The Economic Costs of the Existing Sanctions in Relation to Russia

Tasks

The study looks at the impact of the 2014 Russia sanctions on foreign trade and welfare effects in Germany, Russia, and the European Union (EU).

Methods

In addition to a descriptive analysis, econometric methods are used to estimate the effects of the different sanctions regimes (EU, Russia, USA) on bilateral trade with Russia. The findings are fed into a simulation analysis to determine welfare costs by country, region and sector. A company survey complements the study with qualitative aspects that can be used to supplement the affectedness of German companies by the sanctions.

Data and other sources

COMTRADE, World Input-Output Database, WTO-TRAINS, VGR der Länder, firm-level survey.

Results

Russia is unilaterally dependent on the EU as a supplier and as a buyer: In 2018, 46% of exports went to the EU and 38% of imports came from the EU. EU imports from and exports to Russia did not exceed 5% of total imports/exports. While Germany and the other EU Member States supply Russia with final goods such as machinery, vehicles and electronic goods (20%, 10% and 7% of imports respectively), the EU imports almost exclusively raw materials from Russia. The Russian export business is very dependent on European demand for raw materials and has a poorly diversified export portfolio - both in terms of product mix and customers.

The causal analysis based on the gravity model supports the finding that Russia's foreign trade with Germany declined significantly as a result of the sanctions. Exports to the EU were hit particularly hard in the agriculture (-55%) and mining (-40%) sectors.

The simulation analysis using the Ifo trade model shows that the real GDP of the EU member states would increase on average by 0.12% (20.85 billion euros) and that of Russia by 1.13% (17.13 billion euros) if the EU sanctions against Russia were lifted.  German real GDP would even rise by 0.16% (5.42 billion euros). Germany's regions would benefit to varying degrees.

The business survey also shows that eastern German companies are particularly affected by the sanctions - in Saxony, for example, 60% of companies see themselves hindered in exporting to Russia. Problems with exports are cited significantly more frequently (by 28% of companies) than difficulties with imports (by 5%) or investments (by 7%).