It is important for students to understand the workings of international and public finance and that the goal of governments and politicians is not always economic efficiency when making financial decisions. Normative goals other than efficiency can motivate economic decisions. A good economist is able to recognise, clearly name and take into account the values and goals behind economic behaviour, when making sense of the world.
The recent financial decisions of the Russian government provide a clear example of values and goals other than efficiency that can affect economic activities, in this case how geopolitical goals (Putin’s imperial ambitions) are affecting the accumulation and stocks of Russia’s foreign exchange reserves. In January, Russia started selling some of its yuan as well as gold reserves. These decisions were a consequence of sanctions imposed by G7-countries on Russian oil and gas, which pushed Russia’s government budget into a significant deficit, due to a drop in tax revenues from oil and gas.
While this is an extreme example, many economic decisions are more complicated than efficiency considerations and it is crucial for students to understand the multiplicity of factors involved in real-world economic decisions, including political goals and other value judgements. Sometimes decision-makers prioritise other outcomes over efficiency, such as standing up against the West and financing a war, as in the Russian case.
This teaching material was designed by Economy Studies and is part of the "This Month in the Economy Exercises" series.