This paper does not aim to assess the impact of the entirety of the anti-Russian sanctions on the Russian economy. Instead, it focuses on the costs and limitations that have affected international transactions, even if these do not directly stem from a regulator’s rulings. The impact of these restrictions will be examined both on the micro-level of Russian businesses and on the macro-economic level.
2.1 Impact of restrictions on Russian businesses
2.1.1 Growing stockpiles and trade funding issues
As for individual business involved in foreign trade, the costliest set of problems was caused by the companies’ need to step up storage stocks, longer payment deadlines for exporterd goods, and an increasing difficulty taking out trade loans for imports to Russia.
On top of the increasing import stocks, several respondents reported the construction of additional warehouses in countries where they previously had none. Some of them had several new warehouses both in Russia and in transit countries. At the same time, the respondents attributed the stockpiling primarily to disruptions in payment pipelines rather than to trade restrictions.
The official statistics confirms the sizable scale of the phenomenon. In 2023 alone, Russia’s stockpiles grew an unprecedented 3.9% of GDP in total, while since the invasion, stockpile growth has amounted to about 5% of GDP, or about $110B. Seeing as there was no overstocking in Russia’s domestic consumer market and the defense industry were shrinking, we are led to assume that most of this increase in stocks was due to imports.
Some exporter respondents complained of dramatically longer payment deadlines for shipped products. This information is confirmed by the publicly available reporting of Russia’s largest companies whose revenues mostly depend on exports. For example, receivables to Nornickel (highest share of exports in revenue, 96%; dated between December 31, 2021, and December 31, 2024) almost doubled from $470M to $1.374B. Receivables to Alrosa (secondhighest share of exports in revenue, 88%; dated between December 31, 2021, and June 30, 2024) grew from $140M to $210M.
Some of our respondents experienced an ever more substantial surge in receivables. An aggregate increase in debts to Russian suppliers amounts to tens of billions of dollars and could be over $50B7. It is these figures that large account for an increased share of Russian “shadow” surpluses discussed in a number of Western publications.
7 — This prompts two reservations: a) some of the receivables are controlled by front companies associated with the exporter companies’ owners and executives; b) in all likelihood, the rise in export receivables either is over or will peak soon. Economy-wise, the bulk of this growth has replaced the trade loans, which used to be available to the consumers of Russian goods before the invasion. As soon as these loans are substituted, a surge in debts to the Russian exporters will be over. In fact, it may already be over.
The same is true for the imports. After the invasion, obtaining trade loans and payment deferrals for imports to Russia became impossible in some jurisdictions and extremely challenging in others. Most imports have to be paid for upfront, either before the shipment or before the production. The supply chains have been extended, too. On average, Russian importers have been forced to pay for imports two to three months earlier compared with the pre-war period. This is the equivalent of $50B to $70B in diverted company funds.
These estimates based on the interviews and the extrapolation of individual companies’ figures are in agreement with Russia’s Central Bank data on changes to the international investment position. The Central Bank statistics shows that between the start of the invasion and October 1, 2024, “other sectors” of the Russian economy (i.e. mainly real-sector companies) reduced their debts to nonresidents by $51B8 while increasing their foreign assets (foreigners’ liabilities to them) by $214B9. Much of this blistering change owes to the above-described reduction in trade loans from foreign counteragents, increase in receivables from foreign buyers, and the created trade funding instruments for Russian foreign economic operations at the expense of financial resources placed by operators outside of Russia (including the build-up of capital reserves for “mirrors” outlined in Section 1).
8 — Sum of changes to rows 137 and 147 of the Central Bank’s report on the international investment position
9 — Sum of changes to rows 66 and 76 of the Central Bank’s report on the international investment position
If we add the $214B increase in “other sector” foreign assets to the stockpile increase worth $110B and the $51B reduction in debts, the toal amount will be close to $400B, but part of the data reported by the Central Bank has to do with non-trade factors. a more conservative estimate says $200B that was required to step up the stockpiles and fund foreign trade.
It was this need for an urgent diversion of these vast resources that primarily impacted the Russian businesses. However, it is worth pointing out that these losses are mostly history as both the stockpiles and receivables have gone up while the trade loans have been substituted. The current configuration will have a long-term adverse effect on the Russian businesses’ foreign trade ROIs, for the same operations require more capital. But there will be no need to round up some $200B anymore.
2.1.2 Decreased labor productivity
The restrictions under consideration resulted in an increase in the time spent by the employees of the respondents’ companies on financial reporting and compliance. In other words, there was a decrease in labor productivity in business administration as well as financial and legal chicanery, with more paperwork required, more procedures, and more audits.
