How should the government respond to sanctions, or about the Elephant and the Pug

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Как правительство должно ответить на санкции, или про Слона и Моську

After the introduction of new sanctions the Russian stock market goes into a steep dive. On Friday, the RTS index fell 12%, a share “Rusala” in Hong Kong by 55%. The fall in major blue chips that are not even included in the sanctions lists (Sberbank, LUKOIL) ranged from 10% to 20%. The dollar reached almost 64 rubles, and the Euro – 78. How should Russia respond to these sanctions?

Как правительство должно ответить на санкции, или про Слона и Моську

Let’s start with the background. Vladimir Putin managed to build a very efficient alternative reality for domestic consumption (see my article “the Economy of lies”). In short, much less of all irons to tell you that we were great or cool than actually to be great and cool. The problem is that at some point the officials have come to believe in the information that they feed through Federal channels to the population (for example, Maria Zakharova admits that watching the news of TV channel “Russia” a lot for myself and learn new things. In this regard, there were two global issues:

1. Officials who believe that we really stood up, if we want something the world will show geopolitical ogogo.

2. The West, which is the first time in leprosy Putin reacted rather sluggishly, trying to play “you… don’t touch it, it will not stink”.

Aggressive attempts to show everyone that we stood up and ready to prove it, began not yesterday and not even from the Crimea, and more than 10 years ago. In November 2006 murder of Litvinenko in London (which no one, except Putin, sanction could not). In February of 2007 the famous Munich speech, Putin has already officially declared that we are ready for a new confrontation with the United States, NATO and generally with the West. In August 2008, Russia attacked Georgia, in fact, acting for one of the sides in the internal Georgian conflict.

After the first wave of Putin’s aggression happened hard by the financial crisis. The RTS index since the war with Georgia in December 2008 dropped by 3 times (from June 2008 to December 2008 – 4 times). Already in the 4th quarter of 2008, the Russian government was not up to the geopolitical games – had on a daily basis to ship cars dough friendly oligarchs to save them from bankruptcy. The West probably thought that his tactics “Putin did not touch it, it will not stink” it worked. However, as soon as the price of oil crept up again, financial markets have stabilized, Putin once again hyped up on the geopolitical field. Chop off the Crimea, accompanying the entire process flow of the lie – that we were not there and we are not going there, we go there, hiding behind women and children

we were there from the beginning. Then started the war in the Donbass, constantly denying the presence of Russian troops there, although the ears of our military presence there sticking out from all the cracks. Finally, the questionable operation in Syria to the Russian bayonets to back the Assad regime to power. The West realized that although they g… and didn’t touch, but it stinks to the whole world more and more, and the problem should be solved. A series of Russian sanctions, which began in 2014 is the reaction to the second round of the Russian international aggression.

To understand how it should react to the Russian government to the sanctions, we first need to understand how Western society. It is extremely slow and bureaucratic. The introduction of any measures and their abolition requires significant time and coordination. That is why the first round of aggression for Russia went unpunished – Western bureaucrats decided to look – and suddenly the problem will resolve itself. After the second round of aggression, the West has realized that it did not resolve, and after a long correspondence and discussion took a fundamental decision that every aggressive step the regime in Russia must be punished get sicker and sicker. That is why the steps and actions that we said goodbye 10 years ago, cause tough resistance today.

Russia now has two options for response. The first option is to continue to play on the elephant and the pug, knowing that the elephant is already furious. The second option is to admit (at least unofficially) that the forces are not equal, stop yapping at the elephant and even make some conciliatory gesture.

Consider the first option – to continue leaping and barking and trying to bite an elephant’s ankle. We’re playing this tactic the last few years. For each round of sanctions come up, as if a painful bite West. To the Magnitsky act we said, “antisirotsky law”, prohibiting the adoption of our orphans to U.S. citizens, and forbade entry into Russia a number of U.S. citizens who are “involved in violations of fundamental rights and freedoms of man”, and yet somehow guilty before Russia. In August 2014, in response to the Crimean Donbass sanctions, Russia imposed counter-sanctions – a ban on food imports from Western countries. In other words, every time we bombed Voronezh with virtually zero damage to foreign countries.

Even Russia can not cause any serious damage to the West. Russia is less than 2% of global GDP (the U.S. and the European Union – 50%). The structure of our foreign trade is the exchange of resources for everything else. The West can quite easily replace our resources range from other markets. Even if it will cause a price increase, it will not be a problem, as the share of value added in modern economies – only a few percent. Russia to substitute goods and technology of the West no. All these “Rosnano”, “Russian technologies”, “SKOLKOVO” fiasco. The domestic market for such a volume of manufactured materials just yet. If Russia decides to restrict the export of its resources, it will impact primarily on Russia. We just will lose export revenue, and hence the ability to buy crucial imports from abroad. Russia objectively there is no leverage to cause any significant economic damage to the West. And the West has. The reaction of the Russian financial markets by the new sanctions showed how painful we can make the West even without making any serious effort from your side, and we have no way to adequately respond (after the foreign Ministry promised a tough response to U.S. sanctions, the Dow Jones rose 2%). If we decide to increase the confrontation, introducing retaliatory sanctions (the sense of which, in terms of damage is zero), this can only cause irritation in the West, and as a consequence, the introduction of the us against new sanctions, which can be much more painful than this round. For example, if the list will include Gazprom, LUKOIL, Rosneft, Sberbank, Norilsk Nickel. It would mean the collapse of the Russian stock market and a deep crisis in the economy.

The second option, of course, unpleasant for the Russian hawks, but this is the only possible way out of the crisis. Of course, the Soviet Union was in the late 1980’s unpleasant to admit that he had lost the cold war. But if we recognized this fact 10 years earlier, and reforms could be undertaken which is softer, without shock therapies, upheavals and mass impoverishment of the population. And so, the Soviet Union walked out of arms race just at the time when the economy was not even on the verge of bankruptcy and was in bankruptcy, and further the policy of confrontation was physically impossible. We are now in a similar situation. Four-year sanctions war showed that power, to put it mildly, are not equal. We have exhausted all methods of its economic impact, and the West is not. If USA and Europe want, they will be able to simultaneously bankrupt all the key Russian companies and the state budget, for example, the embargo on the import of resources from Russia and expanding sanctions lists at the expense of other large Russian companies. Defeat in this war of sanctions, Russia will still have to recognize, sooner or later. Better early, saving at least some face than in the process of bankruptcy of the economy, probalsa kneeling to the West with requests to somehow feed us humanitarian aid (see case 1991-1992)

What are the concrete steps the Russian government could take to reduce confrontation with the West? There are three obvious (and beneficial) step is the abolition of antisanti, stop supporting separatist forces in the Donbas and the withdrawal of troops from Syria. The lifting of restrictions on food imports from the West will not only allow to demonstrate that Russia wants to reduce tensions, but also will dramatically lower food prices inside Russia. It is a myth that the embargo affects hipsters. He increased the prices of products of mass consumption such as vegetables, dairy products, meat. The lack of support of the unrecognized modes of the LC and the DNI and the transfer of border control of Ukraine will allow us to show that we are not going to further artificially heated domestic conflicts. Finally, the conclusion (really final) troops from Syria and stop supporting Assad is a step in the same direction. We reject the aggressive foreign policy and support insane dictators. Again, the withdrawal from Ukraine and Syria will allow to save considerable funds for the budget, which would be used, for example, to support socially unprotected groups of the population.

Would Putin for the second scenario? On the one hand, it is contrary to all the rhetoric of relations with the West, which it built in the last 10-15 years. On the other, it is obvious that the West has taken a political decision to respond to every aggressive action of Russia, and if Putin will continue to pull the cat’s whiskers, very quickly the economy under the weight of sanctions will slide into a full-blown crisis, and it will lose power as a result of soft or hard revolution. And power is what Putin likes most. The only way for Putin to save it is to stop irritating the West.

Maxim Mironov, Professor of Finance IE Business School (Madrid).

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