Sanctions are linked to the hope of preventing wars. The economic damage should persuade states to desist. This is also the case with Russia and the massive economic measures imposed in response to its attack on Ukraine. Professor Dr Julian Hinz is an economist and junior professor at Bielefeld University’s Chair of International Economic Relations who is studying the effects of sanctions against Russia. In this interview, he explains how the economic measures penalties affect the Russian state and how profoundly sanctions will lead to long-term changes in global value chains.
The sanctions against Russia are wide-ranging. However, not much is happening politically. How effective are the policies?
Economically, the sanctions have had a major impact, with economic activity plummeting. The Russian Central Bank expects a drop in gross domestic product of around 10 per cent, and that would be the biggest decline since the 1990s. On top of that, there is inflation. Consumer prices are going through the roof right now. This is not surprising: the Russian economy normally imports a great deal. That is now difficult or has even stopped altogether. Hence, the economic effectiveness of the sanctions is clearly visible. As for the political impact, we have to ask ourselves: what if the sanctions had not been imposed? At least, the massive economic consequences have a strong deterrent effect on further escalation.
How effective will the agreed oil embargo be when it comes to putting pressure on the Russian government?
The Russian economy is based on oil and natural gas exports. This finances the state and thus also the military aggression. It would be difficult for us in Europe to offset a gas embargo, because gas is supplied to a large degree through pipelines from the East. With oil, things are different: we already receive a large part of our oil by tanker and not just through pipelines. Oil is also the more important raw material for the Russian state budget. Up to three quarters of Russian gas and oil revenues come from oil trading. So, that is where we have to start: an oil embargo hurts the Russian economy a great deal, whereas it hurts us in the West less.
Sanctions also affect the states that decide to impose them. What further effects can we expect?
Certainly, the price increases for oil, gas, and grain are also being driven by the war in Ukraine and the resulting uncertainty. As long as the war goes on, these price increases will continue. If it comes to a gas embargo, I also see economic consequences in Europe: industries that need gas as a pre-supply product would have to buy it elsewhere and pay significantly higher prices. However, sound research findings indicate that the macroeconomic effects would remain small. Germany would fall into recession—but we are far from a doomsday scenario.
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Economic activity will not be remotely comparable to what it was before 24 February. Russia has gambled away its economic future—and strategically, that’s really unbelievable!
Can sanctions be ended as quickly as they were imposed? What economic effects do you expect in this specific case?
Sanctions are affecting companies. Those that no longer export to Russia or import from Russia are looking for new suppliers. A large number of these companies will not return to the Russian market once the war is over. So, value chains are changing. The Russian market was interesting for Western companies because it grew so quickly. Nonetheless, if or when sanctions are lifted, the Russian market will remain unattractive in the long term. The Russian government has shown that there is no safe investment climate in the country. Russian companies, meanwhile, are sourcing significantly more Chinese technology products. There, too, new and lasting ties are being forged. Economic activity will not be remotely comparable to what it was before 24 February. Russia has gambled away its economic future—and strategically, that’s really unbelievable!
What contribution can you as an economist make regarding how sanctions are used in the Ukraine war?
Industry representatives speak for their individual interests, and they need to be heard. However, we we research economists take a more general perspective on the effects of sanctions against Russia, including those on consumers. Sanctions are an economic instrument that is used to pursue political goals. This is what makes exchanging information with political scientists and lawyers so valuable. Each of these three fields has its own perspectives, but they are equal in value when it comes to assessing whether sanctions are meaningful and well designed, and what are their political and economic consequences.
About this series
In these interviews, academics at the university explain their assessment of the war in Ukraine from the perspective of their own disciplines. Previously published interviews:
- Professor Dr Andreas Zick (23.03.2022): ‘We need to know where more violence is brewing’
- Professor Dr Frank Grüner (31.03.2022): ‘Putin is distorting history for his own ends’
- Professor Dr Véronique Zanetti (14.04.2022): ‘A nuclear war must be avoided at all costs’
- Dr Leif Seibert (23.05.2022): ‘Putin and Kirill benefit from mutual legitimation’