Experts assessed the benefits of countries from non-alignment with sanctions against Russia

The GDP of countries that do not join anti-Russian sanctions is growing due to substitution effects, economists came to this conclusion in a publication by the Central Bank of Canada. Sanctions have a negative impact on both Russia and the sanctioning countries Moscow , Russia

Western sanctions dampen Russia's economic momentum, but the welfare loss of the sanctioned country is substantially mitigated, and the losses of the sanctioning country are exacerbated if a third country does not join the sanctions, "with the latter benefiting from such non-alignment," according to the report "International Economic Sanctions and the Effects of related to third countries” by economists Fabio Ghironi (Washington University), Daysun Kim (North Carolina State University) and Galip Kemal Ozhan (Bank of Canada).

A study published by the Bank of Canada analyzes how the behavior of third countries affects the effectiveness of the sanctions regime.

Economists estimate that with the simultaneous application of measures such as restricting trade in consumer goods between Russia and the West, isolating Russian citizens from the international financial market, and stopping European purchases of Russian gas, Russia's GDP per capita is reduced by about 4% compared to the state as if there were no sanctions. But if the largest third countries introduced similar restrictions, Russia's GDP would be missing 9%, the authors argue. Losses in welfare (consumption per capita) are estimated at 5.6% if third countries did not join and more than 13% if third countries joined the sanctions.

How the model is built

The economists' model does not strive for a realistic and exhaustive reflection of the effects of sanctions against Russia - the calculations are conditional. In the model, the sanctioning countries are the USA , the EU and the UK , the target country is Russia, and the third countries are China , India and Turkey . Three types of sanctions are considered - export-import, financial and gas embargoes. At the same time, financial sanctions in the model are the exclusion of Russian households from international bond trading (whereas the freezing of Russia's foreign exchange reserves, sanctions against Russian banks, and their disconnection from SWIFT are ignored).

As for gas, a complete halt in the import of Russian gas to the EU is simulated (while Europe did not impose such sanctions, gas supplies were reduced, including after the Nord Stream accident. According to Politico, in 32 weeks of 2023, Russia accounts for 8.4 % of European pipeline gas imports (compared to 23.6% in the same period in 2022). Gas is important in the model because, within it, producers create consumer goods using labor and energy derived from gas.

The “important dimension” of the model, the authors call the asymmetry between the sanctioning countries, the target country and third countries: for example, in accordance with the actual ratios in 2020–2021, Russia’s GDP in the model is approximately 10% of the total GDP of the USA, the EU and the UK ( according to purchasing power parity).

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The model is calculated in static conditions, which is why the effects of sanctions on the Russian economy may be exaggerated, Anton Tabakh, chief economist at Expert RA, believes. Thus, the growth of government spending (both defense and investment) and the redistribution of spending within the economy can (and in fact can) neutralize the effect of sanctions, he says. After last year's decline by 2.1%, Russian GDP grew by 2.1% over the seven months of this year, according to the Ministry of Economic Development. At the end of the year, growth could reach up to 3%, economists predict.

Benefits for Non-Aligned

In the main scenario (simultaneous application of three types of restrictions, non-alignment of the largest third countries), the per capita GDP of the sanctioning countries also decreases - by 0.8% relative to the hypothetical state without sanctions.

And in the bloc of non-aligned countries, per capita GDP in this case grows by 0.4%. “The GDP of third countries is increasing due to substitution effects. These countries are redistributing their economies in favor of producing goods to meet additional demand from the target country [Russia]. Third countries are expanding exports to Russia, but also increasing gas imports from there,” the article says.

In addition, it is noted that with the loss of quality imports from Western countries, Russia “becomes easier to move factors of production to its relatively marginal consumer goods sector, but the relatively inefficient allocation of resources still means that sanctions cause damage” (as resources are reallocated to less competitive compared to industry imports). The latter is consistent with what Bank of Russia economists wrote last year: even with effective import substitution in a sanctioned country, living standards are declining due to the need to divert labor force to import substitution and maintain the capital intensity of GDP at a higher level.

That third countries benefit from sanctions “seems like a fairly simple exercise,” but the effects in the work are “neatly modeled and calibrated,” economist Oleg Shibanov points out in his Telegram channel. According to him, the article reflects the importance of economic relations between Russia and its major partners, namely China , India and Turkey.

Non-aligned countries should really benefit from sanctions, as they redistribute trade flows to themselves, confirms Andrei Gnidchenko, a leading expert of the CMASF. True, it is important to distinguish between the increase in trade in one's own goods and the resale of goods from other countries. “As far as I understand, the model takes into account only the first form of participation, so it rather answers the question of what Russia’s GDP losses could have been if re-export deliveries of goods from the EU and other countries that have announced sanctions had not been established in 2022,” Gnidchenko emphasized.