Effect of Sanctions on Russia on the International Economy

Since February 24th, 2022, Russia has waged a war of aggression against Ukraine. Many countries demonstrated remarkable unity in condemning Russia's actions and acted with decisive resolve by sanctioning Russia. More than 40 countries are part of the coalition to impose economic sanctions on Russia and Belarus. Moreover, because the Kremlin has blocked public access to economic statistics since the war in Ukraine, economists struggle to grasp a clear image of the Russian economy. However, according to the World Bank’s latest report, the Russian GDP in 2022 expects a drop of 4.5% instead of the 8.9% that it was forecasting in June. The Russian economy might fall by 3.6% in 2023 instead of 2% and grow by 1.6% in 2024, less than the previous forecast of 2.2%. Western sanctions imposed since the invasion in late February are likely to lead to a significant drop in the country's economic growth for years to come. 

However, the economies of the countries that are sanctioning Russia are also facing damages. Many countries in Europe are struggling to meet their energy needs, driving up inflation and forcing countries to backpedal on their green movement. The United States also faces soaring inflation. Prices for fuel, food, rent, and other goods surged due to pandemic labor shortages and supply-chain bottlenecks, combined with commodity market price increases from sanctions on Russia. To what extent is the use of economic sanctions as a coercive tool to shape the behavior of Russia effective? 

Inside the Russian Economy 

A closer analysis of the Russian economy depicts its slow growth, as well as areas that sanctions have failed to be effective. More than 40 countries have announced strong sanctions and export controls targeting Russia, presenting a united front against Russia’s aggression. According to the World Bank, Russia’s imports in 2022 will drop by 20.8% (compared to 2021) and exports will drop by 12.3% (see Table 1). Additionally, restriction on access to financial markets makes firms and elites less lucrative and discourages them to operate in Russia. A series of sanctions have led to consumer spending plummeting, and the Kremlin is running a budget deficit. Russia’s economy is undoubtedly facing repercussions from the invasion of Ukraine.

However, sanctions on Russia have not been catastrophic. Russian GDP growth is now expected to fall by 3% in 2022, significantly less than the IMF’s initial forecast of an 8.5% decline, which underestimated the cushioning effect of the surge in energy prices. The improvement in estimated data comes from India and China being buyers of Russian oil and other goods. Disjointed sanctions created a bypass route for Russian businesses, mainly oil firms to take advantage of. Russia's Economic Development Ministry is even more optimistic. Their forecast is for the country's GDP to contract only 2.9% in 2022 and 0.8% in 2023, and to grow 2.6% in both 2024 and 2025.

Source: World Bank

Sanction-Imposing Economies: U.S. and EU

Western sanctions hurt Western countries as well. Countries that are imposing sanctions on Russia are seeing rising inflation from high energy and food prices. Gas prices in Europe have skyrocketed to about 70 euros today from 6 euros in March 2022. The prices of food have also been rising ever since the COVID-19 pandemic lockdowns, straining global supply chains, leaving crops to rot, and causing panic-buying in supermarkets. The war in Ukraine then further worsened the outlook, as Russia and Ukraine account for nearly a third of global wheat and barley. Ukraine is also the world's fourth-biggest exporter of corn. 

Europe, which imported 40% of its natural gas from Russia last year, is now facing severe shortages due to dwindling Russian imports and higher inflation fueled by energy prices. This could lead to a long, cold winter when the demand for energy increases while Europe continues to stop importing seaborne petroleum from Russia, as an EU regulation introduced in June requires. Germany, whose Minister of Economic Affairs and Climate Action comes from the Green Party, was forced to reactivate 17 coal-fired power plants to meet the energy demand. In the U.S., with inflation sitting at a forty-year high, President Biden requested Saudi Arabia’s leaders to rescue countries from the energy crisis by pumping more crude to ease the inflationary pressure that high fuel prices are placing on other goods.

Economies Not Participating in Sanctions: India and China 

Indian and Chinese oil buying has offset most of the fall in Russian shipments to Europe, weakening the effectiveness of sanctions on Moscow. According to the report by financial times, China and India imported 11mn tonnes more oil from Russia in the second quarter of 2022 compared with the first quarter. Payments for Russian oil from the countries increased by $9 billion. Despite the effort of the U.S., EU, UK, Canada, and Japan to cripple Russia’s financial system and limit imports, China and India, the world’s most populous countries, kept buying Russian oil and other commodities. These two nations are taking advantage of discounted oil prices. Since the invasion, Russian oil has traded at discounts of as much as $30 a barrel compared with Brent crude, the international benchmark. The total income Russia receives has been higher than in 2021 because global prices have gone up. As a result, profits at Tatneft, a large Russian oil producer, rose 52 percent year on year in the first half of 2022.

China and India are clear winners of the sanctions on Russia. According to Chinese statistics, trade turnover between Russia and China reached $93 billion in the first seven months of this year, a 30% rise in trade from 2021. In India, the country’s bilateral trade with Russia has risen to a record high of $18.2 billion between April and August, according to India’s Ministry of Commerce and Industry. This was mainly fueled by a surge in the import of oil and fertilizers. While the two nations are not directly supporting the war effort by Russia, they are taking advantage of the isolated Russian market. 

Concluding Thoughts

While economic sanctions on Russia had a significant impact on Russia’s economic growth, there had been no catastrophe, as Russia has found ways to overcome restrictions. Nonetheless, Russia will face long-term problems in economic development, especially in the technology sector, where the reliance on imports is high. Western sanctions and the departure of many technology companies from the Russian market have combined to severely disrupt Russia's access to technology imports, including components that are crucial for military purposes and its energy sector. The U.S. Department of Commerce and the U.S. Department of the Treasury reported that semiconductor imports have fallen 70% since last fall, severely damaging the production of ballistic missiles. According to the Kommersant, a nationally distributed daily newspaper in Russia, a draft government document, prepared by the Russian Ministry of Industry and Trade, has recognized that the Russian microelectronics industry is lagging 10-15 years behind the global level. The burden of sanctions on technology will seriously hinder Russian companies to compete in the global market in the long run. Economic sanctions are effective in the long run, and Russia will experience a gradual decline in the level of technological development. However, for economic sanctions to work as a coercive tool to prevent further malicious acts quickly, the West needs cooperation from China and India.