On the Usefulness of Sanctions

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July 3, 2015

On the Usefulness of Sanctions

By fitzmorgen

Translated from Russian by J.Hawk

Sometimes the management, unhappy with an associate, goes after his smallest infractions and even imaginary ones. The associate suffers in silence…and then one day the management goes too far. The associate finally quites.

The management thinks: well, we finally got rid of this loser, now we’ll find someone else, younger and more energetic.

The “loser”, in turn, finds identical work where they pay twice as much and, having experienced normal working conditions, wonders why he hasn’t quit many years ago.

But now the management has problems finding a replacement. The offered salary is attractive only to genuine losers, so much so that one look at them is enough to wonder why security hasn’t stopped them at the entrance. When the management realizes that it can’t find suitable replacements even after raising the salary, it calls its former associate with an offer to return.

But now it turns out that he works only 8 hours per day at his new job, not 12, that he gets a full hour for lunch, that he has comfortable working conditions, and in general he is treated so much better that it’s no longer even a question of money.

But, sooner or later, the “loser’s” replacement is found. Sometimes of lower quality, sometime (though rarely) of equal quality. But people who watch such situations unfold often rush to draw the moral to the story: well, since you are already treating your associates like serfs, at least prevent him from quitting by offering more money or by other means. Because finding a new associate is too tiresome.

But the observers don’t understand the obvious: the management’s hostility is an important part of the work process. As soon as the management shows a sign of weakness, the unfortunate associates will raise their heads, realize what’s happening, and simply run away. Their only chance is to keep the associates in such a state of oppression that they don’t have any strength left to quit and try their chances in the frightening unknown.

I’ll write about such businesses in another article of my “thoughts on doing business in Russia” series. But now let’s shift to the topic of anti-Western sanctions.

This lengthy introduction was needed in order for you to fully appreciate the comical nature of the situation.

There exists a European Union, a rather sly international institution which made a ton of money off exports to Russia. There exists Russia, a rather well industrialized country which, for historical reasons, opened its market to the Europeans a bit too much. And that’s the situation in which the EU starts to feel its oats and introduce sanctions against Russia!

Do you know how the “torn to shreds” Russian economy looks from within? I’ll cite a few fragments from an inspiring article about import substitution:

http://aftershock.su/?q=node/318213

“We are buying and selling laminates since 2007. We started with the Russian firm Kronostar in Sharya, Kostroma Region. But then we shifted to Chinese liminate in 2008-2009. It costs 225 rubles per sq.m, whereas ours costs 240 rubles. And Chinese quality is a bit hither. We are expanding the variety of Chinese laminates, introducing 12mm panels. Here, too, the price is a bit lower than domestic.

The incentive to sell imported laminate is the ability to sell with a bigger profit margin, because only we have a contract with these two Moscow firms. But then comes the fall of 2014! The dollar becomes stronger, laminate prices go up with it. We sell the remnants of Chinese laminates. The demand in December is very high, three times higher than in 2013. Consumer demand boom. We ask our suppliers about their prices, and now they are lower than China! We start our purchases, we expand our selection. We are buying Russian laminates through Moscow dealers of four plants:

Tarket, which opened in 2012
The already mentioned Kronostar.
Kronoshpan, Yegorievsk, near Moscow
Kastamonu, a new plant opened by the Turks in the Alabuta free economic zone in September 2014.”

Second example:

“Oriented Strand Board (OSB). In 2007-2009 we bought and sold US and Canadian boards. In 2010 we started to sell boards from Bolderaya, Latvia. In 2012 we included Romanian, Czech, and German OSB boards.

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A Russian firm Kalevala opened a factory in Karelia during the summer of 2013. But their prices were higher than for imported board, in spite of shorter deliveryd istances. Then they opened plants in Yegorievsk and Kirov, but Latvian boards were still cheaper.

