Peace Through Economics: Why the Sanctions Against Russia Will Work

Vladimir Putins macho, tiger-tranquilizing persona has fueled a warped perception among some po-
litical commentators of the futility in exerting economic sanctions on Russia. Data in the Russian
economy suggests that Putin has made irrational policy decisions which will eventually cause econom-
ic havoc in his country. There are global implications to the conflict in Ukraine, as Russian support for
Ukrainian rebels has disrupted trade between Ukraine, Europe, and the U.S. Thus, the economically
rational decision by U.S. and European policymakers is to keep enforcing the sanctions they already
enacted and let the market bring Russia to its knees.
It is no secret in Russia that geopolitical tensions are exacerbating economic stagnation that existed
prior to the conflict in Ukraine. Economists in the Russian government previously forecasted the
economy to grow only a paltry 0.5% this year, but some of them argue that the economy might have
fallen into recession during the second quarter. Paul Roderick Gregory, professor of economics at the
University of Houston, argues that sanctions enacted in July are already damaging Russias economy
by causing capital flight and a steep increase in borrowing costs. This is particularly problematic for
Russia, as it obtains half of its capital abroad. A Bloomberg report in August illustrates that Russia is
now an extremely unattractive place to invest. In fact, not a single US dollar, Euro, or Swiss franc
was lent to a Russian company in July. Putins popularity stems largely from his promise of economic
prosperity, but the data suggests that promise is fast becoming an empty one.
The global implications to Russias intervention in the conflict in Ukraine are too vast for the U.S. and
Europe to ignore. Germany particularly suffered from a decline in GDP by 0.2% in the second quar-
ter, as it has large investments in Ukraine and receives much of its natural gas from Russia over a
pipeline through Ukrainian territory. The result is a decline in German imports, meaning that trading
partners like the United States are seeing a negative effect on their trade balance. Further sanctions on
Russian sectors like the oil and gas industry might make sense if the Ukraine conflict worsens, but for
now the sanctions in place now are lethal enough. Soon subduing a tiger will be the least of Putins
problems.JK
THE PENNSYLVANIA STATE UNIVERSITY ECONOMICS ASSOCIATION PRESENTS:
EDITOR: JOE KEARNS PRINT EDUCATION COORDINATOR
CONTRIBUTORS: MIKE CHUBINSKY, NICK HILMAN, JOE
KEARNS, SHAAN PATTNI
FALL SEMESTER 2014: VOLUME ONE
SEPTEMBER 9, 2014
THE OPTIMAL BUNDLE
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Sept. 11 Initial Jobless Claims
Sept. 11 Treasury Budget
Saudi Stock Market Will Open To Foreigners
The worlds biggest exporter of oil has found a way to increase its eco-
nomic power and relevance. Saudi Arabian policymakers have decid-
ed that in 2015 foreigners will be allowed to buy and sell shares in the
countrys benchmark Tadawul All Share Index. The Tadawul surged
2.8% after this information became public in late July, which pushed
the index to close at its strongest level since May 2008. The positive
market response shows the optimism and support for foreign capital
and investment in the region. Furthermore, this move fits into the
Royal familys strategic effort to diversify the Saudi Arabian economy,
and provide needed employment opportunities to its young and rest-
less population. Even this powerful oil-producing giant is not im-
mune to influence and draw of the international marketplace.MC
Turkey: Fault Line of Geopolitical Conflicts
The first democratic Turkish presidential election, won by long running Prime Min-
ister Recep Tayyip Erdogan, has massive domestic and international political im-
plications. As president, Erdogan will hold executive power, and many are specu-
lating that his regime will increasingly be authoritarian, as demonstrated through
handling of the massive riots in 2013. His centralization of power has economic
implications as well, having cited Islamic text to pressure the Turkish central bank
earlier this year to maintain dangerously low interest rates. In spite of the im-
portance of maintaining strong diplomatic relations with Europe, Erdogan will
likely continue to undermine his countrys historic secularism, moving away from
Europes liberal democratic norms. With the looming uncertainty caused by the
ISIS crisis and European sanctions on neighboring Russia, Turkeys new era could
not have come at a worse time. NH
U.S. Jobs Report Frustrates and Falters
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Saudi Arabia is the worlds
biggest exporter of oil.
Recep Erdogan, the former
Turkish prime minister, is the
nations first democratically-
elected President.
Unemployed person: If
the economy is doing so
great, wheres my job?
Economic reports for the past quarter have been released, and all of the reports
showed promising signs except the most important one: the jobs report. Sure,
consumer confidence, corporate investment, and GDP growth were all up, but
the market did not bat an eye, as everyones attention was focused on a weaker
-than-expected jobs report. The gain of 142,000 jobs in August bucked the ro-
bust job growth trend of the last seven months (average increase of the last
seven months was 226,000), and has left economists and investors feeling flat.
As Steven Blitz, chief economist at ITG Investment Research, puts it "[The re-
port] doesn't tell me the economy is slowing down, but it also says we're not
acceleratingIt's just more of the same." Though this jobs report relieves the
pressure on the Fed to significantly alter their easy-money policies, all eyes are
now turned to their September meeting for their thoughts and forward guid-
ance.SP
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