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India’s Fiscal Deficit: Recent Trends and How to Tackle It

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Role of any government in the  economy is an essential  one where it takes decision on receipts and  expenditure. Total expenditure and total receipt are the two important features of budget yearly presented by government. Fiscal deficit actually refers to the excess of the spending over the revenues.[1] It  is calculated as a percentage of the  GDP.[2]  

Gross fiscal deficit or GFD is basically the excess of the total expenditure which includes the loans, net of recovery, over receipts of revenue (which includes external grants) and receipts of non-debt capital.[3] Net fiscal deficit is the GFD minus net lending.[4] 

Whenever fiscal balance is in positive then it is considered to be beneficial as revenue  is above  expenditure. Whereas, negative fiscal balance in fact means borrowings on which an economy depends on and is seldom bad.[5]   

Targets for fiscal deficit  are set annually  that  India fails to follow . We will see through this paper why is fiscal deficit happening , what impact it has on economy,  how  demonetisation and GST has impacted it and also how to use it to tackle the economic problems.  

Why Is Fiscal Deficithappening?

 Tax evasions by various organisations along with various other factors, leads to a loss in revenue for government that leads to fiscal deficit.

The Union budget, for 2019-20, estimated fiscal deficit to be 3.3% of GDP or Rs 7.03 lakh crores.[6] The overly-optimistic revenue estimations for 2019-20, was further worsened by the reduction in corporate income taxes (CIT), for which there were no expenditure or revenue offsetting steps been taken. This could result in the government breaching, by about 50 basis points, its fiscal deficit goal.[7]  Cutting CIT to the extent of Rs. 1.45 trillion, was mainly done to lift the weakening economy.[8]The fiscal impact would be felt much sooner than the decision’s growth impact.[9] 

The government ended August 2019, with a Rs 4.36 lakh crores revenue deficit.[10] As of mid-November, the Center mopped up just 6 lakh crores in direct taxes, that is about 50% less of the current direct tax revenue goal of 13.35 lakh crores.[11] This will lead to an increase in fiscal deficit. 

Comptroller and Auditor General or CAG stated that government’s key deficit numbers might be substantially higher than mentioned in the budget. CAG has therefore, asked whether or not extra-budgetary resources taken into account in budget reflect the true picture.[12] The CAG re-calculated, 2017-18 fiscal deficit to reveal that it is 5.85% actually. Government reported a 3.46% fiscal deficit that year.[13]  The fiscal numbers of the government over past few years are under heavy scrutiny as growth has been sluggish since year 2016’s third quarter.

Impact Of Fiscal Deficit On Economy

Fiscal deficit is similar to a vicious cycle. Fiscal deficit has dire consequences on the economy as the government borrowings is in fact one of the last resorts left with the government and that results in higher interest rates in the market.[14] 

Higher interest rates are resulted because markets are doubtful about repayment by the government;  due to which the government bears high interest rates, for this perceived risk that later puts the government into further debt, hence being a vicious pattern.   Higher the rates, lower is the scope of private investment that decreases resources that are available for the private sector investment. High government borrowings can have various potential hazards that are mentioned below.  

The Crowding Out Effect

The government to cover up for its deficit borrow more from the private sector in form of bonds. By selling the bonds it takes money from the private sector. When the private lenders lend money to the government, they actually lend it out, of their savings/ profits. The savings of the private sector gets reduced which lessens itsability to invest which ultimately crowds out the private investment, out of the market.[15]

Therefore, government spending increases and the private spending reduces. Since the government spending’s are considered less effective than private spending this is bad for the economy. The government during a fiscal deficit in fact does two things: increases borrowings or increases tax revenue.

INCREASES TAX REVENUE- Whenever the government increases tax, it does it by actually increasing corporate taxes, income taxes etc. which results in a reduction in disposable income of the firms, so this increase in the government spending does not really result in increase in the aggregate demand(AD).[16]

The increase in the government spending becomes offset by the decrease in the AD   that is due to decrease in the disposable income. When the private sector has lesser money, it even spends lesser in the private projects.

Inflation 

When the government sticks to not borrowing of money but actually ‘monetisation’, inflation occurs,[17] which increases the money supply in the market. Therefore, aggregate demand too increases causing inflation. Fiscal deficit can also imply an increment in the government spending’s which then increases AD that results in higher price levels of services and goods.

