Trade embargoes against Russia are as leaky as a basket

This week I would like to leave the macroeconomic news for a while and address the question of the effects of the sanctions that the EU has imposed on Russia. In particular, I would like to focus on the measures that seek to restrict exports to Russia. A whole range of goods are no longer allowed to be exported to Russia, the sanctioned goods.

I use German trade figures, because they are more detailed and much more up to date than ours. In 2021, Germany exported approximately €26,6 billion worth of goods to Russia, the Netherlands approximately €6,6 billion. In the following you will find many graphs. They actually speak fairly self-explanatory. The vertical black line in the graphs represents February 2022, the month of the Russian invasion of Ukraine. The sanctions started soon afterwards and a whole series of sanctions packages have now been successively imposed.

The first graph shows that the trade embargoes have sharply reduced Germany's exports to Russia. The monthly value of those exports has fallen by about 75%. Viewed in this way, the trade-restricting measures are very effective.

But there is a lot to be said and we all hear that some of the decreased exports still reach Russia, but in a roundabout way, via other countries. Below I illustrate this for nine countries that you can assume play a role in this process. The order is determined by the current volume of German exports to the countries involved, from small to large.

German exports to Tajikistan do not amount to much. However, at some point there was a sixfold increase. The value of this trade flow is now falling again, but is still above pre-war levels.

The picture of German exports to Armenia is approximately the same, but the amounts are considerably larger.

German exports to Moldova have also increased since the start of the sanctions, albeit to a lesser extent than in the previous two cases. Moldova has the ambition to join the EU. Would that limit circumvention of trade embargoes through this country? You can hope so.

German exports to Kyrgyzstan never amounted to much. But of all the pictures here, this is the most spectacular. €60 million per month remains relatively small, but it is ten times as much as in the past. How difficult can it be to find out what and who are behind this?

Georgia is also a country that clearly lends itself to circumventing trade embargoes.

The pattern of trade with Uzbekistan differs from the pictures shown earlier. The German export value appears to have structurally doubled, but there are a few enormous outliers. You wonder what kind of goods ended up in Russia via Uzbekistan during those months. Again: how difficult is it to find out what happened here during those months?

Exports to Kazakhstan have also increased significantly, although there has been a decline in recent months. Germany's monthly export value to this country is still more than €100 million higher than before the trade embargoes were imposed.

Serbia is often mentioned as a country involved in the 'bypass trade'. I don't find the graph very convincing. In contrast to previous graphs, there was already a clear growth in German exports to this country before the war. That growth has continued. It is difficult to determine whether and to what extent this has to do with circumventing the trade embargoes.

Turkey seems to be a country to which Germany suddenly exports much more after the outbreak of war. While the monthly export value fluctuated between €1,5 and 2 billion for years, it now appears to be comfortably above €2,5 billion.

This picture shows that the decrease in the monthly German export value to Russia is only fractionally larger than the increase in the export value to the total of the above nine countries. Part of that increase may simply be the result of economic growth in those countries. But the conclusion seems justified that the trade embargoes are largely circumvented; in fact, those embargoes just seem as leaky as a basket.

Closing
Following the Russian invasion of Ukraine, the EU imposed a series of sanctions against Russia. The purpose of this is of course to put Russia under such economic pressure that it ends the war. Trade embargoes are an important part of the sanctions. The problem with such embargoes is that trading partners can avoid them by geographically shifting the flow of trade. The above analysis leads to the conclusion that the embargoes are indeed being circumvented to a large extent. I would like to leave it to the discretion of the reader (and policymakers, of course) what we should conclude from this.

Part two of this analysis will follow in my weekly commentary next week, which will focus on how things are actually going in the Russian economy. How extensive is the economic damage that sanctions (not just trade embargoes) are causing to the Russian economy? To be continued.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.