Barry Bosworth on the Effect of Sanctions on Russia’s Economic Slide

Russian officials are saying that falling energy prices will push their nation’s economy into recession in 2015. Russian President Vladimir Putin, who earlier this week canceled a new natural gas pipeline to Europe, is expected to unveil his economic agenda later this week. These developments occur in the context of continued Western sanctions against some areas of the Russian economy.

Brookings Senior Fellow Barry Bosworth, the Robert V. Roosa Chair in International Economics, gave the following comment to ABC about the effects of the sanctions on Russia, Europe, and the U.S.:

The sanctions have no economic effect on the United States because we do not trade with Russia to any significant degree. Thus, they are a painless, feel-good action for the United States. They are, however, a bigger issue for Europe because of extensive trade relationships—energy, agriculture, and a wide range of consumer goods that Europe exports to Russia. Plus, a lot of [Russian] oligarchs have residences and money in Europe. It is more disruptive for Europe. Still, Germany has been very tough on Russia because of the invasion of Ukraine.

The sanctions do have a big impact on Russia, largely through its financial system. The United States exercises a great deal of control over international finance, and has disrupted Russian bank finances. Plus, foreign direct investment from Europe is very important to Russia, both because of the money and the technical know how.

The sanctions do have a negative effect, but the bigger short-run impact is from the collapse of oil prices. The energy price declines are more important than the sanctions for the immediate future, but the long-run costs of both to Russia are considerable.

I think sanctions have a significant economic impact, but they seldom if ever lead political leaders to change course. In that sense, they do not work, and their economic impact is gradually eroded as countries find ways around them. For example, the sanctions are a big plus for China, which will be an energy market of greater interest to Russia going forward. That, bilateral relationship makes a lot of sense for everyone.

See also Steven Pifer’s recent comments on sanctions here, here, and here.