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FOCUS: Russia-Ukraine War

How Hard Do Western Sanctions Hit Russia? Economists Have Some Real Answers

Countries around the world have imposed round after round of sanctions on Russia since the beginning of its full-scale invasion of Ukraine. But are they enough?

Street vendors sell flowers in Russia.

Street vendors sell flowers in Russia.

Ekaterina Mereminsky

After the beginning of the full-scale invasion of Ukraine, one of the first sanction packages imposed on Russia, along with the freezing of gold and foreign exchange reserves, included a ban on the supply of certain goods and technologies.

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Unlike the oil price ceiling, which was supposed to starve Russia of money to fund its war, the purpose of these sanctions was different: first, to limit the production of weapons in Russia, to deprive its inhabitants of their usual goods and cause dissatisfaction with the decline in the quality of life — and by extension the war — and last, to undermine long-term economic prospects.

Independent Russian news site Vazhnye Istorii worked with a group of international economists to try to measure how effective these sanctions were.

How sanctions work

In 2021, Russia imported $293.5 billion worth of goods, most of which came from the European Union. Last year, the country lost 11.7% of its imports: shipments fell by $34.4 billion, according to the customs service.

Because of the war, the EU banned the sale to Russia of many goods and technologies, which accounted for about half of the union's exports to the Russian Federation, or €43.9 billion. The ban fell primarily on transport equipment (45% of the value of banned imports), chemical products (19%), electronics (12%) and cars (11%).

The lack of imports from EU countries resulted in an increase in imports through third countries, including former Soviet republics, as well as Turkey. In the fourth quarter of 2022, EU-made goods needed by Russia, worth around $760 million, passed through those countries, economists calculate. These imports, while significant, only made up for a quarter of the losses.

Technological products were by far the most difficult items to replace. One would expect Russia to focus its efforts on replacing high-tech products, rather than less strategic ones, especially given the growing military needs. But replacing medium- and high-tech products is more difficult: before the war, more than half of Russia's supply came from countries that have now imposed sanctions. Their imports have fallen by more than five times, causing a shortage of $7 billion in goods (in the fourth quarter of 2022 compared to the fourth quarter of 2021).

How sanctions don't work

Ukrainian President Zelensky and European Commission President Ursula von der Leyen walk together.

Ukrainian President Zelensky and European Commission President Ursula von der Leyen walk together.

Ukrainian Presidents Office/Zuma

The main exception to the success of sanctions is semiconductors and microcircuits. They make up only 1% of the total value of Russia’s imports, but they are key for some industries, including military use.

Vazhnye Istoriifound that a manufacturer of Russian drones, despite all the sanctions, receives Western chips through intermediaries based in the United States, China and Russia itself.

For the whole of 2022, imports of microprocessors and semiconductors to Russia increased from $1.82 billion to $2.45 billion. The leaders in the supply of microchips to Russia in 2022 were China, Hong Kong, Germany, the Netherlands and Finland.

What do sanctions threaten?

Russia faces significant difficulties in replacing imports from the EU and other countries, and many important markets are in short supply. This could have a serious impact on the Russian economy and its ability to meet the needs of critical products and technologies.

So far, Russia is not really feeling the consequences of the “import famine." Supplies of consumer goods have recovered, and the deficit of investment and intermediate imports is not felt immediately. But the absence of symptoms does not mean that the disease does not exist.

By the time Russian manufacturers get going again, market positions will already be occupied.

The acuteness of the problem is illustrated by a recent comment by the analytical center TsMASF, close to the Russian authorities. “The establishment of new logistics routes for investment imports is becoming fundamentally important,” they said. “Those factors that ensured economic growth last year have already been exhausted; the activation of growth requires new solutions.”

If this situation continues, there is a significant risk that by the time Russian manufacturers get going again, market positions will already be occupied by products from manufacturers from friendly countries, including China, India, Belarus and Iran. Such is the paradox: the notorious Russian import substitution is incredibly dependent on imports.

Parallel imports and circumvention of sanctions do not lead to anything good, "only to an increase in the cost of supplies, a certain decrease in quality, a lack of service that usually accompanies complex technological goods,” says Natalia Volchkova, a professor at the Russian School of Economics. “This drives up prices. And it will continue in the future. The highest quality equipment and technologies are being replaced by lower quality ones. From this point of view, we see significant gaps in the Russian market,” adds Volchkova.

How to increase the pressure

President Vladimir Putin in his office during a video conference.

President Vladimir Putin sits in his office while on a video conference.

Gavriil Grigorov/Kremlin Pool/Zuma

It is easier to improve export controls in America. There are more problems in Europe, due to the fact that each EU country implements export controls on its own.

The more restrictions that are imposed on financial transactions, the more it affects trade in general.

Comprehensive measures can help: imposing financial sanctions, improving the application of anti-money laundering rules, anti-corruption measures and export controls. The expansion of financial sanctions will make cross-border settlements more difficult — the fewer banks that escape sanctions and remain connected to the global SWIFT system, the easier it will be to track them. The more restrictions that are imposed on financial transactions, the more it affects trade in general.

Banks in Armenia, Kazakhstan and Hong Kong, fearing secondary sanctions, are beginning to block payments to Russian companies for servers, microcircuits, processors, telecom equipment and other electronics, and experts foresee a shortage. Secondary sanctions play an important role in this: the U.S. is already compiling lists of companies involved in deliveries through third countries to Russia. The next, eleventh package of EU sanctions is aimed precisely at closing loopholes and at preventing supplies bypassing the sanctions.

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