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Are Sanctions on Russia Working?

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The debate continues on the utility and efficacy of US-led economic sanctions in isolating and weakening Russia.

 

A new study by the Yale School of Management has published data that supports the US government’s view that the sanctions imposed on Russia have jeopardized its economy. According to the study,  more than 1,000 international firms have left Russia in the wake of the Ukraine war.

 

“As a result of the business retreat, Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base.”

 

In particular, the sanctions have devastated Russia’s foreign technology- dependent automotive, aviation, and arms industries. At the same time, Russian gross domestic value-added indicators have fallen by 62 percent in the construction sector, 55 percent in agriculture, and 25 percent in manufacturing. 

 

Russia expects to enjoy a current account surplus of $265 billion this year, thanks to robust commodity exports.  The IMF projects Russia’s GDP to shrink by 6% in 2022, far from a “knockout blow.”

 

According to the IEA, Russia’s exports of crude and oil products to Europe, the US, Japan, and Korea have fallen by nearly 2.2 mb/d since the start of the war, but the rerouting of flows to India, China, Turkey and others, along with seasonally higher Russian domestic demand has mitigated upstream losses. By July, Russian oil production was only 310 kb/d below pre-war levels while total oil exports were down just 580 kb/d. 

 

The EU embargo on Russian crude and product imports that comes into full effect in February 2023 is expected to result in further declines, as some 1 mb/d of products and 1.3 mb/d of crude would have to find new homes.  Prices realized by the Kremlin are lower as well.  The Yale report notes the spread between Brent and Ural (Russian) benchmarks has widened to $35 per barrel, reflecting discounts extracted by Asian buyers.  

 

 While the sanctions have cut Russian access to Western financial institutions, Russian firms continue trade through countries like the United Arab Emirates and Turkey which have chosen not to join the allied sanctions. Reuters reports that Turkey is being used as a “warehouse and bridge” by European businesses to supply goods to Russia. 

 

The Royal United Services Institute, the British defense and security think tank reports  that more than 450 foreign-made components have been found in Russian weapons recovered in Ukraine, suggesting critical technology was acquired by Russia from Western countries years before the invasion.  According to the research, when disassembled, 27 Russian weapons and military systems were found to rely predominantly on Western parts, with almost two-thirds of the components manufactured by US-based companies. 

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