How do you weigh the effectiveness of an economic weapon? How do you gauge the likely impact on your antagonist? How do you assess the cost to yourself? As Nick Mulder has shown us in his powerful new history of the economic weapon, the calculus of sanctions is one of the important domains in which economic and social scientific expertise first came to the fore in 20th-century government.
It is tempting to just observe that if you take a set of complex equations and plug in a set of parameters that you (to use a crude expression) "pull out of your **" you can produce whatever numerical output you want, but it may be more productive to just go to the old "forrest" v. "trees" distinction and try to look at first principles.
1. Lets start with the relatively observable fact (as described above) that Russia provides 30% of Germany's primary energy.
2. There either IS "spare capacity" for energy production equal to that 30% or there IS NOT.
3. All analysis of the form discussed above is fundamentally predicated on the assumption that THERE IS such "spare capacity", and then models the cost of re-configuring Europe's (and the World's) energy systems to switch from Russia as the source to that "spare capacity" source (whatever/wherever it is).
4. So, is there?
5. The fact that the US has been begging the Saudis/UAE to increase output yet got no effect, and is now turning to Venezuela suggests that there IS NOT all that much "spare capacity". (The fact that prices are at all time high and any such hypothesized "spare capacity" hasn't moved to take advantage of these high prices supports the thesis that it doesn't exist.) It may be possible to find a few percent (5%?) by ramping up coal, but again, where are all these "ready to go" coal power plants?
6. If that is the case, then any effort by Germany to diversity ITS supply, will involve diverting such energy supplies from someone else.
7. That someone else will now need to substitute for the missing supplies - and if there is no "spare capacity", then the only place they can turn is Russia.
8. So, unless there is a "net decline" in total energy use, the net result of Germany's policies would be be higher prices (due to the need to rearrange how energy is routed) while volumes produced and sold by all suppliers (including Russia) remain the same.
9. Thus, we need to look at the alternative concept - there is no "alternative source", so Germany needs to simply reduce global consumption of energy by that 30% of Germany's energy usage.
10. Given the broad correlation between energy use and "activity" (including economic activity, but really all activity - "Life" is "Energy Use"), for Germany to reduce energy consumption by 30% would represent a massive drop in GDP. It may not be quite 30% because some "efficiency gains" are possible, but it would be close.
11. More importantly, that decline isn't just a "number". It would involve "energy rationing", so choices will need between cutting household heating (leading to people freezing) of shutting down transport and factories (leading to massive unemployment).
12. The alternative is to "spread the pain" across Europe, forcing other EU countries to lower their energy consumption and redirect the savings to Germany.
13. This brings us to the fact that Germany is not the only EU country using Russian energy. (It is worth noting that Russia controlled sources (including Kazakhstan) are also a major supplier of Uranium for Nuclear Reactors - 40% of US purchase, and a fair chuck of France's).
14. While there are "long term" options (Geothermal? Wind? Fusion?) these will not be providing significant amounts of energy in the next 12 months.
Fascinating summary, thank you. I’d like to see some analysis/discussion about the Russian hard currency windfall to due to price escalation. What does this really mean? Is this hard currency that Russia cannot access due to the market constraints put in place by the west? If not, where does it go, how is it spent? Is the war a net financial gain for Russia because of this windfall? Is Russia (and the world) learning that starting a war is a great way to raise profits in energy? I’d like to understand the answers to this line of questions a lot better.
I purchased Mulder’s book as a result of an earlier Chartbook mention. Reading it, you can’t help but feel as if you’re eavesdropping on current sanctions discussions.
What appears to be going on at the moment reminds me of the Italian invasion of Ethiopia scenario where sanctions were delayed until after the invasion, fiscal sanctions were first put in place in the hope that the Ethiopians could hold off the Italians until the wet season (their version of “General Mud”) by which time the Italian economy would face collapse hastened along by the threat of sanctions on Italian energy imports (which, as it turned out, was the only thing Mussolini feared as Italy imported 95% of its oil).
In the event, the Ethiopian army eventually collapsed in large part because of an “impartial” arms embargo, the refusal on legal grounds to close the Suez Canal to Italian resupply ships and the League’s refusal to provide any financial support in the form of credit guarantees. Italy won the war before General Mud’s arrival and, for reasons that were not explained, all sanctions were promptly canceled thereby removing any leverage the League might otherwise have had to force an Italian withdrawal.
