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Sanctions Effects on Russia: A Possible Sanction Transmission Mechanism?

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Abstract

This study examines the effects of sanctions implemented by the European Union and the United States of America against the Russian Federation following the latter’s annexation of the Crimea Peninsula and invasion of Eastern Ukraine. The analysis focuses on indirect or spillover effects caused by EU and US sanctions on several macroeconomic variables of the Russian economy. Employing a structural vector autoregressive model, the study uses time-varying sanction indices to simulate sanctions, substituting for binary dummy variables traditionally employed in modelling sanction’s implementation. The findings reveal that sanctions have an indirect impact on Russia’s GDP through their direct effects on inflation, interest rate, and domestic currency – a notion introduced as “sanction transmission mechanism”.

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Sources OECD, World Bank, Rosstat, CBR

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Notes

  1. For example, the 2014 EU sanctions were mainly targeting deep-oil extraction (technological sanctions), exports of arms & dual-use goods, financial instruments that exceed a 30-days maturity, as much as private individuals and companies involved in Crimea (Appendix A).

  2. The OECD has replaced REER in base 2010 = 100 by REER base 2020 = 100 and has discontinued the 90-day rates and yields interbank rates, while ROSSTAT has discontinued government final consumption expenditure to the 2008 SNA methodology.

  3. Russia stopped publishing several key data following sanctions.

  4. World Bank national accounts data; Indicator Code: NE.EXP.GNFS. ZS.

  5. Reported by ROSSTAT, from Federal Customs Service of Russia.

  6. First differences and logarithms are particularly hard to interpret within the frame of Impulse-Response functions.

  7. Note that this cointegrating relation does not affect our results as removing CPI from our models does not change the outcome of this study. Following (Kitov et al., 2008), it could however be interesting to compare our VAR results to a VECM to observe the potential influence of the long-term relationship between inflation and GDP on sanctions’ impact.

  8. Given the high number of values, these are not in the paper but available upon request.

  9. EU trade since 1988 by SITC [DS-018995].

  10. U.S. Exports of Goods by F.A.S. Basis to Russia [EXP4621]; GDP from the U.S. Bureau of Economic Analysis.

  11. A ban on arms sales, arms-sales financing, U.S. government credit or other financial assistance, exports of national-security-sensitive goods, and most foreign assistance. US Department of State, public notice 10519.

  12. As the difference in magnitude between the EU sanction index and the US sanction index could influence our results, we also tried additional models with normalised sanction indices (Appendix B). There are no significant changes in our results when normalised indices are used, confirming the robustness of our results.

  13. Note that quarter-on-quarter growth of public expenditure was 4.7 times lower between 2014q3 and 2016q2 than its historical average (2003q2 to 2014q2). It was even negative between 2014q4 and 2015q1. A straightforward explanation is that the price of oil between 2014q3 and 2015q1 decreased by 47%, which in turn impacted Russia’s oil income and thus government spending.

  14. Source: Central Bank of Russia.

  15. The average quarterly growth rate of gross fixed capital formation reached − 3.5% between 2014q4 and 2015q2, source: OECD.

  16. Source: Rosstat.

  17. Euro to rouble, adjusted close.

  18. Russian companies were forced to sell at least 80% of any foreign currency earnings and severe restrictions were imposed on cross-border capital flows, stopping the rouble from being a fully convertible currency.

  19. Source: International Energy Agency.

  20. From $122/barrel on June 5, 2022 to $74.17/barrel on May 7, 2023.

  21. https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain.

  22. Source: OECD data, Benchmark definition, 4th edition (BMD4).

  23. Source: Federal Treasury of Russia, budget.

  24. These are not exactly equal to zero but to 0.001.

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Acknowledgements

We express our sincere appreciation to Olga Manyakhina Phelps for her meticulous proofreading of the paper. We are grateful for the dedicated assistance provided by our research assistants, Eden Ana Raviv, Christopher Nash Boykin, and Shen Shen, in editing and proofreading this study. Additionally, we acknowledge with gratitude the valuable feedback and suggestions provided by the editorial board of the European Journal on Criminal Policy and Research, as well as the three anonymous reviewers.

Funding

This work was supported by the United States Department of Defense Minerva Program Grant No. FA9550-21-1-0156. The funding source is not involved in study design, collection, analysis and interpretation of the data, writing report and decision to submit the article for publication.

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  1. Morad Bali lead to this work.

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  1. Nicholas School of the Environment, Duke University, Grainger Hall 9 Circuit Drive, Durham, NC, 27708, USA

    Morad Bali & Lincoln F. Pratson

  2. Department of Monetary Operations, Central Bank of Madagascar, Antananarivo 101, Antananarivo, Madagascar

    Nady Rapelanoro

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Bali, M., Rapelanoro, N. & Pratson, L.F. Sanctions Effects on Russia: A Possible Sanction Transmission Mechanism?. Eur J Crim Policy Res (2024). https://doi.org/10.1007/s10610-024-09578-w

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