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You wanna be Uncle Sam's flunky? Pay the price! The Saker

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Russian Sanctions
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Russia issued sanctions against the European Union and United States in response to repeated threats and accelerating sanctions against Russia. These are for 12 months, not 3 as are the EU and US sanctions. The Saker provides an overview of Russia's rationale and benefits. How long will Obama and the neoconservatives continue this madness? At what price? Who benefits? Michael Collins
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You wanna be Uncle Sam's flunky? Pay the price!

By The Saker at Vineyard of the Saker, Aug 7

(Reproduced with the author's permission)

Dear friends,

I just took a short break from my life in "meatspace" to comment on the great news of the day: Russia announced a full 12 months embargo on the import of beef, pork, fruits and vegetables, poultry, fish, cheese, milk and dairy products from the European Union, the United States, Australia, Canada and the Kingdom of Norway. Russia is also introducing an airspace ban against European and US airlines that fly over our airspace to Eastern Asia, namely, the Asia-Pacific region, and is considering changing the so-called Russian airspace entry and exit points for European scheduled and charter flights. Furthermore, Russia is ready to revise the rules of using the trans-Siberian routes, and will also discontinue talks with the US air authorities on the use of the trans-Siberian routes. Finally, starting this winter, we may revoke the additional rights issued by the Russian air authorities beyond the previous agreements. This is such an interesting and major development that it requires a much more subtle analysis than just the crude calculation of how much this might cost the EU or US. I will attempt no such calculation, but instead I would point out the following elements:

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First, this is a typically Russian response. There is a basic rule, which every Russian kid learns in school, in street fights, in the military or elsewhere: never promise and never threaten - just act. Unlike western politicians who spent months threatening sanctions, the all the Russians did was to say, rather vaguely, that they reserve the right to reply. And then, BANG!, this wide and far-reaching embargo which, unlike the western sanctions, will have a major impact on the West, but even much more so on Russia (more about that in an instant). This "no words & only action" tactic is designed to maximize deterrence of hostile acts: since the Russians do not clearly spell out what they could do in retaliation, God only knows what they could do next! :-) On top of that, to maximize insecurity, the Russians only said that these were the measures agreed upon, but not when they would be introduced, partially or fully, and against whom. They also strongly implied that other measure were under consideration in the pipeline.

Second, the sanctions are wonderfully targeted. The Europeans have acted like spineless and brainless prostitutes in this entire business, they were opposed to sanctions from day 1, but they did not have the courage to tell that to Uncle Sam, so each time they ended up caving in. Russia's message to the EU is simple: you wanna be Uncle Sam's flunky? Pay the price! This embargo will especially hurt southern Europe (Spain, France, Italy, Greece) whose agricultural production will suffer greatly. These countries also happen to be the weakest in the EU. By hitting them, Russia is maximizing the inevitable friction inside the EU over sanctions against Russia.

Third, EU carriers suffer from much higher costs and flight times on the very important Europe to Asia route. Asian carriers will not, giving the latter a double competitive advantage. How is that for a way to reward one side while hurting the other? The EU got one Russian airline in trouble over its flights to Crimea (Dobrolet) and for that the entire EU airlines community could end being at a huge disadvantage vis--vis its Asian counterparts.

Fourth, Russia used these sanctions to do something vital for the Russian economy. Let me explain: after the collapse of the USSR the Russian agriculture was in disarray, and the Eltsin only made things worse. Russian farmers simply could not compete against advanced western agribusiness concerns, which benefited from huge economies of scale, from expensive and high-tech chemical and biological research, which had a full chain of production (often through large holdings), and a top quality marketing capability. The Russian agricultural sector badly, desperately, needed barriers and tariffs to be protected form the western capitalist giants and, instead, Russia voluntarily followed by the terms of the WTO and then eventually became member. Now Russia is using this total embargo to provide a crucially needed time for the Russian agriculture to invest and take up a much bigger share on the Russian market. Also, keep in mind that Russian products are GMO free, and that they have much less preservatives, antibiotics, colors, taste enhancers, or pesticides. And since they are local, they don't need to be brought in by using the kind of refrigeration/preservation techniques that typically make products taste like cardboard. In other words, Russian agricultural products taste much better, but that is not enough to complete. This embargo now gives them a powerful boost to invest, develop and conquer market shares.

Fifth, there are 100 countries that did not vote with the US on Crimea. The Russians have already announced that these are the countries with which Russia will trade to get whatever products it cannot produce indigenously. A nice reward for standing up to Uncle Sam.
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Sixth, small but sweet: did you notice that EU sanctions were introduced for 3 months only, "to be reviewed" later? By introducing a 12 months embargo, Russia also sends a clear message: who do you think will benefit from this mess?

Seventh*, it is plain wrong to estimate EU financial losses by simply calculating the total value of sales for the most recent year (or other period). For example, if EU country X had exports of Y million dollars to Russia, the value of lost exports is just the beginning of total losses. The lost sales of these products may create a surplus that may then adversely affect demand and lower prices and profit margins for specific products. When production is decreased as a result of lost sales, producers in country X will lose economies of scale, creating more pressure on prices and profits. Conversely, for hypothetical non-EU country Z or a Russian company, a contract with Russia might mean enough cash to invest, modernize, and become more competitive, not only in Russia, but on the world market, including the EU.

Eighth, the Baltic countries have played a particularly nasty role in the entire Ukrainian business. As a result of Russia's sanctions, some of their most profitable industries (such as fisheries), 90% dependent on Russia, will have to shut down. These countries are already a mess. They will hurt even more. Again, the message to them is simple: you wanna be Uncle Sam's flunky? Pay the price!

Ninth (and this is really important), what we're seeing is a gradual decoupling of Russia from the western economies. The West severed some of the financial, military and aerospace ties Russia severed the monetary, agricultural and industrial ones. Keep in mind that the US/EU market is a sinking one, affected by deep systemic problems and huge social issues. In a way, the perfect metaphor is RMS Titanic as the orchestra continued to play music while the ship was sinking. Russia is like a passenger who is told that the Titanic's authorities have decided to disembark him at the next port. Well, gee, too bad, right?

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