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U.S. Sanctions on Russia: What Do They Mean for the U.S. Economy?

December 16, 2015
The United States has imposed a number of sanctions against Russia in response to the annexation of the Crimean region of Ukraine and ongoing armed clashes in eastern Ukraine. Since the Crimean referendum and consequent official recognition of Crimea as an independent state by Russia, the U.S., along with the EU and several other states including Canada, Japan, Switzerland, and Norway, have introduced three rounds of sanctions on Russian businesses, individuals and some sectors of the country’s economy. Russia responded with its own sanctions, particularly a ban on imports of agricultural products from the aforementioned countries.

By Joldoshbek Osmonov, MPA’16

Despite the heavy rhetoric, the U.S. sanctions were limited and targeted to specific Russian individuals, entities and sectors. The sanctions came under the Ukraine Freedom Support Act of 2014 (P.L. 113-272; 22 U.S.C. 8921 et seq.), which was passed by the U.S. Congress and signed into law by President Obama in December 2014.[1] The concrete U.S. sanctions included asset freezes for specific individuals (Russian President Vladimir Putin’s “inner circle”), asset freezes for specific entities (a number of state-owned and private companies and financial institutions affiliated with Putin), restrictions on financial transactions with Russian companies operating in key sectors like finance, defense and energy (including the largest oil producer, Rosneft, and the largest bank, Sberbank), and restrictions on oil-related and dual-use exports[2]

Additionally, the United States has taken cooperative actions with other countries to put more economic pressure on Russia, including opposing the launch of new projects by the World Bank and European Bank for Reconstruction and Development (EBRD) in Russia. Russia was also suspended from participation in the G-8.

The situation in Ukraine and the consequent international sanctions on Moscow have worsened the economic situation in Russia, which was already struggling with the consequences of the 2008-2009 global financial crisis. The biggest factor in Russia’s economic downturn was the fall of oil prices; Russia, being one of the major oil and gas exporters and having an economy heavily dependent on energy exports, was hit hard by the drop in demand and reduced price of oil and natural gas.

The sanctions by the U.S., the EU and other countries have deteriorated the economic situation in Russia and led to several serious hardships, including large capital flight, significant depreciation of the currency (ruble) and high inflation, strains on public finances and overall economic contraction.[3]

What does all this mean for U.S. economic interests?

While the EU countries have suffered economically from the sanctions against Russia, the U.S. seems to avoid any significant negative impact from the sanctions and Russian retaliatory actions. It is all due to comparatively little economic interaction between the United States and Russia. Both United States and Russia account for only small shares of each other’s total direct trade and investments. The following figure shows the major economic numbers: [4]

Figure A: U.S. – Russia Economic Relations.Figure A: U.S. – Russia Economic Relations.

According to the figure, Russia is a minor investment and trade partner for the United States. So it is doubtful that the sanctions on Russia and its response will greatly affect U.S. economic interests. Moreover, if we look at U.S. sanctions, they are directed at specific groups of individuals and companies, while the restrictions are limited to particular types of transactions.

However, U.S. businesses that operate in Russia or do business with Russian companies did raise concerns. Despite the fact that the U.S.–Russian economic relations are not substantial, in some cases the ties between the two countries at the sector or company level are significant.  U.S. companies such as ExxonMobil, PepsiCo, Ford Motor Co, and General Motors have invested heavily in partnerships and creating joint ventures with Russian companies. According to the U.S. Commercial Service, there are a number of key sectors for U.S. exports to Russia, including auto, industrial and agricultural equipment, aviation, chemicals, construction, and consumer electronics.[5] On the side of imports, Russia is one of the biggest suppliers of titanium (for Boeing jetliners), palladium, enriched uranium, oil products, iron and steel, and other specific products.

Some American companies are being negatively affected as a result of U.S. sanctions and Russian retaliatory actions. However, due to the relatively insignificant economic interaction between the two countries, the negative impact of mutual sanctions on overall U.S. economic interests should not be overstated. It seems that it is too early to speak about the end of confrontation and it is hard to predict where the bilateral relations will be in the near future. At this moment, the full impact of the sanctions on the U.S. economy remains to be seen.

References:

  [1] Congressional Research Service. U.S. Sanctions on Russia: Economic Implications http://www.fas.org:8080/sgp/crs/row/R43895.pdf

  [2]Ukraine crisis: Russia and sanctions: http://www.bbc.com/news/world-europe-26672800

  [3]Congressional Research Service. U.S. Sanctions on Russia: Economic Implications http://www.fas.org:8080/sgp/crs/row/R43895.pdf

  [4]Congressional Research Service. U.S. Sanctions on Russia: Economic Implications http://www.fas.org:8080/sgp/crs/row/R43895.pdf

  [5]The U.S. Commercial Service is the trade promotion arm of the Department of Commerce’s International Trade Administration. U.S. Commercial Service, “Doing Business in Russia: Country Commercial Guide for U.S. Companies,” 2013, http://www.buyusainfo.net/docs/x_5396902.pdf

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