It’s not entirely clear what lessons have been learned, but evidently given today’s more hybrid sanctions approach, some have. As to the larger question of whether our sanctions regime will remain in force until Russia withdraws (and whether that withdrawal would include the Donbas and Crimea) or whether, as in the Italian scenario, it unravels in the event of a Russian conquest (even in the face of an ongoing Ukrainian insurgency) remains unaddressed.
Worth reading - but wrong question if your opponent does not follow economic reason. Instead: Could economic sanctions stop Putin´s war? If the answer is "no", we should take other actions.
Remarkable: "But on closer inspection it seems that the separation between economic expertise and political judgement is not that neat. If one believes that the costs are, in fact, “incalculable” then excessively precise estimates of the likely costs will in themselves - regardless of the conclusions reached - tend to encourage an activist bias entailing considerable risks. Secondly, the divergent assessment of the meaning of similar estimates of GDP contraction suggests that GDP is insufficient as a measure to capture what rival camps think is essential about the economy. That may help to explain the caution of those who are closer to industry or labour and have to think through the implications of what a 3, 4 or 5 percent shock would actually mean for individual firms, supply chains and workers. Rather than a matter of bias that should be considered a matter of situated perspective, or standpoint. Closeness to “the interests” of producers reveals things that cannot easily be seen from the vantage point of a global macro model however sophisticated it may be."
One more reason to overthrow the key role of GDP-based decisions.
Wonder whether these models are really that scientific. Or did they have an opinion about sanctions first (understandable), and the models are just another way to express them?
You can check this on Twitter for the two camps. Compare Bachmann et. al. to Krebs/Dullien before and after the models came out. I am pretty sure their opinion about sanctions came first, the results from their models followed. This is such an emotional topic, it's almost unavoidable.
Switching off this much primary energy input will have highly nonlinear effects. Forget about silly economic models that are driven far out of their range of applicability. I WONT TRY THIS AT ALL.
No question that Russian oil/gas can be replaced with some level of economic pain, but what is missing from the calculations above is:
- Internal German politics - the pain would still be borne predominantly by working or lower middle class which could further radicalize them towards right (or left). The "Ampel" coalition is already precarious. Any politician would first ask: "can I keep in power through this"?
- German industry competitiveness - energy from just about any other source will be more expensive, and this cost will be factored into any German product / export. To remain competitive (same prices) in global market, there will be less left for labor (see point above) and the EU project (some cost of rebuilding Ukraine will be paid by EU which means less funds for other members from Estonia down to Bulgaria, and this may destabilize the EU)
Germany can afford the cost increase, as it can simply outbid others if it chooses to. Germany would suffer indirectly via adverse effects on "rest-of-the-world" trade partners who are unable to withstand the shock. In addition, in the course of divesting itself of investments in Russia, it would effectively sell those investments to rival China, at a once-in-a-lifetime discount. That's the cost.
There's a cognitive bias towards catastrophizing that which is inherently unpalatable. Here's a thought, compare the downside the naysayers are conjuring up with the wartime privation experienced by wartime economies. Libertarians and free marketeers take to their fainting couch at the hint of governmental intervention. We've been here many times before.
Take a look at the month by month volume of gas consumption. There is a huge difference between winter and summer. The closer we get to Easter, the less pain from boycotting Russian gas. Then there is some six months to prepare for the next winter.
I wonder if Russia engages is some kind of barter system or they take payment in Gold or CNY with China who would seem to be one of few trading partners who will want to continue a relationship given their need for Russian commodities. I also wonder how Russia is paid for the trade with Europe that is on-going. Traditionally it would be USD or EUR, but clearly Russia would not want to be paid with those currencies.
Covid was a true shock, unexpected in terms of scale and timing. If Germany cut off Russian energy they would at least has time to prepare economic support to limit contangion. Was this type of policy response included in the analysis? If not, maybe the net cost could be much lower.
Débat utile, sans occulter le point central : qui agit et selon quel timing ?
- L’Europe prend l’initiative de la coupure des robinets de gaz russe;
- l’Europe laisse au régime russe le choix du moment de la coupure, qui de toute façon est inéluctable au vu des « obstacles » qui se dressent face aux ambitions de Monsieur Putin.
It is tempting to just observe that if you take a set of complex equations and plug in a set of parameters that you (to use a crude expression) "pull out of your **" you can produce whatever numerical output you want, but it may be more productive to just go to the old "forrest" v. "trees" distinction and try to look at first principles.
1. Lets start with the relatively observable fact (as described above) that Russia provides 30% of Germany's primary energy.
2. There either IS "spare capacity" for energy production equal to that 30% or there IS NOT.
3. All analysis of the form discussed above is fundamentally predicated on the assumption that THERE IS such "spare capacity", and then models the cost of re-configuring Europe's (and the World's) energy systems to switch from Russia as the source to that "spare capacity" source (whatever/wherever it is).
4. So, is there?
5. The fact that the US has been begging the Saudis/UAE to increase output yet got no effect, and is now turning to Venezuela suggests that there IS NOT all that much "spare capacity". (The fact that prices are at all time high and any such hypothesized "spare capacity" hasn't moved to take advantage of these high prices supports the thesis that it doesn't exist.) It may be possible to find a few percent (5%?) by ramping up coal, but again, where are all these "ready to go" coal power plants?
6. If that is the case, then any effort by Germany to diversity ITS supply, will involve diverting such energy supplies from someone else.
7. That someone else will now need to substitute for the missing supplies - and if there is no "spare capacity", then the only place they can turn is Russia.
8. So, unless there is a "net decline" in total energy use, the net result of Germany's policies would be be higher prices (due to the need to rearrange how energy is routed) while volumes produced and sold by all suppliers (including Russia) remain the same.
9. Thus, we need to look at the alternative concept - there is no "alternative source", so Germany needs to simply reduce global consumption of energy by that 30% of Germany's energy usage.
10. Given the broad correlation between energy use and "activity" (including economic activity, but really all activity - "Life" is "Energy Use"), for Germany to reduce energy consumption by 30% would represent a massive drop in GDP. It may not be quite 30% because some "efficiency gains" are possible, but it would be close.
11. More importantly, that decline isn't just a "number". It would involve "energy rationing", so choices will need between cutting household heating (leading to people freezing) of shutting down transport and factories (leading to massive unemployment).
12. The alternative is to "spread the pain" across Europe, forcing other EU countries to lower their energy consumption and redirect the savings to Germany.
13. This brings us to the fact that Germany is not the only EU country using Russian energy. (It is worth noting that Russia controlled sources (including Kazakhstan) are also a major supplier of Uranium for Nuclear Reactors - 40% of US purchase, and a fair chuck of France's).
14. While there are "long term" options (Geothermal? Wind? Fusion?) these will not be providing significant amounts of energy in the next 12 months.
Fascinating summary, thank you. I’d like to see some analysis/discussion about the Russian hard currency windfall to due to price escalation. What does this really mean? Is this hard currency that Russia cannot access due to the market constraints put in place by the west? If not, where does it go, how is it spent? Is the war a net financial gain for Russia because of this windfall? Is Russia (and the world) learning that starting a war is a great way to raise profits in energy? I’d like to understand the answers to this line of questions a lot better.
I purchased Mulder’s book as a result of an earlier Chartbook mention. Reading it, you can’t help but feel as if you’re eavesdropping on current sanctions discussions.
What appears to be going on at the moment reminds me of the Italian invasion of Ethiopia scenario where sanctions were delayed until after the invasion, fiscal sanctions were first put in place in the hope that the Ethiopians could hold off the Italians until the wet season (their version of “General Mud”) by which time the Italian economy would face collapse hastened along by the threat of sanctions on Italian energy imports (which, as it turned out, was the only thing Mussolini feared as Italy imported 95% of its oil).
In the event, the Ethiopian army eventually collapsed in large part because of an “impartial” arms embargo, the refusal on legal grounds to close the Suez Canal to Italian resupply ships and the League’s refusal to provide any financial support in the form of credit guarantees. Italy won the war before General Mud’s arrival and, for reasons that were not explained, all sanctions were promptly canceled thereby removing any leverage the League might otherwise have had to force an Italian withdrawal.
