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Sanctions on Russia: what are the ramifications of this new trade war?

Following the invasion of Ukraine, Western sanctions have targeted Russia’s trade, companies, individuals and financial sector. The measures, which are far more wide-ranging than those following the annexation of Crimea in 2014, raise big legal and economic issues for the world trading system.

The war in Ukraine is now in its seventh week. The Russian invasion reflects President Putin’s long-standing obsession with the status of Ukraine: his belief that it constitutes part of ‘Greater Russia’ and his fear of a thriving pro-Western economy and polity on his south-western doorstep.

The response of many governments, most notably in Europe, the United States and other pro-Western countries, has been to impose a range of sanctions on Russia, as well as offers of military and political support to Ukraine. The European Union (EU) and the UK alone account for around 40% of Russia’s trade in goods and services.

The measures are likely to have a significant impact on Russia’s economy. The World Bank forecasts that on the basis of sanctions announced in March 2022, by the end of 2022, Russia’s GDP will be 11% lower, investment 17% lower, inflation will rise to 22%, and exports and imports will fall by 31% and 35% respectively (World Bank, 2022). In addition to this impact on the economy, there should be an effect on Russia’s war effort, not least because a large share of Russian imports is relatively technology-intensive.

But it is not just Russia that will be affected. Apart from the destructive effect of the war on Ukraine, there will be an impact on adjacent countries, especially in Europe. The flow of refugees will place a strain on welfare states in these countries. There will also be effects on trade. The EU, the UK and the United States have all placed restrictions on energy imports from Russia in response to the invasion. The ability of the EU, in particular, to diversify away from dependence on imports from Russia, notably of oil, gas and fertiliser, will take longer.

Of potentially greater long-run significance for Russia is the range of other measures adopted by these countries, including sanctions on financial services and on individuals who are perceived to be close to the Putin regime.

More generally, the Russian economy may suffer from the collapse of technical, scientific and cultural ties with the West. This could lead to a ‘brain drain’ of younger and more outward-looking Russians who do not wish to remain in a country that is rapidly becoming a pariah on the world stage.

Sanctions and trade wars

The imposition of sanctions on Russia is perhaps the most striking illustration of the recent reversal of policies designed to encourage greater trade between countries. These policies emerged following the establishment of a range of multilateral institutions after 1945 and, in particular, the General Agreement of Trade and Tariffs (GATT) in 1947 and its successor, the World Trade Organization (WTO), established in 1995.

The intention of the GATT/WTO was to minimise the threat of ‘trade wars’, whereby trade defence mechanisms such as tariffs, non-tariff barriers and embargoes are imposed for strategic political and economic motives. The desire to avoid trade wars led to measures designed to discourage both one-sided and ‘tit-for-tat’ trade restrictions, and the implementation of mechanisms designed to resolve trade disputes.

It was also implicitly hoped that greater trade co-operation between countries would lead to the liberalisation of political regimes and bring greater emphasis on human rights and individual freedoms. Increasingly in recent years, these hopes have been dashed.

Trade sanctions have been implemented over the years against smaller countries such as Rhodesia (now Zimbabwe) from the mid-1960s through to the 1970s and, more recently, Myanmar in 2021 (Losman, 1978; Poletti and Sicurelli, 2022). These measures have generally been perceived as rather ineffective due to the proximity of those countries to other countries that were prepared to ignore such embargoes and sanctions.

But more recently, the willingness of President Trump to institute trade wars with countries that he perceived to be engaged in ‘unfair’ trade practices against the United States – including China, the EU, the UK and indeed pretty much everyone else – points to the erosion of the mantra of ‘free trade’ as engineering the growth of world output. Indeed, it indicates a move towards more nationalist and protectionist economic policies among some major countries.

The use of trade restrictions against Russia for political reasons is arguably more morally justified – and universally supported – than explicitly protectionist policies. This has been reflected in popular support for the measures.

Social media has played a role in encouraging boycotts of individual firms operating in Russia, the boycott of Russian goods and services and the inclusion of individuals (and their families) on sanctions lists. For example, Nestlé was slow to pull out of Russia until social media called for boycotts of Kit Kats and Nespresso coffee pods (Blitz, 2022). The daughters of Putin and the step-daughter of Russia’s foreign minister Lavrov were called out on social media such as Twitter and Instagram for their lavish lifestyles in the West, and sanctions were placed on them by the UK and US governments.

What sanctions can be imposed and what are their legal implications?

Sanctions against Russia are subject to the rules and mechanisms designed by international institutions to limit protectionist policies. They are also bound by more basic principles of the rule of law, especially when it comes to sanctioning individuals.

A variety of measures have been taken against Russia since the invasion of Ukraine. These include:

  • Sanctions against goods, services and finance in Russia.
  • Sanctions against individual companies operating in Russia.
  • Sanctions against specific individuals associated with Putin.
  • Suspension of the ‘most favoured nation’ (MFN) clause in the WTO, which prevents countries from discriminating between their trading partners.

The use of these sanctions raises questions about how trade measures can be used in a political setting and what are the legal and economic consequences. The perceived weakness of the WTO in handling trade disputes has, for example, led the EU to take the lead in strengthening its own trade defence mechanisms, including a proposal for an ‘anti-coercion instrument’. This is a response to coercive tactics taken by third states to threaten or undermine EU policies. The anti-coercion instrument would allow the European Commission to take trade, investment or other restrictive measures towards a non-EU country exerting pressure (European Commission, 2021). The question is whether the events in Ukraine have eclipsed these mechanisms and safeguards.

The objectives of economic sanctions are often compared to the objectives of criminal justice:

  • Do they deter bad behaviour?
  • Can they be enforced?
  • Are their punishments effective?
  • Do they lead to changed behaviour by the targeted countries?

Sanctions against goods and services

In 2020, 44% of Russian exports were bound for NATO countries (40% to the EU and the UK, and 3% to the United States). In terms of imports to Russia, 38% come from NATO member states (35% from the EU and just over 4% from the United States).

Given that trade as a share of Russian GDP in recent years is close to 50%, wide-ranging trade sanctions could in principle have a significant effect on economic activity in Russia (Gasiorek and Larbalestier, 2022).

Russia relies heavily on imports for technology, finance, capital and consumer goods. For example, imports of machinery, parts and electrical equipment account for around a third of imports by value, and a large share of them comes from the EU. Further, pharmaceutical products account for only 5% of imports by value to Russia, but two-thirds of these come from the EU.

In due course, Russia may be able to diversify suppliers. Even in the short term, it may be able to obtain some necessary imports by indirect means, such as false invoices or smuggling. But while Russia has land borders with countries, such as Belarus, that are not implementing sanctions, there is unlikely to be scope for the kind of unchecked imports that allowed countries, such as Rhodesia, to evade sanctions in the past.

Economic sanctions against Russia will affect the global economy insofar as they cover exports of wheat, corn, sunflower oil, fertiliser, metals (nickel, copper and iron), neon, palladium (used in microchips) and platinum. Gas and oil are the main commodities where countries applying sanctions will be at their weakest.

Russia has long exploited gas and oil exports as a weapon of trade war in its disputes with Ukraine. Here the EU is vulnerable in the short run: it is estimated that after the winter, European supplies will be at 30% capacity. Within the EU, member states have wanted to keep control over their energy policy choice, especially the mix of energy and when national public interest may be used to divert from the four freedoms (goods, services, capital, establishment).

State aid and competition law may be used to challenge these choices, and indeed to encourage certain choices, for example, the development of green energy. But member states retain sovereignty. The lack of an integrated energy policy for the EU is the Achilles heel that Russia will continue to try to exploit.

Evidence from sanctions after the annexation of Crimea in 2014

There have been some attempts to estimate the impact of current economic sanctions on Russia by looking at the limited sanctions imposed after the 2014 annexation of Crimea. These included financial restrictions on capital for investment, freezing of financial assets, immigration sanctions on particular individuals, prohibitions on technology transfer and technical assistance, and highly targeted trade sanctions. In turn, Russia retaliated with some restrictions on exports of some food products.

Evidence from world trade data suggests that both import and export values fell after 2014 (see Figure 1). But it is important to note that Russian trade values were already on a downward trend before that time, reflecting the weakness of the world oil and gas market. Indeed, as illustrated in Figure 1, the oil price index is a very good predictor of the value of Russian trade.

Figure 1: Russian exports and imports by value and oil price index, 2005-2019

Source: United Nations (UN) International Trade Statistics Database. Note: the dark blue line (oil prices) is an indexed value, rather than a nominal value.

It is estimated that the trade restrictions implemented in 2014 resulted in no more than a 1% reduction in Russian GDP (Korhonen, 2019).

The most significant sanctions are thought to be those that restricted Russian companies’ access to foreign capital, since investors in the EU and the United States were barred from providing capital to five major Russian banks, as well as companies operating in the oil and gas, and military sectors (Korhonen, 2019). Another study also suggests that targeted companies performed significantly worse than other companies engaged in similar activities in Russia (Ahn and Ludema, 2019).

Cutting off external sources of financial support to Russian companies after 2014 had an impact on the viability of their activities. Investors in the EU, the UK and the United States were forbidden to provide financing beyond 30 days to several Russian state banks, oil companies and several firms operating in the military sector. This had two major effects:

  • First, foreign investment in Russia fell as a consequence of these sanctions – by one estimate by $700 million per quarter(Korhonen and Koshinen, 2019).
  • Second, the foreign debt of Russian banks held abroad fell from a peak of $214 billion to $74 billion in 2019, as these institutions switched to assets held domestically in roubles. The Russian economy has becoming increasingly dependent on capital generated internally, a process that will be exacerbated by the more wide-ranging sanctions introduced in 2022.

What were the legal ramifications of the annexation of Crimea and suspension of Russia’s MFN status?

A further response to Russian aggression in Crimea was the revocation of Russia’s MFN status from the EU, the United States and other G7 countries.

The MFN clause is the foundational principle of the GATT/WTO. It guarantees that each member of the WTO receives the same treatment: the lowest tariffs granted to one member should apply to all members. But there is an ‘essential security’ clause in Article XXI of the GATT, which can be used unilaterally to justify protectionist measures. Reacting to the Russian invasion of Ukraine in February 2022, Canada, the UK, the United States and several other WTO members revoked the MFN from Russia (Collins, 2022). The use of this clause has emerged before in the Russia-Ukraine context.

The political use of trade to sanction a breach of international law is understandably contentious. Resort to trade countermeasures for a breach of international law is seen as undermining the stability of the world trading system. Few disputes have been brought before WTO panels – indeed, the most notable was in relation to Russia’s annexation of Crimea in 2014. Another arose in 2019 when Qatar initiated consultations with Bahrain, Saudi Arabia and the United Arab Emirates concerning sanctions in relation to Qatar’s alleged funding of terrorism.

A WTO panel examined the essential security provision in the dispute brought by Ukraine against Russia after the annexation of Crimea by Russia in 2014. The illegal annexation led to the imposition of economic sanctions by various countries against Russian entities. Russia responded by imposing transit bans and other restrictions preventing the transit of goods from Ukraine to Kazakhstan and other bordering countries.

Ukraine brought a dispute to the WTO claiming this was a breach of the GATT. While Russia asserted that the measures were necessary for the protection of its essential security interests. Russia – backed by the United States – argued that the WTO panel lacked jurisdiction to evaluate its measures. The panel disagreed with this last point and found that it had jurisdiction to review Russia’s use of the essential security justification. But it also found that the situation between Ukraine and Russia since 2014 was an emergency in international relations, and that Russia’s measures had been taken during that emergency.

The panel concluded that every WTO member may define what it considers to be its essential security interests. This discretion is limited by an obligation to interpret and apply the essential security clause in good faith. This involves an obligation ‘to articulate the essential security interests … sufficiently enough to demonstrate their veracity’, and there should be a connection between the essential security interests invoked and the measures taken. Russia could determine the ‘necessity’ of the measures for the protection of its essential security interests.

The panel would not decide on the legality of Russia’s annexation of Crimea under international law. It ruled that it was ‘not relevant’ to its determination whether Russia had ‘any international responsibility for the existence of this situation to which Russia refers’. Russia objected to the panel’s reference to the ‘international community’s’ condemnation of the annexation of Crimea’, leading to the replacement of this term with ‘the UN Resolution’. This indicates the panel’s view of separating out liability under international law and liability under international economic law.

The legal implications of these events for the sanctions imposed on Russia in 2022 are unclear. It might be hard for the countries introducing sanctions – unlike Ukraine itself – to argue that their essential security interests have justified their actions against Russia without arguing that in some more general sense, Russia’s actions in Ukraine threatened a more global conflict.

On the other hand, given the world’s almost unanimous condemnation of the Russian invasion – and growing claims of war crimes committed in Ukraine – it would be ironic at best for Russia to attempt to pursue a dispute at the WTO, arguing that the suspension of the MFN clause was unjustified.

New financial sanctions

The financial sanctions introduced in 2022 are wide-ranging. First, the Russian central bank has been barred from using its ‘emergency reserves’ held in foreign central banks and commercial banks in the form of foreign exchange and securities. By freezing these assets, Russia’s ability to use its foreign exchange reserves to purchase goods and services abroad is severely limited.

In similar vein, the Russian sovereign wealth fund has been targeted and cannot sell assets abroad to finance purchase material. This has an immediate impact on the much-vaunted Russian ‘war chest’ of $600 billion (Cecchetti and Schoenholtz, 2022).

Since these sanctions are internationally co-ordinated and include countries that are normally reluctant to participate in actions of this kind – such as Switzerland – these are potentially powerful constraints on Russian economic activity. They are forcing the economy to rely largely on current receipts from its exports to finance foreign purchases.

Since Russia is running a trade surplus – and has imposed capital controls to limit outflows of foreign exchange through capital flight or purchase of non-essential imports – the immediate effect may be limited. But as countries currently importing from Russia find alternative sources of supply, the constraint on foreign exchange reserves will bite harder.

Russia has responded to the financial effects of these sanctions by demanding that foreign countries pay for their energy supplies in roubles. This could be difficult to enforce, especially since the assets of the Russian central bank abroad are frozen and contracts would have to be legally re-negotiated for changes to occur.

Even if this could happen so that foreign purchasers of Russian oil and gas have to convert their currencies into roubles via the remaining parts of the Russian banking system that are not sanctioned, it is hard to see that this threat is anything other than symbolic.

Russia could try to enforce some sort of multiple exchange rate system by which roubles must be purchased at an artificially high rate, but it is not clear how this would work. Such exchange rate regimes typically collapse or lead to the development of increasingly overt black markets where the local currency is purchased at a cost well below the official rate.

There are also sanctions against Russian commercial banks. SWIFT (the acronym for the Society for Worldwide Interbank Financial Telecommunication) is a messaging system that allows banks around the globe to communicate quickly and securely about cross-border payments. It is a member-owned co-operative based in Belgium, made up of global banks. On 2 March, SWIFT announced that it would cut off seven Russian and three Belarusian banks from its system with effect from 12 March.

The consensus is that this measure will have a limited effect. First, because several Russian banks are not sanctioned; and second, because there are other, albeit more costly, means of communicating bank transactions other than through SWIFT (House of Commons Treasury Committee, 2022).

In similar vein to those imposed on Russia’s central bank, several countries have imposed sanctions on other Russian banks such as Sberbank, VTB Bank, Alfa-bank, Bank Otkritie and Rossiya Bank. Again, this involves freezing assets held abroad and a ban on any bank dealings in these markets.

Other companies and entities, as in the post-2014 sanctions, are limited in the activities that they can undertake abroad – whether purchases (for example, in the case of defence and technology state-owned companies) or raising capital (in the case of oil and gas companies such as Gazprom).

Critics have pointed to the fact that several Russian state-run and commercial banks continue to operate relatively free of sanctions. As the war continues, there will be pressure to widen the reach of the sanctions, but while Russia continues to export products such as oil and gas, it is inevitable that some means of trading with Russia will continue.

The effects of asset freezes on banks on domestic Russian activity is harder to calibrate. Research suggests that after the post-2014 episode, sanctioned Russian banks adjusted their asset and liability structures, moving away from foreign assets and liabilities into the domestic market (Mamonova et al, 2021). They may therefore be more protected from the current sanctions.

Since the Russian central bank can presumably still provide liquidity to the domestic banking system, the Russian financial system is likely to survive, albeit in an increasingly autarkic economic system.

Sanctions against specific individuals

Russian oligarchs or billionaires considered close to Putin were quickly targeted by the EU, the UK and the United States. The personal and corporate assets of these individuals have been frozen and they have also been denied access to maintenance of assets and hiring employees.

Calls for these sanctions have been made since the annexation of Crimea in 2014, justified by arguments that these oligarchs fund major infrastructure projects in Russia, such as the Sochi Olympics or the bridge to Crimea. Crucially, they also fund personal projects for Putin, such as his villa on the Black Sea and private yachts (European Council, 2022).

The oligarchs deny that they have political influence over Putin and that such sanctions are not justified. But do they have any legal recourse in such a case?

After sanctions were imposed following the 9/11 attacks, the EU agreed guidelines on the use of sanctions. Under these, individuals and firms may resort to legal challenges to the sanctions using domestic law – and in the EU with recourse to EU courts, either directly or through the preliminary reference procedure.

EU law provides procedural safeguards, alongside guarantees of adherence to fundamental rights found in EU law, but the EU courts will not interfere in the merits of the case. An attempt by Rosneft – a Russian energy company, 69% of which is owned by the Russian state – to have the underlying EU Regulations annulled when sanctions were imposed on it after the annexation of Crimea was dismissed by the Court of Justice of the European Union (CJEU) in 2017. The Court found that there was a reasonable relationship between the sanctions and the objectives underpinning them:

‘… in so far as that objective is, inter alia, to increase the costs to be borne by the Russian Federation for its actions to undermine Ukraine’s territorial integrity, sovereignty and independence, the approach of targeting a major player in the oil sector, which is moreover predominantly owned by the Russian State, is consistent with that objective and cannot, in any event, be considered to be manifestly inappropriate with respect to the objective pursued’.


The world has responded to the war in Ukraine in an unprecedented way: by using economic sanctions and defensive trade instruments to show political opposition to the Russian invasion. In particular, financial sanctions against Russian banks and other state agencies have had a dramatic impact on Russia’s ability to use foreign exchange and credit lines to bolster its war effort.

This makes the Russian economy more dependent on current revenue flows from its exports of oil, gas and related products. Cutting usage of such products, especially by EU countries, remains a priority. But as Figure 1 shows, any fall in the price of oil will have an adverse effect on Russia’s foreign exchange revenues. Measures to enhance supplies of oil and gas from other producers are therefore a priority, thereby raising total supply while simultaneously allowing countries to divert demand to other producers.

On the legal side, time will tell if the response can have political leverage and force Russia to withdraw from Ukrainian territory. For example, one question, both legal and economic, remains unanswered: how long should the sanctions and revocation of the MFN last, and can Russia successfully appeal any of the dramatic legal and administrative measures taken against it?

A cessation of military activity and withdrawal from Ukrainian territory seems an essential prerequisite before these questions can be answered – and this will only be the first step in what could be protracted negotiations over the future security of Ukraine.

Where can I find out more?

Who are experts on this question?

  • Stephen Cecchetti
  • Adam Cygan
  • Richard Disney
  • Erkal Ersoy
  • Sergei Guriev
  • Ben Moll
  • Kim Schoenholtz
  • Erika Szyszczak
Authors: Adam Cygan, Richard Disney and Erika Szyszczak
Note: An earlier version of some of this material was discussed in a seminar on 29 March 2022 involving some of the authors and participants from the Universities of Kyiv and Lviv.
Photo by Lidia Mukhamadeeva on iStock
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