Russian Roulette: The High-Stakes Game of US-EU Sanctions on Russia

By: Yash Mundra


Decoding Sanctions: When Diplomacy Meets the Economy

Nations deploy economic sanctions as a critical tool to sway or coerce another state’s behavior, primarily for political or economic objectives. These coercive measures can take the form of trade embargos, freezes on financial assets, or restrictions on technology transfers. Despite the common perception that sanctions solely impair the targeted nation, the reality is far more complex. While sanctions primarily aim to pressure targeted countries, it’s critical to scrutinize their reciprocal impact on the enforcing countries’ economies.

Imposing economic sanctions inherently restricts trade and investments with the sanctioned nation. This reduced market access potentially triggers profit losses and job cuts in the enforcing country, hitting particularly hard in sectors that rely heavily on international trade. It thus becomes imperative to consider the far-reaching impacts of such decisions, given the interconnected nature of global economies.

On the 24th of February, 2022, Russia invaded Ukraine in an escalation of the Russo-Ukrainian war, which began in 2014. On the battlefield, a catastrophic war has created death and destruction. Beyond it, the Western countries trying to cripple the Russian economy have waged an economic war by using their arsenal of sanctions. In this article, we intend to analyze how the impact of the sanctions on the sanctioned country compares to the effect of those sanctions on the imposing country. We will analyze this through the lens of the Russo-Ukrainian war.

The war started in 2014, and Russia was hit with a few sanctions, but the frequency and intensity of the sanctions imposed in the year 2022 were far greater. Therefore we have restricted our analysis to the sanctions imposed in the year 2022. [1][2]

Data Analysis Approach

To test this hypothesis, we have devised a unique data analysis approach focused on isolating the impacts of the sanctions on these economies using three vital economic indicators:

1. Gross Domestic Product (GDP) growth rate,
2. Consumer Price Index (CPI) inflation, and
3. Unemployment Rate.

These indicators serve as essential measures of economic health, indicating the economic growth rate and the price stability level. We intend to analyze these metrics for the following groups:

1. Sanction imposing countries – US, EU
2. Sanctioned countries – Russia

We have considered the impact from Pre-sanction years (2019-2021) to Post-sanction years (2022). We chose 2022 as the cutoff year because that is when the war gained momentum. A whopping 107 sanctions were imposed on Russia starting from February 2022 till June 2023. [3]

Of these, 29 were imposed by the US, and 30 were imposed by the EU (the numbers are not mutually exclusive). Thus, we have chosen the US and the EU as the two “sanction-imposing countries” for analysis. Do note that though the UK imposed 32 sanctions, it includes the after-effect of Brexit followed by Covid and an energy crisis, making it hard to isolate the impact of sanctions. Consequently, we had to exclude the UK from our analysis of the EU. [4]

While performing this analysis, the challenge is that in addition to the impact of sanctions, the selected economies suffer from the fallout of the following issues.

2. Direct Impact of the War beyond sanctions

The same can be better understood after looking at the following equations:

1. US, EU = COVID + Sanctions
2. Russia = COVID + War + Sanctions

The next step was to find a way to isolate the impact of sanctions only. To do so, we needed to eliminate the effects of COVID and War.

Part 1: Measuring the impact of sanctions on the US and the EU

US, EU = COVID + Sanctions

We selected a group of eleven countries (China, Japan, South Korea, Mexico, India, Thailand, Brazil, Indonesia, South Africa, Chile, Peru) that did not heavily depend on Russia and Ukraine for trade, i.e. the top 5 exporters and importers for these eleven countries are not Russia/Ukraine. These countries, thus, wouldn’t be directly or indirectly affected by the war and would provide the best approximation to evaluate the effect of the pandemic. [5]

For these 11 countries, we measured our 3 indicators:

● GDP growth rates,
● CPI inflation, and
● Unemployment rates

Since these countries were “only” affected by COVID, these would help us isolate its impact from Pre-sanctions (2019-2021) to Post-Sanctions (2022) duration. The underlying assumption here is that the effects of sanctions start surfacing in the same year as they were imposed, i.e, 2022.

Since their impact cannot be directly subtracted from that of the US and the EU, we used a “haircut” of 10% to adjust the effect of 11 countries. Which is to say, since these economies aren’t as powerful as the US and the EU, they were slightly (10%) more affected by COVID. So we adjusted the number to make it comparable with the US and the EU.

Using the resultant impact, we arrived at the estimated indicators of the USA and EU had they not been struck by COVID. This adjustment helped us negate the consequences of exogenous factors like the COVID-19 pandemic, thereby isolating the effects of the sanctions.

