Our research studies US sanctions that began in February 2022 and significantly restricted exports from US global companies to Russia. Our findings reveal that sanctioning countries reduced exports of sanctioned products to Russia by 80 percent and exports of nonsanctioned products to Russia by 40 percent. In comparison, nonsanctioning countries increased their exports of sanctioned products by 40 percent. Despite sanctions, Russia’s total imports of sanctioned goods did not decrease relative to nonsanctioned products due to trade with nonsanctioning countries. Additionally, sanctioning countries cut imports from Russia by 80 percent, while nonsanctioning nations increased these imports by 40 percent.
Enhancing compliance among firms in nonsanctioning countries remains a political priority, so we investigated how these firms adjusted their supply chains in response to Western sanctions on Russia. Our analysis focuses on two types of sanctions: extraterritorial export sanctions and financial sanctions. Multinational enterprises (MNEs) headquartered in sanctioning countries (i.e., sanctioning MNEs) are required to comply with long-arm sanctions, which restrict the export of sanctioned products that use technology or inputs from sanctioning countries. Firms in nonsanctioning countries are also subject to these regulations if they rely on sanctioning countries for technology or inputs, but their compliance is uncertain due to enforcement challenges.
Our research explores how Western extraterritorial sanctions on exports impacted MNEs in neutral countries and firms that operate primarily within neutral countries (i.e., domestic firms). Our findings show that sanctioning MNEs reduced their exports of sanctioned products to Russia by 34 percent more than nonsanctioned products, demonstrating strong compliance with sanctions. However, domestic firms increased their exports of these sanctioned goods by 36 percent, and nonsanctioning MNEs had a smaller increase of 6 percent. Although MNEs from sanctioning countries complied, firms in neutral countries capitalized on the opportunity to expand their exports, making the sanctions less effective. However, domestic firms in neutral countries were able to charge higher prices for exports of sanctioned products to Russia. This suggests that the Russian economy might still have suffered—despite these firms’ noncompliance—due to higher import costs.
Domestic firms in neutral countries were the main drivers of increased exports of sanctioned products to Russia, so enhancing compliance from these firms could significantly limit Russia’s access to these goods. Russia’s total imports of sanctioned products decreased by 22 percent after the sanctions became effective, and its overall imports decreased by 23 percent. However, if domestic firms and MNEs in neutral countries complied as much as sanctioning MNEs, Russia’s total imports of sanctioned products would have decreased by 76 percent, and its overall imports would have decreased by 53 percent.
The markets to which domestic firms in neutral countries sell their products play an important role in shaping their compliance behavior. Firms with a higher share of exports to sanctioning countries reduced their exports of sanctioned products to Russia. These firms are at a higher risk of violating sanctions because sanctioning countries may respond by restricting access to their markets. Moreover, penalties against these firms are easier to enforce because of their presence in sanctioning countries.
However, firms that sourced more inputs from sanctioning countries increased their exports of sanctioned products to Russia. Despite being subject to extraterritorial export constraints, these firms likely prioritized profits over compliance, as the gains from exporting to Russia outweighed the perceived risks of penalties. Efforts to strengthen secondary sanctions should focus on monitoring firms importing from sanctioning countries that are also selling sanctioned products to Russia.
Domestic firms in neutral countries significantly increased both their imports from sanctioning countries and their exports of the same sanctioned products to Russia. This pattern accounted for 69 percent of the total increase in exports of sanctioned products to Russia from neutral countries. In contrast, MNEs in sanctioning and nonsanctioning countries reduced their participation in trade rerouting activities.
As sanctioning MNEs reduced their exports of sanctioned products to Russia, they simultaneously increased exports of these products to both sanctioning countries and countries friendly to Russia. The first adjustment suggests a genuine effort to find new customers, as products sold to sanctioning countries are unlikely to be redirected to Russia. However, the second adjustment hints that sanctioning MNEs may be attempting to circumvent the sanctions.
Additionally, our research finds that sanctioning MNEs reduced imports more in financially risky sectors. Financial sanctions included banning numerous Russian banks from the Society for Worldwide Interbank Financial Telecommunication, which banks use to send communications related to financial transactions. These sanctions heightened risks in the Russian economy, particularly for sectors reliant on external financing and trade finance. Sanctioning MNEs were less likely than domestic firms in India, Mexico, Pakistan, and Vietnam—major developing countries that have not sanctioned Russia—to secure financing from banks in their headquarters’ country to trade with Russia. Thus, trading with Russia became more costly for sanctioning MNEs, further reducing trade in financially risky sectors.
Note:
This research brief is based on Haishi Li et al., “To Comply or Not to Comply: Understanding Neutral Country Supply Chain Responses to Russian Sanctions,” CESifo Working Paper no. 11110, September 7, 2024.
