sanctions: the evidence

In my recent post about the Canadian House of Commons defence committee’s report on Ukraine, I complained that the committee had recommended strengthening sanctions against Russia without producing any evidence that sanctions were an effective tool in changing Russian behaviour. As luck would have it, I have acquired a copy of a recent report which analyzes the effect of sanctions on the Russian economy. I thought, therefore, that I should share the report’s conclusions with you.

Before doing so, it’s first necessary to point out that damaging the Russian economy isn’t the ultimate point of sanctions. If sanctions are to have any meaningful purpose, then that purpose has to be to change Russian behaviour, specifically vis-à-vis Ukraine, given that Ukraine was the pretext for the sanctions. That said, sanctions aren’t going to make Russia change its behaviour if they don’t damage the Russian economy. Coercion has to hurt if it is to coerce. No pain, no gain, as it were. So are they hurting?

The report I have in hand is entitled ‘What difference have sanctions made and is that about to change?’ It was published in September by Macro Advisory Eurasia-Russia Consulting which describes itself as ‘the leading independent macroeconomic and political strategy firm specialising in the Eurasia region, including Russia and the CIS states.’ The report concludes that, ‘it is impossible to say categorically that sanctions have either significantly contributed to the economic decline [in Russia since 2014] or that they have helped the economy survive what would otherwise have been a more severe recession.’ However, the report’s authors tend more towards the latter option, saying that ‘sanctions helped in many respects.’

According to the report, the Russian economy was slowing down even before 2014. The major cause of the subsequent recession was the collapse in the oil price. The impact of sanctions was very small. However, sanctions did affect the way that the Russian government responded to the oil-price-driven recession. Following the global financial crisis of 2008, the government reacted by spending large amounts of its reserves on propping up the ruble, and also by increasing government spending more generally in a type of Keynseian counter-cyclical strategy. In 2014, it abandoned this policy. Instead it allowed the ruble to become a free-floating currency, while it also exercised a tight monetary policy designed to drive down inflation.

The report’s authors credit this latter strategy with preventing the post-2014 recession from becoming as deep as many feared it would be. They write:

Sanctions removed, or made more difficult, the soft options of borrowing and spending … The combination forced the state to be much more fiscally disciplined and more flexible with monetary policy. The ruble free float would not have happened without sanctions. … the decision to stop supporting the currency was the single most important action taken by the government and one of the key reasons why sectors, such as agriculture, have become more competitive and started to grow. … [Therefore] it can be argued that the 2014 sanctions actually helped Russia avoid a steeper recession and a more severe financial crisis.

The report says also that the sanctions forced the oil and gas sector to become more efficient, resulting in an increase, not a decrease, in production after 2014. In general, says the report,

Russia is in good financial shape. … Russia is the sixth-lowest indebted nation and has the sixth-largest financial reserves. … As a result of the sanctions, Russia was forced to repay $250 bn of external debt between 2014 and 2016. That represented 12.5% of pre-devaluation GDP and 25% of post-devaluation GDP. Not many countries in the world could have done that and still avoid a catastrophic crisis. It shows the resilience in the macro-economic and social-political system.

What then of the future?

On this Macro Advisory is a little more cautious. It claims that a lot depends upon the effects of the latest sanctions legislation passed by the US Congress. With this legislation, Congress has effectively seized control of sanctions from the president. Given past experience (e.g. with Cuba, Iran, and the Jackson-Vanik amendment which imposed sanctions against the USSR), the likelihood is that the existing sanctions against Russia will remain for a very long time, regardless of what happens with US-Russia relations more broadly. The new legislation is disturbing, moreover, because it contains stipulations which could be used to dramatically increase sanctions against Russia in the future. This possibility creates a degree of uncertainty which deters foreign direct investment (FDI) in Russia. Currently FDI in Russia is rising again, but that could easily change. A much harsher sanctions regime is possible, and that, says the report, could have a negative effect on the Russian economy.

The report lays out three possibilities. The first involves a relaxation of sanctions by European powers. The second sees sanctions remaining as they are. The third envisages much tighter US sanctions. The report assesses that in the first scenario, growth in Russian GDP will pick up to 3.0% by 2020, accelerating to 4.5% by the end of Putin’s final term in office in 2024. In the second scenario, growth will gradually rise to 3.0% by 2022 and remain roughly constant at that level thereafter. In the third scenario, growth will drop to 0.8% by 2020 before increasing to 2.3% by 2024.

