Immediately after the Russian attack on Ukraine, the EU adopted its first package of sanctions against Russia. The 13th package followed on February 21, 2024. The ultimate goal of these sanctions – i.e., ending the war  – has not yet been achieved. Nevertheless, the Russia sanctions imposed by the EU and its allies have not been unsuccessful.

What are the aims of economic sanctions?

The ultimate goal of economic sanctions against a country is a change in the political behavior of its government. Sanctions are intended to cause significant economic damage in the sanctioned country, leading to growing dissatisfaction among the population. And this discontent should lead the government to change its behavior.

There are also two other objectives:

  • Economic sanctions are intended to restrict the sanctioned government’s ability to act. If the economy weakens, public revenue shrinks. Government spending then increases to alleviate the social tensions associated with an economic downturn. Both developments reduce a government’s financial scope and thus restrict its ability to act.
  • Secondly, sanctions have a deterrent function. They show the rest of the world that certain behaviors are unacceptable and will, therefore, be sanctioned. This is intended to deter potential copycat countries from making decisions that could be classified as sanction-worthy.

Have the sanctions weakened Russia’s economy?

Not at first glance. Following a slight decline in Russia’s real gross domestic product (GDP) in 2022, the International Monetary Fund estimated that Russia’s economy grew by three percent in 2023.

However, this economic growth was essentially due to increased production in the military sector. The government thus not only provided the necessary weapons and ammunition. It also replaced the lost demand for export goods and thus stabilized the overall economic demand for goods.

For Russian consumers, this is not good news – on the contrary, military production ties up production factors, above all labor. This exacerbates Russia’s existing labor shortage, partly due to the many young people serving in the army and others leaving the country for better opportunities elsewhere.

The lack of labor is leading to a shortage in the supply of consumer goods as the production of military products increases. The result is inflation. Consumer prices are rising, which is reducing the purchasing power of the population.

In response to the high inflation rates, the Russian Central Bank had to raise its key interest rate to 16% in December 2023 and held them at that level at their February meeting. However, high-interest rates dampen investment and thus weaken future production opportunities.

Why do sanctions not have the desired full economic effect?

For sanctions to achieve the desired weakening of a country’s economic performance, a number of conditions must be met. Here are the three most important:

1. The sanctions must be aligned to the size of the sanctioned economy: The smaller a country is, the more it is dependent on imports and exports. However, the Russian economy has a large domestic market. It is, therefore, less dependent on foreign trade.

2. There must be a sufficient number of countries imposing the sanctions: If as many countries as possible participate, high economic damage can be expected in the sanctioned country.

  • There is light and shade with regard to the sanctions against Russia: On the one hand, numerous countries have imposed sanctions measures – the EU and the UK, the US and Canada, Japan and South Korea, Australia and New Zealand – and also Switzerland, which often takes a neutral stance.
  • On the other hand, many countries are not participating. These include, in particular, China and India, Turkey and Iran, successor states of the Soviet Union, and numerous developing countries. This limits the effectiveness of the sanctions imposed on the Russian Federation. What is particularly problematic here is that Russia also receives weapons, ammunition, and components for its own weapons production.

3. Strong sanctions must be imposed swiftly: The more extensive and the quicker the sanctions are imposed, the greater their effectiveness. Here, too, there is light and shade. Although there are 13 sanctions packages on the part of the EU, the import of natural gas has continued.

What role does the time factor play?

Even if the short-term success of the sanctions is limited, they will have a noticeable impact on the future performance of the Russian economy. In addition to the aforementioned decline in investment, there are additional aspects to consider.

The sanctions hit Russia particularly hard in the area of modern technologies: The products that will no longer be exported to Russia by the EU, for example, include high-quality products, including electronic products, semiconductors, and software, as well as equipment for the energy industry and the aerospace industry. Russia itself has no or only poor substitutes for these products.

Here is just one example: around 75 percent of Russia’s civil aviation fleet consists of aircraft from the US, Canada, and the EU. If spare parts are no longer supplied for them, repairs are impossible. Over time, a significant proportion of the civil aviation fleet will therefore no longer be operational.

Generally speaking, for many imported utility objects, the lack of imports can be compensated for by using the products concerned for longer. In the short term, the lack of key imports is manageable for the Russian economy. However, the longer the sanctions last, the greater the economic damage in Russia will become over time.

Machines cannot be used indefinitely. If worn out, their absence becomes a brake on production in the affected sectors. Furthermore, modern technologies can also be used by importing modern machinery from abroad. The ban on supplying these machines to a sanctioned country therefore also has the effect of reducing productivity within the Russian economy.

And there is another effect that weakens economic growth: the flight of capital from Russia and the lack of investment from abroad weaken Russian investment in the civilian production sector – and this is crucial for the long-term economic growth of an economy. 

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What role does the political system play in the success of sanctions?

Whether economic sanctions actually persuade the government of a country to change its policies also depends on the extent of democracy or autocracy:

  • In a democracy, it is to be expected that the population will react to the economic damage by voting out the incumbent government if it does not change its behavior. This means the economic sanctions can achieve their goal – provided the economic damage is sufficiently large.
  • In autocratic or even dictatorial states, the population’s dissatisfaction does not lead to the government being voted out of office if there are no free elections. Therefore, the government has no need to react to the economic damage caused by sanctions in its own country.

At least in the short term, it is therefore unlikely that the Russian government will be put under pressure by its population and thus react in the desired way. However, the time factor also plays a decisive role here:

  • The longer the sanctions last, the greater the loss of wealth and income in Russia. This increases the dissatisfaction of the population.
  • To contain or avoid protests, the government has to deploy personnel and other scarce resources. This ties up production factors in the manufacture of consumer goods, which worsens the supply situation for the domestic population – and increases people’s dissatisfaction.

Do the subsidies against Russia make sense?

In the democratic market economies, nobody expected the Russian government to cease its military activities in direct response to the sanctions. Nevertheless, in my opinion, the decision to impose sanctions was and is reasonable for at least three reasons:

  1. The long-term weakening of the Russian economy is likely to reduce Russia’s negotiating position, as the economic damage will increase over time.
  2. The slowdown in long-term economic development will lead to a deterioration in living conditions in Russia. This could undermine Putin’s legitimacy and thus contribute to the erosion of his rule.
  3. It is quite conceivable that Russia will become a deterrent example for other countries that are potentially planning similar sanction-worthy decisions – in this case, the sanctions at least fulfill their deterrent function.

And last but not least: sanctions are an expression of a normative fundamental decision. They make clear that certain political decisions are so vehemently rejected by the sanctioning countries that they are prepared to accept economic losses for their stance.

This is a much stronger signal than mere political declarations. It also increases the likelihood that other countries considering political decisions worthy of sanctions will refrain from doing so.

About the author

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Among others, he has recently worked on the effects of carbon pricing and the benefits of a potential global climate club.

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