Economy
How Sanctions Relief Would Help (and Hurt) the Russian Economy
March 19, 2025
- Alexander LibmanProfessor of Russian and East European Politics, Freie Universität Berlin
Economist Alexander Libman explores the factors that could keep companies from doing business with Russia, even in the unlikely event that sanctions are lifted.
The last weeks have seen furious and unpredictable zigzags in US-Russia relations. Things that even just a couple months ago appeared to be extremely unlikely are now being intensively discussed, though that can change in a matter of weeks.
One of these scenarios, hardly imaginable only a short while ago, is that the US could reduce sanctions pressure against Russia – certainly, in the case that Russia and Ukraine indeed agree to a ceasefire or even sign a peace treaty. Whether that will happen and how remains a mystery; nevertheless, the question arises: how would a reduction of sanctions pressure affect the Russian economy?
The last three years have demonstrated that the effectiveness of sanctions, at least in the short run, remained relatively low (see more in Russia.Post by your author).
Attempts to cut Russia off from technological imports, massively reduce its earnings from oil exports and push it into a currency crisis by freezing the assets of the Russian Central Bank all failed. Yet sanctions have cost the Russian economy, and from this point of view, less sanctions will have economic benefits.
There are good reasons to think that these benefits will remain modest. This is driven by three main factors.
Expectations and uncertainty matter
The most disruptive effects of sanctions do not necessarily have to do with the sanctions themselves, but rather with the expectations around the sanctions regime and the uncertainty about how the sanctions will be enforced.
Expectations matter, as they affect long-term investment decisions: when deciding to make deals with Russia, firms think not only about the current restrictions but also about the possibility that new restrictions will be introduced in the future. From a foreign private company’s point of view, it makes no sense to rely on supply from Russia, as that can be interrupted later, or to explore the Russian market, as the company may be forced to exit in the future.
Uncertainty matters, since firms, if they are not entirely sure whether certain transactions would violate the sanctions regime, would rather refrain from such transactions. This effect is particularly visible in the banking sector. Banks, concerned about possible punishment from their own governments, would frequently block any transactions seen as suspicious and would interpret possible risks very broadly. This is, in fact, the reason why many Russian citizens and companies, which are in no way subject to sanctions, are still affected by them – because banks still want to err on the side of caution.
One of these scenarios, hardly imaginable only a short while ago, is that the US could reduce sanctions pressure against Russia – certainly, in the case that Russia and Ukraine indeed agree to a ceasefire or even sign a peace treaty. Whether that will happen and how remains a mystery; nevertheless, the question arises: how would a reduction of sanctions pressure affect the Russian economy?
The last three years have demonstrated that the effectiveness of sanctions, at least in the short run, remained relatively low (see more in Russia.Post by your author).
Attempts to cut Russia off from technological imports, massively reduce its earnings from oil exports and push it into a currency crisis by freezing the assets of the Russian Central Bank all failed. Yet sanctions have cost the Russian economy, and from this point of view, less sanctions will have economic benefits.
There are good reasons to think that these benefits will remain modest. This is driven by three main factors.
Expectations and uncertainty matter
The most disruptive effects of sanctions do not necessarily have to do with the sanctions themselves, but rather with the expectations around the sanctions regime and the uncertainty about how the sanctions will be enforced.
Expectations matter, as they affect long-term investment decisions: when deciding to make deals with Russia, firms think not only about the current restrictions but also about the possibility that new restrictions will be introduced in the future. From a foreign private company’s point of view, it makes no sense to rely on supply from Russia, as that can be interrupted later, or to explore the Russian market, as the company may be forced to exit in the future.
Uncertainty matters, since firms, if they are not entirely sure whether certain transactions would violate the sanctions regime, would rather refrain from such transactions. This effect is particularly visible in the banking sector. Banks, concerned about possible punishment from their own governments, would frequently block any transactions seen as suspicious and would interpret possible risks very broadly. This is, in fact, the reason why many Russian citizens and companies, which are in no way subject to sanctions, are still affected by them – because banks still want to err on the side of caution.
“Even if the US (or some other Western countries) officially cancels some sanctions, much less can be done about the expectations and the uncertainty that will hang over Russia.”
The automotive plant Moskvich (formerly Renault Russia). In July 2022 Renault announced that it was leaving Russia. Source: Wiki Commons
How can companies be certain that sanctions will not be reintroduced in the future? Even if the war in Ukraine ends with a durable peace (which is unlikely), new conflicts between Russia and the West are probable, and the West could react to these conflicts with new sanctions.
Sanctions can also be introduced not as a response to Russia’s actions but as part of domestic politics in Western countries, as long as Russia’s strongly negative image makes arguments calling for a tougher stance against Russia politically reasonable.
