Ülo Ennuste Economics

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SHORT ARTICLE

Baltic Journal of European Studies
Tallinn University of Technology (ISSN 2228-0588), Vol. 4, No. 2 (17)

Ülo Ennuste: Towards Special Methodological Problems
of Macro-Optimal Sociocybernetic International Economic
Sanctioning Coordination Modelling: Introductory Remarks on
Preliminary Postulates and Conjectures

Motto:
“the reason sanctions are popular is not that they are known to be
effective, but “that there is nothing else between words and military
action if you want to bring pressure upon a government”
Jeremy Greenstock
Introductory remarks
In economic literature, one of the first examples of economic international
sanctions is provided by the measures taken by the U.K. government in the
Rhodesia independence conflict (Bannock et al., 1978, p. 174).
As we can see also in current publications in recent Wikipedia definitions,
Economic sanctions are domestic penalties applied by one country
(or a group of countries) on another country (or a group of countries).
Economic sanctions may include various forms of trade barriers and
restrictions on financial transactions. Economic sanctions are not
necessarily imposed because of economic circumstances—they
may also be imposed for a variety of political and social issues.
Economic sanctions can be used for achieving domestic political
gain. (Wikipedia, n.d.)
Actually, the most recent example for the EU-28 is provided by the third round
of measures presently implemented in unison as partners by the EU and the USA
in the camp against the Russian Federation in the case of the Russian aggression
in South-East Ukraine (EU, 2014).
While this sanctioning seems to develop as a many-stage process (the preparation
of the next round was announced by the European Council on 30 August 2014,
and on 12 September all this was published in the Bulletin of European Union
(EC, 2014), there may be still time to analyze the structure of the sanctioning
process mechanism design in an economic union with sovereign national
member states—theoretically in the spectre of modern stochastic coordinated
game theoretical and institutional economic, etc. methods (Appendix A), and
make corrective suggestions.
Modelling remarks
Theoretically, the most complicated problem in the planning of collective
sanctions in the EU context in this third round is the central optimal coordination
of the defensive/deterrent economic sanction measures taken by the imposing
EU Member States, as these penalty measures, projected by the imposing
countries against transgressing third national economy, are as a rule hurting the
Member States’ economies as well—and—directly and indirectly to different
stochastic degrees.
First of all, via counter-attacks by the transgressor in many ways: political,
economic, military etc. (at least in this conflict, see The Economist, 2014).
Thus from the cybereconomics perspective, the adequate optimization criterion
has to be complex: for example, real economic risk axis, and complementary
imaginary political risk axis. Additionally, complications in this model may come
into game via third-country fuzzy logic and dictators’ infamous moral hazards.
And most importantly—the complexity of the problems increases as, alongside
sanctions to the antagonist, the coalition union has to introduce complementary
domestic economic policies and mechanisms for the minimization of losses
inflicted to the national member economies from the counter-reactions of the
antagonist, and mechanisms for truth-telling in the coalition.
Alas, in the text about the EU sanctions (EU, 2014), we openly cannot find a
smallest measure by the EU to organize complementary domestic counterstrategic
coordination mechanisms, institutions, crisis committees, etc. It seems
that these complex circumstances make hardly a pragmatic normative coordination
quantitative modelling too bad (see, e.g., Schlefer, 2012) but at least it may clarify
the lines of reasoning—for example, why in this kind of complex uncertainties
a MinMax expected loss criteria may be the most adequate; how complex plane
optimization may provide an opportunity to measure the angels/slopes between
alternative vector-risk criterion (economic and political) strategies; and the
missing point that the implementation of international economic sanctions has to
be prepared beforehand domestically, especially in energy security, etc.
The basic existing modern evolutionary heterodox macro-socio-economics and
-cybernetics—even though there are missing financial theories and international
trade theories by Krugman, and others—provides for this special example at least
a three-postulate pillar, which is probably a sufficient methodological framework
for modelling about an optimal coordination of international sanctions for the
group of countries under the condition of complex uncertainties:
1) The consideration of uncertainties and risks in the hierarchical coordination—
and these in the most complicated stochastic cases such as, for example,
Donald Rumsfeld’s “known unknowns”, Bayesian, etc. (on the examples
see Ennuste, 1989) mixed strategies and scenario approaches in the many
stages of game theoretic decentralized/democratic coordinated equilibrium
mechanisms.
2) The modelling of coordinated optimization of socio-economic institutional/
mechanism structural changes and designs (Ennuste, 2003).
3) The consideration of changes in national knowledge structures and
consideration connected with communication moral-hazard risks and
moral coordination (Ennuste, 2008).
All the various contributions of these methodological tools to the implementation
by the agents of optimal strategies and institutional designs in terms of
antagonistic coordinated games are presented in the above-quoted papers by the
author, containing also relevant significant classical source references.
Preliminary conjectures
Firstly, in the case of financial-economic union, the optimal sanctioning of the
third national economy, the specific all-union sanctioning tax for the Member