Personally, I suspect that scenario two is the most likely – things will continue on much as they are. If the authors are correct, therefore, we should expect that, barring some external shock such as another global recession, during Putin’s final term in office the Russian economy will experience steady if not extremely rapid growth, ending up with three years of 3.0% growth per annum. That’s not enough to catch up with the West, but it’s not bad either, and certainly sufficient to put a noticeable amount of extra money in Russians’ pockets. If that’s really true, then economically speaking Putin’s last years will be a moderate success from an economic point of view.

Of course, these are all just projections and, as we know, economists often get their projections wrong. Nevertheless, none of this is good news for those who think that sanctions are an effective tool against ‘Russian aggression’ or who imagine that the collapse of the ‘Putin regime’ is just around the corner.

14 thoughts on “sanctions: the evidence”

  1. Yeah, it’s always the safest to predict that things will remain as they are.

    Why should US sanctions have so much affect? I understand that Europe is a much more important trade partner for the RF than the US is. Is there an assumption that “much tighter US sanctions” involve forcing the EU clients to escalate their sanctions too (like what we see with the north stream 2)? And succeed?

    Liked by 1 person

    1. I think the more germane issue is that the EU market is approximately 20x that of Russia. If the US introduces sanctions against foreign companies investing in Russia, whom are the likes of Siemens going to go with?


  2. The Russians control 12 time zones of REAL wealth (natural abundance), the U.S. has ‘keyboard kurrency’. These macro economists are obviously suffering from micro brains.


  3. 1. Sanctions also helped out by disguising the inevitable recession from the oil price collapse as the result of Western hostility to Russia.

    2. My medium-term bet is that sanctions are going to increase (so scenario #3). Democratic hostility to Russia has taken psychotic characteristics; the Republicans appear to be in electoral trouble; and Trump’s own approval ratings keep going down and down, even as he surrounds himself with neocons and sundry Swamp creatures. Not a stable situation and it is not going to resolve in Russia’s favor.

    Liked by 1 person

    1. Huh. I got the opposite impression: the Trump administration survived and stabilized. The economy is already better than anyone can remember. Nafta is gonna die (more or less) in a few months. He earned some favors with the Jerusalem thing. All in all, he’s doing better than I expected, and it might really turn a corner next year. Russia is not going to be on the agenda. But we’ll see.


      1. Yes, we’ll see. The economy is indeed the one good thing going for him.

        He has “stabilized” his administration but at the cost of ejecting all the ideological Trumpists. Now Trump is indeed in the stage of offering the neocons he replaced them with “favors” so that they don’t eject him too.

        Predictwise is giving Trump *lower* chances (50%) of finishing out his term than at the start of the year (60%).


      2. Да куда ж он нахуй денется, as they say. Surely, your ‘predictwise’ thing has to be heavily affected by droves of unfortunate liberal souls still suffering from the exploding head syndrome.

        Liked by 1 person

      3. “… unfortunate liberal souls still suffering from the exploding head syndrome.”

        That’s probably more of a /r/politics and Blue Checkmarks on Twitter thing.

        The people on gambling and prediction sites have to actually put their own money where their mouths are, which is wonderful for focusing on the real issues.


  4. Russia needs to prepare for the worst.

    The Russia gate lies have been effective at neutering Trump – that sanctions bill which will target individual business people could be very destabilising – unless Russian govt has a plan B to mitigate the effect.

    The business people oligarchs are being targeted in order to effect a coup.

    -How to neuter this? If the business men /oligarchs don’t own the business then these individuals should not be subject to sanctions.
    The state could buy/ nationalise the buisiness?

    – next year we will see the democrats win more seats and the impeachment of trump will gather pace with more blame Russia.

    – the democrats with the help of republicans who hate trump will push for more sanctions.


    1. “The business people oligarchs are being targeted in order to effect a coup.”

      Hey, James! Wanna bet? Wanna bet that any/all of your predictions will come real next year, including a “coup attempt” in Russia? Or are you justengaged in what we in Russia call “жопологизм”, it’s like alcoholism, only you indulge in the “predicting” (actually – wishing for) the worst case scenarios?


      1. No not wishing for the worst – I am just stating what could happen.

        Sanctions are not going away – the purpose of the sanctions is to divide society and set one group against another.

        – the sanctions on individuals business people and their assets if they are seen to be close to the president – is designed to undermine the leadership.

        I am not saying this will work but what is planned

        And therefore one must have s strategy to deal with every attack


  5. The reason why there are sanctions is not because the West truly believes that they (might someday) work and change Russia’s behavior. They are in place, because the alternative is war.