Higher Taxes 

Whenever the debt to GDP ratio amplifies, the government requires to increase the tax revenue which it does by increasing its tax rates.[18] 

Impact of demonetisation and goods and service tax(GST) on fiscal deficit

Demonetization changed our currency system providing the people an incentive to use and spend money in a much productive way than letting cash lying around. Cash lying around was deposited in the banks and eventually people started trusting digital payments. Banks also experienced a surge in liquidity. Banks then deposited this sum, through different windows such as SLR, to RBI. This resulted in an increase in the government treasury. The raids for the black money also led to an increase in revenue. This resulted in an increase in income taxpayers. Income taxpayers grew by 9.1 million. There had been an 80% rise, above the average annual increase, in taxpayers.[19] The rise was also reflected in the filing of IT returns and the payment of advance tax. While in the evaluation year 2016-17 the figure of taxpayers increased, in the next year the rate of growth fell to acquainted levels.

But demonetization affected India’s MSMEs badly. Micro-industry owners weren’t ready to cope with the lasting effects of demonetization. Therefore, a lot of micro-industry workers lost their jobs and also went back to their villages. These companies therefore had a low growth rate of 1%.[20]   

The primary goal demonetisation was tackling black money, at which it failed. Since the system has recovered 99.3% of the demonetized notes, it indicates that the activity didn’t bring enough “black money”.[21] This could be because just a tiny portion of tax evasion takes place in cash. 

It resulted in job cuts which led to higher unemployment rates.[22] Job losses led to lower productivity and the decrease in liquidity disrupted India’s cash-based economic structure, which devastated unorganized sector. Though, demonetisation led to higher tax revenue, the cumulative losses arising from the move left a scar on economy, which had an impact on GDP and fiscal deficit. Since demonetisation the GDP, has decreased to 5% (July-September 2019) from 8.8% (July-September 2016).[23] In FY20, fiscal deficit breached Rs 7lakh crores mark.[24]

By removing the cascading effect of multiple central and state taxes, GST has worked to increase profit and reduce costs of doing business. This could attract investment which would lead to an increase in GDP.  The increase in GDP would result in an increase in revenue for the government since taxes will increase. The GST is a type of tax that is consumption based and not anymore production based.

During the first 6 months, of the GST implementation, indirect taxpayers increased by 50%, partially due to several small businesses actively opting to be a part of the GST in attempt utilise input tax credits.[25] Even with a wider base, however, GST revenues were underwhelming.[26] Indirect tax collections of the Center in the post-GST era, rose by just 1.8% from the year earlier in April-September 2018, far slower than the growth of 5.6% seen in the full year of 2017-18 and even smaller than the growth of over 20 percent in the previous two years.[27] This is primarily because of decrease in economic activity, sluggish demand and compliance issues. 

Therefore, flawed GST implementation, coupled with demonetisation, served as the catalyst in India’s growth slowdown, which opened doors to fresh economic problems and affected the fiscal deficit.[28] 

Measures To Control Fiscal Deficit

There are two methods of restraining fiscal deficit. First, if the government decreases its expenditure, second, if it increases its revenue. There are again ways to achieve on both the ends.    

Reduce Expenditure 

SALE OR CLOSURE OF SICK UNITS  

India is a centre for the public sector undertakings(PSUs). Several of these PSUs are not making profits and demand more than giving. So, selling or closing the non-viable, sick industry would decrease the government spending on them.[29]

REDUCE SUBSIDY PAYMENTS

The subsidy bill is more than 10% of GDP, of which the non-merit subsidies add up to 5.7%.[30] Rationalization these could free up to 6% of fiscal space.[31]

REDUCE INTEREST PAYMENT  

India’s government is paying a lot of interest in previous years loans. Approximately one-fourth of the Indian spending of the budget went to interest payments.[32]   Therefore, government borrowings need to be reduced in order to decrease interest payments resulting in lower expenditure. 

Increase In Revenue   

PREVENT EVASION AND INCREASE TAX REVENUE 

Government needs to take measures to stop tax evasion and streamline the process of tax so that taxpayer base of the country widens which will lead to higher taxation. Agriculture could be included in the tax net, because distinguishing jobs cannot be the criterion for not paying tax, but rather it should be centered on high and low income.  In fact, people for evading taxes disguise their non-agricultural income as agricultural income.  

