Nations deploy economic sanctions as a critical tool to sway or coerce another state's behavior, primarily for political or economic objectives. Such measures can take the form of trade embargos, freezes on financial assets or restrictions on technology transfers. Yet contrary to the common perception that sanctions solely impair the targeted nation, the reality is far more complex. While sanctions aim to pressure targeted countries, it's critical to scrutinize their reciprocal impact on the enforcing countries' economies.

Economic sanctions inherently restrict trade and investments with the sanctioned nation. This reduced market access potentially triggers profit losses and job cuts in the enforcing country, hitting particularly hard in sectors that rely heavily on international trade. It thus becomes imperative to consider the far-reaching impacts of such decisions, given the interconnected nature of global economies.

On the February 24, 2022, Russia invaded Ukraine in an escalation of the Russo-Ukrainian war, which began in 2014. On the battlefield, the catastrophic war has created death and destruction. Beyond it, the Western countries trying to cripple the Russian economy have waged an economic war by using their arsenal of sanctions. So how does the impact of the sanctions on Russia compare with their effect on the imposing countries?

A Data Analysis Approach

We devised an analytical approach focused on isolating the impacts of the sanctions on these economies using three vital economic indicators: gross domestic product (GDP) growth rate, Consumer Price Index (CPI) inflation, and unemployment rate. We will apply these metrics to the sanction-imposing countries (the U.S. and EU) and sanctioned country (Russia).

We considered the impact from pre-sanction years (2019-2021) to post-sanction years (2022). We chose 2022 as the cutoff year because that is when the war gained momentum.

A whopping 107 sanctions were imposed on Russia starting from February, 2022 until June, 2023. Of these, 29 were imposed by the U.S. and 30 by the EU (the numbers aren’t mutually exclusive). Note that while the United Kingdom imposed 32 sanctions, those actions included the after-effect of Brexit followed by COVID-19 and an energy crisis, making it hard to isolate the impact of sanctions alone. Consequently, we had to exclude the U.K. from our analysis of the EU. 

The challenge in performing this analysis is that, in addition to the impact of sanctions, the selected economies suffered from the fallout of COVID-19 and the direct impact of the war beyond sanctions. The picture can be better understood through the following equations:

• U.S., EU = COVID + sanctions
• Russia = COVID + war + sanctions

The next step was to find a way to isolate the impact of sanctions only. To do so, we needed to eliminate the effects of COVID-19 and war.

The Impact on the U.S. and EU

In measuring the impact of sanctions on the U.S. and EU, we selected a group of 11 countries (China, Japan, South Korea, Mexico, India, Thailand, Brazil, Indonesia, South Africa, Chile and Peru) that did not heavily depend on Russia and Ukraine for trade. (In other words, the top five exporters and importers for these countries are not Russia or Ukraine.) Therefore, they wouldn’t be directly or indirectly affected by the war, and would provide the best approximation to evaluate the effect of the pandemic.

Since these countries were “only” affected by COVID-19, they would help us isolate its impact from the pre-sanctions to post-sanctions period. The underlying assumption here is that the effects of sanctions started surfacing in the same year they were imposed — 2022.

Because their impact cannot be directly subtracted from that of the U.S. and the EU, we used a “haircut” of 10% to adjust the effect of 11 countries. Which is to say that, since these economies aren’t as powerful as the U.S. and the EU, they were slightly (10%) more affected by COVID-19. So we adjusted the number to make it comparable with the U.S. and the EU.

Using the resultant impact, we arrived at the estimated indicators of the U.S. and EU had they not been struck by COVID-19. This adjustment helped us to isolate the effects of the sanctions.

The Impact on Russia 

To ascertain the impact of sanctions on Russia, we needed to eliminate the effect of both COVID-19 and war. Thus, we had to find a country that was impacted by those factors, but not sanctions. Enter Ukraine.

One challenge was to directly subtract Ukraine’s impact from Russia. We cannot compare the effects between the two countries, because their economies vary significantly in size. Thus, we used a much larger "haircut" of 90% on the change in GDP growth rate, CPI inflation and unemployment rates to make Ukraine’s impact comparable to Russia’s. This comparison allowed us to arrive at a GDP growth rate for Russia had it not been affected by COVID-19 and the war, thereby isolating the impact of the sanctions.

The Blowback Phenomenon: GDP

The GDP growth rate is a primary measure of economic performance. When negative, it signifies an economic contraction, denoting a decrease in the total production of goods and services.

In this case, the U.S. economy has experienced a growth rate of just 0.30%, significantly lower than the predicted growth rate of 1.73%. This decrease of 1.43% is likely attributable primarily to sanctions imposed by the U.S. government.  

