Sanctions Cost Russia 1.2% GDP – Study by FBK

The 2014economic sanctions against Russia (Annex 1, rus, pdf) are having an increasingly negative impact on the Russian economy. According to the FBK Grant Thornton Institute of Strategic Analysis, only in 2014 Russia lost 0.2% GDP (121.4 billion roubles) due to the sanctions applied. In the period till mid-2015 (one year of sanctions in effect) the drop of GDP caused by the sanctions will amount to 1.2% (949.4 bn roubles).

The assessment of economic losses was a daunting task, according to Igor Nikolaev, the FBK Institute of Strategic Analysis Director. First, because before the sanctions were applied there was a strong bearish trend for GDP dynamics in Russia (with the official forecast of GDP growth by 3% in 2014, the annual rate of GDP growth for 1H was registered at 0.8%). Second, the GDP dynamics depends to a great extent upon numerous factors, which makes it difficult to assess the impact of the one, i.e. the imposed sanctions.

A key step in the assessment was to identify an indicator the dynamics of which is explicitly connected with the imposed sanctions, and at the same time there is a strict correlation between the dynamics of that indicator and the dynamics of GDP.

In the result of the study (Annex 2, rus, pdf) the dynamics of the corporate sector external debt was chosen as the indicator in question. The existence of a significant statistical connection between this index and the GDP dynamics allowed making the required assessment on the regression model basis.

Attempts to use other indicators as the basis for constructing appropriate models for the purpose of forecasting the GDP dynamics in association with the sanctions did not provide any satisfactory results from the point of view of exposing a statistically meaningful relationship with the DGP dynamics.

Comparing the cost of sanctions for the Russian economy in 2014 and during the year since they were imposed (0.2% GDP and 1.2% GDP, respectively) we should admit that the cost of the sanctions increases along with the deterioration of the economy in Russia, points out Igor Nikolaev. The mounting affects of the sanctions are due to the fact that the longer the period of their use the more the amount of external corporate debt that should be paid, so the greater the impact of the lack of leverage. In addition, the result here is seriously affected by the dollar rate. Its growth is, to a great extent, also caused by the sanctions, as the loss of access to western capital markets has seriously accelerated the devaluation of the rouble. The fall of the rouble is the inflation, the growing uncertainty of the economic situation and further FDP slide. For a weakened economy even some small negative turns into a serious problem.

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