Hot Topics in International Trade – August 2022 – Assessing the Effectiveness of Sanctions Against Russia | Braumiller Law Group, PLLC

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Since the Kremlin’s invasion of Ukraine on February 24, Western countries have set up vast global financial ramifications. To gauge the extent of the effectiveness, one must decipher the numbers behind the misleading economic statistics published by Russia. A staggering implication of the trade war with the West is the total collapse of GDP growth achieved in the post-Soviet era. The sanctions have certainly not only had an impact on the entire Russian economy, but also on individuals. According to the Yale School of Management’s first comprehensive economic analysis published in July 2022 by Jeffery Sonnenfeld, based on in-depth analysis of high-frequency consumer data, cross-channel audits, news releases from Russia’s international business partners and data mining of complex maritime data, it is evident that: “trade retreats and sanctions are catastrophically crippling the Russian economy”.

The Office of Foreign Assets Control (OFAC) sanctions include the designation of approximately 29 individuals and 70 legal entities to the Specially Designated Nationals (SDN) list, as the US Treasury Department deemed them essential to support the complex military-industrial of the Russian Federation, and in turn directly the conflict in Ukraine. Additionally, the Bureau of Industry and Security (BIS) released a new rule adding 36 entities spanning 9 countries to help prevent US inputs from ending up with Russian military end users. The direct impact that these policies impose on the Russian economy has already led to a massive exodus of foreign companies that would account for 40% of Russia’s annual GDP. In addition, lack of access to foreign capital markets has forced Russia’s commodity-based export market to rely on an Asia-centric approach to selling products such as natural gas, which is of course being traded from a desperate position in Moscow, which has led to the collapse of Russia’s long-term strategic positioning in the commodity market. As Russian gas exports to Europe fall to near-record levels thanks in part to the shutdown of the Nord Stream gas pipeline to Europe, moving east as a buyer has great consequences. The natural gas transportation infrastructure that is being built and financed by China is not in place right now. As a result, China increased its oil purchases at an unheard of $35 a barrel discount to the Brent benchmark price, demonstrating Putin’s lack of bargaining power. Russia’s consumer price index, or economic measure of inflation, is estimated at over 20% since February as imports have fallen significantly, including from its closest ally China.

The lack of foreign components for the technology has led to much of Russia’s military and consumer struggles. Before the invasion, an average of around 100,000 cars were sold in Russia from month to month, whereas today only a quarter of such transactions take place. Domestic production without international supply chain inputs led Putin to suspend safety requirements on cars such as airbags and anti-lock brakes. In international industries dependent on imported inputs such as technology, inflation is estimated at 40-60%.

The failure of import substitution and the exodus of 10,000 foreign companies as well as around 500,000 people – many of whom are wealthy and/or highly skilled – have placed Russia in an extremely precarious position. This will likely lead to Russia’s heavy reliance on a Chinese government that does not reciprocate co-dependency. Ultimately, sanctions pressures led to many supply chain input shortages affecting invasion, military infrastructure (particularly in aerospace, such as the withdrawal of Boeing both tangible) and product support deeming these reused aircraft parts unsafe. These warnings from Boeing have not stopped airlines like Aeroflot from reassigning parts of available planes to continue operating. Even Pobeda went so far as to suspend almost half of its fleet to service and supply parts for the remaining planes. According to Commerce Secretary Gina Raimondo, Ukrainians have found semiconductors from kitchen appliances reused for military purposes. The overwhelming amount of empirical evidence shows the far-reaching consequences of sanctions not only for the Russian government and military, but above all the hardships for those still living in Russia.

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