The EU presents a contrasting scenario. Despite imposing sanctions, it reported a GDP growth rate of 2.97%, comfortably surpassing its expected rate of 1.73%. However, this elevated rate doesn’t necessarily indicate that the EU was immune to the sanctions. Rather, it appears to be largely due to the €2.018 trillion (current prices) economic stimulus package that the EU implemented.

Economic stimulus packages help counteract the adverse effects of monetary shocks by encouraging spending and investment. However, it's important to note that their beneficial effects are unlikely to be a permanent solution. Without them, the EU would probably have experienced a significant downturn similar to that of the U.S.

In Russia's case, the sanctions have significantly compounded an already challenging economic landscape. The observed GDP growth rate was -3.8%, which falls below the projected rate of -3%. This additional decline of 0.8% underscores the consequences of the sanctions.

The sanctions have seemingly worsened an economic contraction for Russia, as highlighted by the negative GDP growth rate. This downward trend can be attributed to several factors stemming directly from sanctions:

• They curtailed Russia’s capacity to trade;
• They restricted access to international financial markets and foreign investments, and
• They resulted in a hostile business environment, triggering a downward economic spiral.

CPI Inflation

Inflation, reflected by the CPI, represents the average price variation over time for a range of consumer goods and services. An increase in this index signals a rise in inflation and, subsequently, a decrease in the purchasing power of money, as consumers must pay more for the same basket of goods and services. 

In the case of the U.S., the sanctions resulted in an uptick in the CPI inflation to 12.99 points, surpassing the forecasted figure of 10.27 points by 2.72 points. Sanctions often result in increased inflation through multiple channels because:

• They create trade barriers that restrict the supply of imported goods and services;
• They can destabilize exchange rates, potentially devaluing the domestic currency and rendering imported goods and services more expensive, and
• The resulting unpredictability can discourage investments and hamper productivity.

Simultaneously, despite being one of the imposers of the sanctions, the EU saw an increase in inflation. The EU's CPI inflation climbed to 12.56 points, exceeding the anticipated 10.27 points by 2.29 points. Like the U.S., the sanctions likely played a central role in driving this surge.

The sanctions imposed by the USA and EU have had a pronounced impact on Russia's inflation rate. Specifically, Russia's observed CPI inflation spiked to 24.98 points, a drastic increase from the anticipated rate of 4.68. This escalation by 20.3 points illustrates the far-reaching economic implications of these sanctions.

In Russia's case, the immense surge of 20.3 points in inflation can be seen as a direct result of the sanctions. Such a sharp rise in prices directly affects the population, reducing people's purchasing power and lowering living standards. It's also likely to pressure the government to implement policies to control inflation, which can be challenging during economic hardship. 

Therefore, the consequences of the sanctions have significantly impacted Russia's economy, reflected in the steep inflation surge.

Unemployment Rate

Unemployment data for the U.S. and EU show marked changes in unemployment of -2.07% and -0.88%, respectively. These negative values indicate a decrease in unemployment — ostensibly, a positive outcome. However, these figures must be contextualized to be correctly understood.

The reason for these larger-than-expected decreases in unemployment was likely a result of artificial stimuli. Both regions implemented costly COVID-19 recovery stimulus packages. Moreover, the U.S. implemented an employee retention credit to encourage businesses to keep employees on their payrolls. While effective in the short-term at reducing unemployment, these measures can have adverse longer-term effects like inflationary pressures.

Russia, meanwhile, showed an observed decrease in unemployment of -1.13%. However, based on the performance of Ukraine (which was directly affected by the war), an increase in unemployment of 1.54% was expected, reflecting a discrepancy of 2.66%. 

While this might seem positive at first glance, the reasons behind the drop point to potential economic instability. Much of this decrease can be attributed to factors tied to the ongoing conflict: 

• Increased military spending, creating jobs within the army and related sectors;
• Displacement of workers, leading to changes in the workforce distribution, and
• Public works, possibly initiated as a response to infrastructural damage or strategic wartime needs.

While these factors may decrease unemployment in the short term, they do not necessarily indicate a healthy or sustainable economic situation.

In summary, while the sanctions have led to decreased unemployment in both the sanctioning and sanctioned countries, the reasons behind these changes may indicate potential economic instability in the future. In the case of the U.S. and EU, it's likely due to the large stimulus measures taken, while in Russia, it's likely due to factors associated with conflict and war.

This data-driven comparison accentuates the mutual consequences of sanctions on both the subject and instigators. While Russia, the country under sanctions, endured substantial economic repercussions, the nations imposing the sanctions — the U.S. and EU — were not invulnerable to the aftereffects of their decision. The data illustrates a slump in GDP growth rates, coupled with an upswing in CPI inflation across both clusters of countries. However, the severity of these impacts varied.

Yash Mundra is a business analyst, and Yogesh Gaddam a summer intern, with FischerJordan.