Barring a near-miracle, sooner or later, sanctions will cripple Russia’s economy. To most economists, that seems like an open and shut case.
What’s more nuanced, however, is how those same bans on trading with Russia will send ripples through the rest of the global economy. While forecasting anything is complicated, it’s trickier still when there’s a war. Still, experts say the effect across the world will be uneven—creating some surprising winners and losers.
At the moment, money is fleeing Russia despite the recent imposition of capital controls in that country, and foreign investment that would have been destined for Moscow will get diverted elsewhere, says Robert Wright, a senior faculty fellow at the American Institute for Economic Research. “With the Russian stock market shut down people won’t be putting any more money into it,” he says.
Countries receiving inflows of money redirected away from Russia will see their economies grow faster than projected prior to the Russia-Ukraine conflict. The likely top candidate for foreign money that would’ve flowed into Russia will be the U.S., as evidenced by the recent rally in the value of the U.S. dollar. The dollar index has rallied nearly 3% since Russia’s invasion of Ukraine began. Other liberal democracies where property rights are protected, such as those in Europe, should also expect to see beneficial inflows.
Countries including Mexico and Turkey, which have not imposed sanctions, could also get an economic boost. “They could benefit from increased trade and act as a go-between for Russia and the rest of the global economy,” Wright says. Put another way, if a product from Russia is required somewhere in the world, a non-sanctioning country could profit by purchasing the product from Russia and then reselling it.
Brain drain beneficiaries
Some countries’ economies could benefit from highly skilled Russian and Ukrainian workers leaving their homes and migrating to more favorable locations. The U.S. was a key destination for scientists and intellectuals fleeing communism during the Cold War, as were some parts of Europe. In recent years, immigration has become more controversial across Europe and the U.S.
“I would imagine U.S. resistance to getting highly skilled people is not as much of a problem versus unskilled labor,” says Erica Groshen, former Federal Reserve official and senior economic advisor at Cornell University School of Industrial & Labor Relations. The potential for a so-called brain drain is closely linked to how much Russia veers away from democracy, she says.
Groshen sees defense industries and energy companies prospering in the near term. Defense, alongside cybersecurity, is fast making its way to the top of the political agenda in Europe and the U.S. In anticipation of increased profits, stocks in the aerospace and defense sector have already rallied substantially over the past week. Spending will likely increase on securing supplies of fossil and renewable energy sources. “The crisis raises the case for countries to have local supplies of each,” she says.
Still, the sanctions on Russia create myriad downsides for the global economy, which will likely suffer from reduced exports of food and critical agriculture-related goods. “Ukraine and Russia are both global breadbaskets,” says Andrew Milligan, Edinburgh-based market strategy veteran and former U.K. Treasury official. Combined wheat exports from the two countries make up 29% of the global export market, according to the U.S. Department of Agriculture. Traders have already bid up the price of grain by about 77% since the beginning of February—in anticipation that supplies will drop due to the conflict and sanctions.
Ultimately, the impact could be higher food costs, experts say. Supplies of agricultural fertilizer may decrease around the world, as Russia and its ally Belarus control more than a third of the world’s potash production, a key ingredient in fertilizer. And Russia alone controls 14% of nitrogen-based plant food production, according to a report from financial research firm CFRA. Reduced global availability could send prices for these nutrients higher and financially hobble farm belts across a slew of countries.
Lower corporate profits and slower economic growth
Sanctions are likely to result in slightly lower corporate profits in the U.S. and Europe, partly due to rising energy costs and technology firms pulling out of Russia, Milligan says. Ultimately that effect will shave some growth from GDP in some economies. “The closer you are to the epicenter, the worse it is going to be,” he says.
For Europe, that will likely mean growth in the U.S. will be 0.25% to 0.5% lower than it would have been otherwise over the next year or 18 months, while Europe will be worse off by 0.5% to 1%, Milligan estimates. The difference is that Europe trades more with Russia than the U.S. does. The hit to Europe’s growth could be partially offset by new investment in the region that would previously have gone to Russia. However, that will likely be a tiny effect because Russia’s economy is relatively small. Russia’s $1.48 trillion economy is so small in comparison to Europe’s roughly $18 trillion GDP (with the U.K. included) that diverted investment could make a small difference but probably not too much.
Reduced travel and tourism
The tourism industries in some countries could take a brutal hit, especially in some European and North African locales, says Ivo Pezzuto, a professor of global economics and digital transformation at ISM business school in Paris. “The Russians are big spenders on tourism and luxury goods,” he says. Or at least they have been throwing a fair amount of cash around in Europe’s fashionable vacation destinations such as the Italian and French Rivieras. Egypt, a key destination for Russian tourists, may also suffer.
Separately, sanctions on specific oligarchs may force the sale of luxury real estate and yachts. That may come about due to the seizure of assets. Or it might be because the people involved can’t travel to their properties. In turn, that could present an opportunity for people looking to buy at a better price. “Those sales might represent a bargain for some people in the west,” Pezzuto says.
Of course, it’s worth remembering how much things have changed in less than a month. And they could change even more again, which might make the outlook better. Or it might make it worse.
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