Part 2: Measuring the impact of sanctions on Russia

Russia = COVID + War + Sanctions

To ascertain the impact of sanctions on Russia, we needed to eliminate the effect of COVID and War both. Thus we had to find a country only impacted by the war and Covid, but not sanctions.
Enter Ukraine.

However, one challenge here was to directly subtract Ukraine’s impact from Russia. We cannot compare the effects between the two countries. Their economies vary significantly in size. Thus, we used a much larger “haircut” of 90% on the change in its GDP growth rate, CPI inflation, and Unemployment rates to make Ukraine’s impact comparable to Russia’s. This comparison
allowed us to arrive at a GDP growth rate for Russia had it not been affected by COVID and the war, thereby isolating the impact of the sanctions.

Results: The Blowback Phenomenon

Detailed Analysis

GDP Growth Rate:

The Gross Domestic Product (GDP) growth rate is a primary measure of economic performance. When this rate is negative, it signifies an economic contraction, denoting a decrease in the total production of goods and services.
In this case, the US economy has experienced a growth rate of just 0.30%, significantly lower than the predicted growth rate of 1.73%. This represents a decrease of 1.43%.
The decrease of 1.43% is thus likely attributable primarily to sanctions imposed by the US government.

Meanwhile, the EU presents a contrasting scenario. Despite imposing sanctions, it reported a GDP growth rate of 2.97%, comfortably surpassing its expected rate of 1.73%. However, this elevated growth rate doesn’t necessarily indicate that the EU was immune to the sanctions.

Rather, it appears to be largely due to the €2.018 trillion (current prices) economic stimulus packages that the EU implemented. [7]

Economic stimulus packages help counteract the adverse effects of monetary shocks by encouraging spending and investment. However, it’s important to note that these stimulus packages’ beneficial effects are unlikely to be a permanent solution. Without them, the EU would likely have experienced a significant downturn similar to that of the US. In Russia’s case, the sanctions have significantly compounded an already challenging economic landscape. The observed GDP growth rate was -3.8%, which falls below the projected rate of – 3%. This additional decline of 0.8% underscores the consequences of the sanctions.

These sanctions have seemingly worsened an economic contraction for Russia, as highlighted by the negative GDP growth rate. This downward trend can be attributed to several factors stemming directly from sanctions:

● Sanctions curtailed Russia’s capacity to trade
● Sanctions restricted access to international financial markets and foreign    investments
● Sanctions resulted in a hostile business environment, triggering a downward economic spiral

CPI Inflation:

Inflation, reflected by the Consumer Price Index (CPI), represents the average price variation over time for a range of consumer goods and services. An increase in this index signals a rise in inflation and, subsequently, a decrease in the purchasing power of money, as consumers must pay more for the same basket of goods and services.

In the case of the USA, the sanctions imposed resulted in an uptick in the CPI inflation to 12.99 points, surpassing the forecasted figure of 10.27 points by 2.72 points. The escalation in inflation can be tied to several factors connected directly to these sanctions.

Sanctions often result in increased inflation through multiple channels:

● They create trade barriers that restrict the supply of imported goods and services, leading to price inflation due to the resulting scarcity
● They can destabilize exchange rates, potentially devaluing the domestic currency and rendering imported goods and services more expensive
● The unpredictability induced by sanctions can discourage investments and hamper productivity, contributing further to inflation

Simultaneously, despite being one of the imposers of the sanctions, the EU also saw an increase in inflation. The EU’s CPI inflation climbed to 12.56 points, exceeding the anticipated 10.27 points by 2.29 points. Like the USA, the sanctions likely played a central role in driving this inflation surge.

Consequently, despite being the imposers of the sanctions, the USA and the EU felt substantial inflationary pressures.The increases – 2.72 points in the USA and 2.29 points in the EU highlight the broad economic impact that sanctions can have, affecting growth and leading to inflationary consequences. [8]

The sanctions imposed by the USA and EU have had a pronounced impact on Russia’s inflation rate. Specifically, Russia’s observed CPI inflation spiked to 24.98 points, a drastic increase from the anticipated rate of 4.68. This escalation by 20.3 points illustrates the far-reaching economic implications of these sanctions.

In Russia’s case, the immense surge of 20.3 points in inflation can be seen as a direct result of the sanctions. Such a sharp rise in prices directly affects the population, reducing people’s purchasing power and lowering living standards. It’s also likely to pressure the government to implement policies to control inflation, which can be challenging during economic hardship.

