U.S. Sanctions And Russia's Economy
U.S. Sanctions and Russia’s EconomyRebecca M. NelsonSpecialist in International Trade and FinanceFebruary 17, 2017Congressional Research Service7-5700www.crs.govR43895
U.S. Sanctions and Russia’s EconomySummaryIn response to Russia’s annexation of the Crimean region of neighboring Ukraine and its supportof separatist militants in Ukraine’s east, the United States imposed a number of targeted economicsanctions on Russian individuals, entities, and sectors. The United States coordinated its sanctionswith other countries, particularly the European Union (EU). Russia retaliated against sanctions bybanning imports of certain agricultural products from countries imposing sanctions, including theUnited States.U.S. policymakers are debating the use of economic sanctions in U.S. foreign policy towardRussia, including whether sanctions should be kept in place or further tightened. A key questionin this debate is the impact of the Ukraine-related sanctions on Russia’s economy and U.S.economic interests in Russia.Economic Conditions in RussiaRussia faced a number of economic challenges in 2014 and 2015, including capital flight, rapiddepreciation of the ruble, exclusion from international capital markets, inflation, and domesticbudgetary pressures. Growth slowed to 0.7% in 2014 before contracting sharply by 3.7% in 2015.The extent to which U.S. and EU sanctions drove the downturn is difficult to disentangle from theimpact of a dramatic drop in the price of oil, a major source of export revenue for the Russiangovernment, or economic policy decisions by the Russian government.The International Monetary Fund (IMF) estimated in 2015 that U.S. and EU sanctions in responseto the conflict in Ukraine and Russia's countervailing ban on agricultural imports reduced Russianoutput over the short term by as much as 1.5%. Russia's economy, more recently, is showingsome signs of recovery, in part due to higher oil prices, a flexible exchange rate regime, andsizeable foreign exchange reserves, among other factors. The IMF projects Russia’s economy willgrow by 1.1% in 2017.U.S. Economic InterestsWhen the sanctions were announced in 2014, U.S. business groups raised concerns that sanctionsharm American manufacturers, jeopardize American jobs, and cede business opportunities tofirms from other countries. When the sanctions were rolled out in 2014, news reports cited anumber of U.S. firms that were adversely affected by U.S. sanctions on Russia and Russia’sretaliatory measures. There are questions about the overall impact of the sanctions on the U.S.economy, however. Russia accounts for a small portion of total U.S. trade and foreign investment.U.S. sanctions also target a specific Russian individuals and entities and, in some cases, restrictonly specific types of economic transactions.Congressional Research Service
U.S. Sanctions and Russia’s EconomyContentsIntroduction . 1U.S. Sanctions in Response to the Ukraine Conflict . 2Economic Implications for Russia. 3Recent Trends in Russia’s Economy . 4Estimates of the Sanctions’ Impact on the Russian Economy . 7U.S. Economic Interests . 8U.S.-Russia Trade and Investment Relations . 9U.S.-Russia Economic Ties at the Firm Level . 11Conclusion . 13FiguresFigure 1. Economic Trends in Russia . Error! Bookmark not defined.Figure 2. Foreign Bank Loans to Russia . 7Figure 3. Inward Foreign Direct Investment in Russia . 7Figure 4. U.S. Merchandise Trade with Russia . 9Figure 5. U.S. and EU Economic Ties with Russia . 10ContactsAuthor Contact Information . 14Congressional Research Service
U.S. Sanctions and Russia’s EconomyIntroductionOver the course of 2014, the U.S. government rolled out targeted economic sanctions on Russianindividuals and entities in critical commercial sectors in response to that country’s annexing ofthe Crimean region of neighboring Ukraine and its support of separatist militants in Ukraine’seast.1 Designed to change behavior of the Russian government by putting pressure on the Russianeconomy, sanctions include asset freezes for specific Russian individuals and entities; restrictionson financial transactions with Russian firms operating in key sectors; restrictions on U.S. exports,services, and technology for specific Russian oil exploration or production projects; and tighterrestrictions on U.S. exports of dual-use and military items to Russia.The United States coordinated its sanctions with other countries, particularly with the EuropeanUnion (EU). Russia retaliated against sanctions by banning imports of certain agriculturalproducts from countries imposing sanctions, including the United States.U.S. policymakers are debating the