Friendly fire: the trade impact of the Russia sanctions and counter-sanctions

Matthieu CROZET, Julian HINZ

Research output: Journal PublicationsJournal Article (refereed)peer-review

Abstract

Economic sanctions are a frequently used instrument of foreign policy. In a diplomatic conflict, they aim to elicit a change in the policies of a foreign government by damaging their economy. Sanctions, however, are also likely to affect the sanctioning country. This paper evaluates these costs, in terms of export losses, for the diplomatic crisis between the Russian Federation and 37 countries over the conflict in Ukraine that started in 2014. We first gauge the impact of the diplomatic conflict using a traditional trade framework and quantify the trade losses in a general equilibrium counterfactual analysis. Losses for the Russian Federation amount to US$53 billion or 7.4% of predicted total exports from 2014 until the end of 2015. Western sanctioning countries, however, have also been impacted with an estimated loss of US$42 billion, 0.3% of their total exports. Interestingly, we find that the bulk of the impact stems from products that are not directly targeted by Russian retaliation, an effect that we coin friendly fire – an unintended, largely self-inflicted cost for Western sanctioning countries. We investigate the underlying mechanism at the product- and firm-level data. Results indicate that the drop of Western exports has not been driven by a change in Russian consumers’ preferences, but mainly by an increase in country risk affecting international transactions with Russia.
Original languageEnglish
Pages (from-to)97-146
JournalEconomic Policy
Volume35
Issue number101
DOIs
Publication statusPublished - Jan 2020

Bibliographical note

Paper presented at the 68th Panel Meeting of Economic Policy, October 2018. An earlier version of this paper was titled ‘Collateral Damage: The impact of the Russia sanctions on sanctioning countries’ exports’. We are grateful to Banu Demir, Julien Martin and Florian Mayneris for generously sharing their data with us. We would also like to thank anonymous referees, Jezabel Couppey, Keith Head, Sebastien Jean, Claire Lelarge, Ariell Reshef, Gabriel Felbermayr and participants at seminars conferences at CEPII, Paris 1 University, University Paris Sud, University of Dusseldorf, the Chinese University of Hong Kong, University Milano Bicocca, CESifo (Venice Summer Institute), Kiel Institute, ETSG (Helsinki), WIFO (Vienna), the University of Nottingham (Ningbo) and Lingnan University for fruitful discussions and comments. We are also indebted to CEPII for financial and technical support.

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