Micro-Economic Implications Of Sanctions In Russia

Looking at the global economy, almost all nations of the world have shifted from planned economies to free market economies. While the former is a communist economy wherein the administration controls the nation's economy, the latter follows a capitalist system of economy. Chin (1996, p12) opines that countries following the capitalist system of economy has market functioning independent of government interference. Hence, forces of supply and demand govern market prices in achieving equilibrium. In essence, a free market economy is chosen because of the numerous advantages. Especially, in case of free market economy, firms are free to enter and exit the industry. Moreover, there are non-tariff barriers to enter into trade relations which push for export of goods thereby giving the industry a leap.

But, Chin (1996, p13) debates that the shift from a planned economy to a free market one is somewhat intricate. Actually, majority of economies are unable to implement perfect market economy and thus look forward to government involvement. The Russian economy is a good example that underwent reforms following the collapse of the Soviet Union during 1991 marking a shift from a centrally planned economy to a free market economy with privatization of majority of the industries. Besides, the United States also contributed to the economic reformation in Russia due to its interests in the nation's rich natural resources. But, going forward, the market economy was not faring well in Russia because of financial predicament. Although, the Russian economy underwent privatization, a substantial part of the manufacturing sector still continued to be government controlled. (Martel & Hailes, 1995, p98)

In a controlled economy, it is the government who determines the manner in which economic activities are undertaken in the nation. Therefore, the government imposes sanctions for regulating imports and also certain businesses that runs within the economy. Specifically, these are sanctions that cover import quotas that are trade restrictions which confines the volume of imports. Besides, there are tariffs, subsidies, total bans and import duties. And these sanctions have considerable impact on the economy as a whole. An analysis of the micro-economic sanctions in Russia related to the above is stated below.

The domestic economic sector is protected through a system of import restrictions known as quotas. Entry restriction of certain substandard goods from entering the country is ensured through imposition of import quotas that might otherwise result in dumping. Govt. fixes anti-dumping tariffs in order to protect its domestic economy. This might arise due to substandard goods flooding the market at cheaper prices than the locally produced goods. This might result in people purchasing the cheaper imported product that might be detrimental to their health as also the environment. Besides, imposition of import quotas helps in safeguarding the sunrise industries of a nation. Due to this, import face competition against local manufacturer of goods posing a threat to sunrise industries whose growth might be harmed. (Siebert 1999, p228). But conversely exports particularly in oil and gas are supported being the primary export product. Thus, it is important that trade is regulated to permit economic growth.

Likewise, tariffs comprise trade barriers which are applied to shield the domestic import substitutes sector thereby promoting industrialization. These needs importing the factor of production so as to manufacture products which might otherwise be imported. (Siebert 1999, p226). Nonetheless, Russia is a natural resource rich nation that is important for the rest of the world. Also, it forms a potential market for European nations and the United States. Therefore tariffs have been fixed to safeguard its economy and this has resulted in delayed process of integrating Russia to the world economy.

Wehrheim (2003, p10) mostly mentions that specific import tariffs have been made applicable on all industrial sectors of national economy. Therefore, import tariffs leads to import reduction thereby safeguarding domestic industries and therefore promoting economic growth. For example import restriction of cars leads to higher production of cars in the domestic market and helps in the creation of employment scope. But, prices of cars assembled locally rise. But on the contrary, there will be reduced demand for cars compared to imported cars as prices of imported ones will be much lower. Apart from this, the US Trade Representative (2005, p518) administration asserts that high tariff rate for automobiles up to 25% are being levied making them costly. Due to this the purchasing power of people gets lowered. Because of this foreign investors withdraw their investments in the country thereby slowing down industry growth.

This apart, in order to regulate trade, non-trade barriers are also applied. Hence the Russian Government has specified some rules and regulations for the production of some products. For example, stringent mechanism has been fixed for alcohol production, some of which include duplicative and firm licensing needs. But this exercise is done with the objective of raising government apart from restricting consumption of product revenue. (The office of the US Trade Representative 2005, p519). Such decisions on the production of alcohol results in increased prices on products thereby impacting household purchasing power negatively. Despite, consumption of such products never go down and hence they have an inelastic demand. As a result, industrial growth happens.

Various scholars have an answer to the different effects of trade barriers on the Russian micro economy. Therefore (Blagov 2010) clarifies the manner in which govt. subsidies have resulted in up-scaling and modernization of production facilities particularly in the metal sector. Due to this, a higher percentage of growth of gross domestic product has become possible. This has seen a phenomenal rise of steel producing companies promoting industrialization contributing in a big way in balancing the economy of Russia.