Large businesses had to add several employees their legal and financial teams while keeping their core operations unchanged. We obtained an insight into the cost estimates of this type of work carried out by two companies. For large businesses, these costs are measured in tenths of a percentage point of export revenues. However, the smaller the company, the greater the losses.
Medium-sized businesses saw an increase in the amount of time spent by different employees completing a standard operation. The table below shows the calculation of the change in time spent by an actual Russian business carrying out one standard operation before the invasion vs. today.
The processing time and labor costs rose by an order of magnitude. Meanwhile, according to a number of respondents, the time spent performing these tasks has seen a much more considerable increase among the high-ranking execs than among the basic-level employees. Previously, the payments were administered by the back office, whereas a CEO or an owner spent almost no time doing this. Today, orchestrating the transaction schemes and interacting with the banks on the matter account for 20% to 30% of the executives’ business hours. Outside of the war, they would be spending this time much more productively. In addition, it spawned a whole industry of intermediary companies with no creative contribution other than helping circumvent the sanctions.
For bona fide small businesses involved in foreign economic activity, legal costs and the time wasted on formalities have become a major obstacle. Some respondents scrapped foreign trade operations altogether because of the increased red tape. Besides, the respondents representing small businesses are the only ones to have been seriously affected by disruptions in payment processing. After all, small businesses can only afford one or two payment channels, which means that disruptions are more likely. At the same time, to be safe, large businesses are building several alternative payment channels (one large importer indicated that they had 14 completely independent channels), so most of the problems and disruptions are relatively easy to overcome. Overall, the respondents representing bona fide small businesses have been the most hit by the payment issues. They often reported cuts to, or cessation of, foreign trade operations along with a surge in costs.
Notably, the growing compliance and legal costs are true of both Russian and many Western companies. Businesses that conscientiously monitor the destination of their products and the origin of payments do so at the expense of time and effort put in by their employees10. The businesses that have decided to continue their actual interaction with Russian counteragents through a shell company are also forced to hold risk assessment meetings and order legal counsel, which would not have otherwise been required.
10 — The respondents have shared a few cases where the sanctions are enforced solely by Western businesses at a very high price. We will not provide detailed descriptions, for those had to do with product turnover rather than money transfers, which is outside of the scope of this study
Apart from that, pressured by their compliance officers, many of the E.U. businesses that had never traded with Russia and had no plans to do so are often forced to pay for the legal services to introduce clauses related to the “end-use monitoring” of the shipments to their contracts and then spend their employees’ time monitoring this “end use” or at least emulating it. Although this is dwarfed by the scale of similar processes in Russia, the overall scale of these costs in the global economy is clearly underestimated and underdiscussed politically.
2.1.3 Commission fees
Among other things, this study initially sought was to calculate some mean losses of the Russian businesses incurred by foreign economic transactions. However, after interviewing the respondents, it became clear that both the conditions and the overall situation are too company-specific, which only allows for broader assessments and general patterns.
The importers have been affected by the commission fees than the exporters. Normally, exporters receive a premium to the Central Bank rate when selling the “unfriendly” currencies outside of Russia. The respondents representing large exporters claim that this premium covers the costs of maintaining payment infrastructure, and their export revenues even increased 1% to 3%. Smaller exporters that have to resort to the intermediaries still have to pay extra for receiving export revenues, but this rarely exceeds the range of 2% to 7%.
A significant part of the payment infrastructure maintenance costs is immutable. Therefore, the size of the business plays a crucial role when it comes to the share of direct commission fee costs in the company’s turnover. The larger the business, the smaller the percentages.
If we bracket the “special situations” described below, most businesses involved in foreign economic activity incur costs (gain profit) approximately within the following range.
The table does not cover “gray area” importers that are either dodging the taxes and customs duties or are not paying them in full. The costs for such importers to transfer money abroad are typically no more than 3-4% of the cash rubles credited to the intermediary and even less if the import is paid for with a cryptocurrency. “Gray area” importers are one of the few cohorts of respondents to have indicated that for them, the economic situation has generally improved, with an increase in revenues and turnover. However, an important consideration is that these gains are paid for by a decrease in tax revenues of the Russian budget.
Some of our respondents had been operating in the “gray area” even before the invasion. Others switched to “shadow” schemes or ramped up their share in their business operations after being hit by the sanctions. In the previous paragraphs, we have repeatedly pointed out that the costs of compliance and interaction with the banks are unaffordable for small businesses. Apparently, small Russian importers were faced with a choice: either cease foreign trade operations or transition to the “gray area.”