DISINVESTMENT 

Disinvestment is PSUs offers the government funding to cover the fiscal deficit and also has long-term advantages, as this money can be spent or invested in productiveuses that would generate jobs, increasing revenue and taxpayers.[33] The government has targeted mobilising 1.05 lakh crores by the means of disinvestment.[34]

ECONOMIC GROWTH

 Business promotion will help the economy to flourish. If the economy grows, the government tax revenue increases. It includes setting up a framework conducive to businesses and environmental improvement. 

Conclusion

India’s fiscal deficit, for many years, has been a concern. Although, fiscal deficit affects the economy in many ways like by increasing inflation, increasing interest rates, crowding out private investment, etc., it can be helpful when borrowings are done for productive uses, which can amplify government revenue. It can also be controlled by several measures when it is harmful for the country. The government, in recent years, has taken several reforms like introducing GST and demonetisation, the effects of these can be observed on the fiscal deficit.

A fiscal stimulus dose is needed to revive the growth rate of the economy. The stimulus size will be calculated by the constraints on debt servicing, borrowing capacity and Indian sovereign rating concerns. A downgrade will raise borrowing costs not only for government, but also for private sector; this could cause a freeze in the portfolio funds which track indices passively and has been flowing into India. In addition, such a freeze can strain the exchange rate of the rupee, which could drop abruptly. The possibility of a sudden cessation or reversal of foreign flows is serious, and our fiscal managers cannot neglect it. That is the price you pay for being not able to pay, in your own currency, for imports. It is undeniable that foreign inflows are required, at least in order to pay for capital goods and imported oil.

As India’s fiscal space is at a risk, it can also be assisted with easier monetary policy. Monetary policy must maintain a loosening or easing bias, given the economy’s cyclical weakness, at least till the predicted recovery takes hold.  

To be effective or successful in fiscal policy, it must be counter-cyclical, so a larger deficit in a year like a recession is all right. Every valuable additional fiscal rupee must result in a boost in consumption and growth immediately. The tax on capital gains ought not be abandoned, as stock market being at a high, as these are progressive direct taxes. Because Google, Apple, Microsoft, Amazon and Facebook, five of the world’s most successful entities, in India have a huge customer base, a digital tax should be imposed. The GST rate must be rationalized. This could give the fiscal buck, a greater turnout than a reduction in the individual income tax, which is borne only by about 3% of the population. This should be followed by a base expansion. The compensation formula provided to states for their failures in GST collections could be revised, as they too should bear some of the fiscal pain. 


[1]“Definition of ‘Fiscal Deficit” (December 2018) <https://economictimes.indiatimes.com/definition/Fiscal-Deficit>

[2]Will Kenton, “Fiscal Deficit” (August 2019) <https://www.investopedia.com/terms/f/fiscaldeficit.asp>

[3]“India’s Economy Dashboard” The economic times (February 1, 2019) <https://economictimes.indiatimes.com/news/economy/indias-economy-dashboard/what-is-economy-dashboard/slideshow/67755935.cms>

[4] Ibid 3.

[5]Sean Ross, “Understanding the Effects of Fiscal Deficits on an Economy” (August 2019) <https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp>

[6]Singh K, “August Fiscal Deficit at 78.7% Of 2019-20 Target ”The economic times (September 30, 2019) <https://economictimes.indiatimes.com/news/economy/indicators/august-fiscal-deficit-at-78-7-of-2019-20-target/articleshow/71377147.cms?from=mdr>

[7]Asit Kumar Misra, “IMF says India should avoid fiscal stimulus, opt for easing policy” (May 2019) <https://www.livemint.com/news/india/imf-says-no-to-fiscal-stimulus-okay-with-further-monetary-policy-easing-11577181218530.html>

[8]“Fiscal deficit hits 93% of budget estimate at ₹6.52 trillion till Sept-end” (October 2019) <https://www.livemint.com/news/india/fiscal-deficit-hits-93-of-budget-estimate-at-rs-6-52-trillion-till-sept-end-11572526967720.html>

[9]Asit Ranjan Misra, “Corporate tax cut may widen fiscal deficit by 40 bps: Fitch Ratings” (October 2019) <https://www.livemint.com/politics/policy/india-s-fiscal-deficit-may-shoot-up-to-3-7-in-fy20-fitch-ratings-1569489629214.html>

[10]Ibid 6.

