The impact of foreign sanctions on business performance in Russia

Khanh Hoang, Toan LD Huynh, Steven Ongena July 22, 2022

Editor’s note: This column is part of Vox’s debate on the economic consequences of war.

The effects of the sanctions and restrictions imposed on Russia following its invasion of Ukraine in February 2022 have been widely discussed here on Vox (e.g. Pestova et al. 2022, Langot et al. 2022, Lafrogne-Joussier et al. 2022 ). In this column, we extend these discussions by returning to what happened around the Crimean event in 2014.

For our study (Huynh et al. 2022), we collected data on 788 listed Russian companies over the period 2000 to 2019. Data on foreign sanctions was gleaned from the Global Sanctions Data Base (Felbermayr et al. al. 2020, Kirilakha et al. 2021), a global economic sanctions dataset covering all bilateral, multilateral and plurilateral sanctions from 1950 to 2019. With respect to our identification strategy, we consider the exogenous shock of 2014 as the critical event to interpret the causal relationship using a difference-in-difference adjustment complemented by a propensity score matched sample. Each observation in the treatment group is matched with an observation in the control group using nearest neighbor matching based on their characteristics such as firm size, debt, market value, fixed assets and financial constraints so that they are identical in terms of financial resources at the enterprise level. features. Additionally, in our Approach IV, we use Ukraine’s geopolitical risk (Caldara and Iacoviello 2022) and Americans’ favorable opinion score toward Russia (from the Global Attitudes Survey 2019) as instrumental variables.

Russian companies and foreign sanctions

We first focus on the association between a reduction in the performance of Russian firms, represented by their return on assets (ROA) ratio, and the number of foreign sanctions imposed on Russia during the year (it refers to the stock of sanctions in place, rather than the flood of new sanctions). Figure 1 illustrates the heterogeneity of the impact of foreign sanctions on the performance of Russian companies. To start with the first row, a one standard deviation change in the number of foreign sanctions (which equates to nearly 20) decreases ROA by 3.4 percentage points – a large effect equal to nearly 30% of the standard deviation of the ROA. The dots represent the parameter estimates (after controlling for firm characteristics and macroeconomic determinants) and the lines the 95% confidence interval revealing the statistical significance. The more negative the parameters, the more negative the impact on the ROA of Russian firms; and the wider the dotted line, the lower the statistical significance.

Figure 1 The impacts of foreign sanctions on the performance of Russian companies

After implementing the previously mentioned identification strategy, we provide causal inference for the performance of the sanctions firm after validating the instrumental variables by the F-test of Olea and Pflueger (2013), the test statistics Kleibergen-Paap weak identification test, Anderson-Rubin Wald test and confidence interval, and Hansen-J over-identification test statistics. Our foreign sanctions impact coefficients are significantly negative, implying a causal effect of sanctions on the performance of Russian firms.

When looking at different types of sanctions such as financial sanctions, travel sanctions and trade sanctions (including sanctions weighted by imports and exports), there is heterogeneity in the impacts on business performance. . Travel sanctions have the highest negative impact due to their earliest imposition on the Russian economy and the highest number of sanctions imposed by Western countries in this category. Simultaneously, while trade sanctions have varied over time, financial and travel sanctions have persisted.

Russian “shields”? No distance or origin effects, but energy and oligarchs “shield”

We start from the political proximity with the Kremlin because we formulate the hypothesis that firms close to the Kremlin can be protected from sanctions. We measure physical distance to the Kremlin (Moscow) and test whether geographic location matters for the impact of foreign sanctions on business performance. We provide evidence that the distance to Moscow on the link between the performance of sanctions companies has no impact (line 8 in Figure 1). The second test is based on the origin of the company to see what could further prevent companies from being affected. The results indicate that being of foreign origin does not help companies suffering from a decline in business performance.

One of our main findings is that foreign sanctions do not seem to affect energy companies in Russia, but undermine the performance of companies in other (non-energy) sectors. Looking at the ROA of these companies over the period 2014-2019 (shown from time 0-4 in Figure 2), we see that there has been a slight drop in ROA compared to the previous period; however, the trend is unclear. The joint significance of all estimated coefficients for the post-2014 period does not reject the hypothesis, implying a zero effect of economic sanctions on energy firms following the sanctions shock in 2014.

Figure 2 The effects of sanctions on the performance of energy companies with the reference year (2013)

Additionally, we manually collect data for companies linked to Russian oligarchs that have ties to Putin by following the “Putin list” provided by CNN, resulting in 21 companies with these oligarchs as founders or major shareholders. Among these 21 companies, only six are energy companies. Using the sample of these companies, we find that foreign sanctions do not have a significant impact on their performance. Our findings for energy-related companies and the oligarch suggest the presence of a shield protecting these companies from the negative impact of foreign sanctions.

Exploration of mechanisms and preparation for sanctions

We set up an empirical model to determine how firm characteristics are associated with the number of foreign sanctions, shown in Figure 3. We find that, on average, Russian firms invest less in both capital (2 .6%) and in R&D (down 1.1%). %) and bear a higher cost of capital (up nearly 2%) as a result of increasing foreign sanctions. As a large part of the foreign sanctions imposed on Russia take the form of financial or trade sanctions (or both), this increases uncertainty, thus hampering business investment and causing more friction in the market.

picture 3 The mechanism of foreign sanctions on business performance

We assume that Russian companies may have been prepared for the Crimean event. Four arguments are made in this regard based on our analyses, summarized in Figure 4. First, trade flows in Russia increase significantly in 2013, in line with stocking behavior, which is also supported by other publications ( Aidt et al. 2021). Second, Russian companies generally cut investment by 4.3% in 2013 in response to foreign sanctions, but not companies linked to the oligarch and energy companies. Third, energy companies increased their inventories by 3.3%, a 20-fold jump from the average annual increase over the period 2000-2012 (when inventories were held flat for all intents and purposes). Finally, Russian companies linked to the oligarch bought back an average of 3.0% of their outstanding shares in 2013 compared to other companies, an amount three times greater than the annual average for the period 2000-2012. This suggests that these firms (linked to energy and the oligarch) may have had an informational advantage and prepared, neutralizing the impact of subsequent sanctions on their performance.

Figure 4 The preparation of energy companies and oligarchs for the event in Crimea

Interestingly, we also find similar anomalous patterns of stock changes of energy-related and oligarch-related firms in 2021 compared to 2015-2020, while the stock magnitude is much smaller in the other companies. As Russia invaded Ukraine in early 2022, these patterns imply the readiness of Russian businesses as they sense the possibility of a coming war.


Our study assesses the economic effects of nearly two decades of recent sanctions on Russian businesses. We find that foreign sanctions appear to be detrimental to business performance in general; however, there is no clear impact on Russian energy and oligarch-related businesses. We show that the cost of capital and the political risk of Russian companies increase with foreign sanctions, and that business investment and R&D intensity decrease somewhat. In sum, the sanctions had some impact on Russian businesses, but the effect was rather small and mostly missed the most important sector of the Russian economy (i.e. the energy) as well as the wealth of the oligarchs. Interestingly, we find that Russian energy and oligarch-related companies were apparently prepared for the Crimean event. Although the sanctions have generated economic hardship, they may not be enough; “bears just don’t suffer from hibernating during the winter”.

A new wave of much tougher sanctions has just been imposed and the question “Are they going to hold out?” may require a cautious and nuanced response. Given that Russian companies may have been prepared, in the end, more than just sanctions may well have been needed to stop and undo this unprovoked invasion.


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