EXECUTIVE SUMMARY:
• Russia's recent ‘hidden’ economic sanctions against Estonia may well have an effect opposite to that intended by their instigators.
• As well as possibly cooling down an overheated economy, the sanctions could affect the ‘wrong’ targets - groups with strong natural economic links to Russia - and favour anti-Russian politicians.
Sometimes what seems to be a stick turns out to be a boomerang. The thrower may not learn of the mix up before it is too late. The ‘hidden’ economic sanctions imposed by Russia on Estonia as a punishment for re-locating a Soviet Second World War memorial are a case in point. This unseen boomerang effect of the Russian ‘stick-diplomacy’ has not only contributed to icy relations with the EU but works as a self-enforcing whip on sinner's back.
At first sight, the case for the stick-diplomacy seems compelling. According to some preliminary calculations, the losses of Estonian firms reach tens of millions of US dollars. However, these firms know that they do business in a highly risky market and being rational have considered the risk-reward ratio. To operate under assumption that politics and business in Russia are as different as water and fire is simply naïve. Even if some businessmen believe in fairy-tales, then their losses do not equal aggregate losses to the Estonian economy. The head of International Monetary Fund delegation, Franek Rozwadowski, told to the EPL Online, an Estonian daily, that the Russian sanctions may actually have a favorable effect on the Estonia by cooling down overheated economy. Estonia's GDP grew eleven percent last year.
Particularly, if the long-run effects of sanctions are considered, then there is no need to base the assessment of costs on static models. The sanctions will lead Schumpeterian ‘creative destruction’ by encouraging Estonian firms to seek new opportunities and enter into new markets. The recent history illustrates the point. The Russian sanctions of the 1990s were instrumental in accelerating the re-orientation of the Estonian economy to the West. The collapse of the Russian market coupled with Estonia's unilateral free trade policy played a crucial role for the rise of this small nation as a phoenix from the Soviet dust.
The boomerang-effect is even more compelling once the foreign policy aims are considered. Academic research brings out the paradoxical nature of economic sanctions. On the one hand, the use of economic sanctions has become increasingly wide-spread. On the other hand, the implementation of sanctions does not achieve intended foreign policy aims. Studies have indicated that the sanctions work best in the economic and other areas of ‘low politics’. The track record is weak in using sanctions for reaching goals in ‘high politics’ because the costs to the involved parties tend to be higher. The symbolic importance of relocating the Bronze Soldier is related to the latter. The mercantilist underpinnings of Russian foreign policy-making lead to the overexploitation of economic relations as a means for ‘higher’ foreign policy goals.
However, such foreign policy is counterproductive unless its primary goal is to create instant happiness among domestic fans of the stick-diplomacy. Even if the instant gratification would be the aim, the self-fulfilling prophecy of sanctions is short-lived and will not translate into constant happiness among the Russian nationalist groups. The primitive mercantilism makes it certain that the ‘right’ people get punished and the ‘wrong’ people get rewarded.
The sanctions reward Estonian politicians who decided to move the memorial. They punish more pro-Russian politicians. The Prime Minister, Andrus Ansip, is more popular than ever in Estonia. His Reform Party would win a clear majority in the elections if held today. This would be a highly unusual outcome in the fragmented terrain of Estonian politics where the voting system makes the achievement of a clear majority nearly impossible. At the same time, the actions and statements out of sync with the government policy by Edgar Savisaar, Mayor of Tallinn, have led to a public outcry and collections of nearly 100 000 signatures to the petition demanding his resignation.
Similarly, the distributional impact of the punishment is uneven among firms and interest groups. The ‘losers’ are groups that have the closest economic ties with Russia. In other words, the sanctions weaken the groups that would benefit most from the good economic and - as everything in Russia is over politicized - political relations with Russia. These groups are natural advocates of the Russian interests in Estonia. This dynamic captures only the decrease of material effects of economic cooperation. Obviously, trade has many positive externalities such as diffusion of ideas and direct contacts among people. Understanding these impacts do not require KGB-legacy challenged apparatchiks to learn any new lessons. The basic political economy logic outlined above played out well during the Yeltsin era's trade policy of ‘double tariffs’ on the Estonian goods.
It is a natural instinct of Russian foreign policy-makers to see everything that resembles a stick as a stick. However, some carrots may resemble sticks. They are better used for eating rather than beating. Some crooked sticks may actually be boomerangs. It is wiser not to throw them unless the difference is spotted beforehand.
The writer is a founder and Advisory Board Member of the Estonian Free Society Institute. This article originally appeared at www.tcsdaily.com, and is reproduced with the permission of the author.