[11] Nandi S, “More Steps to Revive Growth Soon: Finance Minister Nirmala Sitharaman” livemint (December 7, 2019) <https://www.livemint.com/news/india/more-steps-to-revive-growth-soon-finance-minister-nirmala-sitharaman-11575706380335.html >

[12]Narayanan D, “CAG Demonstrates How Govt Relies on off-Budget Resources to Fund Deficit” Economic times (July 25, 2019) <https://economictimes.indiatimes.com/news/economy/indicators/cag-demonstrates-how-govt-relies-on-off-budget-resources-to-fund-deficit/articleshow/70360281.cms> accessed December 26, 2019.

[13]Ibid 12.

[14]Reem Heakel , “Forces That Causes Changes in Interest Rates” (August 2019) <https://www.investopedia.com/insights/forces-behind-interest-rates/>

[15]Rajesh Kumar, “De-jargoned | Crowding out” (September 2012) <https://www.livemint.com/Money/x5B8XGNuQXqeZzZ6RU41jJ/Dejargoned–Crowding-out.html>

[16]Tenjvan Pettingar, “Crowding Out” (Economics Help,2017) <https://www.economicshelp.org/blog/1013/economics/crowding-out/>

[17]Chandavarkar, Anand G. “Monetization of Developing Economies (Monétisation Des Économies En Développement) (Monetización De Las Economías En Vías De Desarrollo).” Staff Papers (International Monetary Fund), vol. 24, no. 3, 1977, pp. 665–721. JSTOR, www.jstor.org/stable/3866500

[18]Julia Kagan , “Gdp Tax Ration” (July 2019) <https://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp>   

[19]Ibid 18.

[20]Aishwarya Krishnan“Demonetization Anniversary: Decoding the Effects of Indian Currency Notes Ban” (May 2019) <https://economictimes.indiatimes.com/tdmc/your-money/demonetization-anniversary-decoding-the-effects-of-indian-currency-notes-ban/articleshow/61579118.cms?from=mdr>

[21]Ibid 20.

[22]Koustav Das, “Three years after demonetisation: Lot of sound and fury signifying nothing” (November 2019) <https://www.indiatoday.in/business/story/demonetisation-three-year-anniversary-economic-slump-gdp-unemployment-negative-growth-outlook-1617099-2019-11-08 >

[23]Ibid 42.

[24]Ibid 42.

[25] Kundu T, “How GST and Demonetisation Impacted Govt Finances” livemint (November 5, 2018) <https://www.livemint.com/Industry/pkS48kM47yZbxS49jL6MSN/How-GST-and-demonetisation-impacted-government-finances.html>

[26] “Dip in GST Collections Tells a Story” The hindu business line (October 3, 2019) <https://www.thehindubusinessline.com/opinion/quick-take/dip-in-gst-collections-tells-a-story/article29585185.ece>

[27]Ibid 20.

[28]Ibid 19.

[29]Devika Kher, “Divestment: More than just revenue” (May 2016) <https://www.livemint.com/Opinion/ZxVQBVNoq8UbqDwVhCMY6M/Divestment-More-than-just-revenue.html>

[30]Nikita Kwatra, “How government can fund a growth revival” ,(November 2019) <https://www.livemint.com/news/india/how-the-government-can-fund-a-growth-revival-11574237638358.html>

[31]Ibid 24.

[32]Krishnaand Tripathi, “Budget 2019: Do you know, a fourth of India’s Budget goes into interest payment?” (January 2019) <https://www.financialexpress.com/budget/budget-2019-do-you-know-a-fourth-of-indias-budget-goes-into-interest-payment/1454897/

[33]Smriti Jain, “Budget 2014: Five prescriptions for Narendra Modi to tackle fiscal deficit” (The Economic Times,2014) <https://economictimes.indiatimes.com/news/economy/policy/budget-2014-five-prescriptions-for-narendra-modi-to-tackle-fiscal-deficit/articleshow/37697902.cms>

