Russia’s invasion of Ukraine has sparked a military and humanitarian crisis not seen in Europe since the end of World War II. And while the West has refused to be drawn into a military engagement, it has supported Ukraine with financing and military aid and attempted to isolate Russia diplomatically and economically.
Sanctions have been crucial to the attempt to inflict economic pain on Russia. But while the sanctions imposed on Russia by an unexpectedly compact Western coalition have had an effect, they have not had the devastating impact they were expected to—the Russian gross domestic product is expected to decline by merely 3.4% this year while the value of the ruble has increased by about 20%.
In part, Russia’s relative economic resilience has been due to its oil and gas exports, especially to the European market. But researchers at Harvard Kennedy School’s believe that the list of sanctions on Russia has left the country too many supply alternatives and that a more coordinated approach could increase the cost to Russia by about 60% without any measurable difference to the sanctioning countries.
Ricardo Hausmann, the Rafik Hariri Professor of the Practice of International Political Economy and director of the Growth Lab, has over the past decade used a unique approach to understand how economies can develop by measuring their economic capabilities and how those capabilities can combine to increase complexity and thereby wealth. Following the Russian invasion of Ukraine last February, and the subsequent rollout of sanctions by Western countries, especially the United States and the European Union, Hausmann and his team sought to understand and if they could be better engineered to have greater impact.
“The Ukraine war is being fought both on the battlefield and on the economic front, with millions making sacrifices to protect the country and its democracy.”
They focused on sanctions on exports to Russia as these allow for exploiting an important asymmetry in the trade relationship between Russia and the West: The coalition of Western countries accounted for about 54% of Russian imports, prior to the invasion. The European Union accounted for about 41%, the United States for only about 2.3%, and other countries for the remaining 9%. In contrast, Russia accounted for a much smaller share of around 2% of European exports. This implies that sanctions on exports to Russia can cut off critical supplies for its economy with little impact on coalition exports.
Using the Growth Lab’s granular approach, Hausmann, with postdoctoral fellow Ulrich Schetter and Growth Lab Research Director Muhammed Yildirim, looked at more than 5,000 products imported into the Russian market, their relative importance to the Russian economy, and studied the combined market share of sanctioning countries.
The trade sanctions, imposed in the first months of the conflict, were designed primarily to target Russia’s military and defense sector, but more broadly to limit the country’s access to technology and to atrophy its industrial base.
The researchers found that while the sanctioned products were, in fact, important to the Russian economy, often the market share controlled by the sanctioning countries was not large, allowing Russia to substitute goods from other countries for American or European goods. Moreover, while there has been impressive coordination on many fronts: less than 50% of all products sanctioned by the United States or the European Union are restricted by both.
The researchers also found a bias toward capital goods—things like machinery or airplanes—which, besides coordination problems, can also take time to have an impact because Russia can use pre-existing stocks. The researchers —such as car transmissions or food additives—that could have an immediate impact.
The significance of the new approach is that it looks at the granular, product-level data allowing a more effective sanctions design that can have a relative GDP effect on Russia 100 times larger than on the sanctioning countries. The researchers also see scope for increasing Russia’s losses by targeting more products.
“The Ukraine war is being fought both on the battlefield and on the economic front, with millions making sacrifices to protect the country and its democracy,” Hausmann wrote in a recent commentary. “We must support them by ensuring that trade sanctions are as effective as they can be.”
—
Photograph by Yuri Kadobnov / Contributor