As soon as Western countries started using sanctions against Russia, a psychological barrier was broken – Russia became one of those countries that is perennially mentioned with sanctions. That is enough for the private companies to exercise caution. Comparable examples include Iran, Myanmar and Belarus – they regularly face waves of loosening and tightening sanctions, which confuses foreign companies and makes them wary of working with these countries.
Similarly, the problem of uncertainty will remain, as well. Even if some sanctions are canceled, others will stay on the books (at the very least, because sanctions against Russia were introduced by multiple countries – the US, the EU, the UK, Australia, Japan, South Korea, Canada and Switzerland – in a somewhat asynchronous way). Thus, companies and banks will never be certain that they completely understand the complex sanctions environment.
This problem would disappear only were it absolutely for certain that sanctions against Russia had gone away forever. Two examples of this are South Africa and Yugoslavia. For South Africa, the end of apartheid proved irreversible; for Yugoslavia, the country ceased to exist. In this sense, Russia is much more likely to follow the path of Iran than that of South Africa.
Protectionism
Sanctions are, economically speaking, not different from other protectionist measures. They reduce competition for local companies, constraining the access of foreign firms to a country’s market. As a result, some firms benefit from sanctions – foreign competition is gone, and they are able to strengthen their position.
In the Russian case, this effect was even more pronounced – foreign companies had to sell their assets at a major discount, and Russian businesspeople benefited. Precisely because of this, less sanctions pressure is, in the eyes of these businesspeople, hardly a positive development – rather, it means that foreign competitors can come back.
Sanctions can also be introduced not as a response to Russia’s actions but as part of domestic politics in Western countries, as long as Russia’s strongly negative image makes arguments calling for a tougher stance against Russia politically reasonable.
As soon as Western countries started using sanctions against Russia, a psychological barrier was broken – Russia became one of those countries that is perennially mentioned with sanctions. That is enough for the private companies to exercise caution. Comparable examples include Iran, Myanmar and Belarus – they regularly face waves of loosening and tightening sanctions, which confuses foreign companies and makes them wary of working with these countries.
Similarly, the problem of uncertainty will remain, as well. Even if some sanctions are canceled, others will stay on the books (at the very least, because sanctions against Russia were introduced by multiple countries – the US, the EU, the UK, Australia, Japan, South Korea, Canada and Switzerland – in a somewhat asynchronous way). Thus, companies and banks will never be certain that they completely understand the complex sanctions environment.
This problem would disappear only were it absolutely for certain that sanctions against Russia had gone away forever. Two examples of this are South Africa and Yugoslavia. For South Africa, the end of apartheid proved irreversible; for Yugoslavia, the country ceased to exist. In this sense, Russia is much more likely to follow the path of Iran than that of South Africa.
Protectionism
Sanctions are, economically speaking, not different from other protectionist measures. They reduce competition for local companies, constraining the access of foreign firms to a country’s market. As a result, some firms benefit from sanctions – foreign competition is gone, and they are able to strengthen their position.
In the Russian case, this effect was even more pronounced – foreign companies had to sell their assets at a major discount, and Russian businesspeople benefited. Precisely because of this, less sanctions pressure is, in the eyes of these businesspeople, hardly a positive development – rather, it means that foreign competitors can come back.
“While consumers would benefit from increased competition, business groups are likely to try to limit it.”
The last weeks have witnessed dozens of statements by Russian officials and businesspeople that, if sanctions relief is forthcoming, Russian government ought to prioritize the interests of domestic business.
Putin himself pointed out that if Western companies decide to return to Russia, they will not receive any benefits – rather the government will prioritize domestic producers. For his part, Maxim Reshetnikov, the economy minister, pointed out that companies returning to Russia will face new requirements and regulations. Among other things, they will be required to operate in the annexed regions of Ukraine if they want to do business on the internationally recognized territory of Russia.
Meanwhile, the Electronics Developers and Manufacturers Association, EDMA, has already called for new restrictive measures against Western electronics vendors that had supposedly showed increased interest toward returning to Russia.
Generally speaking, the Russian government – and even Vladimir Putin himself – over the last years remained surprisingly committed to the idea of a market economy and competition – at least, in his speeches Putin has consistently pointed out how important free competition for economic development is.
At the same time, it is clear that arguments related to national security trump all other issues for the Russian leadership. Thus, it is very likely that lobby groups interested in protecting their privileged position gained over the last few years will prevail and canceled sanctions will be replaced by new protectionist barriers that the Russian government will itself erect – thus harming the Russian economy.
Foreign business, in turn, will take this into account – and it will contribute to the perception of the Russian economy as uncertain, limiting the willingness to do business with Russia.
‘Informality’ and capital flight
Russian business, as mentioned, has successfully adapted to the sanctions regime – and found new ways to pay for cross-border transactions.
