How Sanctions on Russia Will Hurt—and Help—the World’s Economies
Barring a near-miracle, sooner or later, sanctions will cripple Russia’s economy. Most economists see this as an unsolved case.
What’s more nuanced, however, is how those same bans on trading with Russia will send ripples through the rest of the global economy. While forecasting anything is complicated, it’s trickier still when there’s a war. Still, experts say the effect across the world will be uneven—creating some surprising winners and losers.
According to Robert Wright (a senior fellow at American Institute for Economic Research), money is currently fleeing Russia, despite recent capital controls being imposed in the country. Foreign investment meant for Moscow will be diverted elsewhere as a result. “With the Russian stock market shut down people won’t be putting any more money into it,” he says.
Inflows from Russia to countries will help their economies expand faster than expected before the Russia-Ukraine war. The likely top candidate for foreign money that would’ve flowed into Russia will be the U.S., as evidenced by the recent rally in the value of the U.S. dollar. The dollar index has rallied nearly 3% since Russia’s invasion of Ukraine began. Inflows should be expected from other liberal democracies, like Europe and the USA, where property rights protection is protected.
Mexico and Turkey could both benefit from an economic lift, even though they haven’t imposed any sanctions. “They could benefit from increased trade and act as a go-between for Russia and the rest of the global economy,” Wright says. In other words, it is possible for a country that does not sanction Russia to purchase a Russian product and then resell it.
Brain drain beneficiaries
Some countries’ economies could benefit from highly skilled Russian and Ukrainian workers leaving their homes and migrating to more favorable locations. As was some of Europe, the U.S. was an important destination for intellectuals and scientists fleeing communism in the Cold War. Recent years have seen immigration become increasingly controversial in both Europe and America.
“I would imagine U.S. resistance to getting highly skilled people is not as much of a problem versus unskilled labor,” says Erica Groshen, former Federal Reserve official and senior economic advisor at Cornell University School of Industrial & Labor Relations. According to Groshen, the risk of a “brain drain” is strongly linked with Russia’s disengagement from democracy.
Learn More: A Vital Link to the U.S. Sanctions Against Russia
Groshen believes that the future will see energy and defense companies flourish. Along with cybersecurity, defense is quickly rising to the top of Europe’s political agenda. Stocks in aerospace and defense have seen a significant increase over the last week due to increased profits. Securing fossil and renewable energy supplies will increase spending. “The crisis raises the case for countries to have local supplies of each,” she says.
The sanctions against Russia have many downsides. They will reduce the exports of critical agricultural-related products and food. “Ukraine and Russia are both global breadbaskets,” says Andrew Milligan, Edinburgh-based market strategy veteran and former U.K. Treasury official. According to the U.S. Department of Agriculture, combined wheat exports from these two countries account for 29% of global export markets. Traders have already bid up the price of grain by about 77% since the beginning of February—in anticipation that supplies will drop due to the conflict and sanctions.
Experts say that the end result could lead to higher food prices. Supplies of agricultural fertilizer may decrease around the world, as Russia and its ally Belarus control more than a third of the world’s potash production, a key ingredient in fertilizer. According to CFRA, Russia is the sole country that controls over 14% of all nitrogen-based plant foods production. A reduced global supply could lead to higher prices and financial hardship for many countries’ farm systems.
Lower corporate profits, slower economic growth
Milligan believes that the sanctions will result in some lower corporate profits in Europe and America due to increasing energy costs and tech firms leaving Russia. Some economies will see a decrease in GDP as a result. “The closer you are to the epicenter, the worse it is going to be,” he says.
Read More: Why Sanctions on Russia Aren’t Targeting Oil and Gas
According to Milligan, this will mean that the U.S.’s growth will probably be 0.25 to 0.5% less than what it was in the past year, or 18 months. Europe will suffer 0.5% to 1 percent. This is because Europe has a greater trade relationship with Russia than does the United States. The hit to Europe’s growth could be partially offset by new investment in the region that would previously have gone to Russia. However, that will likely be a tiny effect because Russia’s economy is relatively small. Russia’s $1.48 trillion economy is so small in comparison to Europe’s roughly $18 trillion GDP (with the U.K. included) that diverted investment could make a small difference but probably not too much.
Tourism and travel are reduced
Ivo Peezzuto is a Parisian professor of digital economics and global economics at ISM. He believes that the impact on tourism could be devastating in some areas, particularly in Europe and North Africa. “The Russians are big spenders on tourism and luxury goods,” he says. Or at least they have been throwing a fair amount of cash around in Europe’s fashionable vacation destinations such as the Italian and French Rivieras. Egypt, an important destination for Russian tourist, could also have to suffer.
Additionally, certain oligarchs could be subject to sanctions that may result in the selling of yachts and luxury real estate. This could be due to asset seizures. Or it might be because the people involved can’t travel to their properties. That could offer buyers the chance to get a cheaper deal. “Those sales might represent a bargain for some people in the west,” Pezzuto says.
Of course, it’s worth remembering how much things have changed in less than a month. They could also change more, which may make things better. This could either make the outlook worse.