FEBRUARY2023 BearingtheBrunt TheImpactoftheSanctionsonRussia’sEconomyandLessonsfortheUseofSanctionsonChina AUTHORS GerardDiPippo AndreaLeonardPalazzi AReportoftheCSISEconomicsProgram FEBRUARY2023 BearingtheBrunt TheImpactoftheSanctionsonRussia’sEconomyandLessonsfortheUseofSanctionsonChina AUTHORS GerardDiPippo AndreaLeonardPalazzi AReportoftheCSISEconomicsProgram AboutCSIS TheCenterforStrategicandInternationalStudies(CSIS)isabipartisan,nonprofitpolicyresearchorganizationdedicatedtoadvancingpracticalideastoaddresstheworld’sgreatestchallenges. ThomasJ.PritzkerwasnamedchairmanoftheCSISBoardofTrusteesin2015,succeedingformerU.S.senatorSamNunn(D-GA).Foundedin1962,CSISisledbyJohnJ.Hamre,whohasservedaspresidentandchiefexecutiveofficersince2000. CSIS’spurposeistodefinethefutureofnationalsecurity.Weareguidedbyadistinctsetofvalues—nonpartisanship,independentthought,innovativethinking,cross-disciplinaryscholarship,integrityandprofessionalism,andtalentdevelopment.CSIS’svaluesworkinconcerttowardthegoalofmakingreal-worldimpact. CSISscholarsbringtheirpolicyexpertise,judgment,androbustnetworkstotheirresearch,analysis,andrecommendations.Weorganizeconferences,publish,lecture,andmakemediaappearancesthataimtoincreasetheknowledge,awareness,andsalienceofpolicyissueswithrelevantstakeholdersandtheinterestedpublic. CSIShasimpactwhenourresearchhelpstoinformthedecisionmakingofkeypolicymakersandthethinkingofkeyinfluencers.Weworktowardavisionofasaferandmoreprosperousworld. CSISdoesnottakespecificpolicypositions;accordingly,allviewsexpressedhereinshouldbeunderstoodtobesolelythoseoftheauthor(s). ©2023bytheCenterforStrategicandInternationalStudies.Allrightsreserved. CenterforStrategic&InternationalStudies1616RhodeIslandAvenue,NWWashington,DC20036 202-887-0200|www.csis.org Acknowledgments ThisreportwasimprovedsignificantlybythecommentsandsuggestionsofexpertsincludingMaxBergmann,JudeBlanchette,BenCahill,MattFerchen,YakovFeygin,MichaelHirson,IikkaKorhonen,JanisKluge,DouglasRediker,andMariaSnegovaya. Theviewsexpressedinthereportarethoseoftheauthorsandnotoftheexpertswithwhomweconsultedortheiraffiliatedinstitutions. ThisreportwasmadepossiblebythegeneroussupportoftheSmithRichardsonFoundation. Contents ExecutiveSummary1 1|Introduction3 The2014SanctionsonRussia3 TheCurrentSanctionsandExportControlsonRussia4 2|TheEconomicImpactsonRussia6 FinancialShockandRecovery7 SustainedTradeSurplus8 FiscalImpactMitigatedbyEnergyExports10 DisruptedProduction,HigherPrices,andLowerLivingStandards12 ADismalEconomicOutlook15 3|TheGoalsandEffectivenessoftheEconomicMeasuresonRussia17 AnEconomicTheoryofVictory?18 4|ComparingRussiaandChinaasEconomicTargets20 5|LessonsforthePotentialUseofSanctionsagainstChina23 AbouttheAuthors26 Endnotes27 ExecutiveSummary T hisreportassessestheeffectsandeffectivenessoftheinternationalsanctionsandexportcontrolsaimedatRussiasinceitsfull-scaleinvasionofUkraineinFebruary2022.ItisthefirstofthreereportsassessingthefeasibilityandimplicationsoftheUnitedStatesusingeconomicmeasurestodeterChina inacrisisoverTaiwan.SubsequentreportswillanalyzetheeconomicinterdependenciesandvulnerabilitiesoftheChineseandU.S.economiesandevaluatehoweconomicmeasuresmightbedeployedduringvariousTaiwancontingencies. ThisreportfindsthatwhiletheeconomicmeasuresareslowlybleedingtheRussianeconomy,theyareunlikelytodeliveraknockoutblow.Earlypredictionsoftheirimpactwereoverstated.Russia’sfinancialsectorteeteredintheweeksaftertheinvasionbuthassincestabilized.Russia’simportsdroppedinthefirstfewmonthsafterthemeasuresbutbytheendof2022hadnearlyrecoveredtotheirprewarlevelsbyshiftingawayfromEuropetowardChina,Turkey,andafewothereconomies.Moscowpostedonlyamodestfiscaldeficitin2022largelybecauseofoilandgasexports.However,Russia’sindustrialsectorprobablyhasweakened,inflationhasworsened,andrealwageshavefallen. Goingforward,Russia’sabilitytocontinuecollectingrevenueforoilandgasexportswillbeakeydeterminantofMoscow’sabilitytoavoiddrainingitssovereignwealthfundorborrowingdomesticallytofunditswareffort.Iftheeconomicmeasuresremaininplace,Russia’seconomicoutlookwillbebleak,withRussianhouseholdslookingforwardtostagnationatbest.Russiaislikelytoincreasinglysubstitutelower-qualitydomesticgoodsforforeigngoodsandrelyonChinaasitstopsourceofimportedgoods. Westerngovernments’goalsforsanctionsandexportcontrolshaveshiftedoverthepastyear.Initially,thethreatoftheirusewasintendedtodeterMoscowfromattackingUkraine.Thatgoalfailedinlargepart becauseRussianpresidentVladimirPutinbelievedhiswarofaggressionwouldquicklysucceed.Briefhopesof destabilizingRussiaweredashedafterRussia’sbankingsectorandexchangeraterecovered.TheprimarygoalisnowtodegradeRussia’sabilitytosustainitswarthrougheconomicattrition.Themeasuresaredoingthattosomedegree,buttheyareunlikelytobeasdecisiveasbattlefieldoutcomes. TheuseofsuchmeasuresagainstRussiahasspurredspeculationabouttheirpotentialuseagainstChina,particularlyinacrisisoverTaiwan.EnactingcomparablesanctionsandexportcontrolsonChinawouldbefarmoredifficultanddisruptivetotheglobaleconomy.Thebig