Putin himself pointed out that if Western companies decide to return to Russia, they will not receive any benefits – rather the government will prioritize domestic producers. For his part, Maxim Reshetnikov, the economy minister, pointed out that companies returning to Russia will face new requirements and regulations. Among other things, they will be required to operate in the annexed regions of Ukraine if they want to do business on the internationally recognized territory of Russia.
Meanwhile, the Electronics Developers and Manufacturers Association, EDMA, has already called for new restrictive measures against Western electronics vendors that had supposedly showed increased interest toward returning to Russia.
Generally speaking, the Russian government – and even Vladimir Putin himself – over the last years remained surprisingly committed to the idea of a market economy and competition – at least, in his speeches Putin has consistently pointed out how important free competition for economic development is.
At the same time, it is clear that arguments related to national security trump all other issues for the Russian leadership. Thus, it is very likely that lobby groups interested in protecting their privileged position gained over the last few years will prevail and canceled sanctions will be replaced by new protectionist barriers that the Russian government will itself erect – thus harming the Russian economy.
Foreign business, in turn, will take this into account – and it will contribute to the perception of the Russian economy as uncertain, limiting the willingness to do business with Russia.
‘Informality’ and capital flight
Russian business, as mentioned, has successfully adapted to the sanctions regime – and found new ways to pay for cross-border transactions.
“Numerous ingenious schemes were designed to protect payments from banks and governments of Western countries. This ingenuity, however, had a price: Russian foreign trade is now done, to a large extent, in the shadows.”
At the start of the war, Russian companies operated 980 passenger airliners, 777 of them leased from major Western companies, including the Airbus A320 (pictured), among the most popular Airbus models in the world. Airbus suspended services to Russian aviation in spring of 2022. Source: Wiki Commons
In a nutshell, after two and a half decades of moving from “black” and “gray” to “white” business – transparent for tax authorities and compliant with the law – Russian firms are rapidly moving back to the era of the 1990s, when “informality” in the economy was the norm. Informality is suboptimal – it is costlier and riskier. But today, it is required to get around sanctions.
The problem is: the longer Russian business operates through informal schemes and the more money and time invested in developing these schemes, the less likely it is that, even if sanctions are lifted, Russian companies will change their behavior.
Again, the situation is somewhat similar to the 1990s: it took many years (and a lot of pressure from the government) for Russian firms to get used to doing business legally. Whether this pressure will be brought back is unclear. And, more importantly, Russian firms also have no reason to expect that sanctions will never be reenacted – because of that, they look set to maintain informal schemes to evade them. Still, this means that the effect of lifting sanctions will remain limited.
Even worse, sanctions in the last three years had an effect that, to some extent, benefitted the Russian economy (defying the intentions of their creators) – they blocked capital flight from Russia.
Russian business was literally stuck in the country and, as a result, had no choice but to invest in Russian assets, which buoyed the economy. If sanctions are weakened, opportunities for capital flight will increase, and given the persistent uncertainty (with respect to both future sanctions and the policy of the Russian government), money will leave Russia faster.
Ultimately, to benefit from sanctions relief, the Russian economy needs both domestic and foreign firms to become convinced that the broad period of instability is over, sanctions will not be imposed in the future and events like the aggression against Ukraine will not repeat themselves.
Without this, though there will be some positive effect from sanctions relief, it will not be enough to support strong economic growth (or even to return to the economy before 2022). Firms are unlikely to believe that things are different for good as long as Vladimir Putin is in power and the key elements of the Russian regime remain unchanged.
The problem is: the longer Russian business operates through informal schemes and the more money and time invested in developing these schemes, the less likely it is that, even if sanctions are lifted, Russian companies will change their behavior.
Again, the situation is somewhat similar to the 1990s: it took many years (and a lot of pressure from the government) for Russian firms to get used to doing business legally. Whether this pressure will be brought back is unclear. And, more importantly, Russian firms also have no reason to expect that sanctions will never be reenacted – because of that, they look set to maintain informal schemes to evade them. Still, this means that the effect of lifting sanctions will remain limited.
Even worse, sanctions in the last three years had an effect that, to some extent, benefitted the Russian economy (defying the intentions of their creators) – they blocked capital flight from Russia.
Russian business was literally stuck in the country and, as a result, had no choice but to invest in Russian assets, which buoyed the economy. If sanctions are weakened, opportunities for capital flight will increase, and given the persistent uncertainty (with respect to both future sanctions and the policy of the Russian government), money will leave Russia faster.
Ultimately, to benefit from sanctions relief, the Russian economy needs both domestic and foreign firms to become convinced that the broad period of instability is over, sanctions will not be imposed in the future and events like the aggression against Ukraine will not repeat themselves.
Without this, though there will be some positive effect from sanctions relief, it will not be enough to support strong economic growth (or even to return to the economy before 2022). Firms are unlikely to believe that things are different for good as long as Vladimir Putin is in power and the key elements of the Russian regime remain unchanged.
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