German Experts Study Impact Of Economic Sanctions Against Iran And Russia

By Jutta Wolf

Researchers at the Institute for World Economy IfW Kiel and DIW Berlinhave analysed the economic impact of jointly implementing punitive measures in the context of the 2012 Iran and 2014 Russia sanctions. They find that coalitions serve two crucial purposes—they not only magnify the economic cost imposed on the target but also reduce domestic costs for sanctioning states.

The researchers use a model simulation to examine which impact on welfare the 2012 Iran and 2014 Russia sanctions had, looking at the targeted countries and the coalition countries. The model incorporates modern features of the global economy, such as global value chains, and features trade relations between practically all countries in the world. The year before the sanctions were imposed is used as the benchmark in each case.

The simulations find that the sanctions inflicted considerable economic harm: Russian exports were permanently 36 per cent lower and imports over 30 percent lower than before the sanctions. This translates into a welfare loss of 1.5 per cent, or roughly 10 per cent of Russia’s welfare gains from trade openness.

For Iran, the drop was even more pronounced, with 41 per cent of exports and 83 per cent of imports down. Iranians experienced a welfare loss of 1.7 per cent, constituting 12 per cent of Iran’s welfare gains from openness. The effect of the sanctions occurred even though there was no cohesive, global coalition for the sanctions. 

Smaller coalitions can have an impact

The study compares the effects that occurred with those that could have been achieved by a hypothetical global coalition with the same sanctions policies. The result is that even this smaller group of sanctioning countries achieved about 60 per cent of the effect that a global sanctions coalition could have achieved in the case of both Russia and Iran. “Even if important countries are missing from a global coalition, jointly imposed sanctions can significantly weaken the targeted country,” says Julian Hinz, a member of the Trade Policy Research Centre at Kiel Institute and one of the study’s authors.

The simulations also show which other countries could have been particularly effective in contributing to the sanctions had they joined the coalition: In Russia’s case, these would be China, Vietnam, Belarus, Turkey, and South Korea in particular. Had they joined the sanctions, the economic harm to Russia would have been particularly severe.

The Iran sanctions would likewise have gained significant traction, primarily through the participation of China and also the United Arab Emirates, India, Singapore, and Brazil.

China stands out in both cases. The country has consistently characterized its position as neutral party with regard to sanctions against Iran and Russia. In both cases, China’s involvement in the sanction’s regime would greatly deepen the welfare loss incurred, with little loss of wealth to China itself. “Large, developing economies such as China, India, Brazil, and Vietnam are ‘ideal’ prospective important allies if the coalition seeks to increase the cost of sanctions for Iran and Russia,” Hinz says.

Who bears the costs of sanctions

The simulations also examined which of the sanctioning countries bear the highest burdens in the form of their own welfare losses. Overall, the costs of the Russia sanctions are significantly higher than those of the Iran sanctions.

In the case of Russia, smaller countries such as Latvia, Lithuania, and Estonia in particular bear high costs in terms of their economic welfare, but Ukraine also does. In absolute terms, the burdens are highest for Germany, Poland, and Ukraine. The lowest costs in absolute terms are borne by the United States, the United Kingdom, Japan, Canada, and Australia.

“These sanctions costs could also be seen as equivalent to NATO spending. A balancing mechanism between countries with low and high costs from sanctions could make sanctions coalitions more durable and resilient,” Hinz says.

“Our simulations clearly show that sanctions imposed in coalitions significantly increase costs for the targeted countries. At the same time, joint action reduces the burden on individual sanctioning countries. Thus, coalitions are preferable to bilateral sanctions. Significant welfare losses occur for the sanctioned country even if not all important economies worldwide join the coalition. This is also relevant with regard to the sanctions imposed on Russia this year,” adds Hinz.