[34]“Cabinet approves new strategic disinvestment process” , (October 2019)<//economictimes.indiatimes.com/articleshow/71445908.cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst,https://economictimes.indiatimes.com/news/economy/policy/cabinet-approves-new-strategic-disinvestment-process/articleshow/71445908.cms?from=mdr>

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Digital Futures: Driving Systemic Change for Women

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Authors: Erin Watson-Lynn and Tengfei Wang*

As digital technology continues to unlock new financial opportunities for people across Asia and the Pacific, it is critical that women are central to strategies aimed at harnessing the digital financial future. Women are generally poorer than men – their work is less formal, they receive lower pay, and their money is less likely to be banked. Even when controlling for class, rural residency, age, income, and education level, women are overrepresented among the world’s poorest people in developing countries. Successfully harnessing digital technology can play a key role in creating new opportunities for women to utilise formal financial products and services in ways that empower them. 

Accelerating women’s access to the formal economy through digital innovations in finance increases their opportunity to generate an income and builds resilience to economic shocks. The recently issued ESCAP guidebook titled, Harnessing Digital Technology for Financial Inclusion in the Asia Pacific, highlights the fact that mechanisms to bring women into the digital economy are different from those for other groups, and that tailored policy responses are important for women to fully realise their potential in the Asia-Pacific region.

Overwhelmingly, the evidence tells us that how women utilise their finances can have a beneficial impact on the broader community. When women have bank accounts, they are more likely to save money, buy healthier foods for their family, and invest in education. For women who receive Government-to-Person (G2P) payments, there is significant improvement in their lives across a range of social and economic outcomes. Access to safe, secure, and affordable digital financial services thus has the potential to significantly improve the lives of women.

Despite the enormous opportunity, there are numerous constraints which affect women’s access to financial services. This includes the gender gap in mobile phone ownership across Asia and the Pacific, lower levels of education (including lower levels of basic numeracy and literacy), and lower levels of financial literacy. This complex web of constraints means that country and provincial level diagnostics are required and demands agile and flexible policy responses that meet the unique needs of women across the region.

Already, across Asia and the Pacific, governments are implementing innovative policy solutions to capture the opportunities that come with digital finance, while trying to manage the constraints women often face. The policy guidebook provides a framework to examine the role of governments as market facilitators, market participants and market regulators. Through this framework, specific policy innovations drawn from examples across the region are identified which other governments can adapt and implement in their local markets.  

A good example of how strategies can be implemented at either the central government or local government levels can be found in Pakistan. While central government leadership is important, embedding tailored interventions into locally appropriate strategies plays a crucial role for implementation and effectiveness. The localisation of broader strategies needs to include women in their development and ongoing evaluation. In the Khyber Pakhtunkhwa province, 50,000 beneficiary committees comprising local women at the district level regularly provide feedback into the government’s G2P payment system. The feedback from these committees led to a biometric system linked to the national ID card that has enabled the government to identify women who weren’t receiving their payments, or if payments were fraudulently obtained by others.

In Cambodia and the Philippines, governments have implemented new and innovative solutions to support remittance payments through public-private-partnerships and policies that enable access to non-traditional banks. In Cambodia, Wing Money has specialised programs for women, who are overwhelmingly the beneficiaries of remittance payments. Creating an enabling environment for a business such as Wing Money to develop and thrive with these low-cost solutions is an example of a positive market intervention. In the Philippines, adjusting banking policies to enable access to non-traditional banking enables women, especially those with micro-enterprises in rural areas, to access digital products.

While facilitating participation in the market can yield benefits for women, so can regulating in a way that drives systemic change. For example, in Lao People’s Democratic Republic and India, different mechanisms for targets are used to improve access to digital financial products. In Lao People’s Democratic Republic, the central government through its national strategy, introduced a target of a 9 per cent increase in women’s access to financial services by 2025. In India, their targets are set within the bureaucracy to incentivise policy makers to implement the Digital India strategy and promotions and job security are rewarded based on performance.

These examples of innovative policy solutions are only foundational. The options for governments and policy makers at the nexus of market facilitation, participation and regulation demands creativity and agility. Underpinning this is the need for a baseline of country and regional level diagnostics to capture the diverse needs of women – those who are set to benefit the most of from harnessing the future of digital financial inclusion.

