The Russian economy has a lot more to lose in the long term than the US and its allies, whose crippling sanctions following Russia's military offensive in Ukraine severely dented Moscow’s trade ties with the West, a report said on Thursday.
The decoupling of trade relations meant Russia's economic output would be almost 10 per cent lower annually in the long term, the Kiel Institute for the World Economy and the Austrian Institute of Economic Research said in a joint report. The allies, on the other hand, would suffer much smaller losses.
The projections were made using a simulation model that assessed how trade flows adjust in the long term when international supply chains are interrupted and how this affects the growth opportunities of an economy. It, however, does not model the short-term effects of reciprocal sanctions, which usually lead to income losses on both sides.
“A trade war between Russia and the US and its allies would hit Russia's economy hard in the long term,” said Alexander Sandkamp, a trade researcher at Kiel Institute.
“Although the allies are also likely to be hit hard to some extent in the short term, in the longer term they would only have to fear an annual 0.17 per cent drop in economic output overall in the model-simulated case.”
Russia’s economy is reeling after the US and its allies imposed sanction on Moscow as it intensified attacks on Ukrainian cities. The punitive actions by the West aim to cripple Russian economy and freeze assets of oligarchs in President Vladimir Putin's inner circle.
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Damage after the shelling of buildings in central Kharkiv, Ukraine. EPA -
Workers from a local construction company weld anti-tank obstacles to be placed on roads around Kyiv as Russia's invasion of Ukraine continues. Reuters -
Anti-war protesters attach sunflowers to barriers in front of the Russian embassy. Reuters -
Ukrainian volunteers prepare food for displaced people outside Lviv railway station in western Ukraine. AP -
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Ukrainian refugees rest at Warsaw East train station in Poland. EPA -
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Tears outside a house damaged by a Russian airstrike in Gorenka, on the outskirts of Kyiv. AP Photo -
A civil defence member is poised to shoot as a vehicle approaches a checkpoint in Gorenka. AP Photo -
A Ukrainian civil defence member in the garden of a house damaged by a Russian airstrike. AP Photo -
Members of the US Army 3rd Infantry Division board a plane bound for Germany in Savannah, Georgia. EPA -
Prayers for peace in Ukraine at the Vatican's Saint Peter's Square. AFP -
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Firefighters battle a blaze in a Kharkiv police building hit by shelling. AFP -
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A doctor takes shelter in the basement of a Kyiv perinatal centre. Reuters -
Debris which locals say was caused by shelling in separatist-controlled Horlivka, Donetsk. Reuters -
MPs in London give a standing ovation to Ukraine ambassador Vadym Prystaiko, who was in the public gallery. AP -
Distraught women and children fleeing Ukraine wait to enter Poland at the Korczowa crossing. Getty -
Newborn Ivan lies next to his mother as they shelter in the basement of a Kyiv perinatal centre. Reuters -
Firefighters hand water to people in a Ukrainian train full of refugees in Przemysl, Poland. Reuters -
Ukrainian refugees queue to file for residency permits at Prague's police headquarters. AFP -
Firefighters work to contain a blaze in buildings housing the Kharkiv regional police department. AFP -
A woman and her children sit in a tent in the Kyiv subway, using it as a bomb shelter. AP -
Firefighters work to extinguish a blaze at the Kharkiv National University building, which city officials said was damaged by Russian shelling. Reuters -
An elderly woman comforts a child as they take shelter inside an underground station in Kyiv. Reuters -
People queue at a pharmacy in central Kyiv. Reuters -
A woman is consoled by a volunteer after fleeing from Russia's invasion of Ukraine, at the border crossing in Siret, Romania. Reuters -
A Ukrainian civilian in the city of Zhytomyr practises throwing petrol bombs. Reuters -
Ukrainian President Volodymyr Zelenskyy poses after an interview with Reuters in Kyiv. Reuters -
A blast is seen at Kyiv's TV tower. Reuters -
