Long-Run Consequences of Sanctions on Russia

We analyze the long-run economic consequences of Western sanctions on Russia. Using a new framework for balanced growth path analysis, we find that allowing for capital adjustment amplifies consumption loss due to sanctions, contrary to the intuition that long-run effects should be milder due to greater adjustment opportunities. When capital can adjust, consumption declines are 1.4 times larger for Russia and 2.2 times larger for Eastern Europe compared to static models with fixed capital. Given a trade elasticity of four, long-run consumption falls by 8.5 percent in Russia and 2 percent in Eastern Europe. Western countries experience mild effects regardless.