WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

While the outcome of the current Ukraine crisis is highly uncertain, it seems likely that the West will impose sanctions on Russia.  Applying a stylized VARX model on Russian quarterly time series, we find no statistically significant impact of sanctions on either Russian GDP or the FX rate. However, we find that Russia is extremely vulnerable to a reduction in the price or volume of its energy exports. Aside from energy, the most painful sanctions would include cutting Russian banks off from the SWIFT system and dollar markets, and bans on exports of high-tech goods to Russia. While Russia has become increasingly insulated from the dollar-based global system, and has built up substantial buffers which it can deploy in the case of sanctions, under an adverse scenario the state would have to make large-scale interventions to maintain economic and financial stability. The Ukrainian economy will also suffer, and will require major Western support to maintain macro-financial stability. Over the medium run, the current crisis will further isolate Russia economically, leading to a continuation of its very mediocre growth performance since 2014.