Some Nations Have Done Well Out Of Russia Being Sanctioned - Here's Why

13th March 2024

Since the start of the Ukraine war, the US, EU, UK and other countries including Japan and Canada have increased sanctions on Russia. By late 2023, Russia became the most sanctioned country in the world with over 18,000 restrictions on different items - more than the combined number of sanctions on Iran, North Korea and Syria.

Restrictions include financial measures such as the freezing of the Russian central bank's assets in the countries imposing the relevant sanctions, limiting Russia's access to income from oil and gas exports, sanctions on technologies employed in military production such as microelectronic components, the ban on Russia's diamond and gold exports, and other measures designed to affect Russian shoppers and business. Hundreds of international corporations have stopped working in Russia.

Restricting trade with a particular country, however, does not translate into lower demand for the products sanctioned. Sanctions on Russia resonate in the global economy and there are also "surprising winners" whose economies have benefited.

For instance, restrictions have diverted trade routes away from Russia to the neighbouring Caucasus and central Asia region leading to these economies, including Armenia and Kazakhstan, growing on average by 4.8% in 2022.

Once countries imposed bans on their exports to Russia, Putin started sourcing supplies from other states including Armenia, Georgia, Kazakhstan and Turkey. This enabled Russia to have continuous access to foreign goods and technology, for instance, vehicles and semiconductors.

The imposition of sanctions is an alternative to military conflict, and its objective is to maximise economic damage. They can be economic or financial imposed by governments or international institutions on states, companies and individuals, and are employed when a particular state's interests are threatened or there are violations of international law.

Russia looks for new partners
Reports indicate that bilateral trade between Russia and Armenia, Georgia, Tajikistan and Uzbekistan has increased since the war began. By September 2022, exports from Kyrgyzstan to Russia rose to 34% of its total exports, up from 14% in 2021.

Similarly, restrictions to the Russian banking sector led to a significant increase in net money transfers from Russia to Armenia, Azerbaijan, Georgia, Tajikistan and Uzbekistan. For example, in Armenia transfers reached 17% of GDP, and in Georgia they reached 8% of GDP. Such transfers may be done, for example, by Russians moving to third countries, people purchasing properties in those countries or by people attempting to maintain access to their money via foreign banks.

Changing how it imports goods has also enabled Russia to sustain military production. Countries including China, Turkey and the UAE have become hubs to channel critical technologies to Russia and bypass sanctions.

Reports indicate that Hong Kong has become a hub to transfer western-built microelectronics to Russia. It doubled its semiconductor exports to Russia to about US$400 million (£316 million) worth in 2022. In the same year, Russian's imports of semiconductors from China steeply increased from about US$200 million to over US$500 million. Likewise, the UAE increased its exports of microchips to Russia from US$1.6 million in 2021 to US$24.3 million in 2022.

Meanwhile, through a military weapons deal, Russia and North Korea have deepened their relationship with the increased military sales representing a new income source for the latter.

Other countries have gained from stepping into trade areas where Russia had dominated. In 2022, as sanctions affected the export of diamonds from Russia, there was a strong global demand leading to a 20.4% increase in Botswana's diamond exports that year. Similarly, it has been reported that the UAE has cashed in as a thriving gold hub, increasing its gold imports from Russia from about 1.3 tonnes in 2021 to 75.7 tonnes, worth US$4.3 billion, between 2022 and 2023. In 2022, Russia became the UAE’s main source for gold imports.

As sanctions tighten on the Russian economy and the war continues, there’s a significant brain drain of highly skilled people from Russia. It’s estimated that 11.1% of Russian software developers relocated between 2021 and 2022, for example. Armenia saw a 42% increase in developers, Cyprus 60% and Georgia 94%.

Evidence suggests that of those who have emigrated from Russia since the war began, 80% are university graduates with 100,000 IT professionals relocating in 2022. In the "receiving economies", such levels of "brain gain" can have a significant effect as an influx of highly skilled people impacts innovation, entrepreneurship and, ultimately, economic growth.

US increases oil purchases elsewhere
Asian and Middle Eastern countries are not the only places to benefit. The US has money flowing into its economy as investors that might have put funds into Russia look for new opportunities.

In addition, since imposing restrictions on the imports of Russian crude oil and products in early 2022, the US has increased its imports from countries such as Brazil, Iraq, Mexico and Saudi Arabia. Data shows that in the period between 2021 and 2022, while Brazilian crude oil and products exports to the US increased from 143,000 to 193,000 barrels per day, Iraq’s grew from 157,000 to 311,000, Mexico’s from 711,000 to 808,000 and Saudi Arabia’s from 430,000 to 559,000.

So far, sanctions have yielded some of the expected outcomes. For instance, in 2022, the Russian economy contracted by 2.1% with such growth linked to a 14% reduction in exports and a 11% drop in imports, compared to 2021.

On the one hand, sanctioning countries have had to shift trade sources which have brought financial benefits to trade partners. On the other, Russia has circumvented some restrictions by shifting import sources via third parties. The benefits that third countries obtain from redirected trade may be temporary or positive in the short term, but not necessarily in the long term. This will depend on how the Russian economy is able to perform under continuous restrictions and the uncertainty that such conditions and war entail.

Whatever the result for Russia itself, the shifting patterns of Russia’s needs and imports have certainly boosted some other countries economies, perhaps unexpectedly.

Author
Jose Caballero
Senior Economist, IMD World Competitiveness Center, International Institute for Management Development (IMD)

Note
This article is from The Conversation web site. To read it with links to more information go HERE