Tuesday, 24 May 2022

"Putin is losing the economic as well as the military war."

"Russia’s military failure in Ukraine has defied almost everyone’s predictions. First came abject defeat at the gates of Kyiv. Then came the incredible shrinking blitzkrieg, as attempts to encircle Ukrainian forces in the supposedly more favourable terrain in the east have devolved into a slow-motion battle of attrition.
    "What’s important about this second Russian setback is that it interacts with another big surprise: The remarkable — and, in some ways, puzzling — effectiveness, at least so far, of Western economic sanctions against the Putin regime, sanctions that are working in an unexpected way....
    "As soon as the war began there was a great deal of talk about bringing economic pressure to bear against the invading nation. Most of this focussed on ways to cut off Russia’s exports, especially its sales of oil and natural gas. Unfortunately, however, there has been shamefully little meaningful movement on that front....
    "As a result, Russian exports have held up, and the country appears to be headed for a record trade surplus. So is Vladimir Putin winning the economic war?
    "No, he’s losing it. That surging surplus is a sign of weakness, not strength — it largely reflects a plunge in Russia’s imports, which even state-backed analysts say is hobbling its economy. Russia is, in effect, making a lot of money selling oil and gas, but finding it hard to use that money to buy the things it needs, reportedly including crucial components used in the production of tanks and other military equipment.
    "Why is Russia apparently having so much trouble buying stuff? Part of the answer is that many of the world’s democracies have banned sales to Russia of a variety of goods — weapons, of course, but also industrial components that can, directly or indirectly, be used to produce weapons....
    "The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.
    "That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a 'win'; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.
    "Yes, I know that in practice there are caveats and complications to these statements. Trade surpluses can sometimes help boost a weak economy, and while imports make a nation richer, they may displace and impoverish some workers. But what’s happening to Russia illustrates their essential truth. Russia’s trade surplus is a sign of weakness, not strength; its exports are (alas) holding up well despite its pariah status, but its economy is being crippled by a cutoff of imports.
    "And this in turn means that Putin is losing the economic as well as the military war."
~ Paul Krugman (yes, that Paul Krugman), from his op-ed 'How the West Is Strangling Putin’s Economy'


Phil S said...

Lol. I never thought I would see the day that PC goes Keynesian and starts quoting Krugman. As goes a household so goes a nation. A trade surplus is deferred consumption aka saving and is holding up the value of the Ruble. The poor benighted Russians are no longer able to buy overpriced Starbucks royalty coffee, Maccas or tat from Ikea. There is nothing stopping them buying Chinese. In the meantime the West has gone from mean tweets to soaring energy costs, facing recession, America needing food aid supplied by military flights. This is nonsense on stilts. What would failed economic sanctions look like when the West sent $35bn to US per month for energy while providing $1bn to Ukraine?

PC said...

Oddly enough, when he's on his specialist subject, i.e., trade, Krugman can be very good. As he is here, where he's exactly right: that the point of international trade is not exports, but imports.

He's supported by the recent revelation that the Russian military is having so much trouble repairing and rebuilding modern tanks, because of the sanctions & embargo on modern digital components etc. needed, that they are sending into Ukraine 60 year old T 62 tanks (i.e., 37 tons of death-trap scrapmetal).

Soaring Western energy costs? Perhaps because so many Western govts (Germany especially) have shackled the use of nuclear. Many (Australia, UK, US) have shut down or shackled energy production. And others (NZ) have shut down or shackled exploration. But in any case, the objection proves the point: that the point of trade for the West as well is imports (i.e., Russian gas) rather than exports. The West's denial of this boon for the moment supports rather than invalidates the point.

"Food aid" supplied my military flights? Perhaps again if the US govt allowed markets to work -- in this case, the market for baby formula -- instead of shackling them hand and foot with. protectionist claptrap, then this foot-shooting headline-grabbing mess wouldn't exist. All parties need to learn the point that Krugman is making: that the primary point of trade is the imports it buys you, not the exports needed to buy them.

It's like an amazing technology, trade: in order to make electronics and cars, NZ sends milk powder to buyers overseas; but if buyers overseas shut their borders to our milk powder because of protectionist claptrap, we miss out (if we can't find other buyers) but they miss out too. A lot.

PC said...

Further details on how baby formula supplies are hobbled by claptrap:

"Regulation is a major reason only four large formula producers control most of the U.S. market. First, parents receiving WIC assistance are allowed to choose only certain brands. Second, consumers must pay a 17.5 percent tariff on any imported formula, which prices countless brands out of the U.S. market. It’s a nice arrangement for the companies — and for their lobbyists — but it raises prices for families and makes it difficult to boost supplies during shortages.

"When new formulas enter the market, regulations forbid sellers from letting anyone know about them for 90 days, even as manufacturers may advertise existing formulas all they like. Those first months on the shelf are make-or-break for many new products, which is why existing producers like this otherwise pointless regulation. At times like this, parents might appreciate hearing about new options.

"One of those options is toddler formula, which in many cases meets the Food and Drug Administration’s nutritional requirements for infant formula. However, FDA regulations prohibit many manufacturers from recommending this option."

This is from Ryan Young, “Cronyism Makes the Baby Formula Shortage Worse,” AIER, May 24, 2022.

MarkT said...

I’m wondering, is this ‘motivated reasoning’, motivated in this case by sympathy for Putin’s Russia?

Phil s said...

We are in complete agreement about the idiocy of US trade restrictions in a normal trade environment. My point is that the sanctions are not working apart from some specialist chips as you point out. Western economies are getting relatively weaker as they are punished by inflation whil Russian exports hold up. When they adjust their supply chains they will be fine.

Phil S said...

and on solar cells also. idjits https://johnhcochrane.blogspot.com/2022/05/sloar-panel-tariffs.html