James K Galbraith: The Gift of Sanctions An Analysis of Assessments of the Russian Economy, 2022~2023 nakedcapitalism.com (April 12 2023) Yves here. James Galbraith politely and methodically questions some of the economic logic used to claim that the Western sanctions have done serious, lasting damage to Russia. As we and others have pointed out, readers in Russia and contacts who have even more connections to Russia say that stores are full and commerce goes on more or less as normal, with supply issues only in a few sectors like car parts. Galbraith does not resort to anecdata, but instead points out that many of the dire claims about Russia's performance are either not substantiated or draw incorrect inferences from data. He contends that while it is too early to tell, the sanctions may well have been beneficial to Russia by forcing reforms and restructurings (such as buying out foreign operations on the super cheap and having largely-looting oligarchs decamp) that would have been impossible otherwise. His underlying, very accessible paper, which sadly is too large a file format to embed here. By James K Galbraith, Lloyd M Bentsen Jr Chair in Government and Business Relations, University of Texas at Austin. Originally published at the Institute for New Economic Thinking website. https://www.ineteconomics.org/perspectives/blog/the-effect-of-sanctions-on-russia-a-skeptical-view * There were major shocks to the import of consumer goods and to the domestic production of many non-durables when sanctions were escalated in 2022. However, after a period of adjustment substitutes can usually be found or produced, while the physical capital left behind by foreign enterprises exiting Russia is sold off to domestic buyers at a steep loss. This is a major transfer of wealth from foreign to Russian firms, and it opens large market spaces that were previously dominated by Western companies. * The effect of skills lost through emigration is unquantified and assessments do not account for the much larger inflows of personnel from Ukraine. More important, it is highly probable that the most-skilled emigrants are relatively young, and as the educational system that produced them is intact, they will be replaced in due course. * The financial management of the Russian economy under sanctions has seen the payment system replaced and the ruble mostly stabilized. Sanctions against wealthy individuals have a dual effect. In some cases oligarchs emigrated, losing influence within Russia. In other cases they returned and brought capital back, seeking to protect assets from seizure. The net result is to align those oligarchs who remain active within Russia with the policies and objectives of the Russian state. By contrast with most private assessments, official statements of the goals of sanctions emphasize two narrow objectives: to undermine Russian military-industrial capacities and to "defund the war". They do not focus on the effect on the Russian economy and civilian population. The question of the effect of sanctions on "critical military inputs" is not one that can be answered from public sources. However, while it is possible that some key components for military goods were procured outside Russia, common sense suggests that war preparations would have included stockpiling a substantial supply - as well as reverse engineering and import substitution. Failure to take these steps would have amounted, at the very least, to gross negligence. The funding argument, as noted above, rests on a misconception. In addition, the policy of sanctioning individuals - if its goal was to bring pressure to bear on the Russian state - must be judged a failure. A technical analysis from a senior economist at the US Treasury Department examines the effect of sanctions on Russia's long-term economic prospects, and may be taken as representative of the official view, including, one surmises, intelligence assessments. This analysis rests on the familiar neoclassical production function: capital, labor, technology, and the burdens of state intervention. These factors, working together, are stated to have caused a "grim" decline in Russia's prospects, such that the economy by 2030 will be 20 percent smaller than it would otherwise have been. This application of growth theory appears to neglect two basic mainstream concepts: the profit motive and possibilities for technical substitution. By vastly reducing the presence of non-Russian firms on Russian soil, while restricting energy and other resource exports from Russia, so that resource prices within Russia have remained stable, sanctions have had a favorable effect on the potential profitability of Russian businesses. The Treasury assessment states that Russian firms will not be capable of taking advantage of this potential. But there is no evidence for this view, other perhaps than impressions of the Soviet past and the chaos of the early transition years. Such impressions are now decades out of date. Finally, this essay reviews a recent assessment from the Russian Academy of Sciences (RAS). On matters of fact, there is a striking agreement between this assessment and the information published in the West; the sanctions are described as having "led to large-scale crisis processes that affected almost all areas of the Russian economy". However, the RAS report notes the effective early crisis management by the Russian state, the "relatively favorable" decline of only 0.4 percent in GDP in the first half of 2022 (at an annual rate), and signs of a turnaround already in some key indicators, including business investment. The RAS report contains numerous cautions of the dangers ahead, including a blunt warning about the state budget, yet with recommendations on how the challenges can be met. It is too early to state definite conclusions. However, a very recent Wall Street Journal analysis - coauthored by Evan Gershkovich, now detained in Russia - takes the view (expressed in the headline) that the Russian economy is "starting" to come apart. At a minimum, this logically contradicts any notion that it was collapsing already last year, under the first shock of the application of sanctions. It, therefore, undermines both the Sonnenfeld and the Treasury theses, suggesting that while the facts in those analyses appear impeccable, their conceptual underpinnings are problematic. The contrast between the effects of sanctions on Russia and their effects on Europe is worth noting. With respect to Russia, resource prices remained stable, the internal market for Russian firms grew, physical assets were transferred to Russians at preferential rates, and financial assets were retained in the country that might otherwise have gone abroad. With respect to Europe, imported resource prices soared, markets for exports fell, physical assets had to be sold cheaply and financial assets fled to the United States. Thus one would expect improved market conditions in Russia and deterioration in Europe - and this is what we presently observe. Links: The original version of this article, at the URL below, contains several links to further information not included here: https://www.nakedcapitalism.com/2023/04/james-k-galbraith-the-gift-of-sanctions-an-analysis-of-assessments-of-the-russian-economy-2022-2023.html https://billtotten.wpcomstaging.com/ https://www.ashisuto.co.jp/ --- To unsubscribe: List help: