The impact of financial sanctions on the Russian economy

The paper looks into the impact of the Western financial sanctions on the Russian economy. The results of modeling of capital flow components (taking into account the influence of other factors, including the fall in oil prices) demonstrate that, apart from the direct effect of constraints on foreign funding for sanctioned state-controlled banks, oil, gas and arms companies, there is also a significant indirect effect of lower inflows of foreign direct investment and worsening funding conditions for non-sanctioned companies. The overall negative effect on gross capital inflow in 2014-2017 is estimated at about $280bn. However, the effect on net capital inflow is significantly lower ($160-170bn) thanks to self-adjustment of Russian companies evident in utilization of foreign assets accumulated earlier for debt repayment and overall decrease in gross capital outflow. The estimated sanctions' effect on GDP is significant (-2.4 p.p. by 2017 as compared to hypothetical scenario without sanctions) but 3.3 times lower than the estimated effect of oil price shock.