Then came the fall of 2014. The sharp increase in imported OSB prices forced suppliers to raise their own prices. We start buying Kirov OSB, with the transport costs half of the delivery cost from Moscow. Russian OSB prices are growing, but not as rapidly. We switch to Kalevala OSB when their prices drop below Kirov’s.

Our manufacturers are starting to reduce their prices after the passing of the demand boom. Therefore right now OSB prices are lowest they’ve ever been. Kirov dropped its price from 499 rubles to 350 rubles per sheet. Imported OSB is much more expensive. Only the new plant in Mogilyov, Belarus, can compete with our factories. “

Please note that both OSB and laminate are made from wood, which means their production supports our lumber industry. These plants are helpful in that for every one of their workers there are 10 workers employed in making the raw materials and parts for the factory.

Therefore everyone gets more orders and more money, not only the end manufacturers. The worker Kolya received a bonus after his lumber firm sold a great deal of lumber to an OSB-producing factory. The worker then goes into a barber shop, into a cafe, into a car dealership, a real estate office to buy a plot for a new home. The economy receives an injection of money which results in a general revival.

Right now we are observing only the beginnings of that revival, but by fall the positive effects from sanctions and ruble devaluation ought to become fully visible.

And now let’s look at it from the opposite side, from the West. The Austrian Institute of Economic Studies shows that the official EU data on losses from Russian sanctions are underestimated by many times.

http://www.rosbj.ru/2015/06/23/316-австрийский-институт-экономиче/

“For example, according to the Federal Association of German Industry, some 350 thousand workers are employed in making exports to Russia. But everything depends on what that number actually reflects. Streicher in a Die Welt interview brings up the following example. In order to sell a car in Russia, you also have to make four tires which are not made by the automaker. Therefore tire industry suffers along car industry. The tire industry in turn has an impact on the rubber industry and so on. The same is true for all components. What is more, German workers also supply subcomponents for, to name one example, the French industry which also suffers from the drop of exports to Russia.”

“Businesses, naturally, are trying to adapt. They are trying to shift their former Russian exports to other markets. But if that is a problem for the manufacturing, for agriculture it’s somewhat easier. Although there is a hidden problem, namely the unavoidable drop in prices. It forces the agrarians to sell their products at excessively low prices below the margin of profitability.”

As you can see, Austrian scientists are not exactly beacons of optimism. But Germans also cite depressing statistics. German export to Russia this year decreased by a quarter, which puts 2 million European jobs at risk:

http://russian.rt.com/inotv/2015-06-27/DWN-Rezultati-sankcij-prevzoshli-hudshie

“The recent events surpassed our worst expectations,” says Eckhardt Cortes, the head of the German Economy Eastern Committee. Mr. Cortes points out that Germany is losing important clients: Russia is rapidly reorienting itself toward China.

Mr. Cortes wants the lifting of sanctions but…the ruble devaluation, thank you very much, US friends and partners, is already a done deal. Our farmers and factories have revived: the markets lost to the Europeans are being rapidly filled by domestic goods.

It all boils down to the fact that Russia was afforded the opportunity to engage in healthy protectionism and defend its manufacturers from Western imports which could have squeezed us with lower prices thanks to their cheaper credit and other unfair advantages. It’s not in our interest to return to how things used to be.

In that context, the comments by certain European politicians that Russia ought to humbly ask Europe for forgiveness and beg them to cancel their insignificant sanctions are rather entertaining:

http://ruxpert.ru/Антироссийские_санкции

Optimists believe that the EU will soon see the light and understand it’s in its own interests to come to terms with Russia, and that it will have to reach an understanding on better, far more just terms.

Nevertheless, Greece shows that the EU is stuck in its own politics and that it would take far more to sober it up than the loss of two million jobs.

On the one hand it is sad. Everyone understands that Europe will remain one of our main partners in 10 or 30 years. On the other hand, the gas issue is being resolved relatively well, we are taking the US-friendly Eastern European countries in gas pincers by sending our pipelines around that uncompromising region. As far as the European farmers and workers are concerned…perhaps they should think twice next time whom to believe and for whom to vote.

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