The European Union has taken a firm stance against Russia by imposing a series of sanctions since Russia invaded Ukraine in February 2022. However, an analysis by the Leibniz Institute for Financial Research SAFE questions the effectiveness of these actions. Using pre-war data, a SAFE Policy Letter conducted by SAFE Research Affiliate Konstantin Egorov presents evidence that the international sanctions have had a much smaller impact on the Russian economy than expected.
Egorov identifies two key events that foreshadow the Russian economy’s ability to withstand the international sanctions packages. First, the sudden shutdown of one of Russia’s two zinc production sites in 2018 did not lead to a slowdown in the steel industry, which heavily relies on zinc as a commodity. Second, the paper highlights a significant increase in the cost of fuel, known as mazut, in 2020, which had virtually no impact on companies using it, even in regions where substitution with alternative fuels was difficult.
The SAFE analysis suggests that the stability of the overall economic production can be attributed to Russia’s heavy reliance on commodities. These are easier to replace than specialized manufacturers. In addition, the high profit margins of many commodity producers enable the Russian economy to withstand rising costs.
“It is crucial to distinguish between the short- and long-term effects of sanctions against Russia. While most commodity producers in the country do not require inputs to generate goods in their day-to-day operations, they may face challenges in upgrading or replacing their machinery in the long term. Increased costs for such equipment could significantly affect their decisions to continue business in the future,” explains Egorov.
The SAFE Policy Letter highlights that in 2021 only 6.6 percent of Russia’s exports and 49.3 percent of its imports consisted of highly specialized manufacturing goods such as machinery, cars, or production-related equipment. Most of Russia’s trade was in products closer to commodities than manufactured goods, including raw materials such as oil and gas, as well as chemicals, food, and textiles. As a result, Russian producers could easily adjust their operations in the face of higher costs – meaning that the sanctions missed their target.