Another group that stands out are the small and medium-sized exporters whose customers are unwilling to work with Russian suppliers or have specific requirements for the scheme used to transfer money to Russia. Such problems primarily affect the export of IT services or relatively complex products to “unfriendly” countries.
In order to receive money for the real goods and services from such customers, exporters need some kind of a front. Some exporters are fronted by real foreign companies with similar business focus areas, for which they charge Russian exporters hefty commission fees. Other exporters are fronted by financial intermediaries, but through a company set up specifically for this purpose and meeting certain requirements. The service of receiving money for such a company and transferring it to Russia is more expensive than simply accepting the money. In many cases, the only possible solution for preserving export contracts is for the exporter to establish their own company in a transit or “unfriendly” jurisdiction, and sometimes a company with a real presence, and outsource some of its operations to this “unfriendly” jurisdiction.
Figure 8. Front workflow
All of these options are significantly more expensive than the conventional services for accepting remittances from abroad. Therefore, the costs of such exporters vary considerably from the figures shown in the table above and normally fall within a range of 10% to 15% of the revenue, although some respondents (*) even reported the loss of 25% to 30% of the revenue.
Given the diversity of costs, it proves hard to estimate the total costs economywide. Over the course of the war, Russia’s foreign trade turnover has been averaging over $700B a year. If we are to average out the importer and exporter losses and factor in those who have avoided any losses and those who have been affected the most, the most likely range of losses associated with payments will be on average between 1.5% and 4%, or $10B to $30B a year. a sizable portion of this money goes to the Russian-based intermediaries and masterminds behind the schemes. However, the transaction costs associated with other jurisdictions are also a big factor.
2.2. Impact of financial operation-related restrictions on Russia’s economy
The assessment of this impact heavily depends on the economic perspective we adopt, the relevant indicators, and the explanatory framework. If we approach it through the lens of quantifiable macroeconomic indicators, the impact is almost imperceptible. But if we examine it from the point of view of institutional change, the impact is much more significant.
2.2.1 Macroeconomic perspective
The macroeconomic indicators that are customary for describing a peacetime economy are not quite suitable for describing the realities of a wartime economy. In times of peace, GDP growth normally connotes a growth in people’s income and quality of life (QoL), whereas under a wartime scenario, a rapidly growing GDP may be accompanied by an equally rapid decline in people’s income and QoL. Besides, a structural reorganization of the economy tailored to the military needs has a powerful effect on most economic indicators. This creates the strongest distortions (interferences) that hinders an accurate evaluation of the results of isolated external influences, such as the sanctions.
Here are a few illustrations.
Paragraph 2.1.1 offers a detailed description of why Russian businesses had to divert about $200B to fund the growth of stockpiles and receivables as well as to reduce trade loans. According to all the laws of economics, these expenditures, coupled with higher risks and higher capital costs, should have led to a sharp decline in investment. In reality, though, the volume of fixed capital investment in Russia amounted to the same 19.9% of GDP in 2023 as it did in 2021. The entire increase in stockpiles was financed by a rise in gross savings, which hit record highs since the 1990s. We explain the reasons for this phenomenon in our report “The Russian Economy at the Time of War”.
In theory, the growth of foreign trade costs prompts a decrease in the companies’ income and the taxes collected from them. The stories of our respondents about the transition of some businesses to the “gray area” also favor this assumption.
However, statistics show that Russian budget revenues grew 11.4 trillion rubles ($120B) a year between 2021 and 2024. If we exclude the highly volatile oil and gas budget revenues that were most affected by the sanctions, we will discover that the volume of budget revenues to GDP remained at the pre-war level; in 2025, it will grow thanks to a rise in tax rates.
With regard to some indicators, the sanctions in question should not have had an adverse impact even in theory. In particular, the accounts of our respondents show that the sanctions have significantly increased the costs of imports into Russia, with an average neutral impact on the export costs. On paper, such change in the terms of foreign trade should spur a growth in domestic production, which has indeed been recorded in Russia in recent years. One can, of course, argue that an increase in foreign trade transaction costs reduces the economy’s specialization and, consequently, average labor productivity. In practice, though, this effect may come through only decades later.
Similarly, in theory, the redistribution of value added between the economic sectors does not affect the final GDP volume. In bypassing the sanctions, most of the cross-border payment and import services are provided by Russian businesses. If the volume of exports and imports does not deviate much from the long-term trend (and so far there is no prominent deviation from the trend), the costs of circumventing the restrictions for some companies and industries only imply a redistribution of part of the profit and value added of these companies and industries (manufacturing and retail) to other companies and industries (banks and logistics), without affecting the final GDP volume.
Similar examples can be cited, too. Almost any assumptions about the drop in certain metrics due to the cross-border transaction issue, the ones that may be suggested by common sense, are not supported by the available statistics. There is only evidence to back up a certain decline in labor productivity in trade and finance as well as a decline in the availability of some imported goods to the end user.
2.2.2 Impact of international payment-related restrictions on institutions
Instead of earning off the creation of new goods and services suited to the needs of final consumers, thousands of talented Russians began to make money devising ways to bypass the rules. This endeavor proved to be more profitable for many high-skilled professionals and successful entrepreneurs, for circumventing the sanctions involves expertise and creativity. The trouble here is not just that the useful products and services they could have created never saw the light of day. Worse yet, they have developed a professional deformation that will see many of them keep bypassing the rules for the rest of their careers.
With all reservations, over the last few decades, Russia exhibited a trend for a growing number of bona fide businesses and an increased transparency of certain government agencies. This trend has reversed. Hundreds of thousands of people who had been opting to follow the rules before the invasion began (or even were forced) to break those rules. Bribery has almost been incentivized, whereas the risk of accepting bribes has dwindled. a bulk of official data ceased to be published to foil the potentially enhanced efficiency of the sanctions. It is hard to say to what extent the reduced openness of Russian government agencies has made life more difficult for Western officials, but there is no doubt that it has lowered the risks of facing the consequences over corruption for their Russian counterparts. High-tech or law-abiding businesses have borne the brunt of the sanctions policy, while the commodity-related and “gray market” businesses have been minimally affected. This preserves the commoditybased structure of the economy and demotivates law-abiding behavior. The list goes on.
Crucially, though, the deleterious impact the restrictions have had on the institutions is not limited to Russia. Listed below are several real-life cases reported by our respondents on their Western counteragents.
- A Russian importer, a study participant, had been purchasing fairly complex products from a supplier in an OECD country for over 10 years for millions of dollars per year for over 10 years. Before the war, the supplier had rigorous documentation requirements for the buyer. Only the end user company was allowed to pay. The consumer was obligated to constantly fill in a lot of forms developed by the supplier, about the specifics of the business and the end use of the products. The sanctions rendered formal interaction between the supplier and the consumer impossible. However, the supplier decided that customer retention would outweigh risk. Now the supplier is receiving payments for products from third parties in third countries, with less supporting documentation. We are unaware whether the supplier from the OECD country has commuted their requirements for all of their customers or whether they are now rigging the documentation they used to receive from the Russian customer. An important point is that previously, this was a completely legal business operation where the supplier could obtain any information about the end use of their products. Now the supplier has violated the rules, and there is no real information on the end use, even if it is suddenly requested by some official agencies in the supplier’s country (*).
- X1, an E.U.-based company owned and managed by Europeans, exported products to Russia, which, under an expansive interpretation of law, could be qualified as dual-use goods. Following the invasion, they imported into Russia all the products paid for before the war started, simply by substituting the HS code when clearing the customs. An identical E.U.- based company, X2, also owned and managed by Europeans, found itself in a similar spot. The company was certain (most likely, justifiably so) that their products were not dual-use items, and the civilian use of those products was easy to legally justify. X1 long ago received the money for the delivered products while X2’s products have been sitting in the customs storage for more than two years (*).
Our respondents shared many cases of Russian law-abiding businesses being punished and those using illegal workarounds being rewarded. Businesses that sought to follow legal norms in good faith and relied on the rational and conscientious behavior of Russian or Western officials took a massive hit. Businesses that simply forged the records or engaged in other illicit actions gained and went unpunished. All of this will have long-term negative effects on both sides of the border. - A small family-owned logistics firm based in an E.U. country, formerly part of the Eastern Bloc. More than 20 years’ experience in road transportation to Russia and Belarus. a small pool of regular customers. After the sanctions were imposed, some of the customers’ records suggested foul play, and the goods, which, according to the documents, were sent to Central Asia, were shipped to Russia. As recounted by the respondent, business owners using this company’s (*) services believe that they have to turn a blind eye to many things to keep the business going.
- A transit country has developed an advanced infrastructure for circumventing the sanctions and servicing Russian foreign trade. Pressured by the U.S., local regulators began to hamper the infrastructure operations. As a result, the beneficiaries of the infrastructure began to fund media publications and political rallies campaigning against the U.S. pressure and coercion and urging others to “protect their own sovereignty” (*).
All the above cases were recounted to us and cannot be entirely verified. Similar numerous first-hand about Russia are more reliable. However, in our opinion, it was important to emphasize the double-edged sword of such damage. There is little difference between the motivations and business incentives on either side of the border. Both are faced with a difficult choice between personal gain and compliance with constraints whose fairness is not always obvious and whose enforcement is poor. In other words, businesspeople on both sides of the fence were first tempted and then have repeatedly been shown that violating the bans is not punishable and that giving in to temptation is as much profitable as it is safe. The takeaway the businesses have derived will have a long-term adverse impact on the institutions and incentives in both Russia and the West.
In concluding the subject of institutions, it is worth outlining the two possible scenarios. Assuming that the scale of sanctions will stay unchanged, the intensity of Russia’s trade relations with Western countries may either significantly shrink or remain at the current level. In the former case, the effects described in this section will be significantly reduced. Most businesses will return to law-abiding behavior, ceding the remnants of trade flows to semi-criminal structures. However, if the current situation persists, where the sanctions are formally in place, but, in fact, trade operations continue to follow a variety of schemes, this will provide non-compliant businesses with long-term competitive advantages and create stable cohorts exerting influence to preserve things the way they are.
2.3 Afterword
In conclusion, we find it relevant to mention an episode from history that, we argue, closely matches the situation examined in this paper, namely, the U.S. National Prohibition Act of 1919.
This is not to say that Prohibition did not achieve any of its declared goals. Alcohol consumption and the number of alcohol-related deaths in the U.S. declined. Although researchers debate the magnitude of this decline, they generally agree that, following the drop of the early two to three years, alcohol consumption flatlined over the following decade.
However, in addition to the price of Prohibition, which had been discussed before the adoption of the Act and which the American public was willing to pay (reduced tax revenues from alcohol, shutdown of wineries and liquor stores), the U.S. had to face many unexpected negative upshots whose scale only expanded over time. Government spending on the Prohibition enforcement increased from $6.3M in 1921 to $9.2M in 1925 and to $13.4M in 1930. The number of people arrested for violating the law was also steadily on the rise, but had no effect on the scale of the illegal business operations. The tax revenues from alcohol, which used to be collected by the government, went to organized crime. During the entire period of Prohibition, the power of the mafia and its ability to corrupt the bureaucracy grew steadily. Tourists began to opt for vacations in countries without alcohol restrictions over the American resorts. Dozens of thousands of bars and entertainment venues began to operate completely on the wrong side of the law without paying even the taxes that were not related to the sale of alcohol. Dozens of millions of Americans gained experience in breaking the law on a daily basis. And the list goes on and on.
The assumption that any sanctions can significantly reduce the foreign trade operations of a country with a foreign trade turnover of $600B to $800B a year is almost as short-sighted as the assumption that the approval of a number of regulations can turn dozens of millions of alcohol drinkers into teetotalers. The reasoning of some representatives of the Western establishment who assert that a few more fixes to the regulations and law enforcement can help achieve the goal looks as disconnected from reality as were similar discussions about Prohibition in the early 1920s.
As with Prohibition, financial restrictions on Russia are undoubtedly increasing the costs and causing some damage to the Russian economy and businesses. One can argue whether the current damage is the worst possible or it could still go a step further, but apparently, we are close to the maximum possible impact, and it may even have peaked six months ago. It is also clear that if the current design of the sanctions persists for several more years, the world will see an increase in the inherently underestimated costs of creating uncontrolled international payment systems, reproducing incentives for businesses to be less compliant and dozens of thousands of people on both sides of the border gaining the daily experience in breaking the law and getting away with it.
A natural objection would be that the aim of the current policy is not to halt Russian foreign trade or cause an economic debacle in Russia, but only to slightly increase the cost of the invasion. As a rebuttal, one should bear in mind that the goals of Prohibition were subsequently achieved in a more efficient and cheap manner for the government, e.g., by introducing excise taxes on alcohol, i.e. the decisions that instead of criminalizing millions of transactions, which were objectively impossible to stop, sought to make such transactions legal yet more expensive. At the same time, the money paid by alcohol consumers were transformed into government revenues, which were used to finance, among other things, the anti-drinking campaign.
If we assume that, contrary to our expectations, the sanctions coalition will succeed in enforcing the measures taken in the foreseeable future, the reasoning above will be rendered irrelevant, and Russian trade will be completely shut off from the “friendly” jurisdictions. But should it fail, the current situation will only benefit the “mafia,” i.e. the operators of alternative transaction systems. It is much more reasonable to either completely scrap the bans, which are impossible to administer anyway, or to legalize certain operations but charge fees for them. The vast majority of businesses on both sides of the border will still prefer to return to the legal framework at a certain price.
This conclusion, we maintain, transcends the sanctions targeting Russia. Instead, it should be considered while designing sanctions against any other country.