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War and Sanctions

Tom White

22nd July 2014

Violence is obviously the worst element of conflict, but the economic devastation can also be huge. Economists should be reflexively anti-war. Jeffrey Sachs discusses the waste of war on Project Syndicate. You can use the topic of war to introduce economic ideas like opportunity cost, fiscal stimulus and supply side shocks.I was reading about sanctions and trying to think how they affect economies. They are obviously intended to reduce the benefits of specialisation and international trade for their target. And like almost all trade restrictions, they hurt the economies implementing such policies too.

This is a complex topic, and is especially interesting to politics students. This Telegraph article might help, promoted by the disaster surrounding the Malaysian airliner that was shot down over Ukraine.

According to the story, the US has the power to bring Russia to its knees through control over the world's banking system, and could imposing sanctions that effectively shut the Russian energy giants out of international finance. Apparently “the Americans have the power to throttle Russia because no European or Western bank of any importance is going to defy the US after the fines imposed on BNP Paribas". How could tougher action against the whole financial sector cause the Russian economy to “collapse in six months"?

The article says that Russia's economy is the same size as California's. Combined sanctions by the US, Europe, Japan and the OECD bloc “pit a $35 trillion colossus against a $2 trillion midget".

Russia trades far more with the EU than the US, and several European countries are heavily dependent on imports of Russian gas. But Russia is even more dependent on selling that gas as a source of income, and Europe has built up large gas reserves. The EU also has huge spare capacity for imports of liquefied natural gas (LNG).

Hopefully this particular crisis can be averted. It would have dreadful consequences.

“The real danger is that we hit Russia too hard and crash the whole Russian economy. Nobody wants to do that," said Professor Alan Riley, from City University.

The Economist tackles some of the issues surrounding conflict and poverty here.

Tom White

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