States (as in the ESM example) should be introduced for solidarity compensation
mechanism (analogous to, e.g., the ESM mechanism, the European Semester
mechanism, etc.) of the union’s members who suffer the worst losses in the
economic sanction war—the war in defence against the escalation of political
and armed aggression.
Secondly, besides other common real factors such as international trade losses
in the sanction wars, also financial and capital losses should be taken into
consideration, as well as losses/gains in the imaginary international credibility
capitals of national societies and losses in the respectability of their political and
knowledge structures.
Thirdly, and most importantly, strict material and moral penalties and restrictions
should be imposed on the institutions/agents who internationally distort national
knowledge structures, authorized under the auspices of the third transgression
state, whether they are resident agents or not—as such distortions prolong the
duration of economic wars with relevant damages to the probabilities of national
sustainability (Ennuste, 2008).
Complex modelling involving indirect relations and feedbacks may lead to
counter-intuitive conclusions. For example, from the aspect of impairment of
Russia’s economy, the Mistral deal may be, with great probability, justified—
and in the example of Estonia, financial restrictions on some Russian capitalfounded
banks may probably give new opportunities to improve the national
balance of payments and international investment position, or a good innovation
in the borderline science parks to develop Russian camps, etc.
For the qualitative measurement of effectiveness of the implied sanctions in the
short term:
1) The speed of national statistical production should be enhanced on the
level of present ICT level.
2) The official national statistical publications have to be made more
transparent and comprehensive, and available to the public. For example,
Estonian Statistical Yearbooks do not contain estimations of the assets of
households (because administrators here are regularly disregarding the
difference between income and wealth/capital (see, e.g., Piketty, 2014).
This, for example, makes a quick assessment of national households’
property losses by cuts in gas supply by the transgressor cumbersome (see
Appendix B).
3) Especially national central banks must openly publish international balances
of payments also in the country by country format, etc. Considering complex
uncertainties (e.g., fuzzy logic of the antagonistic country), it is important
to bear in mind the effectiveness assessments that in these conditions the
diversity of sanctions is as important as the generally moderate degrees of
sanctions—and open possibilities for further bargains.
Last but not least, a key part of the answer to how to minimize maximum
losses for the imposing cooperative camp is to prepare favourable national real
and information environments in advance. To make beforehand the necessary
adjustment processes in foreign trade and foreign financial sectors, first of all
concurrent investments are needed. But also investments in national information
cyber-security and national statistical speed and credibility and sufficient
completeness fields and, which is perhaps the most cumbersome, favourable
preparation in national knowledge and political structures for adequate
cooperative coordination.
References
Applebaum, A. (2014), ‘War in Europe is not a hysterical idea,’ The Washington
Post, 29 August 2014. Retrieved from http://www.washingtonpost.
com/opinions/anne-applebaum-war-in-europe-is-not-a-hystericalidea/
2014/08/29/815f29d4-2f93-11e4-bb9b-997ae96fad33_story.html
[accessed Aug 2014]
Bannock, G.; Baxter, R. E. & Rees, R., eds. (1978) The Penguin Dictionary of
Economics, 2nd ed., Harmondsworth: Penguin.
Ennuste, Ü. (1989), ‘Some Models of Stochastic Planning Mechanisms,’
Finnish Economic Papers, vol. 2. Retrieved from http://econpapers.repec.
org/article/fepjournl/v_3a2_3ay_3a 1989_3ai_3a2_3ap_3a116-124.htm
[accessed Aug 2014]
—— (2003), A Linear Planning Analysis of Institutional Structure in the
Economy, Policy Documentation Center. Retrieved from http://pdc.ceu.
hu/archive/00001564/01/linear.PDF [accessed Aug 2014]
—— (2008), ‘Synthetic conceptions of implementing mechanisms design for
public socio-economic information structure: illustrative Estonian examples,’
in Socio-Economic and Institutional Environment: Harmonisation in the EU
Countries of Baltic Sea Rim, vol. 4, pp. 9–39. Retrieved from http://www.ies.
ee/iesp/No4/Ennuste.pdf [accessed Aug 2014]
EC (2014), ‘Council Implementing Regulation (EU) No 961/2014 of 8
September 2014 implementing Regulation (EU) No 269/2014 concerning
restrictive measures in respect of actions undermining or threatening the
territorial integrity, sovereignty and independence of Ukraine,’ L271,
Official Journal of the EU, 12 September 2014.
EU (2014), ‘EU Sanctions against Russia over Ukraine crisis,’ European
Union Newsroom Highlights. Retrieved from http://europa.eu/newsroom/
highlights/special-coverage/eu_sanctions/index_en.htm [accessed Aug
2014]
Kasparov, G. (2014), “It’s a War, Stupid!” Times, 30 August 2014. Retrieved
from http://time.com/3227869/garry-kasparov-its-a-war-stupid/
Kukk, K. (2005), The White Book: Losses Inflicted on the Estonian Nation
by Occupation Regimes 1940–1991, State Committee on the Investigation
into Repression Policy of Occupation, Tallinn: Estonian Encyclopaedia
Publishers. Retrieved from http://digar.nlib.ee/digar/show/?id=8192
[accessed Aug 2014]
Piketty, T. (2014), Capital in the Twenty-First Century, London: Belknap Press
of Harvard University Press.
Schlefer, J. (2012), The Assumptions Economists Make, Cambridge, MA:
Harvard University Press.
The Economist (2014), ‘The war in Ukraine: reversal of fortune,’ The Economist
Briefing, 6–12 September 2014, vol. 412, no. 8903, pp. 21–24.
Wikipedia (n.d.), ‘Economic Sanctions.’ Retrieved from http://en.wikipedia.org/
wiki/Economic_sanctions [accessed Aug 2014]

