Economic Consequences of the Trade Sanctions - Term Paper Example

Consider the economic consequences of the trade sanctions imposed by various parties related to the Ukraine crisis Contents Contents 1 Introduction 2 Main Body 3 Conclusion 11 References 12 Introduction Ukraine crisis has deep rooted impacts in the global economic consequences. Over the past quarter century globalization has been an inevitable force which cannot be denied at any point of time. Recently the global fraternity has come across the recent crisis of Ukraine. The recent crisis of Ukraine has been more of a power showcasing event between two super powers of the world. Due to the sanctions issued by various parties, global people are counting hours for severe consequences. The modern world is highly interrelated with each other. Within this context of high degree interrelation, if any country imposes any trade sanctions and then effects are quite clear in case of other countries. Globalization has its own advantages and curses. With the help of globalization countries can share their surplus resources with the other countries. It creates a sense of unity in global arena. On the other hand globalization has its own negatives. Due to globalizations, countries which are having weak economy are significantly over dependent upon economically strong countries. Here in this case of Ukraine crisis, two economic super powers are fighting among each other and are imposing bans and trade sanctions. All these bans and trade sanctions have very serious consequences for the global fraternity. Economically weak countries which are highly dependent upon strong countries feel the pressure significantly. With the help of this essay economic consequences caused by the various trade sanctions related with Ukraine crisis will be evaluated. The essay will analyze all the critical factors in a detailed fashion. Main Body The Crimea issue and standoff between Russia and Ukraine has emerged as a serious matter of concern for not only the two conflicting nations but also for the global community (Lascelles, 2014). (Source: Weaver and Hille, 2014) The above picture is indicating that, various nations across the world do high level business with Russia as far as the food and agricultural exports are concern. In fact the country which is taking some proactive measures to impose sanction upon Russia i.e. US also does almost $1.6 billion food and agricultural business with Russia. It means economies of all these countries are significantly dependent upon the export. So there is no shadow of doubt that there are high negative economic consequences on the above shown countries. Especially European Union is the highest exporter of food and agricultural products to Russia. Trade sanctions have most adverse economic consequences on the EU economy only. Due to all the trade sanctions EU and other nations as well are deprived of foreign currency. Generally EU exports almost €11.9bn agricultural products to Russia. The ban can reduce almost €5.3bn business. It certainly has adverse effect on the related economies. Countries from west and especially allies’ countries of USA have significantly criticized the Russian interferences on the Ukrainian soil. They have termed it as the high degree of Russian aggression towards the relatively weak Ukraine. On the other hand from the very beginning Moscow have indicated their clear intention that they are not willing to bow down in front of any kind of external pressure and that is why they have hit back with their own sanctions. The instances of bidirectional sanctions have created economic deadlocks which have negative comprehensive consequences. The whole European Union and even Ukraine are seriously dependent upon Russia’s energy manufacturing organization Gazprom. Russia has pressurized Ukraine to payback all the pending $900 million gas bill and has threatened to cut the gas deal with Ukraine. This kind of sanction can be significantly counterproductive for the related economy. Energy and gases are the backbones of domestic manufacturing. Once the sanctions are imposed, it certainly reduces the supply of energy, power and gases. Due to the scarcity of energy GDP of the countries can be affected negatively. Total manufacturing index of the countries reach to a low level. On the other hand middleclass citizens of Russia are highly dependent upon the European foods. That is why trade bans and sanctions of European foods have high economic consequences for the common Russian people. Russia is highly dependent on EU and other countries as far as the food and agricultural products are concern. That is why the saga of food and agricultural bans can have severe consequences as far as the Russian economy is concerned. The country may face several economic consequences like rising inflation, rising costs of food grains and acute supply problems of food and agricultural products. All these economic consequences can bring other economic problems. As far as the Russian president is concerned, he has a different point of view about the foods and agricultural bans and sanctions. He has argued that this kind of protectionism will improve the domestic agricultural and food production process of the country. It means consequences of the food trade sanctions can certainly be a boon for the local producers. As the demands remain same this kind of trade sanctions can create more opportunities for domestic production. Domestic production can reduce the dependency on other countries. It can help Russia to create more jobs in the agricultural sector and in other sectors also (Hope, 2014). This argument articulates that trade sanctions have two sides, one side is positive and other side is negative in nature. Here in this case of Ukraine crisis, embargo has been used for the purpose of achieving foreign policy objective. This economic weapon puts complete barrier for any kind of international trade. Due to this embargo, domestic producers lose the opportunities of earning foreign currencies but certainly gain the opportunities of earning significant money from their domestic business. That means the countries which have significantly huge domestic markets, can compensate their foreign trade losses out of their domestic business. On the other hand these kinds of sanctions are not at all suitable for the small countries where domestic markets are small. Here in this case of Ukraine crisis, Russia is facing many numbers of bans from the other countries. Due to its huge domestic markets, Russia may face less economic consequences but small countries like Ukraine and UK may face serious economic consequences. All these sanctions have significant effects on the economy of Kazakhstan (Farchy, 2014). Economy of Kazakhstan is significantly dependent upon the Russian economy. As the Russian economy is facing the issues of sanctions, automatically the effects will be there on the Kazak economy also. Due to all the sanctions GDP growth of Kazakhstan has slowed down significantly. In the first half of 2014, the country has recorded a GDP growth of 3.5% only. In previous year it was 6% at the same point of time. It means trade sanctions have both direct and indirect economic effects. This economic down turn has happened due to a significant fall of trade between Russia and Kazakhstan. (Source: Farchy, 2014) The above picture is indicating that due to its own sanctions Russia has failed to invest significantly on the various countries from EEU zone. Due to the declining FDI from Russia economies of all the above countries have tanked significantly. The consequences of Ukrainian crisis are significantly high and it has boundary less presence. Due to this crisis global fraternity have witnessed sanctions and retaliatory sanctions. All these sanctions have affected the lives of common global people. Russian people are the large buyers of European peaches but recent ban of Putin on EU food items have badly affected this business also. It has created serious financial and storing problems for the business. People who are associated with this business have to sale their products in fewer prices. Selling products in lower prices is not at all good from the economic point of view. Due to the annexation of Crimea with Russia and for provoking instability on the eastern part of Ukraine, EU and U S have sanctioned bans on the several Russian banks. Sanctions of EU are significantly targeting the state owned financial organizations of Russia. All these sanctions are significantly counterproductive for the Russian economy. Sanctions have barred Russian banks from raising long-term loans from European Union. Incapability of raising long term loans is not at all suitable for the Russian economy. Russian economy is significantly dependent upon arms deals. The sanctions of EU, have cancelled all the arms deals. On the other hand EU is significantly dependent upon the Russian energy sector. As a retaliatory measure Russia is also considering to cut the supply line of energy to EU. All these sanctions and counter sanctions have significant economic effects for the various parties related with this crisis. Deep-water exploration services of Russian state owned oil firm are significantly dependent upon the American services and technologies. All those services and technologies have been included into the US sanction. All these sanctions have significant negative effects on the Russian oil exploration process which can be significantly harmful for the Russian economy. It has been observed that, sanctions are significant matter of concern for Russia. Due to the high level of international sanctions, $75bn capital has left the country (Kelly, 2014). In last year Russian economy grew by only 1.3%. According to Reutres, Russian economy is getting stagnant due to the double sanctions from EU and USA. On the other hand EU is also facing the economic consequences of Russian ban. (Source: Weaver and Hille, 2014) The above picture is articulating that Russia is the second largest importer of beef and veal products and most of its imports come from the EU and Brazil. With the Russian sanctions of Beef imports, EU has lost lots of revenues. In the last one decades Russia has become one of the most profitable markets for the European consumer goods. Country like Germany is the highest European exporter to the Russian consumer market (Wagstyl, 2014). The EU bans towards Russia is not at all suitable for the German economy. German exports to the Russian soil worth for almost 38bn Euros. So sanctions are automatic losses for German and Russian economy. All the sanctions are creating Deadweight loss for Russia. The sanctions have reduced economic surpluses of Russia. This economic surplus is being significantly affected due to the absence of competitive equilibrium in Russian economy. State owned organizations are not able to import various services and technologies from the EU and USA. Marginal costs of the Russian firms are increasing. This increasing trend of the marginal costs is not at all suitable consequence for Russian economy. Due to the Ukrainian crisis Russian economy has faced significant consequences as far as the capital flight is concerned. The country has experienced high degree of capital flight. According to the estimation of World Bank and IMF, if the Ukraine crisis remains same then Russia will have to face much more economic crisis. If the trend continues for whole year then capital flight can extend up to $100bn (BBC, 2014). It is showing that, due to the Ukraine crisis high degrees of uncertainties are looming large for the Russian economy. Due to all the sanctions the country is losing its absolute advantage. Opportunity costs of the country are also increasing and comparative advantages of the country are going down. According to the report of Business New Europe, financial sanctions due to Ukraine crisis have caused significant revenue loss for Russia. The amount of revenue lost is almost $400 billion. It categorically indicates that financial sanctions have utter negative impacts on the Russian economy. This year Russian economy was supposed to recover from the earlier recession of 2008. Unfortunately the Ukrainian crisis and sanctions have reversed the trend. Russian economy has slowed down significantly. (Source: Aris, 2014) The above picture is indicating that, in the last few quarters’ capital investments in the Russian economy have reduced significantly. It reduced by almost 20%. Domestic organizations of Russia are not investing their money into their own country. The trade sanctions have not only developed negative economic consequences for Russia it has significant adverse affects on the European economy as well. European countries like Greece, Italy and Spain are facing certain level of debt crisis. Russian market is one of the most lucrative exporting markets for them. Counter trade sanctions from Russia have blocked the exporting opportunities for those countries. That is why economic situations of those European countries are getting exposed in front of higher economic volatility. The countries are failing to recover from their adverse economic situations. Due to various financial sanctions, Russian currency depreciated significantly. This depreciating trend of ruble has made the import more costly for the country. Overseas travelling of Russian people has become expensive. Inflationary pressure has increased significantly. It has been observed that economic consequences of trade sanctions have varying effects on the related parties (Oliver, Mount and Hope, 2014). Economic interests towards Russia are not same for all the parties related with the crisis. US investment in Russian soil is very less and the country does not share high export relationship with Russia. For the case of EU situation is totally different. EU shares high export relationship with Russia. It means trade sanctions due to Ukraine crisis are much more harmful for European economy than US economy. US economy has higher degree of self resilience but European economy has high levels of dependency on Russian imports and exports. All the above facts and arguments are clearly indicating that trade sanctions due to the reason of Ukraine crisis have created multidimensional negative economic consequences for all the related parties. Conclusion The above essay has critically analyzed various economic consequences of the trade sanctions. During the course of this essay one thing has been cleared that trade sanctions were totally and purpose fully targeted towards the Russia. The main objectives of all the sanctions were to attack the strong positions of Russian economy. The essay has categorically indicated that trade sanction was not at all one way traffic. Russia also retaliated significantly with some counter sanctions. The essay has clearly indicated that Ukraine crisis have developed one more crisis for the global fraternity i.e. trade sanctions. Trade sanctions due to the Ukraine crisis have increased the tariffs of imported goods into Russia. By imposing sanctions on EU, Ukraine and USA, Russian powerful President Putin has tried to showcase tit for tat attitude. There is no shadow of doubt that Russian economy has been badly impacted with all the trade sanctions. Their lowering trends of capital investments and GDP growth have clarified the fact into this essay. On the other hand the essay has clearly showcased the adverse economic effects of trade sanctions on the EU, Ukraine and USA economy. The above essay has successfully analyzed the whole situation. From the above essay one thing can be easily concluded that trade sanctions related with Ukraine crisis only have negative and adverse economic consequences on all the parties. It has been observed during the essay that, no parties have been economically benefited out of the trade sanctions. All the above factors have significantly indicated that consequences of trade sanctions are deep rooted and it has created economic uncertainties for all the parties related with Ukraine crisis. References Aris, B., 2014. Impact of sanctions on Russia: an assessment. [Pdf]. Available at: < http://www.europeanleadershipnetwork.org/medialibrary/2014/06/25/791bd7b5/Impact%20of%20Sanctions_Ben%20Aris.pdf>. [Accessed 20 November 2014]. BBC. 2014. How far do EU-US sanctions on Russia go?. [Online]. Available at: < http://www.bbc.com/news/world-europe-28400218>. [Accessed 20 November 2014]. Farchy, J., 2014. Russia’s neighbours: Primary colours. [Online]. Available at: . [Accessed 20 November 2014]. Farchy, J., 2014. Standoff with west reveals splinters in Putin’s Eurasia project. [Online]. Available at: . [Accessed 20 November 2014]. Hope, K., 2014. What impact will the MH17 disaster have on Russia?. [Online]. Available at: < http://www.bbc.com/news/business-28404988>. [Accessed 20 November 2014]. Kelly, L., 2014. UPDATE 2-Russian economy stagnates as capital flight hits $75 billion. [Online]. Available at: < http://www.reuters.com/article/2014/07/09/ukraine-crisis-russia-money-idUSL6N0PK43020140709>. [Accessed 20 November 2014]. Lascelles, S., 2014. Guest post: whatever happened to globalisation?. [Online]. Available at: < http://blogs.ft.com/beyond-brics/2014/08/29/guest-post-whatever-happened-to-globalisation/>. [Accessed 20 November 2014]. Oliver, C., Mount, I. and Hope, K., 2014. Europe’s peach growers feel pain of Russian sanctions. [Online]. Available at: < http://www.ft.com/intl/cms/s/2/ecbf2fe8-222e-11e4-9d4a-00144feabdc0.html#axzz3Ja4Rbitv>. [Accessed 20 November 2014]. Wagstyl, S., 2014. German diplomacy: Dominant by default. [Online]. Available at: . [Accessed 20 November 2014]. Weaver, C. and Hille, k., 2014. Russian consumers prepared to swallow food ban. [Online]. 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