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Op-ed

Let's Work Together on Sanctions

by Simeon Djankov, Peterson Institute for International Economics

Op-ed in Kommersant, Moscow
August 28, 2014

English language version © Peterson Institute for International Economics


The Russian and European economies have something in common: They are not growing. According to the latest numbers by the International Monetary Fund (IMF), the Russian economy will grow a measly 0.2 percent this year, and at 1 percent in 2015. The IMF's World Economic Outlook forecasts a 1 percent growth for the euro area this year and 1.5 percent next year. Its report was, however, published before the disappointing numbers for second quarter growth in the euro area: Growth was flat, with France, Germany and Italy recording negative or no growth.

The lack of economic growth is not a new phenomenon in either economy. Russia's deceleration started after 2012, with a growth of only 1.3 percent last year. The euro area has endured several years without growth, recording negative growth rates of –0.7 percent and –0.4 percent in 2012 and 2013, respectively. Both economies also suffer from long-term problems: demographic decline and an increasing gap in technology and energy costs with the United States and parts of Asia. 

Once the evidence on the costs of sanctions is corroborated by both Russian and European businesses, they can jointly initiate discussions with their politicians. Otherwise the economic benefits from bilateral trade remain far in the background.

In these circumstances, the recent economic sanctions that the European Union and Russia have imposed on each other will only make matters worse. On top of a longer-term lack of growth prospects, there is now a temporary adverse shock to both economies.

How large the adverse shock is remains to be calculated. Various figures have been suggested by economists: Former Russian Finance Minister Alexei Kudrin put Russia's possible economic losses at about €50 billion a year, although this figure includes both sanctions by Europe and the United States.  EU exports of the food products banned by Russia—meat, seafood, dairy products, fruit and vegetables, other foods—are worth between €5.3 and €6.8 billion annually, according to the European Statistical agency Eurostat.

Exports from the euro area to Russia account for less than 5 percent of the bloc's total. So on the surface, the losses should be small. Yet certain economies will be more affected. Italy exported €12.7 billion to Russia last year, and France more than €10 billion. Smaller economies will suffer too, particularly those with large agricultural exports. The Dutch statistical office estimated in August that the temporary loss of Russian markets to its Dutch agricultural and food sector will be €200 million, with another €300 million in indirect annual losses coming from reexports of Dutch produce through the Baltic states. Romania stands to lose about €40 million: In 2013, it exported 2.3 percent of its fruit and vegetable production to Russia. Bulgaria's Union of Agricultural Producers estimates the loss at €14 million.

But the biggest problem is the increased uncertainty for investors and the blow to business confidence. European investors have many ongoing projects in Russia that now face delays or possible cancellations. Similarly, Russian investors have been active in European markets but now would be looked at with increased suspicion.

Some economists have made light of the difficult situation. "Having introduced import restrictions in response to the sanctions, we are presented with a great opportunity to develop crucial sectors such as agriculture and food processing," Russian Economic Development Minister Alexei Ulyukayev argues in a recent article in the Kommersant. This is far from the truth. Autarky–with its limits on trade—never helps the economy, as students of economics know. It only distorts it and especially hurts consumers. Temporary distortions are even worse. Local producers may decide to overinvest in capacity, only to see markets open again and returns to their investment plummet.

What can help in such a situation? In my view, one can start with an honest discussion in the Russian business community on the true costs of sanctions. There are simple methodologies to calculate these costs and their distribution across sectors and over time. This initiative will give a more precise argument of why sanctions—on both sides—are detrimental and who bears the brunt of their costs. The estimates can be made not just in lost trade but also in lost jobs.

Second, with these estimates in hand, Russian business associations can seek dialogue with their European partners. Numerous European business leaders have been quite vocal about the negative effect of sanctions on their economies. In contrast, Russian business leaders have been conspicuously absent from the debate.

Finally, once the evidence on the costs of sanctions is corroborated by both Russian and European businesses, they can jointly initiate discussions with their politicians. Otherwise the economic benefits from bilateral trade remain far in the background, and the daily fill of political posturing overwhelms common sense. This makes the task of politicians to find a compromise more difficult. It doesn't have to be this way. Let's work together to find a solution.


RELATED LINKS

Book: Economic Sanctions Reconsidered, 3rd edition (hardcover plus CD-ROM) May 2008

Paper: Case Studies in Economic Sanctions and Terrorism May 2008
Revised June 2012

Policy Brief 01-11: Using Sanctions to Fight Terrorism November 2001

Working Paper SPECIAL: US Economic Sanctions: Their Impact on Trade, Jobs, and Wages April 1997

Policy Brief 98-4: Sanctions-Happy USA July 1998

Op-ed: The Snake Oil of Diplomacy: When Tensions Rise, the US Peddles Sanctions July 12, 1998

Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011