APPENDIX A. Technical remarks: the institutional mechanism
structure of the players
Sanctioning Alliance
Coordination
Symposium*(SCS)
Transgressor/
Antagonist
Third
Country
Significant
Fourth
Countries
Known
unknowns
Unknown
knowns
and
unknowns
EU US RF CH BRICS,
etc.
Natural abnormalities
like Iceland
volcanic
eruptions,
etc.
………….
Symposium of 28
Member States (SEU)
Noncoordinated
antagonist
Non-coordinated
Member States’
Coordinative
Symposiums (MCS),
e.g.: EEMCS, etc.
* Symposium—a code name for the coordinative mechanisms/institutions implementing material
and moral side-payments (Ennuste, 2008).
The risk-game theoretical coordinated decomposed equilibrium solution is
based on the optimal mechanisms optimizing the coalition members’ losses
considering economic and political losses risks: a) self-inflicted directly by
sanction strategies (e.g., curtailing imports from the adversary); b) losses/gains
inflicted directly by side-payments (material and moral) in the situation of
optimal all-coalition collective sanction strategies; c) loss risks indirectly by
counter-attacks; d) significant economic losses may be in the national (domestic
and in the other countries) capital (private and households), GDP real genuine
volume, actual individual consumption, etc., in economic potential and probable
sustainability, in labour force, etc.; the moral risk-losses may be the members’
international political and economic and military credibility ratings, etc.

