This FIW Spotlight focuses on the impact of sanctions on trade by the European Union (EU) and Austria with Russia. The imposition of sanctions has led to a significant drop in trade, with a 40% drop in EU exports to Russia and a 19% drop in Austrian exports. Remarkably, Russia bears the economic cost of these sanctions, as illustrated by a significant GDP loss of 7.9% on a permanent basis. This analysis shows the profound impact of sanctions on international trade relations as well as the economic losses of the sanctioned country, in this case Russia.
The invasion of Ukraine by Russia in February 2022 has led to a wave of outrage around the world and triggered a complex response of sanctions and counter-sanctions. These policies not only have a direct impact on the nations involved, but also send shockwaves through the global economy that reach far beyond the countries directly affected. At a time when the global economy is still struggling with the aftermath of the COVID-19 pandemic, understanding the economic costs of these sanctions is crucial.
At the beginning of the conflict, studies were published promptly that analysed the economic costs of possible sanctions and trade stops (Bachmann et al., 2022; Balma et al., 2022). At that time, however, it was not yet possible to measure the exact impact of these measures on trade. The authors could only make assumptions and create models. Seventeen months later, it is now possible to measure the changes in trade volumes and thus provide a precise analysis of the costs of these measures. First, the author takes a look at the impact of the sanctions on trade before examining the macroeconomic consequences in more detail in a hypothetical scenario.
Trade collapses
The sanctions taken have had a significant impact on trade with Russia. EU exports to Russia plummeted by over 60% when the first set of sanctions came into force in May 2022. Subsequently, exports have recovered somewhat. However, they were still 40% below the multi-year average in January 2023. These aggregate figures at the EU level do not give an indication of the differences in trade depression between member countries (see chart 1). Among the largest member countries, France’s and Germany’s exports to Russia fell the most. German exports in January were 59% below the long-term average, French exports 48% below. Austria’s trade with Russia was less affected. Austrian exports initially fell by 41% in May 2022. They then recovered and even reached a plus of 2% in July 2022. Nevertheless, the sanctions also have a negative impact on trade for Austria. In January 2023, exports were still 19% below the multi-year average. The different trade effects between the member states show that the countries trade very different goods with Russia. Each “basket of goods” contains different shares of sanctioned goods and services. For example, the Austrian export mix contains an above-average number of non-sanctioned goods groups, such as food and pharmaceutical products, which explains the small decline.
In order to calculate the economic impact of the sanctions, the different “baskets of goods” of the countries in trade with Russia must be taken into account. To do this, the author first calculates the sanction effect at the level of different product groups using the so-called “gravity equation” from the international trade literature (Head and Mayer, 2014). Subsequently, the author uses these sanction effects in a model of international trade (Felbermayr et al., 2023). This allows the author to explore the following “what if” scenario: What would the world look like if there were only the Russia sanctions, but all other economic influencing factors were held constant? Since all other influencing factors are excluded – for example, other crises or political measures in the past year – the “pure” effect of the sanctions can be examined.
Russia bears the brunt
The calculations show that Russia clearly bears the costs of the sanctions (see chart 2). Russian GDP falls by 7.9% in the long term due to the sanctions imposed by the West and Russian counter-sanctions. This means that the sanctions alone permanently lower the level of the Russian economy. In other words, without the sanctions, Russian society would be 7.9% “richer”. The effect remains even if the Russian economy were to grow again in real terms in the future.
In contrast, GDP in the EU decreases by only 0.21%. This corresponds to a sum of 33 billion euros. Of the large member states, Germany is the hardest hit. German GDP falls by 0.26%. This is mainly due to its dependence on energy imports from Russia. In Austria, GDP falls by 0.2% and is thus slightly below the EU average.
Austrian exports fall by 1.7%. Pharmaceutical products (-9.5%) and other transport equipment (-8.6%) are the most affected. Machinery and equipment (-4%) and electronic equipment (-2.2%) are other export-strong sectors that are negatively affected (see chart 3). However, some sectors also benefit from the sanctions. Not surprisingly, exports of petroleum (11.9%) increase significantly. Austria can take over part of the lost Russian exports here. The production of petroleum refers to the processing of crude oil. Austria does not produce oil, but processes more imported oil than before the sanctions, when petroleum was also imported directly from Russia to the EU. Other sectors that benefit from the sanctions are the production and casting of metals and the mining of metal ores, whose exports each increase by 1.6%.
The analysis of the Russia sanctions highlights the complex and far-reaching impact of policy measures on the global economy. While the sanctions hit Russia significantly, with a long-term GDP loss of 7.9%, the impact on the EU as a whole is smaller but still noticeable. The Austrian economy can absorb some of the West’s sanctioned trade flows with Russia. However, it is not enough to offset the economic costs for Austria.
Author:
Hendrik Mahlkow has been working an an economist in the WIFO Research Group “Industrial, Innovation and International Economics” since 2023. He is a quantitative trade economist who is mainly interested in environmental economics and geopolitics. Using large computational general equilibrium models, he calculates so-called counterfactual scenarios: “what-if” considerations that allow to evaluate planned policy measures ex ante, or to review already implemented measures ex post. He is pursuing a PhD in Quantitative Economics at the Christian-Albrechts-University of Kiel. Most recently, he spent a research semester at the University of California, Berkeley.
References:
- Bachmann, Ruediger, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Benjamin Moll, Andreas Peichl, Karen Pittel, and Moritz Schularick, “What if? The economic effects for Germany of a stop of energy imports from Russia,” Technical Report, ECONtribute Policy Brief 2022.
- Balma, Lacina, Tobias Heidland, Sebastian Jävervall, Hendrik Mahlkow, Adamon N Mukasa, and Andinet Woldemichael, “Long-run impacts of the conflict in Ukraine on food security in Africa,” Technical Report, Kiel Policy Brief 2022.
- Felbermayr, Gabriel, Hendrik Mahlkow, and Alexander Sandkamp, “Cutting through the value chain: The long-run effects of decoupling the East from the West,” Empirica, 2023, 50 (1), 75–108.
- Head, Keith and Thierry Mayer, “Gravity equations: Workhorse, toolkit, and cookbook,” in “Handbook of international economics,” Vol. 4, Elsevier, 2014, pp. 131–195.
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