Assess the Micro-Economic Implications of Sanctions in Russia

Focusing on the world economy, most countries have moved from planned economies to free market economies. Whereby the former is a communist economy in which the government has control over the country’s economy while the latter is a capitalist system of economy. According to Chin (1996, p.12), in a capitalist system of economy, the market operates freely without the intervention of the government. As such, prices in the market are determined by the forces of supply and demand achieving equilibrium. Essentially, a free market economy is preferred as a result of the benefits attached to it. Particularly, in a free market economy, there is free entry and exit of firms. Additionally, there are non tariff barriers to trade that encourage export of goods hence boosting the economy.

However, Chin (1996, p.13) argues that the transition from a planned economy to a free market economy is rather complex. Apparently, most of the economies fail to achieve a perfect market economy and thus call for government intervention. A case in point is the Russian economy which reformed after the crumple of the Soviet Union in 1991 shifting from a centrally planned economy to a free market economy, whereby most of the industries were privatized. Moreover, the United States was also involved in the Russian economic reformation as it had interests in Russia for it was rich in resources. Nevertheless, with time the market economy was not performing well in Russia due to financial crisis. Even though the Russian economy had been privatized, a considerable section of the manufacturing sector was under the control of government (Martel & Hailes 1995, p.98).

Basically, a controlled economy is faced by the challenge that the government determines how economic activities are carried out in the country. As such, the government establishes sanctions that restrict imports and some businesses that are carried out in the economy. To be specific, some of the sanctions include import quotas which are a trade restriction that limits the extent of imports. In addition to quotas, are tariffs, subsidies, total ban and import duties. Needless to say, these sanctions have a significant effect on the economy. In respect to this, an analysis of the micro-economic implications of sanctions in Russia is discussed below.

Unquestionably, quotas are a system of import restriction that is primarily used to protect the domestic sector. In essence, import quotas are used to restrict certain substandard goods from entering into the country which may result to dumping. In relation to this, the government sets anti-dumping tariffs with the aim of protecting households. This is because, substandard goods that find their way to the country are most likely to be sold at lower prices compared to locally manufactured goods. As a result, households are likely to consume the imported cheaper product which could be harmful to their health as well as the environment. Moreover, import quotas helps in protecting infant industries in the country. This is for the reason that imports compete against locally manufactured goods and thus would be a threat to the infant industries whose growth may be impaired (Siebert 1999, p.228). On the other hand, exports are encouraged and especially in gas and oil which is the chief export product. Therefore, it is necessary that trade be regulated to allow for the growth of the economy.

Similarly, tariffs are trade barriers that are used to safeguard the domestic import substitutes sector hence promoting industrialization. This requires the importation of factors of production in order to produce products that would otherwise be imported (Siebert 1999, p.226). Nevertheless, Russia is a country that is bestowed by quite a number of natural resources that are of great significance to the rest of the world.  Besides it is a potential market for European countries and the United States. As such, tariffs have been set in order to protect its economy and this has led to the delayed process of integrating Russia to the world economy. Particularly, Wehrheim (2003, p.100), states that there are specific import tariffs on all industrial sectors in the country’s economy. Accordingly, import tariffs result in reduction of imports thus protecting domestic industries hence economic growth. For instance, restriction on the importation of cars leads to increased production of cars locally and creates employment opportunities. Nonetheless, the prices of the locally assembled cars increase. On the other hand, demand for the cars will reduce compared to if there were imported cars since their prices would be much lower. In addition to this, the office of the United States Trade Representative (2005, p.518), affirms that there has been a high tariff rate for automobiles up to 25 percent making them expensive. As such the purchasing power of households reduces in this case. In view of this point, foreign investors withdraw their investments in the country thus slowing development of the industry.

Above and beyond, non tariff barriers are also used in trade regulation. As such the Russian government has laid down some certain rules and regulations for the production of certain products. For instance rigid measures have been set with regard to the production of alcohol, some of which include duplicative and firm licensing requirements. However, this is mostly done with the aim of raising government besides restricting consumption of the product revenue (The office of the United States Trade Representative 2005, p.519). On the other hand, such measures on the production of alcohol leads to increased prices on the products hence lowering household purchasing power. Nevertheless, people never give up consumption of such products and as such they have inelastic demand. Consequently this leads to growth of the industry.

On the other hand, different scholars have responded to the various impacts of trade barriers on the Russian micro economy. As such (Blagov 2010) explains how government subsidies have helped in enhancement and modernization of production facilities especially in the metal sector. As a result, this has contributed to a greater percentage in the growth of gross domestic product. More to this point, there has been immense growth of steel firms which has promoted industrialization. This has played a significant role in stabilizing the Russian economy.

Furthermore, U.S.D.A. & ERS (2001) has carried out an analysis specifically on impacts of quotas and total ban of poultry exports to Russia. As such, they have examined some short term and long term effects on the poultry industry. Following this point, the Russian government imposed total ban on import of poultry from the United States in the year 2002 following claims that U.S’ poultry products had stuff prohibited by the Russian veterinary requirements. This was basically to protect household from consuming such substances which could be harmful. Essentially, the restriction of poultry imports resulted in increased prices of poultry meat in Russia. As a result, there was an anticipation of households shifting to meat products from Ukraine which is actually not a perfect substitute for poultry. Nevertheless, there has been a shortage in the supply of poultry meat over time.

Over time, the Russian economy has undergone a restructuring process that has contributed to growth in the gross domestic product especially in 2009. In consistence with this, the government has played a key role in the development of industries in general. So to speak, regulations set by the government have seen new firms being established and grow to a competitive position. Besides, the government has encouraged foreign investment in the gas and oil industry which forms the largest exports in Russia (Johnson 2005, p.9).

Generally, trade barriers in Russia are aimed at protecting the economy and promoting growth and development in various sectors ranging from automobile to agricultural sector. Nevertheless this has seen the growth of various industries hence expansion of the Russian economy and the movement toward integration to the world economy. As such, trade regulations have helped in moderating the Russian economy. On the other hand, the improvement in the Russian economy has led to alleviation of poverty by the virtual of increased production and affordable consumer goods hence increased purchasing power of households.

According to Letiche (2007, p.54), the Russian economy is gradually being integrated to the world economy. Essentially, this is as a result of increased exports in gas and oils and other natural resources to most parts of the world. Actually the export sector has significantly contributed to the growth of the Russian economy. Additionally, Russia is recognized in the world economy for its vast resources that are of great significance to the rest of the world. On the other hand Russia provides a potential market for the products from the West.

According to Martel & Hailes (1995), The United States ought to intervene in the Russian economy towards the production of consumer products that is in no way associated to the trade of arms. As such, loans, favored trade accords and lesser tariffs should be considered. Following this point, US reserves ought to support joint ventures (p.204). As a result, this will promote democratic transformation in Russia hence assisting in its incorporation to the world economy.

The Russian government should look into harmonizing taxes so as to achieve a desirable economic growth in the future. Besides, the government should also encourage foreign investment as this would boost the economy. Nevertheless, liberalization will be a big boost to the economy since this will mean the reduction of trade barriers and thus this will promote Russia’s trade in the Preferential Trade Area. Otherwise, the barriers remain a major hindrance to international trade and investment (Kalicki & Lawson 2003, p.).

Finally, the Russian government needs to establish a self-governing Central bank as this would enable it to attain an independent, stable financial sector. However, this can be achieved by setting rules and regulations safeguarding price stability and avoiding unwarranted influence from the government. As such, the Central government should be free from political influence (Martel & Hailes, 1995, p.129).

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