A girl in Siret, Romania, covers herself with a blanket after fleeing from Ukraine. Reuters -
Ukraine's ambassador to the US, Oksana Markarova, acknowledges applause from US first lady Jill Biden as they attend President Joe Biden's first State of the Union address in Washington. AFP -
A man walks past the remains of Russian military vehicles in Bucha, close to Kyiv. AFP -
Civilians cross a river on a blown-up bridge on Kyiv's northern front. Defending the capital is a 'key priority', Ukraine's president has said. AFP -
Russian aircraft on the ground at Luninets Airbase, Belarus, about 50 kilometres north of the Ukrainian border. AFP -
People look at the gutted remains of Russian military vehicles on a road in the town of Bucha. AP -
A woman with a child who fled from the war in Ukraine reunite with their family after crossing the border in Medyka, Poland. AP -
Animal keeper Kirilo Trantin comforts an elephant at Kyiv Zoo. AP -
An armed man stands by the remains of a Russian military vehicle in Bucha. AP -
Ukrainian families say goodbye as they prepare to board a bus to Poland at Lviv, western Ukraine. AP -
Paramedics move a man who was wounded by shelling in a residential area of Mariupol, south-eastern Ukraine. AP -
Rescuers work at the site of a Russian strike in Zhytomyr. Reuters -
US actor and director Sean Penn attends a press briefing at the Presidential Office in Kyiv. Reuters -
Demonstrators participate in a protest against Russia’s invasion of Ukraine at Lafayette Square in Washington. AFP -
Ukrainian soldiers rest while others eat near the front line with Russian troops in northern Kyiv. AP -
A barricade made of trams, buses and sand bags is seen through the window of car in the northern part of Kyiv. AP -
Members of the European Parliament applaud after Ukrainian President Volodymyr Zelenskyy's speech at a special session to debate its response to the Russian invasion of Ukraine. Reuters -
Ambassadors and diplomats walk out as Russia's Foreign Minister Sergey Lavrov (on screen) speaks during a recorded message at the 49th session of the UN Human Rights Council in Geneva. EPA
European countries have closed their airspace to Russia's private and commercial jets and some Russian banks have also been barred from the Swift global financial network. The US Treasury has prohibited Americans from engaging in transactions with the Bank of Russia, the Russian Direct Investment Fund and the country's Ministry of Finance.
Russia’s central bank imposed capital controls on Monday and more than doubled interest rates to 20 per cent, their highest in nearly two decades, to support the currency. The Bank of Russia also restricted the transfer of coupon payments to foreign holders of rouble bonds and kept the Moscow stock exchange closed for a fourth day.
On Thursday, both Fitch Ratings and Moody’s Investors Service downgraded Russia's sovereign credit rating to “junk” status as the US and EU sanctions piled pressure on the economy. While the EU has barred Russia from accessing its capital markets, the cut in ratings will make it even difficult for Russia and Russian companies to raise funding globally.
The reason for Russia suffering a bigger economic fallout than the West is its heavy reliance on the US and its allies for trade. In 2020, the EU accounted for 37.3 per cent of Russia's foreign trade, but only 4.8 per cent of the EU's foreign trade was conducted with Russia.
If intra-European trade is also taken into account, Russia's share would be even lower. Import barriers imposed by the allies would hit Russia harder than export barriers, according to the Kiel Institute report.
“The simulation results give an impression of what is at stake for both sides in the long term: after a period of adjustment in world trade, Russia will be significantly weakened, while the damage for the allies is manageable,” said Gabriel Felbermayr, director at Austrian Institute of Economic Research.
The impact of the sanctions is also very unevenly distributed among the allies. Eastern European countries such as Lithuania would suffer a 2.5 per cent drop in output in the long term, Latvia 2 per cent and Estonia 1.1 per cent, said the report.
Germany and Austria, on the other hand, would see a 0.4 per cent and 0.3 per cent contraction of their gross domestic product, respectively. The US would only suffer a loss of 0.04 per cent, the report said.