    NYT: Trump Delivers a Mixed Message on His National Security Approach


    “The national security strategies of past administrations were sometimes strong predictors of future action: It was Mr. Bush’s 2002 strategy that revived a national debate about the justifications for pre-emptive military action. And it helped frame the rationale for the invasion of Iraq six months later, arguing that the risks of inaction in the face of a major threat made “a compelling case for taking anticipatory actions to defend ourselves.”

    The new strategy never uses the word “pre-emption,” including in its discussion of North Korea. This omission comes despite the fact that Mr. Trump’s national security adviser, Lt. Gen. H. R. McMaster, has said that if diplomacy and sanctions fail, “preventive war,” or a pre-emptive strike, might be needed to keep the North from attacking the United States. ”

    Here you go. If the US finally realizes that the sanctions does not work, it will start preparing for “pre-emptive” war.


  6. Professor, you yourself wrote about it numerous times – the answer to “why?” is the prevalence of “can-do!” attitude in the Western establishment and “do nothing” never being an option. It doesn’t matter that there is no intended effect afterwards – the simulation of activity is more important than the end result.

    E.g. In Defense of Nothing

    “While it may come as a surprise to outside experts, the policy process in the U.S. government will likely bring these points to the surface. The assumptions underlying U.S. policy in Syria will be questioned, priorities recalibrated, and available resources scrutinized. Out of this will follow what is normally a sober, fairly rigorous evaluation of possible strategies. True, we are in the midst of a presidency that has vilified expertise and set new land-speed records for policy incoherence, but the presence of seasoned professionals in departments and agencies will ensure something approximating this sequence of events ensues. The U.S. policy debate will not be a ramshackle exercise in wishful thinking.

    And, yet, there is a high probability that the policy process will recommend a new strategy for Syria that ignores these historical lessons and drastically exaggerates what can be achieved with a finite set of resources. During our time in government service in the National Security Council and the Department of State, we saw this scenario unfold countless times.

    The dynamic that continually produces this outcome is fairly simple and, in a certain way, is to the credit of the policy professionals in the U.S. national security apparatus. They represent after all, the United States of America. It is, by virtue of its history and culture, an extremely optimistic place. And why not? It is the richest and strongest country on earth. Its history, despite many blemishes, has been one of nearly unalloyed progress. It has won both world wars, put a man on the moon, and invented nuclear weapons, baseball, and on-line dating. It is hard to tell the leaders of such a country, not to mention its people, that something is impossible. In areas remote to most Americans, such as Syria, the hard part is supposedly summoning the national will to succeed rather than having the capacity to do so.

    This cultural trait means that when a hard problem like Syria hits the headlines, doing nothing is a politically and bureaucratically unacceptable answer. So, as the policymakers struggle with the hard reality that the resources necessary to achieve the objective simply don’t exist, some entrepreneur in the back of room always stands up at a critical moment and says, “Wait, I have an idea, we can get what we want with a relatively limited commitment, we can have our cake and eat it too.” With enthusiasm bubbling out of his ears, he continues, “I know this mission has failed the last several times we tried it, but we’ve studied the lessons of those failures and this time will be different.” Usually he attaches a new buzzword like “counter-insurgency” or “precision strike” to what is actually old hat. Politically, it is precisely what the policymaker needs and he seizes on it.

    Internal opposition is dismissed as an un-American counsel of despair. Outside commentators like Itani rightly critique the lack of resources devoted to the plan. But they miss that the United States, with its broad range of global security responsibilities and shaky political will, simply can’t afford to do more and refuses to do nothing. A limited, calibrated approach, combined with a healthy dose of can-do optimism, is usually the answer. When it fails, the pressure for escalation follows.

    While a can-do spirit is certainly desirable in government institutions, particularly the military, too much of it leads to overreach and failure. At a moment in which the United States has multiple security commitments around the world and a new era of great power competition with Russia and China is dawning, it risks becoming the can-do threat to American security and prosperity.”


  7. I never fully understood the reason for the dramatic drop in oil prices that was decided upon around 2014 — indeed, never partially understood it either. But I do know that the US was definitely the winner. Not only did the US increase its exports of all the oil it coughed up through fracking and other methods of spoiling its environment further, the two hated regimes it was never able to change — Russia and Venezuela as primarily oil exporting states — took a huge hit. But their regimes didn’t collapse, although Venezuela came pretty close.

    So my guess is that Washington will go for the third option, now that there is legislation to make slapping on new sanctions a lot easier in the crazed hope that the Russian economy will crumble to dust.


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