Simulation shows: These sanctions would hit Russia's economy hardest

Created: 02/24/2022 05:37

By: Michelle Brey

Workers at a pumping station of the "Druzhba" pipeline near the village of Bobovichi, about 330 km southeast of Minsk.

© Sergei Grits/dpa

What sanctions would have to be imposed to hit Russia's economy hard?

Calculations by the Institute for the World Economy provide information.

Kiel – The Ukraine-Russia conflict* escalates.

While Vladimir Putin is sharpening his tone, Ukraine is preparing for war, the EU, the US and other Western countries have imposed sanctions*.

For the time being, the measures are aimed at the Russian financial sector and individuals close to Putin.

Calculations by the Kiel Institute for the World Economy (IfW) now show what measures would be necessary to hit Russia's economic situation hard.

The economist Hendrik Mahlkow at the IfW simulated the trade actions with which the West would hit the Russian economy the hardest.

Sanctions on Russia: what would be painful for the Russian economy

As a result, possible sanctions against the energy sector are likely to be painful for Russia - because, according to the rating agency Fitch Ratings, the country plays a "key role" on the global commodity markets.

Sanctions against the energy sector are therefore a sharp sword.

The IfW announced this on Wednesday.

"Accordingly, a ban on gas trade would result in a slump in Russian economic output of almost three percent, and a ban on oil trade would result in a slump of a good one percent," is the finding.

"For Germany and the EU, the economic damage would be extremely small in both cases." According to the IfW, it does not matter whether an import embargo is imposed by the EU or whether Russia decides on a delivery embargo.

Sanctions against Russia: Stop trading in gas would slightly increase German GDP

According to the IfW, in the event of a trading stop for gas, the German gross domestic product (GDP) would even increase slightly by 0.1 percent.

"The reason for the plus is that the western allies would replace the missing imports from Russia with products from the alliance partners and Germany is particularly competitive here," says the Kiel institute.

"In the event of a gas embargo, Germany would have a cost advantage in the energy-intensive production or processing of metals, for example, because its energy mix consists of only a relatively small proportion of Russian gas."

According to IfW calculations, a trade embargo with oil would result in a 1.2 percent decline in economic output in Russia, but only by 0.1 percent in Germany and the EU.

The institute estimates the macroeconomic effects of an embargo for machines and machine parts as well as vehicles and vehicle parts to be lower.

These caused Russia's economy to shrink by 0.5 percent and 0.3 percent, respectively.

Here, too, the IfW assesses the effects on the economic performance of Germany and the EU as minimal.

Calculations by the IfW: "Russia's threat to stop gas and/or oil deliveries is not very credible"

"Our calculations are of an exemplary nature, but they clearly show that the medium-term economic consequences of trade embargoes would hit Russia much harder than its western allies," Mahlkow said, according to an IfW press release.

For example, "Russia's threat to stop deliveries of gas and/or oil is not very credible".

“On the other hand, a halt to Nord Stream 2 by the federal government is absolutely understandable.

This does not further strengthen Russia's geopolitical position, and it does not per se mean that Russian gas supplies have to decrease further,” Mahlkov continued.

On Tuesday (February 22), Chancellor Scholz took action in response to the escalation in the Ukraine crisis.

The Nord Stream 2 gas pipeline will not go into operation for the time being.