Economic Sanctions:
What Do They Mean for Russia?
Sergey Afontsev
Department Director,
Institute for World Economy and
International Relations, Moscow, Russia
Professor, MGIMO-University
Advisor, EU-Russia Industrialists Roundtable
ICEUR-Vienna OUTCOMES Seminar
Vienna, November 11, 2014
Introduction
Economic sanctions imposed in the context of the
ongoing political crisis in Ukraine have dramatically
affected both the current dynamics and the future
prospects of Russia’s economic relations with the rest of
the world.
Although no binding resolution of either the UN Security
Council or the UN General Assembly concerning Russia’s
involvement in the political crisis in Ukraine was adopted
thus far, most developed economies took actions
intended to influence decisions of the Russian leadership.
Retaliatory measures introduced by Russia in August left
no doubt that the quest for cooperative solutions will be
more than problematic.
Structure and Timing of Economic
Sanctions against Russia
 Targeted (‘smart’) sanctions directed against particular
persons and legal entities in Russia whose actions could
be interpreted as threatening territorial integrity of and
political stability in Ukraine (March 17 – July 15);
 Sectoral sanctions with a shift from ‘punishing’ agents
who contributed to the Ukrainian crisis to action against
wider sectors of Russian economy irrespective of the role
played by companies operating in these sectors in the
Ukrainian crisis (July 16 – September 11);
 Escalation of sectoral sanctions (September 12 onwards)
with a clear ‘decoupling’ of measures taken and the
dynamics of political conflict in Ukraine, as new sanctions
were imposed exactly at the time when the first signs of
crisis de-escalation became visible.
Consequences for the
Domestic Economy
Although any systematic assessment of the impact of
economic sanctions and retaliatory measures on the
Russian economy should wait for results of a formal
exercise in general equilibrium modeling, two sets of
economic indicators can be addressed to get preliminary
conclusions.
On the one hand, currency and stock market indices
provide the idea on immediate reaction of economic agents
on news concerning new restrictions on Russian economy.
On the other hand, dynamics of such basic economic
variables as GDP, gross fixed capital investment, and
external sector indices shed light on sanctions’ impact on
the growth potential of Russian economy.
Consequences for the
Domestic Economy
Correlation of economic sanctions and market dynamics is limited (almost
nonexistent since mid-September). This suggests that market agents in Russia cared
more on the internal dynamics of the Ukrainian conflict and their own expectations
concerning domestic/external developments rather than on any restrictive measures.
Russian stock and currency market (March 15, 2014 = 100).
Consequences for the
Domestic Economy
Key macroeconomic indicators
(year-on-year growth rates, per cent)
Consequences for the
Domestic Economy
Dynamics of the key macroeconomic indicators reveal three
major trends that were not known a year ago.
 Gross fixed capital formation collapsed in Q1 2014 and did not
recover afterwards. Financial restrictions together with capital
flight (which is expected to reach $100–$120 bn in 2014) work to
further suppress investment activity since Q2 2014.
 Russian imports suffered a major drop by 6.3 per cent in Q1–Q3
2014. This can result from both the slowdown of the GDP growth
in Russia and deterioration of trading climate. Irrespective of the
exact contributions of these factors, consumer welfare is to be
affected negatively.
 Growth in consumer prices has accelerated remarkably,
contributing to the overall drop in real disposable income by 0.2
per cent in H1 2014.
Consequences for the
Domestic Economy: Prices
Consequences for the
Domestic Economy: Business
Most companies (even those not directly
affected by sanctions) complain that sanctions…
restrict access to finance (capital markets in the
EU and the US are actually closed, alternative
markets are more expensive with limited supply);
reduce consumer confidence and thus contribute
to further drop in demand;
create problems with foreign partners even in
fields not covered by sanctions.
Consequences for the
Domestic Economy: Business
Russian companies should repay/refinance $106,7 bn by
the end of 2015, incl. $84 bn by companies under
sanctions:
 oil & gas companies under sanctions – $84 bn ($35.4 bn
by Rosneft only);
 financial sector companies under sanctions - $22 bn.
Most companies (probably not Rosneft) will be able to
repay/refinance their foreign obligations without
addressing the Russian government for financial
assistance (Source: Sberbank Investment Research,
Moody's Investors Service).
Consequences for the
Domestic Economy: Business
Consequences for the
Domestic Economy: GDP
Keeping sanctions intact will cost Russia 0.1 per
cent of GDP growth in 2015 and 0.4 per cent of
GDP growth in 2016 (Source: Central Bank of
Russia).
Further escalation of sanctions will reduce GDP
growth by 1.2 per cent of GDP in 2015 and 0.8 per
cent of GDP in 2016 (Source: The World Bank). As
a result, Russia will face an economic decline by
0.9 per cent in 2015 and 0.4 per cent in 2016.
Consequences for the
Domestic Economy: GDP
Pessimistic GDP forecasts
Optimistic GDP forecasts
Consequences for the
External Sector
 Restrictions on trade, finance and technological cooperation
made diversification challenges even more pressing.
Consequences for the
External Sector
 Extensive reliance on US dollar and euro is seen as a
problem, but is not easy to overcome.
Source: Bank for International Settlements, 2013
Consequences for the
External Sector
 New incentives for ‘Russia’s pivot to Eurasia’ to find new
energy markets as well as trade and investment partners
in technologically advanced economies.
Russia’s key trading partners, 2014 (per cent of total trade).
Consequences for the
Domestic Politics
Results of the opinion poll on objectives/reasons behind
foreign sanctions against Russia (multiple choice),
per cent (WCIOM, 15.08.2014).
Consequences for the
Domestic Politics
 Hopes that economic ‘pain’ caused by escalated sectoral
sanctions will invite popular protect and a sort of ‘colored
revolution’ in Russia appeared to be futile not so much
because the Russian government has enough control over
domestic political processes (and mass media in
particular), but because the experience of the neighboring
countries (and especially that of Ukraine) clearly shows
what kind of consequences these revolutions generate.
 Escalated sanctions are widely seen as an external threat,
which claims for political consolidation and fuels the
‘revenge of justice’ feelings among the Russian population.
Recent opinion poll showed that 84 per cent of people
supported retaliation measures, and 80 per cent felt that
their net effect will be favorable for Russia.
Consequences for the
Domestic Politics
Results of the opinion poll on expected consequences of
Russia’s retaliatory measures (multiple choice), per cent
(WCIOM, 22.08.2014).
Consequences for the
Foreign Policy
 Public consolidation against the ‘external threat’ worked to
smoothen cleavages on foreign policy issues among different
elite groups in Russia created by targeted sanctions, thus
eliminating chances for outside actors to affect decision
making in Russia over its involvement in Ukrainian crisis.
 The ill-chosen timing of the new EU sanctions and
spectacular inability of the EU member countries to withstand
political pressure by the US make Russian elites even more
inclined to look for more reliable (Eastern) partners.
 Under Russia’s current political system, subjecting it to more
economic ‘pain’ will result in further alienation from the West
without any contribution to de-escalation of the Ukrainian
conflict.