Among western powers, Germany is hardest hit by anti-Russian sanctions. Biggest losses not from the counter-sanctions, but from “Friendly fire”


December 15, 2017, Fort Russ News –

– Deutsche Wirtschafts Nachrichten, translated by Tom Winter –

“Change of exports to Russia in comparison with a no-sanctions scenario for select countries”

The biggest part of the effect on Western exports is therefore “Friendly Fire,” i.e, a consequence of Western action.

Berlin. Russia sanctions affect Germany more than the Western powers
A study by the Institut für Weltwirtschaft (IfW) shows that Germany’s exports have been massively damaged by the Russia sanctions. By contrast, the USA, Great Britain and France are only marginally affected.

The EU summit has greenlighted an extension of economic sanctions against Russia over the Ukraine crisis. The heads of state and government decided the question “unanimously,” said EU Council President Donald Tusk on Thursday evening on Twitter. According to diplomats, the punitive measures will remain in force for another six months until the end of July next year. Moscow had previously expressed the hope that the EU and Russia could talk about reducing sanctions.

The IfW has published an interesting study on this topic, which shows that German companies are much more affected by the sanctions than the other major Western powers, the United States, Great Britain and France. 

The study shows that the negative factors are, above all, the limited possibilities of financing exports. In addition, the study finds that the slump in exports could not be offset in other markets. According to the study, Russia bears 60 percent of the burden and the sanctioning states 40 percent. Of these 40 percent, 90 percent are accounted for by the EU member states.

The conclusions of the IfW on the sanctions:

Trade and financial sanctions are a widely used foreign policy instrument. They are intended to damage the economy of the targeted country through barriers in the movement of goods, capital, and people in order to exert political pressure. In their modern form (“Smart Sanctions”) they promise a tailor-made measure with the possibility of fine-tuning, and a quick return to normal condition.

While the track record of sanctions on policy objectives is unclear (Drezner 2011), they do have a price that is often overlooked for private actors in sanctioning countries (eg Hufbauer et al., 2009). By limiting cross-border transactions, they harm domestic companies operating in the targeted country, which is currently of particular interest to the Russian Federation in terms of the sanctions regime.

In a recent study by Crozet and Hinz (2016), we examine the impact on exports from the Russian Federation and all major economies, whether or not they participate in the sanctions. In addition, we use the example of French companies to identify the mechanisms that underlie the overall effect at a micro-economic level.

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Sanctions against Russia and the Russian reaction

Following Russia’s participation in separatist movements in eastern Ukraine and the annexation of Crimea, 37 countries, including all EU Member States and the United States, imposed sanctions on the Russian Federation from March 2014 onwards.

These were further tightened in early summer 2014. In July, the EU and other countries imposed strict financial sanctions against a number of Russian financial institutions and industrial groups, mainly in response to the shooting down of a civil aircraft in eastern Ukraine.

Russia then responded with an embargo on certain foods and agricultural products from sanctioning countries. The intensity of economic relations before the sanctions and the large number of countries involved, which make up around 55 percent of world production, make this episode unprecedented and particularly instructive.

Global Impact of Sanctions and Countermeasures
In order to assess the impact of sanctions on trade, a counterfactual situation without sanctions is simulated in a structural gravity model. The intuition is to predict trade flows without sanctions and to compare them with the values observed under sanctions.

Our model takes into account changes in Russia’s import capacity when forecasting bilateral flows in a hypothetical world without sanctions, for example due to the collapse of oil prices and the devaluation of the ruble. As a database for estimation and simulation, we use monthly bilateral data from UN COMTRADE.

The total cost of Russian sanctions, measured as escaped trade, is estimated at $114 billion from the beginning of the conflict to the end of 2015, with approximately $ 70 billion or 61 percent of the total export loss to the Russian Federation. The export loss for sanctioning western countries amounts to about $ 44 billion, or about 0.4 percent of these countries’ exports and about 0.1 percent of their gross domestic product.

Importantly, trading losses on products covered by the Russian embargo, at just over $10 billion, are only a small fraction of the total loss. The biggest part of the effect on Western exports is therefore “Friendly Fire,” i.e, a consequence of Western action.

This result has a direct impact on the political debate in the sanctioning countries. Often arguments against certain sanctions relate only to possible retaliatory measures or the reduction of imports.

Instead, it shows that, at least in the case of Russian sanctions, sanctions and the diplomatic conflict as such have mainly caused losses in exports, which are not the result of retaliation, but of Western policy.

The European Union accounts for 90 percent of total lost trade in sanctioning countries and 93 percent of lost trade in non-Russian embargoed products.

However, the impacts are not evenly distributed across countries (Figure K1-1). Measured in terms of trade volume with Russia, trade losses in Norway and Australia are the strongest, with exports realized falling as much as 39 percent below estimated exports to Russia.

However, compared to total exports, Finland (trade loss of 1.7%), Poland (0.9%) and Germany (0.8%) are hardest hit.
German exports are on average around 727 million dollars per month lower than in the counterfactual no-sanction scenario, where lost trade is mainly related to product groups that are not subject to the embargo. The German share of total lost trade in the sanctioning countries is thus almost 40 percent, while other large geopolitical players such as the United Kingdom (7.9 percent), France (4.1 percent) and the United States (0.6 percent) are considerably less affected.

Some countries, such as Lithuania and Estonia, have even benefited from the sanctions. Moreover, Japan was not affected by the retaliatory import ban for certain goods (although the country had participated in Western sanctions), and exported significantly more of these goods to Russia than before the embargo, although the increase was low in absolute terms and export losses were could not make up for all other product categories.

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