribus" analysis. We considered how the outcome changes if one input variable is changed. The overall outcome may be influenced by a gazillion input variables and others may override this one input variable's influence, of course. Trade statistics of poor countries have a lot of statistical noise. There may be a mighty influence for less trade and the end result of all input variables may still be an increase of trade for a while.

A certain input variable has recently been very powerful, though; inflation. The "Sanctions don't work!" crowd doesn't attempt to convince people of their opinion by using trade statistics that were  corrected for inflation, currency exchange rate issues or even things such as population and economic growth. A serious economics scholar would be expected to do so if he/she/it proposed a paper on the subject for peer reviewed publication. No, that highly opinionated crowd uses relatively short run and raw trade statistics (nothing like 'since 1991', no 'real', no 'per capita', no '%GDP').

In short; they're not in the information dissemination business. They're in the propaganda business.

 

Long story short; sanctions don't work as absolutely as desired, but they hurt. Adjustments can be made to the sanctions regime, and it can become ever more restricting, an allegorical anaconda strangling an aggressor state. Russia's quality of life won't plummet much, though. The cases of Cuba and Iran show that a country with decent natural resources luck can maintain regime survival and a low-but-not-starving consumption level for decades in face of severe sanctions.

S O
defence_and_freedom@gmx.de

 

P.S.: More could be written about this. I didn't touch on the subject of opportunity costs this time, for example. And the whole 'thinking' of the "Sanctions don't work!" crowd is somewhat reminiscent of the bollocks spreaders who claim that minimum wage increases get significantly if not fully neutralised by what inflation they (supposedly) cause.

wa.