It’s not entirely clear what lessons have been learned, but evidently given today’s more hybrid sanctions approach, some have. As to the larger question of whether our sanctions regime will remain in force until Russia withdraws (and whether that withdrawal would include the Donbas and Crimea) or whether, as in the Italian scenario, it unravels in the event of a Russian conquest (even in the face of an ongoing Ukrainian insurgency) remains unaddressed.
Worth reading - but wrong question if your opponent does not follow economic reason. Instead: Could economic sanctions stop Putin´s war? If the answer is "no", we should take other actions.
Remarkable: "But on closer inspection it seems that the separation between economic expertise and political judgement is not that neat. If one believes that the costs are, in fact, “incalculable” then excessively precise estimates of the likely costs will in themselves - regardless of the conclusions reached - tend to encourage an activist bias entailing considerable risks. Secondly, the divergent assessment of the meaning of similar estimates of GDP contraction suggests that GDP is insufficient as a measure to capture what rival camps think is essential about the economy. That may help to explain the caution of those who are closer to industry or labour and have to think through the implications of what a 3, 4 or 5 percent shock would actually mean for individual firms, supply chains and workers. Rather than a matter of bias that should be considered a matter of situated perspective, or standpoint. Closeness to “the interests” of producers reveals things that cannot easily be seen from the vantage point of a global macro model however sophisticated it may be."
One more reason to overthrow the key role of GDP-based decisions.
Wonder whether these models are really that scientific. Or did they have an opinion about sanctions first (understandable), and the models are just another way to express them?
You can check this on Twitter for the two camps. Compare Bachmann et. al. to Krebs/Dullien before and after the models came out. I am pretty sure their opinion about sanctions came first, the results from their models followed. This is such an emotional topic, it's almost unavoidable.
Switching off this much primary energy input will have highly nonlinear effects. Forget about silly economic models that are driven far out of their range of applicability. I WONT TRY THIS AT ALL.
No question that Russian oil/gas can be replaced with some level of economic pain, but what is missing from the calculations above is:
- Internal German politics - the pain would still be borne predominantly by working or lower middle class which could further radicalize them towards right (or left). The "Ampel" coalition is already precarious. Any politician would first ask: "can I keep in power through this"?
- German industry competitiveness - energy from just about any other source will be more expensive, and this cost will be factored into any German product / export. To remain competitive (same prices) in global market, there will be less left for labor (see point above) and the EU project (some cost of rebuilding Ukraine will be paid by EU which means less funds for other members from Estonia down to Bulgaria, and this may destabilize the EU)
Germany can afford the cost increase, as it can simply outbid others if it chooses to. Germany would suffer indirectly via adverse effects on "rest-of-the-world" trade partners who are unable to withstand the shock. In addition, in the course of divesting itself of investments in Russia, it would effectively sell those investments to rival China, at a once-in-a-lifetime discount. That's the cost.
There's a cognitive bias towards catastrophizing that which is inherently unpalatable. Here's a thought, compare the downside the naysayers are conjuring up with the wartime privation experienced by wartime economies. Libertarians and free marketeers take to their fainting couch at the hint of governmental intervention. We've been here many times before.
It might be worth discussing how this impact might be shared by other countries benefiting from Germany’s action.
Take a look at the month by month volume of gas consumption. There is a huge difference between winter and summer. The closer we get to Easter, the less pain from boycotting Russian gas. Then there is some six months to prepare for the next winter.
I wonder if Russia engages is some kind of barter system or they take payment in Gold or CNY with China who would seem to be one of few trading partners who will want to continue a relationship given their need for Russian commodities. I also wonder how Russia is paid for the trade with Europe that is on-going. Traditionally it would be USD or EUR, but clearly Russia would not want to be paid with those currencies.
https://www.unz.com/mhudson/america-defeats-germany-for-the-third-time-in-a-century/
Covid was a true shock, unexpected in terms of scale and timing. If Germany cut off Russian energy they would at least has time to prepare economic support to limit contangion. Was this type of policy response included in the analysis? If not, maybe the net cost could be much lower.
Débat utile, sans occulter le point central : qui agit et selon quel timing ?
- L’Europe prend l’initiative de la coupure des robinets de gaz russe;
- l’Europe laisse au régime russe le choix du moment de la coupure, qui de toute façon est inéluctable au vu des « obstacles » qui se dressent face aux ambitions de Monsieur Putin.
Timing comme seul enjeu.