Who benefits from the Russia sanctions? – Trade diversion and destruction since 2014

Abstract

This paper hypothesizes that Western sanctions and Russian countersanctions in the aftermath of the crisis in Ukraine starting in 2013 exert a negative effect on aggregated trade flows between senders and target country. Moreover, the paper hypothesizes a general Russian trade diversion due to the Russian political and economic disintegration with the West and the resulting Russian reorientation toward Asia and particularly China. While such economic sanctions as well as other trade barriers serve as explanatory variables for bilateral trade in a high number of studies, the effect on third parties is often overlooked. Hence, the present paper ties in with prior literature on the effectiveness of sanctions as well as the trade effect of sanctions and focuses on a potential third-party effect. In line with vast parts of the literature on the trade destruction effect of sanctions, the direct trade effect of sanctions as well as the countersanctions was found to be negative. In contrast, evidence on trade diversion could not be observed by means of a gravity model approach with some results even indicating further trade destruction, i. e. a negative trade effect on bystanders. The main policy implication for the effectiveness of sanctions and thus the EU CSDP is that economic adjustment in the sense of trade diversion to other countries appears neither to bust sanctions nor serve as a viable method for evasion.