Economists presented three scenarios for the impact of sanctions on Russia's GDP

Loss of imports could reduce Russia's GDP by 4–18%, and exports by 1–25%, depending on the scenario, the Institute of the Bank of Finland estimated. RUSSIAcan mitigate the effect of sanctions,but it will take time and alternative markets

Heli Simola, Senior Economist at the Bank of Finland's Institute for Economies in Transition (BOFIT, an institute specializing in the analysis of the Russian economy), assessed the impact of EXPORT and import sanctions on Russia's GDP in the short term. For a scenario analysis of the effects of Western trade sanctions, see BOFIT, published May 10.

Sanctions restricting the import of goods into Russia can reduce the country's GDP by 4–18%, depending on the scenario, export restrictions by 1–25%, also depending on the scenario.

“Trade sanctions could have a significant negative effect if Russia fails to find alternative markets for imports and exports,” says the BOFIT economist.

As considered in the institute

Simola based the 2019 input-output tables for Russia and other countries from the Asian Development Bank database (Rosstat collates similar tables for Russia, .xlsx). Such data systems, in particular, show which imported products and in what quantities are used in various sectors of the economy. In the case of imports to Russia, three scenarios are considered: the current sanctions regime (ban on the supply of dual-use goods, various technologies, luxury goods, etc. to Russia), the scenario of expanding the embargo on all goods and services of developed countries, and the conditionally extreme scenario of a complete termination of imports to Russia from all countries.

“Since input and output data are presented at a relatively high level of aggregation, we roughly position the current sanctions regime as a cessation of exports to Russia from developed countries (EU, usa , UK, Switzerland, Norway, Australia, CANADA, Japan, SOUTH KOREA and Taiwan) in the areas of mechanical engineering, electrical and electronic equipment, vehicles, aviation, financial intermediation and business services,” the author explains.

“We calculate the share of imports from these countries by relevant industries in use by all manufacturing sectors in Russia. For simplicity, we assume that these imports cannot be replaced at all by domestic production or imports from other countries in the short term. Thus, output will fall in proportion to the withdrawn imports. We then calculate the extent to which these output losses propagate to other industries through inter-industry linkages to estimate the effect on total output and value added in the economy,” writes Simola.

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How GDP will fall depending on the scenario

The analysis showed that under the current sanctions, gross value added in the Russian economy could decline by almost 4% (ceteris paribus).

In the second scenario (developed countries completely stop deliveries to Russia), the drop in total value added reaches 10%. Including in the textile industry of Russia, it can be more than 20%, in the production of rubber, plastics, and the chemical industry - from 20 to 30%.

Finally, in the third scenario, the complete cessation of imports to Russia leads to an 18% reduction in GDP, follows from BOFIT estimates.

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As for the bans on the purchase of products in Russia, as Simola recalls, the USA, Australia and Canada banned the import of Russian oil , oil products, gas and coal, the USA also banned the import of goods such as diamonds and seafood from Russia, the UK introduced restrictive import duties on a variety of Russian products, the EU has banned the import of coal from Russia (starting from August 2022) and some ferrous metals, etc. Calculations of the impact on Russian GDP are similar: an economist calculates the share of Russian products intended for export in a particular industry, proceeds from the assumption that after the embargo is introduced, this share of production is completely retired, and assesses the extent to which these effects spread to the entire Russian economy.

With the current sanctions, value added in Russia is reduced by only 1%. However, in the scenario of a complete halt of imports from Russia to the developed countries that have imposed sanctions, GDP is already reduced by 12%. Finally, in the extreme scenario of Russia's complete isolation from world export markets, value added falls by 25%.

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What reservations should be taken into account

This analysis is meant to serve for illustrative purposes only, as it leaves out several important caveats, Simola stresses. For example, the influence of import and export channels is estimated separately, but they cannot simply be summed up, in particular, because of the relationship between the export and import sectors. In the longer term, Russia will be able to replace at least part of the outgoing imports from Western countries with its own production and/or imports from other markets. “Russia may sooner or later mitigate the negative effects of trade sanctions, but this will take time and alternative markets for exports and imports,” Simola sums up.

Earlier, Bank of Russia analysts predicted four stages of structural adjustment of the Russian economy under the sanctions. Even a high degree of localization of production may not help if the missing imported components are unique and cannot be easily replaced with products from another manufacturer, the Central Bank said, adding that the domestic engineering and electronics industries are at risk. “In terms of establishing supplies from alternative foreign suppliers in the context of ongoing restrictions, the role of small intermediary foreign trade companies and “shuttle” small businesses (especially in the consumer segment) will increase,” analysts of the Central Bank noted.

While certain imports can be replaced by Russian production, in many cases import substitution is either not possible or would not make practical sense, the BOFIT researchers note in another paper from early May (.pdf). In some Russian industries related to mechanical engineering, computer technology, electronics and electrical equipment, import dependence reached 50–60% (according to data for 2018), according to BOFIT.

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What is known about import dependence in the most critical areas

In mid-March, when not all trade sanctions had yet been announced, economists at the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) estimated, using the same inter-industry balance data as BOFIT, that sanctions would bring the greatest harm to the pharmaceutical industry: the proportion of drugs from countries that imposed sanctions, accounts for almost half of the total final consumption of pharmaceutical products in the country (48.2%). In second place is the sphere of chemicals and products (44.7% of final consumption fell under sanctions), and in third place is the production of aircraft, ships, railway locomotives (32.2%). A significant dependence on imports from countries that have announced sanctions is also observed in the automotive industry (27%), the manufacture of rubber and plastic products (26.8%), the production of paper (19.9%) and electrical equipment (19.

In the high-tech sector, Russia has its own developers of computer-aided design (CAD) systems for designing microelectronics, which makes it possible to partially replace foreign systems with Russian counterparts. “However, you can immediately use Russian CAD systems only for relatively simple tasks,” notes CMASF in a May 12 review of the technological development of Russia and the world. The production of semiconductor devices in Russia is based on relatively old technical processes. Serial production of finished microelectronic devices is represented mainly by military and dual-use products. “The existing developments and production capacities in Russia make it possible to develop and produce semiconductor products of a limited range and in a limited quantity.