APPENDIX B. Illustrative empirical case study remarks on Estonian
example
Conjecturable macro-economic hypotheses of Estonia’s national losses and
damages connected with Russian aggression in 2014–2015(?) and with the EU
sanctions
Sanctions are still an important tool […] Only sanctions that bring
the costs of Putin’s war home can have an impact now.
(Kasparov, 2014)
H.1.: Russia’s military territorial aggression in East Ukraine will be liquidated
mainly by Ukraine’s military activities and by the complementary US and
EU collective sanctions plus material aid, or S+ (Appelbaum, 2014). Russia’s
military territorial aggression or occupation of the Baltic States will not
necessarily follow due to the quoted S+ as the necessary factor.
P.S.: Economic estimates of Estonia’s national losses during the Russian
occupation in 1940–1991 reached ca 1(+/-0.5) trillion kroons (Kukk, 2005, pp.
141–174), which is about 30 times the current Estonian net national income
(NNI). This means that if the S+ can reduce the risks of occupation a couple of
percentage points, the expected national gain, in terms of economy, may reach
up to 40 to 60 bn euros (estimated by means of analogy with the 1940–1991
occupation).
H.2.: In case Russian military intervention against the Baltic States will be
prevented, Estonia’s national sub-regional loss risks connected with Russia-
Ukraine War in 2014–2015(?) may be estimated by the following main big-risk
components:
a) Russia’s direct retaliatory counter-sanctions against Estonia as an EU Member
State: inflicting losses to the volume of ΔNNI (e.g., via bilateral trade. My present
preliminary conjecturable estimate of this potential risk may be in the volume of
0.4 bn euros p.a. (here 0.4 denotes an approximate standard numeral 0.4+/-0.5),
including losses of complete cut-off from Russian gas supply, which is presently
the single gas supply for the Baltic States); plus damages to Estonian Domestic
Assets—ΔDA (e.g., complete gas cuts may present potential risk to nullify
completely the value of the entire Estonian national gas system infrastructure.
The damage to the domestic capital may be several billions plus investments to
ground replacement infrastructure, etc.)
b) Estonia’s possible losses inflicted by the EU’s collective sanctions against
Russia, implemented in trade and financial/banking and travel sectors (amounting
almost certainly to 0.2–0.4 bn euros, and probably, at least partially, are included
in compensations by the European Commission)
c) Possible damages to the international credibility of Estonian business and
investment climate and sustainability—and political security risks stemming
from the intensification of ethnic conflicts and stirring up irredentist fifth
columns (“little green men”) in the Estonian ample Russian-speaking enclaves
as in April 2007 in Tallinn, etc. And last but not least—this sanction war is
almost certainly stirring up a propaganda war between the Baltic States and the
Kremlin and additional poisoning of national knowledge spaces especially in
the Baltic Russian-speaking diasporas (even though Baltic national knowledge
structure mechanisms are not yet on the level of the Kremlin’s think-tanks’
dialectical fuzziness). Additional development/sustainability losses, at least for
Estonia, are almost certainly on the horizon.
P.S.: It probably seems too early to summarize quantitatively and, eventually,
economically provisional estimates about Estonia’s expected possible national
losses and damages risks, which are connected with the EU collective sanctions
against the Russian Federation. However, without any doubt these are magnitudes
smaller as maybe rationally expected without these notorious sanctions.

November 6, 2014 - Posted by | Uncategorized

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