2023/08/19

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

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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.

13 comments:

  1. You're correct that there's some additional cost that's not insignificant, but on the whole, due to the global market in energy, the cost is being borne by consuming countries, particularly those not receiving discounted supplies of Russian oil and gas. Russian revenues from their energy sector has increased due to sanctions, and the additional shipment and transaction costs have not been enough to overcome increased prices. Why this should be the case is a bit puzzling, but it may have to do with esp. European countries being forced to buy marginal supplies at higher prices, with the increased market price overwhelming the increased transaction costs to relatively cheap Russian energy resources.

    Another interesting aspect of the response to the sanctions is the geopolitical angle. It gives countries like Turkey and the Stans an incentive to maintain good relations with Russia, but also gives them a bargaining chip both with Russia and the West. The countries facilitating sanctions avoidance are probably the biggest winners.

    ReplyDelete
    Replies
    1. A central assertion of yours is wrong.
      https://www.piie.com/research/piie-charts/russias-higher-energy-sales-china-and-india-late-2022-did-not-make-falling

      Delete
    2. How in the world would a group of people refusing to buy a product from one country lead to this country having a higher revenue in selling this product?
      The sanctions divided the market for oil into two markets: One for Russian oil and one for non-Russian oil. The demand for Russian oil decreased and the demand for non-Russian oil increased. The supply side is not affected! This means the price for Russian oil decreases and the price for non-Russian oil increases. This is basic economics. This means the sanctions hurt both the countries sanctioning and the country getting sanctioned, while benefitting everyone else. This is how sanctions work. The expectation is that the West can bear these costs easier than Russia.
      When looking at the statistics, it is important to disentangle different effects: The end of the pandemic caused an significant increase in demand for energy that benefited Russias oil revenues, but this has nothing to do with the sanctions.
      Sanctions work.

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  2. Sanctions don't work on fossil fuel exporters genius. You can sanction Russia, Iran, Saudia Arabia, Venezuela, etc all you want but ultimately they are sitting on a cheat code. The West needs to man the F up and take care of uncle V once and for all.

    ReplyDelete
    Replies
    1. I think I could give you a brick and you'd hold it in your hand and tell me there's no brick.

      Delete
    2. If by brick you mean soft power, yes it doesn't exist. Read the Chinese take on Unrestricted Warfare and get back to me with Le Sanctions and Muh Leopards. You just can't expect half-arsed measures to work.

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    3. Here's your brick, Sven.

      https://www.euronews.com/my-europe/2023/08/30/eu-purchases-of-russian-lng-up-40-compared-to-pre-war-levels-new-study-finds

      And here's to 15 more years of autistic screeching about lightweight infantry. ­čŹ╗

      Delete
    4. You don't seem to understand how little 21.6 million cubic metres natural gas in seven months are.
      https://www.statista.com/statistics/1331770/eu-gas-imports-from-russia-by-route/
      Nordstream delivered (an already reduced) 33 million cubic metres of natural gas PER DAY in late July 2022.
      https://www.telesurenglish.net/news/Nord-Streams-Gas-Flow-to-Be-Reduced-to-33-Million-Cubic-Meters-20220725-0010.html
      Nordstream 1 had a capacity of 55 BILLION cubic metres/year.
      https://en.wikipedia.org/wiki/Nord_Stream_1

      Seriously, you should be ashamed of yourself given this numbers illiteracy or disinterest. That was a classic case of 'welcoming an argument because it fits to the own opinion regardless of how shitty it is'.
      The worst thing is that in my experience people who do that don't learn from getting shot down and just keep spamming such crap, hoping that something sticks.

      Delete
    5. Jesus Christ this is unreal. LNG is liquid you elementary school dropout. One cubic meter of LNG expands 1379 times on boiling.

      Wanna hear something scary? Crew Served Weapons.

      Delete
    6. OK, the dimension is in use for both liquids and gas, so far I had only seen other dimensions used to describe LNG quantities.

      Your poor manners and ignorance about my education results don't change that your point is still a shot into your own foot, though:

      "The EU's Russian LNG imports in January-June would be equivalent to roughly 13 billion cubic metres (bcm) of natural gas, Aurora said.

      The volumes are relatively minor compared to the much larger amount of pipeline gas Europe imported from Russia before the Ukraine war - around 140 bcm per year."
      https://www.reuters.com/business/energy/lng-imports-russia-rise-despite-cuts-pipeline-gas-2023-08-30/

      https://tradingeconomics.com/commodity/eu-natural-gas

      https://ecfr.eu/article/own-goal-how-russias-gas-war-has-backfired/

      https://www.bruegel.org/policy-brief/eu-can-manage-without-russian-liquified-natural-gas

      Delete
    7. I'm just messing with you. Love your blog.

      Delete
  3. Sanctions, like all acts of war targeting the civilian population, not only don't work, but typically have the exact opposite effect. Do they cause economic pain or dislocation? Of course. However, that is not the *goal* of sanctions. The goal is to bend the target country to our will.
    Most sanctions just make the civilian population enraged & dig their heels in further. It also gives the ruling party more support and power.
    Sanctions are acts of war. They should only be invoked as war breaks out. Their peacetime use is the sign of diplomatic laziness, gangsterism, and arrogance.

    ReplyDelete
    Replies
    1. Earth to anon:
      Sanctions are NOT an act of war.
      Sanctions often violate existing treaties such as GATT, though.

      Pre-WW2 Canada produced almost all of the global nickel production. Nickel makes armour steel less brittle.
      It was an obvious case for embargoing Germany, Italy and Japan during the 30's while capping exports to most countries to pre-sanction levels.

      Delete