use of economic sanctions in U.S. foreign policy towardRussia, including whether sanctions should be kept in place or further tightened. For example, inthe Senate, legislation has been introduced to impose additional sanctions in response to Russia’salleged hacking of U.S persons and institutions, including U.S. political organizations, and otheraggressive actions, including in Ukraine (S. 94), and to provide congressional oversight of actionsthat would limit Russia sanctions (S. 341, H.R. 1059). Legislation has also been introduced in theHouse to tighten sanctions, for example by prohibiting certain transactions in areas controlled byRussia (H.R. 830), and to prohibit U.S. recognition of Russian sovereignty over Crimea (H.R.463). Some Members of Congress have proposed codifying existing sanctions, which could makethem more difficult to ease or remove.2 Most of the current restrictions were put in place byPresident Barak Obama issuing Executive Orders under emergency authorities.On February 2, 2017, UN Ambassador Nikki Haley opened her first public remarks by referringto a recent flare-up of violence in Ukraine, noting that “the dire situation in eastern Ukraine is onethat demands clear and strong condemnation of Russian actions.” She stated that “the UnitedStates continues to condemn and call for an immediate end to the Russian occupation of Crimea”and that “Crimea-related sanctions will remain in place until Russia returns control of thepeninsula to Ukraine.”3A key question in this debate is the impact of the Ukraine-related sanctions on Russia’s economyand U.S. economic interests in Russia. The subsequent discussion on recent economic trends inRussia and U.S. economic ties with Russia may provide insight.1For more information on Ukraine-related sanctions, see CRS In Focus IF10552, U.S. Sanctions on Russia Related tothe Ukraine Conflict, coordinated by Cory Welt. A number of Russian individuals and entities are also subject toeconomic sanctions related to human rights violations, corruption, conflict in Syria, terrorism, transnational crime, andweapons proliferation. For more information on the different types of sanctions on Russia individuals and entities, seeCRS Insight IN10634, Overview of U.S. Sanctions Regimes on Russia, by Cory Welt and Dianne E. Rennack and CRSIn Focus IF10576, The Global Magnitsky Human Rights Accountability Act, by Dianne E. Rennack. In December 2016,the Obama Administration imposed additional sanctions on Russian individuals and entities in response to maliciouscyber activity, including relating to the election process. For more information, see CRS Insight IN10635, Russia andthe U.S. Presidential Election, by Catherine A. Theohary and Cory Welt.2For example, see S. 94, Senator John McCain, “Statement by SASC Chairman John McCain on President Trump’sPhone Call with Vladimir Putin,” January 27, 2017.3Ambassador Nikki Haley, “Remarks at a UN Security Council Briefing on Ukraine,” U.S. Mission to the UnitedNations, February 2, 2017, at https://usun.state.gov/remarks/7668.Congressional Research Service1
U.S. Sanctions and Russia’s EconomyU.S. Sanctions in Response to the Ukraine ConflictThe Obama Administration first imposed sanctions relating to the events in Ukraine in March2014, and announced additional sanctions over subsequent months, working in coordination withthe EU. The Obama Administration explained that the targeted sanctions on specific individuals,firms, and sectors “aim to increase Russia’s political isolation as well as the economic costs toRussia, especially in areas of importance to President Putin and those close to him.” 4In 2014, Congress also passed, and President Obama signed into law, the Support for theSovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (P.L. 113-95;22 U.S.C. 8901 et seq.) and the Ukraine Freedom Support Act of 2014 (P.L. 113-272; 22 U.S.C.8921 et seq.). These Acts contain provisions on U.S. sanctions in response to the conflict inUkraine.5U.S. sanctions on Russia in response to the Ukraine conflict include: Asset freezes and prohibitions against transactions with specific Russianindividuals. The U.S. government has frozen assets under U.S. jurisdiction andprohibited U.S. persons from engaging in transactions with a number of Russianindividuals, including Russian officials, deputies, businesspeople, and associateswith ties to the Kremlin.Asset freezes and prohibitions against transactions with specific entities.Some Russian companies are subject to U.S. asset freezes and are prohibitedfrom engaging in economic transactions with U.S. individuals and entities.Examples include Bank Rossiya, which has been called the “personal bank