Home> Ukraine War: What is the Economic Impact of Trade Sanctions on Russia?

25.04.2022

Ukraine War: What is the Economic Impact of Trade Sanctions on Russia?

Sanctions

Since the start of Russia's invasion of Ukraine, economic sanctions have been imposed on Russia on a scale rarely seen in modern times. As the nature and extent of Russian violence worsens, there are growing calls for even tougher sanctions and for a drastic reduction of EU imports from Russia. But what will be the economic impact of these sanctions? To answer this thorny but urgent question, researchers from Sciences Po’s Economics Department presented their expertise and early research results in a conference chaired by PSIA Dean Arancha Gonzalez, on April 11th.

The question of an embargo on Russian oil and gas “is an issue of choice between air conditioning and peace”, explained Sergei Guriev in his introduction, quoting Italian Prime Minister Mario Draghi. The Professor of Economics and Scientific Director of Sciences Po's economics Master's and PhD programmes started his presentation by describing the catastrophic economic consequences of the war for Ukraine: a drop in GDP estimated to reach 45% this year, and reconstruction costs between U$200 and 500 billion. A human and economic disaster, he highlighted, that puts into perspective the discussion about the situation in Russia.

The Russian economy is also seriously suffering from the war, Pr. Guriev continued. The sanctions applied by the West have been quicker and stronger than the Kremlin expected, and with the addition of boycotts from the private sector, the Russian economy is stretched thin. Russia is likely to enter its worst recession since the 1990s with a probable drop in GDP of 10-11% , inflation is “out of control” and the country is experiencing a massive brain drain, with about 300,000 highly educated Russians having already left.

“Every additional dollar sent to Putin is going to the war”

However, despite the impact of sanctions, Vladimir Putin still has a source of income replenishing his stocks: oil and gas exports. From Europe alone, for oil and gas, Russia receives almost one billion euros per day. Quoting EU foreign policy chief Josep Borrell, Sergei Guriev estimated: since the beginning of the war, we have paid to Putin about €40 billion for gas and oil – while we provided Ukraine with €1 billion in aid .

Hitting this source of cash, which Putin is getting every day, is critical for stopping this war ”, Pr. Guriev explained: Vladimir Putin needs this war for domestic purposes and will double down on it. Given the strain of sanctions on the Russian economy, every additional dollar you send to Mr. Putin is going to the war . As such, the goal of sanctions must not be to scare the Russian president, but to deprive him of any funds to continue the war on Ukraine: “ To make sure he doesn’t have enough cash to pay his soldiers, his officers and mercenaries, his propagandists and policemen.

On European countries, a cost that can be absorbed

Around 80% of coal, 40% of natural gas and between 20 and 40% of petroleum used in Europe are imported from Russia, explained Professor Isabelle Mejean, Research Fellow at the Centre for Economic Policy and Research (CEPR). As such, the cost for European economies of increasing the sanctions on Russia is largely dependent on the possibility of sourcing oil and gas from other countries – which relatively easily for oil, but much harder for natural gas as it requires the existence of pipelines. In the case of an embargo on Russian oil and gas, the price of natural gas is thus likely to increase strongly.

What would be the consequences of this price increase on European economies? According to the Sciences Po economists, the shock would not be as serious as feared. And the question is primarily a political one, explains Professor Xavier Ragot, President of the French Economic Observatory (OFCE): “ Who will pay, and when?”. If the war continues for over a year, leading to a steady increase in oil and gas prices, the French GDP is estimated to drop between 1 and 2%, and with an increase in unemployment of 1.5%. “We can absorb it,” states Pr. Ragot, especially considering the growth expected in 2022 from the easing of the Covid pandemic: Our GDP growth would go down from 4% to 3%,” he explains . But the main concern would be the distribution of this shock among the French population: poorer households are much more exposed to energy prices. “ The key is to be smart enough to target fiscal tools to the poor,” while considering the large differences in this population group, especially between rural and urban families, Ragot said. To avoid a “human disaster”, poor households should be compensated “ with 2 to three times more than their average drop of income,” he explained: and these targeted tools must be established right now.

This urgency was also highlighted by Moritz Schularick, Professor of Economics at Sciences Po and Director of the MacroFinance Lab. On March 8, Pr. Schularick published an “ECONtribute Policy Brief” on the potential economic impact of a cut-off from Russian energy imports on the German GDP . The findings were much less alarming than what the German government has been warning of: a drop of “around 2 to 3%” of GDP . The German industry mainly uses natural gas for heating purposes and could potentially switch to oil or other sources of heating, Schularick highlighted. But the changes required to move away from Russian oil and gas must be done as soon as possible, taking advantage of the lower consumption in summer, the Professor stated. The German government has not shown much willingness to go in this direction and is being strongly lobbied by the industry.

What exactly is hindering a German embargo on Russian oil and gas? For Moritz Schularick, the explanation lies in German politics: the fear of a “yellow vests” movement rising in Germany. Until then, he regrets, “ we are in the worst of both worlds”. And while strong decisions are being delayed, crucial time is passing by: “ come autumn, Putin will have more of a strong position”.

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Article rédigé par The Sciences Po Editorial Team