The analysis: “Serious impact of sanctions on Russia, but risk of shock on raw materials”

“They are a powerful tool, but when applied to a large and integrated country like Russia they can have a knock-on effect for the global economy. Hence the difficulty in finding the right balance in calibrating the measures”

The sanctions against Russia are having a large impact on its economy, but the imposition of further measures, including those on oil exports, if not mitigated by careful policies to mitigate the cost, could cause a shock to supply and prices of raw materials. This is the analysis contained in a work by Emidio Cocozza and Michele Savini Zangrandi, of the Bank of Italy’s Economy and International Relations service one year after the start of the war in Ukraine, which underlines the difficulty “in finding the right balance in calibrating the measures”.

In reconstructing the impact that the sanctions have had on the Russian economy, the eleventh in the world, the two economists state that “globalization increases the ability to impose economic, financial and technological restrictions on Moscow, but at the same time amplifies its repercussions on the world economy…None of the sanctioning regimes introduced since the post-war period has ever affected a country with an equivalent impact on the world economy and international trade”.

In such a complex framework, there are also “significant uncertainties regarding the effectiveness of sanctions”. And in fact, Cocozza and Savini Zangrandi underline, “in their initial phase, the sanctions did not limit Russia’s ability to continue exporting raw materials: combined with the sharp rise in international prices, this allowed the country to ensure a strong trade surplus and the continued inflow of foreign exchange, and the ruble, after an initial weakening, returned to pre-war levels”.

“These developments have been interpreted as an indication that the sanctions have had a limited effect on the Russian economy”, write the two economists, explaining however that “the appreciation of the ruble can do little in the face of the scarcity of inputs and quality problems of potential substitutes”. Because “trade sanctions have caused a contraction in imports that is creating significant problems for Russia. Despite import substitution attempts, it remains heavily dependent on advanced economies for a wide range of critical imported components and services. inventories of imported goods, the negative effects of the sanctions on production, investment and inflation will fully manifest themselves”.

“Furthermore, in the medium to long term, the productivity and growth potential of the Russian economy will be reduced due to lack of access to advanced technologies, loss of trade links and sources of supply, and possible exodus of skilled workers,” foresee Cocozza and Savini Zangrandi.

“An objective assessment must recognize that the sanctions are having a serious impact on the Russian economy, undoing more than a decade of economic growth and integration and fundamentally transforming the country.” Concerns of this type – they underline – are also expressed in a confidential document of the Russian Central Bank. “Similar to what often happens in warfare, economic sanctions produce their effects by friction, over time weakening the economy of the country on which they are imposed, limiting its options and denying it strategic capabilities'”, explain the two economists.

The war in Ukraine, which broke out a year ago, adds to a context of turbulence in the global economy, with “energy prices, which have already risen since 2021 due to the first drops in supplies from Russia and logistical bottlenecks during the post-pandemic economic recovery, which rose further after the outbreak of hostilities”. For this reason, warn the two economists in the study drawn up before the ban on Russian oil that came into force in December, “the imposition of further sanctions on Russian oil and gas exports, not mitigated by careful policies aimed at mitigating the cost, together with the disruption of Ukrainian exports, could cause a significant shock on the supply and prices of raw materials”.

“In conclusion – is their summary – sanctions are a powerful tool, but when they are applied to a large and integrated country like Russia they can have a knock-on effect for the global economy, due to economic and financial interdependencies. From this results in the difficulty in finding the right balance in calibrating the measures”.