The Price of War: Macroeconomic and Cross-sectional Effects of Sanctions on Russia

Abstract

How much do sanctions harm the sanctioned economy? We appeal to the case of Russia which faced three major waves of international restrictions over the last decade (in 2014, 2017, and 2022). In a VAR model of the Russian economy, we first apply sign restrictions to isolate the innovations to international credit supply to proxy for the financial sanctions shocks. We then examine the effects of the overall sanctions shocks (financial, trade, technological, etc.) by employing a high-frequency identification (HFI) approach. Our HFI is based on each OFAC's / EU's sanction announcement and the associated daily changes in the yield-to-maturity of Russia's US Dollar-denominated sovereign bonds. Our macroeconomic estimates indicate that, in response to the first wave of sanctions, Russia’s GDP could have lost no more than 0.8 pp; nearly zero in response to the second wave, and between 8 and 23 pp as a result of the third wave of sanctions---the largest output contraction since the USSR collapse in 1991. Our cross-sectional estimates show that the real income of richer households declined by 1.5--2.0 pp while poorer households enjoyed rising real income during the first year after the shock: +1.2 pp. Finally, we obtain that the real total revenue of large firms with high (low) TFPs declines by 2.2 (4.0) pp during the first year after the sanctions, whereas the effects on small firms are close to zero. Overall, our results indicate heterogeneous effects of sanctions with richer households and larger firms affected the most.

Keywords: Sanctions news shock, Monetary policy, Commodity terms-of-trade, VAR, High frequency identification (HFI), Household income, Firm TFP

JEL Classification: E32, E37, F32