Sanctions against Russia: Effects on Kremlin's economic Growth
A measure of sanctions effectiveness based on Russian export dynamics
Published by Marzia Moccia. .Check performance Export Economic policy Global economic trends
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Following Russia's invasion of Ukraine, the international community decided on several sanctions actions against the Kremlin, aiming to isolate the country politically and economically. The European Union has always been in the forefront on this front, condemning Soviet behavior from the outset and promulgating eleven sanctions packages, with a twelfth currently under discussion.
Along with the European Union, all allies have enacted sanctions of various kinds, first and foremost the United States, followed by the United Kingdom, Switzerland, Canada, Australia, Japan, and South Korea (for a more detailed discussion see the following timeline).
Overall, it involves the introduction of trade, financial, logistical, technological, personnel and political restrictive measures designed to hit the Russian economy, its financial system and its ruling class.
Despite the voluntary coordinated action by the major allied economies, the imposition of the tariffs has provoked intense debate: can these sanctions be considered effective and are they really putting the Russian economy in trouble? Or are the citizens of the economies that imposed them mainly paying the price?
The answer to this question goes far beyond the scope of this article, since this question cannot have a simple, nor unambiguous answer, also taking into consideration that the effects of such interventions could extend to the medium to long term.
In this contribution, we will focus primarily on Russian foreign trade evidence, and, in particular, on the dynamics and composition of Moscow's exports over the past few months. On this front, the purpose that sanctions have set for themselves is twofold:
- reduce Russia's foreign exchange earnings, limiting its ability to purchase goods and services from third parties and weakening its currency;
- hit the growth stimulus of the Russian economy.
The most useful measure for assessing the effectiveness of sanctions in achieving especially the second objective is exports at constant prices (i.e., net of price change), which represent the possible stimulus to growth in the economy from exports. At this point, therefore, it becomes important to be able to measure the most recent dynamics of Russian exports.
How to measure Russian exports?
On the side of international trade statistics, a mirror of the deepening rift created between Russia and the "Western bloc" is the failure to declare Russian foreign trade information to the main international trade circuits and offices in charge, the most important of which is the UN, which makes available statistics collected through the UN Comtrade DataBase. Russian declarations are also found to be unavailable at International Trade Center (ITC) and even on its own National Statistical Institute. In fact, in the aftermath of the invasion of Ukraine, Russia stopped releasing its foreign trade statistics.
However, information on Russia's exports can be obtained by observing the so-called mirror flow, given by the import declarations of countries that have been the recipients of Russian exports. In fact, foreign trade data have the peculiarity of double declaration, made independently of each other. This means that the same flow is declared twice: the first time at the customs of the exporting country (as a flow in export), the second time at the customs of the importing country (as a flow in import).
This mirror flow technique, developed by ExportPlanning to assess the consistency between the statements of two partner countries, becomes useful in this case in order to estimate the value of Russian export flow.
In the following graphs, Russian exports are measured as partner countries' imports from Russia (in blue), while the Kremlin's imports are shown as partner countries' reported exports to Russia (in yellow), in order to give a complete reading of Moscow's trade with the rest of the world.
The downsizing of trade with sanctioning countries
The first element that emerges strongly from the proposed analysis is the drastic downsizing of trade between the "bloc" of sanctioning countries and Russia.
This result affects both flows with EU member states and those with other allied countries. Consider that in the first three quarters of 2023 Russian exports to the EU are about 80 percent lower in quantity than in the same 2021 period, testifying to the EU's gradual enfranchisement from Russian energy; at the same time Russian imports from the EU have declined by more than 60 percent in quantity. Declines of comparable magnitude also affected the other sanctioning economies.
Relations with other trading partners are strengthened: new Russian target markets
However, the dramatic decline in trade just illustrated has been countered by the growth in trade between Russia and non-sanctioning countries, primarily China and India. Indeed, as the chart below shows, trade relations with these geographic areas have strengthened over the past few months. It is, for example, the effect of Russian exports of gas, oil, and grain being diverted from previous European importers to new importers (for a more in-depth discussion see the article Russia-China-India commercial Alliance consolidates).
However, this relocation appears to have been partial: overall, in fact, there has been a reduction in Russian exports since the invasion of Ukraine, which remain at levels 30% below the 2021 figure.
Overall, therefore, Russia has seen its degree of openness to world trade shrink, but less intensely than expected. This result can be traced to the fact that Russia has been able, at least in part, to compensate for lower trade through increased substitute ties. Indeed, trade with countries such as China and India is diluting the effectiveness of allies' sanctions.
In this process of substitution of destination markets, however, Russia appears to have changed the sectoral composition of its exports, depleting it. In particular, the World's imports from Russia of industrial raw materials have been greatly reduced. In fact, if the Russian economy has been able to more easily substitute its markets for natural raw materials, which incorporate little value added, Moscow seems to find it more difficult to substitute higher value-added industrial raw materials (see the graph on the left); on the contrary, the progressive signs of recovery recorded during 2023 in exports of intermediate goods should be noted.
Analyzing the state of the Kremlin's trade relations, it becomes apparent that during 2022, Russia sought an alternative to its exports, redefining its block markets in order to minimize the economic effects of sanctions. This process of trade "decoupling" was more complex to enact in the immediate term, that is, at the dawn of the invasion of Ukraine, but seems likely to be more successful during 2023 as new trade ties with the sanctions-free East strengthen. If the trend of the first three quarters of 2023 continues in the coming months, then the effectiveness of the restrictive measures against Russia, at least in terms of weakening economic growth via fewer exports, will be a limited result.
It should not be forgotten, however, that reflection on the effectiveness of sanctions on the country's growth must, however, start from an overall assessment, which also takes into account other aspects. Indeed, several commentators have pointed out that the extent of the most significant losses may emerge in the medium to long term, especially in relation to lower incoming investment and technological depletion of the country, which can no longer import technology from any of the sanctioning countries. In particular, industries that depend on the most advanced foreign technologies and those with highly digitized business processes are likely to be hit harder than others. Not surprisingly, UNCTAD information on investment inflows to Russia during 2022 testifies to a large decline, amounting to -$18 billion.
The list could also go on with other important elements: the loss of access to financial markets, Russia's disconnection from major global research networks, and the massive brain drain of Russian elites. The effects of these phenomena are not immediately visible, but in the medium term, Moscow's scientific, economic and technological isolation could represent the most serious loss, especially in relation to the country's future prospects.