Last Sunday, 6th March, 2022, an APEurope Correspondents' Pool briefing covered the economic consequences of sanctions in the context of the current Ukrainian situation. One aspect involves understanding the dynamics of sanctions and counter-measures and the other concerns policies to counter sanctions within an economies thus affected. We provide a synopsis of the exchanges.
Although originally sanctions were related to forms of enforcement applied when a person or country did not comply with existing laws, today sanctions have become a strong action taken in order to force people or a country do something the sanctioning party desires with or without any reference to law. On the other hand, the abandonment of solemn undertakings of agreements is also a form of sanction in the sense of withdrawing from those relying on the agreement, the provisions contained therein is a form of punishment. However, solemn agreements are normally regarded as components of legal provisions but for some reason abandonment of agreements are not considered to be sanctions. However, they can be injurious and therefore can result in reactions on the part of the aggrieved parties.
In the current circumstances a series of abandonment of agreements, mainly by the USA and NATO resulted in a series actions by Russia and sanctions being applied to Russia over the last 30 years.
ACTION AND IMPACTS
The type of general analysis we are looking at here can be observed, in general terms, in the diagram on the left. So, for example, a sanction applied against Russia involving a commodity which the UK requires is likely to impact the UK more than Russia because Russia has many trading options. So the line a-b in this case traces an impact on the UK compared with the impact on Russia line a-c. In terms of negative economic growth rates the associated comparative levels can be observed in lines d-e for Russia and d-f for the UK.
THE PRODUCTION, ACCESSIBILITY & CONSUMPTION MODEL
In any analysis the monetary analysis based on the conventional economic theory of supply and demand provides very little useful information on the impact of sanctions. However, the production, accessibility and consumption analysis based on the real incomes approach provides a more informed analysis of the impact of sanctions. This is because this model integrates production costs and price accessibility in the analysis and also provides a better understanding of the actual mechanisms that determine national real economic growth such as experienced by Germany, China and Russia and why the United Kingdom has fallen so far behind and has so many dependencies as to be unable to prevent serious self-imposed negative consequences as a result of the imposition of sanctions on Russia, in this instance. This, as will be explained in this summary, is linked to the inappropriate macroeconomic policies pursued by the UK, now for some 47 Years.
THE UNDERMINING OF THE HEGEMONIC ROLE OF THE DOLLAR
One of the targets has been the product that provides the UK with the best cost advantages, Russian gas and petroleum. Russia sells these products on the basis of long term contracts in order to stabilize the markets as a low reference price to benefit their customers and their own production and distribution planning. The approach helps moderate the prices of these products from competing producer-exporters on a worldwide basis. By attempting to sanction Russian gas and petroleum exports the lower income countries will seek to use alternative means to secure their supplies. Essentially countries that represent over 50% of the world's population, BRICS plus Iran, Venezuela, Turkey and several others cannot operate using dollars because of a series of sanctions affecting the use of the dollar. China and Russia have, for some time, built up alternative arrangements using their national currencies and this approach has already taken in India and Turkey and even Saudi Arabia. As a result the situation is completely different from the similar price hikes in 1973-1983 when the price of petroleum rose seven-fold. Then the IMF introduced the recycling of dollars to maintain dollar-based trade. However, now this will not happen with something like 50% of the world's population provisions being satisfied with a system that does not recycle dollars. As a result the "West" will be impacted by a severe slumpflation because of a lack of what was the international reference currency and as a result the USA will rapidly lose its hegemonic power exercised through dollar-related sanctions.
In any case the theory that countries need foreign exchange to trade is an ingrained misconception held by most economists simply because this is what people are taught at university. In reality people can trade internationally and nationally on the basis of barter, coupons, national currency or foreign exchange as long as the transacting parties accept the chosen medium of exchange or exchange rates between physical quantities and qualities of bartered commodities or goods. To establish this, requires a confidence derived from a political will which in turn is motivated by countries not wishing to be exposed to the risk of the type of damage that using the dollar can impose. The mistake being made by the USA has been to overdo its sanctions policy and now together with European countries and the UK the extremes they are going to has crystallized the realization that the international currency setup, which in reality collapsed in 1971, is too risky for countries that wish to remain free of political impositions by the USA.
The reality is that the BRICS countries and several other countries are very complementary in terms of the products produced. On the other hand, the USA and UK, for example, have very little in terms of industrial and manufactured goods that cannot be made elsewhere. This is because montarism policies implemented since the 1970s have hollowed out industry and deskilled thw workforce. As in the period 1973-1993, the petroleum companies will take advantage of the situation to ramp up the retail prices of petroleum derivatives such as oil, gasoline (petrol) and governments will have to introduce some sort of mitigation instruments which will drain budgets. Overall productivity in the economies affected will decline, demand will be arrested because of declining real incomes and loss in purchasing value of the dollar, pound and Euro, and unemployment will rise.
WHY CONVENTIONAL MACROECONOMIC POLICY INSTRUMENTS CAN DO NOTHING TO MITIGATE THIS STATE OF AFFAIRS
The most relevant work into economic strategies to address such economic circumstances has been conducted at SEEL-Systems Engineering Economics Lab based on the pioneering work into the Real Incomes Approach to economics developed by the British economist Hector McNeill, since 1975. This strategic policy research was initiated to identify appropriate policy responses to the last petroleum crisis. McNeill stated recently that,
McNeill explained why conventional theory is almost wholly-based on monetary factors which do not determine economic wellbeing of the majority of constituents and why even the conventional economic theories are in fact flawed. Although perceived to be a complex issue, McNeill has a very straightforward evidence-based approach to explaining why this is the case. Part 2 of the article will explain these theoretical gaps and explain their implications and solutions. Although addressing the current economic crisis McNeill demonstrates that the proposed approach adopts a general theory based on the production, accessibility and consumptions model to replace the aggregate demand model, in the form of a Real Incomes Policy to manage the whole economy.