Therefore, the consequences of the sanctions have significantly impacted Russia’s economy, reflected in the steep inflation surge.

Unemployment Rate

The unemployment data for the USA and EU, both of whom implemented sanctions against Russia, show observed changes in unemployment of -2.07% and -0.88%, respectively. These negative values indicate a decrease in unemployment – ostensibly, a positive outcome.
However, these figures must be contextualized to be correctly understood.

The reason for these larger-than-expected decreases in unemployment was likely a result of artificial stimuli. Both regions implemented costly COVID recovery stimulus packages. Moreover, the USA implemented the Employee Retention Credit to encourage businesses to keep employees on their payrolls. While effective in the short-term at reducing unemployment, these measures can have adverse longer-term effects like inflationary pressures.

Russia, as the recipient of the sanctions, showed an observed decrease in unemployment of -1.13%. However, based on the performance of Ukraine (which was directly affected by the war), an increase in unemployment of 1.54% was expected, reflecting a discrepancy of 2.66%.

While this might seem positive at first glance, the reasons behind this drop in unemployment point to potential economic instability. Much of this decrease can be attributed to factors tied to the ongoing conflict:

● Increased military spending (creating jobs within the army and related sectors)
● Displacement of workers (leading to changes in the workforce distribution)
● Public works (possibly initiated as a response to infrastructural damage or strategic
wartime needs)

These factors may decrease unemployment in the short term. Still, they do not necessarily indicate a healthy or sustainable economic situation.

In summary, while the sanctions have led to decreased unemployment in both the sanctioning and sanctioned countries, the reasons behind these changes may indicate potential economic instability in the future. In the case of the USA and EU, it’s likely due to the large stimulus measures taken, while in Russia, it’s likely due to factors associated with conflict and war.

Conclusion: “Sanctions? I don’t mean to impose!”

The data-driven comparison accentuates the mutual consequences of sanctions on both the subject and the instigators. While Russia, the country under sanctions, endured substantial economic repercussions, the nations imposing the sanctions—the USA and the EU—were not invulnerable to the aftereffects of their decision. The data illustrates a slump in GDP growth rates coupled with an upswing in CPI inflation across both clusters of countries. However, the severity of these impacts varied.

Questions for the curious mind

This raises a pertinent question – Should large economies like the US and the EU unilaterally exert their power and interfere in a local conflict at all?

This is a complex question, with different schools of thought providing different perspectives. It is crucial to underline that the ‘principle of sovereignty’, a cornerstone of international law, underscores the right of each state to govern itself without external interference. However, in an increasingly interconnected global community, the right to sovereignty competes with the notion of a ‘responsibility to protect.’ This principle suggests that international entities must intervene when populations risk severe human rights abuses, like genocide or ethnic cleansing.

Thus, while larger economies like the US and EU technically can exert their power and intervene in local conflicts, whether they have the right to do so is a matter of perspective and depends on the specific circumstances. Such intervention must balance respect for sovereignty, the principles of international law, humanitarian concerns, and global power dynamics. Ultimately, it is a decision that carries significant responsibility and should be treated with the utmost seriousness.

This raises another question – How can one determine whether a country would be able to withstand or be crippled by sanctions?

Evaluating a country’s ability to handle sanctions involves analyzing its economic, political, and societal contexts. The ability to shift trade relationships and maintain domestic resilience, such as self-sufficiency in essentials like food and energy, also plays a part. Governments with firm control and populations with high nationalism can effectively manage the effects of sanctions. [10]

The resilience to sanctions often differs between developed and developing nations, primarily due to variations in economic structures, political stability, and international relationships. Developed countries (like Russia) with diverse economies, robust financial reserves, and numerous international trade partnerships can better adapt to sanctions. Their influence in international forums and alliances also provides negotiating power.

Conversely, developing nations may face more significant challenges due to heavy reliance on single industries, lesser financial reserves, and weaker influence in international forums. Their vulnerability is exacerbated by political instability and more vulnerable institutions. However, the impact varies with each nation’s unique circumstances, including the nature and extent of sanctions, and often incurs a high human cost.

The bottomline is the bigger the country, the better equipped it is to withstand the effect of sanctions.

To sum up, it’s clear that in the world of international politics, economic measures aimed at a specific country can have surprising effects. What’s been uncovered through our research is that such actions don’t only impact the target country; they can also have unintended consequences on those who impose them. It’s much like a boomerang, or Karma even — you throw it out, and it comes back around.



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