ofPutin;” the Volga Group, a holding company owned by a close ally of Putin; andAlmaz-Antey, a state-owned defense company.6 Restrictions on financial transactions with Russian firms operating in keysectors. Sanctions target sectors in Russia’s financial services, energy, anddefense sectors. U.S. individuals and entities face restrictions on select financialtransactions, such as prohibitions on extending new debt with maturities longerthan 30 or 90 days (depending on the sector). Examples of Russian firms subjectto these sanctions include Rosoboronexport, a state-owned arms exporter;Rosneft, a state-owned oil company and the world’s largest publicly-traded oilproducer; Rostec, a major Russian hi-tech and defense conglomerate; andSberbank, the largest bank in Russia. Restrictions on specific oil-related exports, services, and technology toRussia. The United States restricts U.S. individuals and entities from exporting4White House, “Statement by the President on New Sanctions Related to Russia,” Office of the Press Secretary,September 11, 2014. For more on the Executive Orders and legislation on Ukraine-related sanctions, see CRS In FocusIF10552, U.S. Sanctions on Russia Related to the Ukraine Conflict, coordinated by Cory Welt.5No designations have been made to date under P.L. 113-95. The President issued a signing statement with P.L. 113272, stating that he would not impose sanctions under the act but that it “gives the Administration additional authoritiesthat could be utilized, if circumstances warranted.” For more on the Executive Orders and legislation on Ukrainerelated sanctions, and resulting designations, see CRS In Focus IF10552, U.S. Sanctions on Russia Related to theUkraine Conflict, coordinated by Cory Welt.6Steven Lee Myers, “Private Bank Fuels Fortunes of Putin’s Inner Circle,” New York Times, September 27, 2014;Carol Matlack, “Why the U.S. is Targeting the Business Empire of a Putin Ally,” Bloomberg Businessweek, April 28,2014.Congressional Research Service2
U.S. Sanctions and Russia’s Economy goods, services, or technology in support of exploration or production fordeepwater, Artic offshore, or shale projects that have the potential to produce oilin Russia or in the maritime area claimed by Russia.Restrictions on specific exports. The United States has tightened restrictions onU.S. exports of dual-use and military items to Russia.The United States urged other countries to impose sanctions on Russia, and coordinated sanctionswith a number of other countries, particularly in the EU. In August 2014, Russia announced aretaliatory ban on the import of certain foods from the United States, the EU, and other countriesimposing sanctions.In 2014, the United States and other countries also began opposing new projects in Russia at theWorld Bank and European Bank for Reconstruction and Development (EBRD), to put additionalpressure on the Russian government in response to Russia’s actions in Ukraine.7 Canada, France,Germany, Italy, Japan, the United Kingdom, and the United States suspended the G-8 and insteadresumed convening as the G-7, of which Russia is not a member, for the first time since the late1990s. Russian officials still attend G-20 meetings, which include a broader group of advancedand emerging-market economies.8Sanctions, Retaliatory Measures, and the World Trade OrganizationSome Russian officials have argued that Western sanctions in response to the conflict in Ukraine breach the rules andprinciples of the World Trade Organization (WTO).9 Similarly, some U.S. and European officials have questionedwhether Russia’s ban on agricultural imports from the United States, the EU, and other countries is a violation ofWTO rules. Neither side, however, has initiated any formal proceedings under the WTO dispute settlement processwith regards to the sanctions or retaliatory measures. Some analysts argue that such measures are permitted underthe WTO's national security exemption.10Economic Implications for RussiaU.S. and EU sanctions on Russian individuals, firms, and sectors in 2014 came at a time whenRussia’s economy was still struggling to recover from the global financial crisis of 2008-2009. Inthe early 2000s, Russia’s economy benefited from rising oil prices. Its economy was hit hard bythe global financial crisis and ensuing global economic downturn, as demand for its exports fell,particularly in Europe. Russia’s economy contracted sharply, by 7.8%, in 2009.11 The economyrebounded the following year, growing by 4.5%, before slowing between 2010 and 2013.Economists argue that the financial crisis and weak economic performance highlightedfundamental problems in Russia’s economy, including