After the illegal invasion of Ukraine, which inflicted untold damage on millions of people, Russia is now the most sanctioned country in the world. More than 2,000 additional Western sanctions have been introduced against a group of individuals, companies and institutions. In addition, measures were also implemented to exclude Russia from international payment systems, the use of major reserve currencies or access to key technologies such as semiconductors.
What is the short-term impact of the sanctions
It seems inevitable that Russia will suffer a deep recession: Moscow had built a war reserve of 643 billion dollars, diversifying its holdings in foreign currencies other than Western ones to resist external threats. But the surprise moves by Western allies put pressure on the banking system and the ruble, so much so that the Central Bank was forced to aggressively raise rates and impose capital controls.
What the long-term impact
There are several reasons to believe that Russia’s economy will be weaker, although sanctions have led to different results in the past. Analysis of government statements by the Global Sanctions Database suggests that half sanctions do not achieve the desired result. Those that are successful are usually imposed quickly and multilaterally, in order to limit the ability of the target country to adapt, and we can say with certainty that this has been the case in Russia. An empirical study by German academics Neuenkirch and Neumeier underscores the importance of international collaboration: the authors estimate that UN sanctions will lead to a reduction of more than 2 percentage points in GDP growth per capita over a 10-year period. Compared, the unilateral actions taken by the United States will cause a decline of less than 1 percentage point over a shorter time horizon of seven years. Russian growth was already weak with an average of just 1.8% over the past decade. The coordinated action of sanctions imposed by the West suggests that it could even stop in the next decade. The supply side of the Russian economy will almost certainly be affected. The mass exodus of multinationals will lead to structurally higher unemployment and lower production. Investments will suffer from uncertainty and technological restrictions will force the country to become more self-sufficient. However, the annihilation of supply means it will also have to import more goods, pushing inflation higher. Getting the foreign currency needed to finance these imports will fundamentally depend on Russia’s ability to export oil and gas, which account for around 15-20% of its GDP. Western countries are accelerating the pace to end their dependence on Russian energy, a particularly difficult undertaking for the EU, which imports around 40% of its natural gas from Russia. China and other emerging markets will be able to partially offset the resulting decline in demand, but Beijing is likely to get a significant discount from Moscow and may proceed cautiously for fear of being embroiled in secondary sanctions. Western countries are accelerating the pace to end their dependence on Russian energy, a particularly difficult undertaking for the EU, which imports around 40% of its natural gas from Russia. China and other emerging markets will be able to partially offset the resulting decline in demand, but Beijing is likely to get a significant discount from Moscow and may proceed cautiously for fear of being embroiled in secondary sanctions. Western countries are accelerating the pace to end their dependence on Russian energy, a particularly difficult undertaking for the EU, which imports around 40% of its natural gas from Russia. China and other emerging markets will be able to partially offset the resulting decline in demand, but Beijing is likely to get a significant discount from Moscow and may proceed cautiously for fear of being embroiled in secondary sanctions.
There are numerous cases of emerging markets that have faced similar supply-side disruption. Sanctions, economic mismanagement, or a combination of the two, place great pressure on imports, ultimately generating shortages of both foreign exchange and goods. Structurally higher inflation inevitably follows, leading to weaker economic growth and sustained depreciation of currencies. Examples of this include Argentina and Venezuela, but perhaps the most relevant comparison is Iran. Iran was a major oil exporter in the 1970s, accounting for about 11.5% of global production. Aggressive modernization reforms led to annual GDP growth of nearly 10%, but they also sowed the seeds of the 1979 revolution. Oil production decreased by 4.8 million barrels per day (about 7% of global production), causing a global energy crisis that brought the world into recession. The sanctions subsequently inflicted a heavy toll on Iran. Oil embargoes and technology restrictions have seen its main industry suffer from chronic underinvestment. Today, production is a third below pre-revolution levels at full capacity, and the IMF estimates the break-even price of oil to be $ 400 a barrel. Inflation plagues the country, fueled by widespread shortages and the depreciation of the Iranian currency, the rial, which in 40 years has fallen from 70 to 42,000 against the dollar, a compound annual decline of 17%. On the black market, it is trading close to 300,000. Tehran’s significant fall from grace is a warning Moscow cannot ignore. Sanctions can have mixed effects, but they leave deep and lasting scars on the target country. Even if remorse sets in, a government turnaround is unlikely to make a difference. His reputation has been destroyed in the eyes of the world and he may never recover.