*Tengfei Wang, Economic Affairs Officer

This article is the second of a two-part series based on the findings of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific, and is jointly prepared by ESCAP and the Griffith Asia Institute.source: UNESCAP

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Empowering women-led small businesses in Nepal to go digital

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People walk down a street of shops in Kathmandu, Nepal. (file) photo World Bank/Peter Kapuscinski

Authors: Louise Anne Sophie Lavaud and Mitch Hsieh*
Throughout the years, Laxmi Shrestha and her husband saw the opportunities that opening an online shop could bring to her family business.

“Looking at the trend of TikTok and other sites, we thought selling online could help us but we weren’t technically sound,” said Laxmi, the owner ofLaxmi Hastakala Store, in Banepa, Nepal, and part of a family of artisans.

As she learned about selling online, she picked up on how to market her shop digitally and, according to Laxmi: “It has surely given our business a push we always wanted. Recently we started selling our products online and we also receive payments online.”

Laxmi Hastakala Store is among the 1,800 women-led micro, small and medium enterprises (MSMEs) in Nepal being trained on digital and financial literacy by Sparrow Pay – one of the winners of the Women Fintech MSME Innovation Fund launched in 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Capital Development Fund (UNCDF).

Sparrow Pay has created a local digital marketplace where women-led MSMEs can offer products and services to its existing 800,000+ digital payment service users. Additionally, Sparrow Pay is supporting these women entrepreneurs in adopting digital payments and creating a payment history to support access to additional financial services.

MSMEs are a vital source of employment and a significant contributor to a country’s GDP. However, more than 45 per cent of MSMEs in Asia and the Pacific are constrained from accessing finance and other support for their businesses. Socio-cultural norms mean women-led enterprises have to overcome gender-specific barriers to access institutional credit and other financial services.

ESCAP and UNCDF aim to encourage easy access to digital finance for MSMEs in Asia and the Pacific, break the financial barriers surrounding women-led enterprises and support entrepreneur-centric growth and inclusiveness throughout the region. Initiatives by the 10 winning fintech companies are currently supporting more than 9,000 women-led MSMEs in Bangladesh, Cambodia, Fiji, Myanmar, Nepal, Samoa and Viet Nam.

Just like Laxmi, these women business owners plan on successfully growing their companies in the digital area.

The Women Fintech MSME Innovation Fund is part of a regional programme “Catalyzing Women’s Entrepreneurship: Creating a Gender-Responsive Entrepreneurial Ecosystem,” which seeks to support the growth of women entrepreneurs in Asia and the Pacific by enabling a policy environment for such business owners, providing them with access to finance and expanding the use of ICT for entrepreneurship.

*Mitch Hsieh Chief, Communications and Knowledge Management Section

UNESCAP

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Is It Possible to Lift Sanctions Against Russia? — No

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Every conflict sooner or later ends in peace. Such is the conventional wisdom that can often be heard from those who, amid the current situation of the sanctions tsunami and confrontation with the West, are trying to find hope for a return to “normality”. The logic of such wisdom is simple. At some point, the parties will cease fire and sit down at the negotiating table. The end of hostilities will lead to a gradual reduction in sanctions pressure on Russia, and our businesses will be able to return to work with Western partners.

We have to disappoint those who believe in such a prospect. Sanctions against Russia, for the most part, will not be lifted even in the event of a ceasefire in Ukraine and a peace agreement. There will be no return to “pre-February normality”. Instead of remembering a lost past, we will have to focus on creating a new future in which Western sanctions remain a constant variable.

Why is the lifting of Western sanctions on Russia extremely unlikely? There are several reasons.

The first reason is the complexity of the conflict between Ukraine and Russia. It has every chance of being prolonged for a long time. There may be pauses in active hostilities. The parties may conclude temporary truces. However, such truces are unlikely to remove the political contradictions that gave rise to the conflict. Currently, there are no parameters for a political compromise that would suit all parties. Even if an agreement between Moscow and Kiev is reached, its sustainability and feasibility are not guaranteed. The experience of Minsk-2 shows that the mere appearance of agreements does not automatically resolve political problems and does not lead to the lifting or easing of sanctions. The Ukrainian problem can smoulder and flare up again for decades, partly because both sides are limited in the possibilities of a decisive military victory and complete surrender of the enemy. Relations between Russia and Ukraine are at risk of entering the ranks of long-term conflicts, similar to relations between India and Pakistan, or North and South Korea. The complexity and longevity of the conflict guarantee Western sanctions for the long term.