the economy’s dependence on theproduction and export of oil and gas, as well as the need for reform in a number of areas,7Sandrine Rastello and Helene Fouquet, “G-7 Nations Said to Oppose New World Bank Russia Projects,” Bloomberg,August 1, 2014; EBRD, “EBRD Statement on Operation Approach in Russia,” EBRD Press Release, July 23, 2014.8For more on the G-20, see CRS Report R40977, The G-20 and International Economic Cooperation: Background andImplications for Congress, by Rebecca M. Nelson.9For example, see Alexander Kolyandr, “Russia’s Putin Slams Sanctions as Breach of WTO Rules,” Wall StreetJournal, September 18, 2014.10For example, see Kathrin Hille and Shawn Donnan, “Russia Threatens US with WTO Action over CrimeaSanctions,” Financial Times, April 16, 2014; “USTR Signals Russia Ag Ban Violates WTO Rules; Faults ProcurementPolicies,” Inside U.S. Trade, January 8, 2015.11Unless otherwise noted, macroeconomic data (for example, on growth, inflation, and debt levels) is from the IMF,World Economic Outlook, October 2014.Congressional Research Service3
U.S. Sanctions and Russia’s Economyincluding governance (including the need to address corruption), regulation, privatization,competition, the banking sector, and utility pricing.12Recent Trends in Russia’s EconomyIt is difficult to assess whether, and to what extent, the targeted U.S. and EU sanctions in responseto the conflict in Ukraine, and Russia’s retaliatory measures, have impacted the Russian economybroadly over the past two to three years. Sanctions hit at the same time the price of oil, a majorexport and source of revenue for the Russian government, dropped dramatically, by more than60% between the start of 2014 and the end of 2015.13 That said, many economists, including atthe IMF, have argued that the twin shocks of multilateral sanctions and low oil prices were themajor driver behind Russia’s economic challenges in 2014 and 2015 (Figure 1).14 In particular,Russia grappled with: economic contraction, with growth slowing to 0.7% in 2014, before contractingsharply by 3.7% in 2015;capital flight, with net private capital outflows from Russia totaling 152 billionin 2014, compared to 61 billion in 2013;rapid depreciation of the ruble, more than 50% against the dollar over thecourse of 2015;a higher rate of inflation, from 6.8% in 2013 to 15.5% in 2015;budgetary pressures, with the budget deficit widening to 3.2% in 2015, up from0.9% in 2013;tapping international reserve holdings to offset fiscal challenges, includingexclusion from international capital markets, as reserves fell from almost 500billion at the start of 2014 to 368 billion at the end of 2015; andmore widespread poverty, which increased by 3.1 million to 19.2 million in2015 (13.4% of the population).1512“Geopolitical Risks Cloud Future of Russian Economy,” IMF Survey, June 30, 2014.Federal Reserve Bank of St. Louis, Global Price of Brent Crude, Accessed February 2, 2017.14For example, see IMF, “IMF Staff Concludes Visit to Russian Federation,” November 29, 2016.15International Monetary Fund, World Economic Outlook, October 2016; Central Bank of Russia statistics, WorldBank, Russia Economic Report 35, April 6, 2016.13Congressional Research Service4
U.S. Sanctions and Russia’s EconomyFigure 1. Economic Trends in RussiaSource: Created by CRS using data from the IMF World Economic Outlook and the Bank of Russia.Note: GDP growth, inflation, and government budget graphs compare IMF forecasts from April 2014 with IMFforecasts from October 2016.During 2016, Russia’s economy largely stabilized, even as the sanctions remained in place.Russia’s economy contracted at a slower rate (0.8%); net private sector capital outflows slowed,from over 150 billion in 2014 to 15 billion in 2016; inflation fell by more than half, to 7.2%;the value of the ruble stabilized; and the government successfully sold new bonds in internationalcapital markets in May 2016 for the first time since the sanctions were imposed.Congressional Research Service5
U.S. Sanctions and Russia’s EconomyRussia’s economy benefited from rising oil prices in 2016, from about 30/barrel to over 50/barrel.16 Additionally, the IMF argued that the sanctions and oil shocks were cushioned by aflexible exchange rate regime, which allowed the ruble to depreciate and support exports; bankingsector capital and liquidity injections; regulatory forbearance for the banking sector, to help banksavoid regulatory triggers due to acute ruble depreciation and volatile securities market prices; andlimited fiscal stimulus, particularly tapping the reserve fund to finance deficit spending, whichreache
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