R  E  S  E  A  R  C  H

Exorbitant Privilege and Economic Sanctions

with Maxim Chupilkin, Beata Javorcik, and Alexander Plekhanov 

This paper documents a substantial change in the use of currency of invoicing in import and export transactions, precipitated by the war on Ukraine and the subsequent introduction of trade sanctions on Russia. Over the course of 2022, the share of Russia’s imports invoiced in yuan (CNY) increased by 17 percentage points. The use of yuan as a vehicle currency increased on average by an extra 4 percentage points among trading partners that have an active yuan swap line. This effect is found only for third countries that did not impose economic sanctions on Russia. The share of CNY invoicing increased differentially more for trade in internationally sanctioned dual-use and industrial-capacity goods. The number of importing firms in Russia dealing with CNY invoices increased sharply, while the numbers of importers dealing with USD and EUR invoicing dropped, likely reflecting the rising fixed costs of clearing such payments under sanctions. Thus while dominance of the US dollar (USD) makes international sanctions more effective, as payments denominated in USD need to be cleared through the US banking system, economic sanctions may encourage a shift away from USD as a vehicle currency thus eroding the USD dominance. 

Economic sanctions and intermediated trade

with Maxim Chupilkin, Beata Javorcik, and Alexander Plekhanov 

This paper documents a substantial change in regional trade patterns precipitated by the war on Ukraine and the subsequent introduction of trade sanctions on Russia. The analysis is based on transaction-level records of Russia’s imports from economies outside the Eurasian Economic Union (EEU). The data shows a sharp drop in direct exports from sanctioning economies to Russia following the introduction of sanctions in March 2022. At the same time, imports of sanctioned goods originating in sanctioning economies or under Western trademarks and routed via a trading company in neutral countries increased by 100-200 percent. This intermediated trade increased significantly more rapidly for industrial-capacity goods under international sanctions and dual-use technology. Nine months after the introduction of sanctions, intermediated trade in sanctioned industrial goods amounted to more than a third of the reduction in their direct exports to Russia. The use of neutral intermediaries was associated with higher unit values of imported goods, with additional increases averaging 20 to 40 percent.

Did Sanctions Help Putin?

Do sanctions strengthen the targeted regime? I analyze the 2014 imposition of Western sanctions on Russia and its impact on voting. The United States and the European Union introduced targeted measures against Russian entities and individuals related to President Putin’s regime. Using polling station-level data I investigate whether President Putin gained relatively more support among those local constituencies which were geographically close to a sanctioned firm. I find a significant effect of targeted sanctions imposition on the vote share in presidential elections between 2012 and 2018. Polling stations exposed to a sanctioned firm displayed larger increase in support for presidential candidate Putin. The effect is mediated through an increasingly patriotic rhetoric on Russian state TV. Contrary to policymakers’ hopes, modern-day targeted sanctions seem to be beneficial to a dictator.

Sanctions and Elites

States consist of groups with diverging interests and ideologies who are in perpetual conflict over power and resources and who are differentially affected by sanctions. Using the imposition of US and EU targeted sanctions on Russia starting 2014, we study whether sanctions are able to instigate a change in elite-power relations. We examine how affectedness of sanctioned elites differs over time depending on their closeness to President Putin and his inner circle and whether non‐sanctioned elites are also affected. Combining data on wealth of Russian elites with the universe of Russia’s public procurement contracts, Russian regulations introduced to help sanctioned entities, as well as Russian holdings of offshore assets, Western citizenships and business jet travel to Western countries paints a vivid picture of an uneasy dance between the Russian regime trying to appease the disgruntled sanctioned elites and non-sanctioned elites fearing for their prosperity as they could be next-to-sanction.

Sanctions and Technology Transfer

The 2014 US and EU sanctions on Russia feature restrictions on technology transfer to Russian defense and energy industries. Using firm‐level balance sheet and customs data, I explore the impact of this supply shock on the development of the targeted industries. Specifically, I study the alternative suppliers to which the affected firms turn for technology as well as the potential directed technical change in the form of import substitution attempts. Using patent data, I explore whether there is a change in the innovation rate in technologies related to the defense and energy sectors. Ultimately, sanctions have the potential to cripple Russia’s mid‐ and long-term economic prospects as they deter innovation in its key sectors.