Besides, USDA and ERS (2001) had undertaken an analysis on the effects of quotas and blanket ban of poultry exports to Russia. Therefore, some of the short and long term effects on the poultry industry have been examined by them. Going by this, the Russian Govt forced a complete prohibition on the poultry imports from the US during 2002 after claims surfaced that US poultry products had some substances that is forbidden by the Russian veterinary needs. This measure was done essentially to safeguard families from consumption of such substances that could prove damaging. This import control of poultry products led to price hike in poultry meat in Russia. This translated to an expectation that families might consider switching over to mutton products from Ukraine, although it can never be considered as a perfect substitute of poultry. But still Russian economy experienced a scarcity poultry supply in the course of time.

In all these years, the economy of Russia has experienced a restructuring process that has helped in the rise of Gross Domestic Product particularly during 2009. In keeping with this policy, the govt. has contributed significantly in the growth of industries in general. The newer laws enacted by the govt. have witnessed the birth of new companies and a rise to competitive position. This apart, the govt has induced foreign investment in the oil and gas industrial segment constituting the largest exports in Russia (Johnson 2005, p9).

In general, trade barriers in the Russian economy is used with a view to protect and promote the growth and development in various sectors spanning across automobile to agriculture. Therefore, this has led to the growth of several industries and thus the proliferation of the Russian economy and the shift towards integration into the world economy. Therefore, trade regulations have contributed in regulating the Russian economy. Several improvements in the Russian economy have resulted in poverty alleviation by augmentation of production and affordable consumer goods and therefore higher purchasing power of households.

Letiche (2007, p54) states that the economy of Russia is slowly becoming a part of the global economy. This has become possible because of rising exports in oil & gas and other natural resources to most of the nations of the globe. In fact the export sector has been contributors to the growth of the Russian economy. Apart from that, Russia is known across the world because of the immense availability of natural resources which are very important to the other economies of the world. Russia on the other hand stands as a prospective market for the goods and services from the West.

Martel & Hailes (1995) views that the United States must get involved in the Russian economy for consumer goods production which is not linked in any manner with the sale of arms. Therefore loans, trade deals that are favourable and lesser tariffs must be considered. Adhering to this argument, US reserves must support joint ventures (p204). This will encourage democratic revolution in Russia thereby helping in its inclusion in the world economy.

The Govt. of Russia must examine the possibilities of harmonizing taxes with a view to attain an advantageous economic growth in the future. This apart, the Govt. must also promote foreign investment since this would help in boosting the economy. However, liberalization is going to be a major support to the economy as this would imply the lowering of trade barriers and help in the promotion of Russia's trade in the Preferential Trade Area. In the absence of these measures, barriers would continue to be a significant obstacle to international trade and investment (Kalicki & Lawson 2003, p51).

To sum up, the Russian Govt must launch a Central Bank with self-governing mechanism since this would help in attaining an autonomous and organized financial sector. But this can be possible through framing of rules and regulations, ensuring price stability and circumventing needless governmental influence. Therefore, the Central Government must be independent of political influence (Martel & Hailes, 1995, p129).

References

Blagov, G 2010, Russia to Support Metal Sector. Asia Times. Retrieved from http://www.atimes.com/atimes/Central_Asia/LH05Ag01.html

Chin, ATH 1996, Economic Management and Transition Towards a Market Economy: An Asian Perspective, World Scientific, London.

Johnson, AD 2005, Russia Tax, Law and Business Briefing: 2006, World trade executive, Inc., Masachusetts.

Kalicki, JH & Lawson, EK 2003, Russian-Eurasian renaissance: U.S. trade and Investment in Russia and Eurasia, Stanford University Press, Chicago.

Letiche, JM 2007, Russia moves into the global economy, Routledge, New York.

Martel, WC & Hailes, TC 1995, Russia's Democratic Moment? Defining U.S. Policy to Promote Democratic Opportunities in Russia, Diane Publlishing, Darby PA.

Siebert, H 1999, The World Economy, Routledge, New York.

The office of the United States Trade Representative 2005, National Trade Estimate Report on Foreign Trade Barriers, Diane Publishing, Darby PA.

U.S.D.A. & ERS 2010, Implications of the Russia's New Poultry Quotas. Retrieved from http://www.thepoultrysite.com/articles/38/implications-of-russias-new-poultry-import-quotas.

Wehrheim, P 2003, Modeling Russia's economy in transition, Ashgate Publishing ltd, Burlington, VT.



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