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Dec 22 CEPR Not Imp For Counter-Measures
Dec 22 CEPR Not Imp For Counter-Measures
https://cepr.org/voxeu/columns/war-and-sanctions-effects-russian-economy
In this section
Responding to Russia’s brutal war in Ukraine, the EU, the US and many other countries have imposed extensive economic sanctions on
Russia to restrict its financial and technological capabilities for warfare. This column discusses how transition periods mitigate the
harm to sanctioning countries and global markets, but also blunt the impact on the Russian economy. Still, Russia is largely isolated
from the global economy, with limited new economic partners. The war and sanctions are eroding Russia’s economic outlook for years
to come.
AUTHORS
Heli Simola
Senior Economist, Institute for Emerging Economies, Bank Of Finland
Russia’s brutal war in Ukraine has now continued for more than nine months. The EU, the US and many other countries have imposed
extensive economic sanctions on Russia to restrict Russia’s financial and technological capabilities for warfare. The war and the sanctions
have already affected the Russian economy. Russia has been largely isolated from the global economy and found new economic partners
only to a limited extent. The war and sanctions are eroding Russia’s economic outlook for years to come.
Figure 2 Russia’s goods imports based on official data and proxy constructed from mirror statistics
Sources: Macrobond, Eurostat and BOFIT.
Despite years of trying to substitute imports with domestic production, Russia was highly dependent on imported high-technology goods
and inputs before the war (Simola 2022b). Russia’s production structure remains, as it has for decades, dominated by mining and low-tech
resource-intensive industries. With sanctions now limiting the availability of technology and financing, Russia’s prospects for import
substitution of technological products have become even more limited.
It appears that so far non-sanctioning countries have not provided Russia with substitutes for most technology goods in any substantial
volume. Indeed, Russia’s imports from many non-sanctioning countries have also contracted. While Russian imports from China and Turkey
have exceeded pre-war levels in recent months, the share of technology products has remained unchanged. Technology imports from
neighbouring countries such as Kazakhstan have grown substantially, but the absolute volume is quite modest (Simola 2022a).
Output of many goods in Russia’s medium- and high-technology industries has contracted sharply. For example, in October the production of
trucks was down on-year by 40%, TV receivers by 44% and excavators by 69%. As Russian companies deplete their inventories of imported
inputs and the need for maintenance of imported machinery continues, the sting of sanctions will gradually intensify. The small share of
these industries in Russia’s total output, however, limits the effect on Russia’s total manufacturing production.
Some of the import restrictions implemented earlier are already having a visible impact on Russian industry. For example, Russian wood
and steel producers have been unable to find alternative export markets that offer profitable price levels (Simola 2022c). In these industries,
output has declined sharply and companies have suffered heavy losses (Figure 3).
Figure 3 Seasonally adjusted change in monthly output of selected Russian export-oriented industries
Sources: Macrobond and Rosstat.
Russia’s oil industry has suffered much less. Rosstat, Russia’s statistical office, estimates that the oil and gas GDP remained unchanged in the
second quarter of 2022, even as non-oil GDP contracted by over 5% year-on-year, or slightly more than in the second quarter of 2020, during
the first wave of the COVID-19 pandemic. The restrictions on oil imports imposed by the largest buyer of Russian oil, the EU, have just
entered into force in December 2022. Moreover, a spike in global oil prices has supported Russia’s oil industry (even if Russian oil has been
sold at a discount) together with a reorientation of Russian oil to new export markets, most notably India and China (Simola 2022a).
After entering into force, the EU import restrictions on Russian oil are expected to lead to a decline in Russian export income and oil
production. Simulation studies suggest that the costs of sanctions for Russia could become substantially higher with more countries joining
in (Hertel et al. 2022, Langot et al. 2022, Simola 2022d, Wanner et al. 2022).
The five-year forecasts of the IMF World Economic Outlook provide a rough illustration of Russia’s waning growth potential. Assuming that
the fifth forecast year denotes approximate potential growth, the IMF forecasts show the magnitude of the effect of Russia’s military
aggression and sanctions on its long-term growth since Russia’s illegal annexation of the Crimean peninsula in 2014. In the October 2013
World Economic Outlook, Russia’s potential growth was estimated at 3.5% a year (Figure 4). By October 2022, it had fallen to just 0.7% a year.
Comparing the 2019 and 2021 forecasts suggests that the COVID-19 pandemic only accounted for about 0.25 percentage points of the forecast
decline.
Figure 4 Russia’s long-term growth estimate has been cut substantially in the IMF World Economic Outlook forecasts
Source: IMF October WEO from respective years.
Concluding remarks
There is plenty of evidence that war and sanctions have affected the performance of the Russian economy. The harshest impacts are still
largely limited to individual sectors specifically targeted by sanctions. Transition periods and other measures mitigate the harms of
sanctions on sanctioning countries and global markets but simultaneously blunt their impact on the Russian economy. The direct effect of
sanctions on the Russian population is limited, as they are primarily aimed at degrading Russia’s military capabilities. Nevertheless, all
Russians will suffer for many years from a deteriorating standard of living from Russia’s ill-conceived war.
The literature suggests that a wider coalition of sanctioning countries could substantially increase the costs of sanctions for Russia. The
impact of the sanctions is expected to increase gradually and darken Russia’s economic outlook for years to come. But while sanctions are an
important tool to restrict Russia’s possibilities to continue the war, other measures are also needed.
References
Borin, A, F Conteduca, and M Mancini (2022), “The impact of the war on Russian imports: A counterfactual analysis”, VoxEU.org, 9
November.
Hertel, T, D van der Mensbrugghe, and M Chepeliev (2022), “Cutting Russia’s fossil fuel exports: Short-term pain for long-term gain”,
VoxEU.org, 9 March.
Korhonen, I (2021), “Russia’s growth potential post-COVID-19”, BOFIT Policy Brief 9/2021.
Langot, F, F Malherbet, R Norbiato, and F Tripier (2022), “Strength in unity: The economic cost of trade restrictions on Russia”, VoxEU.org, 22
April.
Mahlstein, K, C McDaniel, S Schropp, and M Tsigas (2022), “Potential economic effects of sanctions on Russia: An Allied trade embargo”,
VoxEU.org, 6 May.
Mukhin, D, and O Itskhoki (2022), “Sanctions and the exchange rate”, VoxEU.org, May 16.
Simola, H (2022a), “Can Russia reorient its trade and financial flows?”, BOFIT Policy Brief 7/2022.
Simola, H (2022b), “Made in Russia? Assessing Russia’s potential for import substitution”, BOFIT Policy Brief 3/2022.
Simola, H (2022c), “Russian foreign trade after four months of war in Ukraine”, BOFIT Policy Brief 5/2022.
Simola, H (2022d), “Trade sanctions and Russian production”, BOFIT Policy Brief 4/2022.
Wanner, J, J Hinz, K Kamin and S Chowdhry (2022), “Sanctions coalitions: Stronger together”, VoxEU.org, 30 October.
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AUTHORS
Heli Simola
Senior Economist, Institute for Emerging Economies, Bank Of Finland
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