Economic implications from sanctions on Russia

  • The previous sanctions following the Russia/ Ukraine crisis in 2014 had a limited effect on the Russian economy: the Russian sanctions imposed on European and American food imports resulted in about an 8 times stronger decline in trade flows than those imposed by the EU and the US on exports of extraction equipment. The difference in sanctions’ effectiveness was attributed to the limited retroactivity of Western sanctions, which allowed some exemptions, according to a recent study.
  • Current sanctions also have exemptions, such as exports of gas energy.  Current sanctions by US, Canada, UK, EU, Switzerland,  Japan, South Korea, Australia, New Zealand (as of 2 March 2022) are against Russian banks which have operations abroad, large businesses, state-owned assets, payments using Swift network, the foreign assets of the Russian political and business elite, the foreign listings of Russian firms, access to financing in the countries imposing the sanctions, limiting access for the Russian Central Bank to its foreign reserves, shutting down access to European ports, and deposits by Russian nationals in the EU of over EUR100,000.
  • A number of US (Apple, Ford, Boeing, Walt Disney, Warner Bros), UK (BP) and EU (Volvo, Renault) multinationals are ceasing their trade with Russia, citing the economic and reputational effect of sanctions on their activities.
  • The governments are also using pressure on their state-owned multinationals (cf. Equinor) and sovereign wealth funds (Norway’s Government Pension Fund) to dispose of their assets in Russia; therefore the use of discreet power by the states on Russia will intensify.
  • Russia will react to current sanctions by rediverting its trade flows to Asia and Eurasian Economic Union, and away from countries that have already previously imposed sanctions on Russia, according to a statement being prepared by the Ministry of Economic Development (Минэкономразвития).
  • The Russian businesses have strong connections to the Russian government, with many firms directly or indirectly controlled by the state, through ownership, board representations, or informal connections.
  • President Putin met with business leaders and urged them to support the Russian economy through this period, and to find the tools that would allow sustaining production and employment. The Russian firms have already experienced dealing with restrictions and sanctions in 2014, with some businesses starting locally producing goods previously provided in Russia through foreign exports, or choosing new trading partners.
  • The Russian economy is stronger than in 2014, but the current sanctions are expected to have a stronger impact than the previous sanctions in 2014. The Central Bank, for the first time since 2013, reported a liquidity deficit, due to cash withdrawals following the fall of rouble.
  • Russia is also imposing sanctions on the West: Russia bans coupon payments to foreigners holding rouble bonds; forbids foreign money transfers from Russia by non-residents over $5000 towards 43 ‘unfriendly’ countries.

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