The second reason is the stable nature of the contradictions between Russia and the West. The conflict in Ukraine is part of a larger Euro-Atlantic security palette. An unstable system of asymmetric bipolarity has formed in Europe, in which the security of Russia and NATO can hardly be indivisible. Russia has no way to crush the West without doing unacceptable damage to itself. However, the West, despite its colossal superiority, cannot crush Russia without incurring unacceptable losses. Containing Russia is the best strategy for the West. Ukraine is doomed to remain one of the areas of containment. For Russia, the strategy of asymmetric balancing of Western superiority remains optimal. It is possible that part of such a strategy will be a course towards a radical territorial redistribution of Ukraine, tearing away from it the eastern and southern parts. But in itself, such a redistribution will not remove the problems of Western sanctions.

The third reason is the institutional features of the sanctions policy of the initiating countries. Experience shows that sanctions are relatively easy to impose but very difficult to lift. Thus, with regard to Iran, a whole “web of laws” has formed in the United States, which significantly limits the administration’s ability to lift sanctions. Even if the sanctions are not enshrined in law, their cancellation or mitigation still requires political capital, which not every politician is ready to spend. In the US, such steps will cause criticism or even opposition in Congress, and in the EU – disagreements among member states. Of course, individual restrictions are lifted or relaxed in the interests of the initiating countries themselves. The experience of sanctions pressure on the Republic of Belarus shows the existence of the “sanction remissions” when restrictions are eased. However, the legal mechanisms of sanctions themselves remain and can be used at any time.

The fourth reason is the quick reversibility of the sanctions. Often, their abolition is accompanied by political demands, the implementation of which is a complicated process. For example, the Iranian nuclear deal required several years of complex negotiations and significant technological decisions. However, the return of sanctions can be carried out overnight. There is an asymmetry in the fulfilment of obligations. Fulfilling the requirements of the initiators requires significant changes, while the return of sanctions requires only a political decision. Rapid reversibility breeds distrust among target countries. It is easier for them to continue to live under sanctions than to make extensive concessions and risk receiving new sanctions. Historical experience shows that the initiators of sanctions tend to play the game of “finishing” the opponent. After the concessions come new, more radical political demands and the threat of new sanctions. The “Pompeo 13 Points” – a list of US demands on Iran beyond the limits of fulfilling the terms of the nuclear deal – have already become a textbook example. The Iranian lesson, apparently, was well learned in Moscow. Iran itself is actively working to achieve its goals in the field of nuclear arms. Ultimately, this shows the ineffectiveness of sanctions in terms of influencing the political course of the target country. But questionable effectiveness does not negate the fact that sanctions continue to be applied and enforced.

The fifth reason is the ability to adapt. Without a doubt, Russia will suffer enormous damage from the restrictive measures which have been introduced. However, the possibility of it adapting to the sanctions regime remains high. Russia has the chance, first, to partially make up for the shortfall in supplies from abroad with the help of its own industry, although this will require political will and the concentration of resources. Second, it has access to non-Western markets, as well as alternative sources of goods, services and technology. The key conditions for solving this problem will be the creation of reliable channels for financial transactions that are not related to the US dollar, the Euro, or Western financial institutions. Such a task is feasible both technically and politically, although it will also require time and political will. Iran’s experience shows that sanctions have seriously hit the country’s development opportunities. However, they did not interfere with the development of agriculture, industry and technology. The modernisation of the Soviet Union also proceeded under severe Western sanctions. The ability to adapt reduces the motivation for concessions to the demands of the initiating countries, especially given the risk of playing for “finishing”.

These reasons make the prospect of lifting or significantly reducing sanctions pressure on Russia extremely unlikely. The US, EU and other initiators have already introduced the most severe restrictions on Moscow. But the upward wave of sanctions escalation has not yet been exhausted. In addition, the achievement of the ceiling of the applied measures is unlikely to mean the abolition of those already introduced. However, the sanctions also do not mean the “end of history” of the Russian economy. It found itself in new conditions that will require adaptation and the search for new opportunities for development and growth.

From our partner RIAC

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