The limited effectiveness of sanctions on Russia : Modeling loopholes and workarounds
Funke, Michael; Wende, Adrian (19.05.2025)
Numero
4/2025Julkaisija
Bank of Finland
2025
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2025051947380Tiivistelmä
Following Russia’s invasion of Ukraine in February 2022, the US, EU, and like-minded countries swiftly imposed an expanded set of primary and secondary export restrictions on Russia. This paper assesses the effectiveness of those measures and their ongoing refinement and modification over time using a calibrated three-country dynamic general equilibrium trade model with heterogeneous firm productivities. The modeling set-up comprises a rich specification of export ban loopholes and workarounds, as well as subsequent countermeasures such as re-exports, ghost trade, and secondary extraterritorial export bans. The numerical model evaluations and the numerous policy counterfactuals highlight the challenges of export ban evasion and offer insights for effective export ban designs in the future. We show that targeted secondary extraterritorial export bans have proven an impactful policy tool in diminishing Russia’s imports of critical technologies.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
Following Russia’s 2022 invasion of Ukraine, a coalition of like-minded countries imposed an extraordinary set of coordinated economic export controls and sanctions on Russia. Over time, Western export bans have become a cat-and-mouse game with each new restriction giving rise to additional trade diversion and sanctions workaround efforts. Despite the efforts of the sanctions coalition to close loopholes and tighten the sanctions regime, Russia has succeeded in bypassing export bans by means of trade diversion imports from non-aligned countries, direct or indirect under-the-radar re-exports, and the use of false transit schemes. Each time the sanction coalition ratchets up export controls, Russia and its partners find new ways to circumvent them.
CONTRIBUTION
Against this background of numerous sanctions evasion activities, we analyze the impact of advanced technology export bans against Russia and their limited effectiveness using a calibrated multi-country dynamic trade model. Our state-of-the-art model incorporates recent advances in the general equilibrium theory of international trade, including assumptions that firms within each sector are heterogeneous in their productivity and that international trade arises in the context of cross-border input-output relationships. Notably, international trade leads to the reallocation of resources within industries, thereby raising average industry productivity. High productivity suppliers, in turn, can then expand to enter international markets. The innovative building blocks of our model are sanctions evasion strategies such as re-export of goods and extraterritorial sanctions against non-aligned countries.
FINDINGS
The analysis yields four main results. First, the model simulations show that export bans on Russia lead to GDP declines in both Russia and sanctioning countries, while the GDP impacts on the rest of the world countries are positive due to traditional trade diversion effects, workarounds, and re-export activities. Second, the incentive for re-export (sanction bypassing via non-aligned countries) is particularly pronounced for high-end products. Third, a tightening of primary export controls increases the incentive for workarounds and sanctions evasion. Fourth, the model-based analysis of multi-layered export bans reveals that heightened imposition of secondary extraterritorial sanctions reduces the incentive for re-exporting and impedes Russia’s access to advanced technology goods.
FOCUS
Following Russia’s 2022 invasion of Ukraine, a coalition of like-minded countries imposed an extraordinary set of coordinated economic export controls and sanctions on Russia. Over time, Western export bans have become a cat-and-mouse game with each new restriction giving rise to additional trade diversion and sanctions workaround efforts. Despite the efforts of the sanctions coalition to close loopholes and tighten the sanctions regime, Russia has succeeded in bypassing export bans by means of trade diversion imports from non-aligned countries, direct or indirect under-the-radar re-exports, and the use of false transit schemes. Each time the sanction coalition ratchets up export controls, Russia and its partners find new ways to circumvent them.
CONTRIBUTION
Against this background of numerous sanctions evasion activities, we analyze the impact of advanced technology export bans against Russia and their limited effectiveness using a calibrated multi-country dynamic trade model. Our state-of-the-art model incorporates recent advances in the general equilibrium theory of international trade, including assumptions that firms within each sector are heterogeneous in their productivity and that international trade arises in the context of cross-border input-output relationships. Notably, international trade leads to the reallocation of resources within industries, thereby raising average industry productivity. High productivity suppliers, in turn, can then expand to enter international markets. The innovative building blocks of our model are sanctions evasion strategies such as re-export of goods and extraterritorial sanctions against non-aligned countries.
FINDINGS
The analysis yields four main results. First, the model simulations show that export bans on Russia lead to GDP declines in both Russia and sanctioning countries, while the GDP impacts on the rest of the world countries are positive due to traditional trade diversion effects, workarounds, and re-export activities. Second, the incentive for re-export (sanction bypassing via non-aligned countries) is particularly pronounced for high-end products. Third, a tightening of primary export controls increases the incentive for workarounds and sanctions evasion. Fourth, the model-based analysis of multi-layered export bans reveals that heightened imposition of secondary extraterritorial sanctions reduces the incentive for re-exporting and impedes Russia’s access to advanced technology goods.