The effect of sanctions on Russia. When will it happen?

Has the civilized world imposed strong sanctions on Russia and how quickly and strongly will they have an effect?

So far, financial and trade sanctions have been imposed on the occupiers. The former have the fastest effect, because finances are the circulatory system of the economy, which reacts immediately to all changes.

Trade sanctions are slower, but together with financial ones, they reliably suppress economic activity. There have been many trade wars in history.

Suffice it to mention the Anglo-Dutch Wars of the 17th -18th century for the right to trade with the colonies or the opium wars in China in the 19th century. Therefore, sanctions that restrict a country's trade are in themselves a form of war.

Restrictions on movement, such as aviation, are ineffective in the short term. Especially since these sanctions will be felt only by those Russians who can afford tourist trips abroad. There are less than five percent of them.

However, in the long run, the consequences of these sanctions will be disastrous for the Russian people, because they will affect the cultural and intellectual abilities of future generations. Precisely because of their "soft action", Western countries are not introducing a visa regime for Russia. Still.

Of course, the civilized world would like the effects of sanctions to be quick, and their impact to be measured in weeks, not months. So, what losses can be expected for the Russian economy and when will they occur?

The answers to these questions depend on many factors. I can try to find by drawing analogies.

Russia has already become the country with the most sanctions in the world. More sanctions have been imposed on it than on North Korea and Iran.

In the context of the latter some analogies seem appropriate. But it’s worth starting in Canada.

In terms of GDP, Russia and Canada are comparable - $ 1.5 trillion and $ 1.6 trillion, respectively.

At the same time, the correlation of the dynamics of economic development of both countries after the defect of the Russian Federation in 1998 exceeds 95 percent. This means that the last more than 20 years of growth and decline in Russia are no different from Canada.

That is, Russia was pressured only by ordinary economic factors. Sanctions related to the annexation of Crimea and the occupation of the Donetsk and Luhansk regions in 2014 did not affect.

In addition, it points to Russia's strong integration into the world economy, primarily through the supply of raw materials. The only thing that stands out is the somewhat higher volatility of the Russian economy compared to the Canadian one.

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From 2013 to 2020, Russia's GDP fell from $ 2.3 trillion to $ 1.5 trillion, or 35 percent. The main reason is the fall in world energy prices and demand.

Sanctions against the aggressors in 2014 did not weaken Russia. Hence the lack of fear of the Russian leadership of new restrictions in connection with the invasion of Ukraine.

In terms of GDP per capita ($ 12,000) and purchasing power parity ($ 30,000), Russia is similar to Poland in the past 20 years - a fairly comfortable level.

How will it be

Now let talk about Iran. Iran and Russia are similar in the structure of exports: the share of oil and gas in it is about 70 percent. In both countries, there is a similar weight of exports in the structure of GDP - about 30 percent.

In both countries, the so-called oil rent, ie profit from oil sales in the structure of GDP less costs. In Iran, this figure is about 20 percent, in Russia - 10 percent.

For comparison: in Canada, the oil rent is not higher than 1.5 percent, although the country's gold reserves are the third largest in the world (9.7 percent). Iran is in fourth place (nine percent), Russia is in sixth place (6.2 percent).

In other words, Russia and Iran have suffered the same disease - dependence on the export of a small number of raw materials and the subsequent import of everything necessary.

Unlike Russia, which has had a long period, Iran has suffered from sanctions, the set of which is similar to modern Russia.

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The history of sanctions against Iran began four decades ago, but it is worth considering a striking example from 2012. At that time, the EU banned the import of Iranian oil, a third of Iranian exports (the United States imposed an embargo even earlier).

At the same time, many Iranian banks have severed ties with SWIFT and frozen more than $ 100 billion in banking assets.

Earlier, the United States banned any investment in Iran and the purchase of technology to modernize the oil sector. That is, the "sanctions menu" has long been known and well tested.

For the sake of comparison, there is currently no ban on the import of Russian hydrocarbons into the EU, but the funds of the Russian central bank are frozen. Is it equivalent? The question is debatable, but it can be argued that the impact is the same.

What are the consequences

As a result of these sanctions, Iran's GDP fell in the first year, according to various estimates, from 10 to 24 percent. The effect continued: in the next three years, GDP fell by 38 percent. Inflation in 2012 exceeded 40 percent. So, 20 percent of the current in Russia is just the beginning.

According to international organizations, since 2012, the Iranian economy has fallen by one third, and the average annual inflation was 35-45 percent.

Rising prices have had the biggest impact on food and accommodation. Many foreign companies have left the country. The impoverishment of the population reached a critical level and led to unrest and a significant wave of emigration.

Iran's ability to achieve its strategic goals is extremely limited, and China has remained almost the country's only trading partner.

Sooner or later, the system finds a new point of equilibrium. The question is where exactly that point will be and whether Russia will be able to move. For example, sanctions on Iran were gradually lifted, but it took years.

The old ones have been replaced by new ones. So far, macroeconomic stabilization has not been achieved - inflation is growing rapidly. In 10 years, the Iranian rial has depreciated against the dollar four times.

What's next

Nobody knows how the situation will develop further. However, it is clear that the Russian economy is experiencing an incredible shock. Russian oil is sold at a big discount, ie Russia does not benefit from a rapid jump in the energy market. At the same time, the Russians hope that the oil and gas trade will continue to be their key trade asset.

However, the additional costs will lead to the sale of Russian energy below market prices, which will negatively affect GDP. In addition, lack of investment will lead to increased costs and degradation of the industry.

It will be very painful, though not immediately. Which means there is gonna be the rejection of American oil and gas by the United States and Europe.

In 2021, Russia exported an average of 4.6 million barrels of oil per day. Iran has already stated that it is ready to increase oil exports to world markets in the near future.

Even if Iran increases production by a million barrels a day, it will stabilize the market. At the moment, Europeans are not ready to completely give up Russian energy, and that is the biggest risk for sanctions.

If we apply the analogy explained above, Russia will get:

✔ through arrears of government and corporate debts;

✔ GDP below a trillion dollars in 2023-2024 or 6,000 to 7,000 dollars per capita with a tendency to worsen;

✔ unbridled inflation - 30-40 percent;

✔ exchange rate of 200-250 rubles per dollar;

✔ erosion of gold and foreign exchange reserves almost to zero;

✔ lack of basic goods;

✔ social instability and threat to territorial integrity.

Russians are entertained by stories about import substitution, Iran seems to have its own Internet, instead of YouTube-Apparat, instead of Facebook - Cloob, instead of App Store - Cafe Bazaar.

Russia will probably create a "Lapot Station" or something. Interestingly, at the time of its exclusion from SWIFT, Iran was also developing its payment system, but it did not become widespread in international trade.

Finally, the risks

Ukrainian partners want to help Kiev pay as little as possible. In Russia, they understand that and play poker: who will be the first to lose their temper. It is important to avoid circumventing sanctions through third countries, especially China.

The ability to sell energy at world prices will allow Russia to emerge from the abyss, so Iran and Venezuela must be fully involved, including the strategic oil reserves of developed countries.

Last but not least. The tangible effect of the sanctions will be seen in April or autumn. That is, Ukraine must win the war against irrational evil on its own.

Sanctions will greatly help to avoid the continuation of aggression, and if there is someone adequate in Russia - stop it. After all, Iran's GDP grew by 13 percent immediately after the lifting of sanctions.