Collateral Damage: The Impact of the Russia Sanctions on Sanctioning Countries' Exports

Sanctions are one of the favourites in the toolbox of foreign policy. In a diplomatic conflict, they aim to elicit a change of policies of foreign governments by damaging their economy through restrictions on trade, financial transactions and the movement of people. However, they are not costless for the sending economy, where domestic firms involved in business with the target countries might incur collateral damages. This paper evaluates the cost, in terms of export losses, of the diplomatic crisis between the Russian Federation and Western countries over the Ukrainian conflict. We first gauge the global impact of the sanctions regime using a structural gravity framework and quantify the trade loss in a general equilibrium counterfactual analysis. We estimate this loss at 60.2 billon $ over the period from 2014 until mid-2015. Interestingly, we find that the bulk of the impact stems from products that are not directly targeted by Russian retaliations – suggesting that most of the loss is not attributable to the Russian retaliation, but to Western sanctions. We then investigate the underlying mechanism at the firm-level using French customs data. Results indicate that neither consumer boycotts nor perceived country risk can account for the decline in exports of non-targeted products. Instead, the disruption of the provision of trade finance services is found to have played an important role.