The Big Leak: How Trade Sanctions Against Russia Are Failing

In 2023, The Hinrich Foundation commissioned Oxford Economics to undertake an econometric analysis of trade data to understand and assess how trade responds and adapts to sanctions imposed following Russia’s February 2022 invasion of Ukraine that impacted the logic of this economic mechanism. 

The findings were striking. 

Darren Anderson

The report, written by Darren Anderson and Daniel Crook, is part of the Hinrich-IMD Sustainable Trade Index 2022 and gives a detailed analysis for society. In a recent interview with the Association of Foreign Press Correspondents in the United States (AFPC-USA), Crook elaborates on aspects of this report and communicates how these findings impact recent political and economic events involving Western sanctions and trading partners.

Anderson is a director in Oxford Economics’ Australia office and leads the global Transaction Due Diligence and Freight teams. Anderson and his team have developed a comprehensive suite of commodity-specific freight projections covering goods movements by road and rail, rail-to-port linkages, urban container movements, port trade (bulk and containerized), and coastal and international shipping. Recently, Anderson led the development of Oxford Economics’ flagship international trade service TradePrism. Anderson holds a Master’s degree in economics with distinction from the University of Sydney and a BA in economics and international relations from the University of Calgary.

Crook is a senior economist in Oxford Economics’ Australia office and is a key member of the global Transaction Due Diligence team. Throughout his career, he has been involved in an extensive array of consulting projects spanning various economic sectors. Notably, his work has encompassed conducting economic due diligence for asset transaction sales, performing thorough econometric analysis, creating robust macroeconomic models and forecasts, and executing strategic cost-benefit analyses and economic impact assessments. Crook holds a Bachelor of Business (Economics) and a Bachelor of Economics Honours from Queensland University of Technology.

Daniel Crook

The following interview, conducted with Crook, has been condensed and edited for clarity.

The United States recently imposed sanctions and export control restrictions against more than 500 Russian individuals and entities, saying it will use all available tools to “hinder Russia's ability to access the global financial system.” What analysis would you do if these new sanctions were announced? Are they going to have a different result or is it likely that the trend shown in this report will persist?

This was only announced quite recently and we haven’t had a detailed look at the impact. However, the breadth of firms and individuals was quite interesting, with more than two dozen entities outside of Russia included. This included people in China, UAE, Vietnam and Liechtenstein. This has the potential to create new difficulties for Russian trade. However, we don’t expect this new tranche of sanctions to bring any significant impact on the Russian economy. It has now been two years since the beginning of the war in Ukraine and Russia has managed to reconfigure their trade to limit the impact of the US and EU sanctions imposed.

According to the Oxford Economics analysis, what is preventing those tactical barriers from working?

Our research highlighted the fact that global trade has tended to reconfigure in the face of sanctions being imposed. The past examples of the limited success of sanctions show that it tends to be difficult for the sanctions to be unanimously adopted by all countries. These alternative trading partners dampen the impact of the sanctions imposed.

This study shows that Russia's total imports fell by 35% in the two months after the invasion of Ukraine. The European Union cut much if not all of the exports of goods from there. Which countries are now responding to this demand and which type of products Russia is importing now from other places rather than Europe?

Our research found that there was a notable pickup in import activity from China, Turkey and Armenia into Russia. China now accounts for almost half of global exports to Russia, up from around 25% pre-war. Machinery and equipment, including motor vehicles, saw the biggest switch away from Europe to other trading partners, according to the latest monthly trade data.

This case study also looked at the impact of trade sanctions imposed on Russia over the past 10 years, investigating trade flows before and after trade sanctions were imposed in 2014 and 2022. What was found in a broader context?

Hinrich Foundation

Broadly, sanctions are a popular response to dissuade certain activities by attempting to limit the sanctioned economy’s access to the global market. However, the sanctioned country’s importance to the global supply of vital commodities, such as energy, tends to impact the success of the sanctions imposed. Universal multilateral support may diminish if there are few alternative countries able to provide an adequate supply of the sanctioned goods.

On exports, India became, according to the analysis, an important buyer of many of Russia's products. Is it possible to evaluate what contributed to this reality?

Much of Russia’s crude oil exports were redirected to India after the G7 and EU sanctions were imposed. This was believed to be heavily price-driven. After the oil price limits and other sanctions were imposed, it was widely reported that India was able to receive discounts on crude oil from Russia.

At the beginning of the invasion, a ban on the SWIFT system for banks operating in Russia was announced. Did this work and what internal and external mechanisms facilitate international transactions today in this reality of trade sanctions?

This wasn’t something that we covered in our report. This restriction aimed to restrict Russian bank's access to the global financial system, disrupting cross-border transactions for Russia’s trade. However, alternative messaging systems exist with Russia developing their own system, the System for Transfer of Financial Messages (SPFS), back in 2014. This potentially limited the impact that restricting Russian bank's access to SWIFT was expected to have.