Tag: Russian Aggression

Ukraine and NATO – Evidence from Public Opinion Surveys

Posted on October 30, 2023 | Policy Brief

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A recent survey on Ukrainians’ attitudes towards a Ukrainian NATO membership shows that 89 percent would support joining the military alliance in a referendum – the highest level of support in the country’s history. Moreover, the convergence of membership attitudes between Western and Eastern regions in Ukraine displays a real loss of trust in Eurasian (pro-Russian) relations as a vector of development for Ukraine. This brief offers some perspectives on how public opinion has changed and what have been the crucial turning points. In particular, the brief digs deeper into the evolution of opinion against a NATO membership, as well as regional differences in attitudes. It also shows how every round of Russian aggression eventually has led to public opinion alignment. These changes not only concern a NATO membership but reflect a deeper transformation of societal values and a consolidation of the Ukrainian national identity, strengthening the grounds for a more democratic society.  

The continued Russian aggression on Ukraine has disclosed several deep-running issues that have for long been undercurrents in Ukraine’s history and whose resolution is a key determinant of the country’s future. One such issue is the relationship with NATO, including a potential accession into the alliance.

The most recent survey on Ukrainians’ attitudes towards Ukrainian NATO membership, conducted in May-June 2023, shows that 89 percent of the respondents would support it in a referendum, 8 percent would not, while 3 percent of the respondents found it difficult to say (KIIS, 2023). The survey (which excludes occupied territories where it was unfeasible to conduct the survey) also shows the lowest ever gap in terms of geographic spread. 93 percent were in favour of membership in the Western regions and 79 percent in the Eastern regions, the traditionally pro-Russian areas where most of the Russian ethnic minority resides. In comparison, in 2017, 71 percent were in support of a NATO membership in the Western regions and 32 percent in the Eastern regions, respectively (Kermach, 2017).

NATO Membership Support in Ukraine Over Time

To gain a deeper understanding of how the public’s opinion on a NATO membership has changed over time, it is suitable to start in 2002, when former President Leonid Kuchma first announced Ukraine’s aspiration to join NATO. At that point the Ukrainian society could be almost equally divided into three categories; those in favour of joining NATO, those against it, and those who refused to take a stance/found it difficult to say/would not vote in a referendum (hereafter referred to as “indecisive respondents”), depicted in Figure 1. This was a very natural consequence of the late 1990s/early 2000s coexisting positive attitudes to both geopolitical directions – towards NATO and the EU, but also towards Eurasian integration.

Figure 1. Attitudes to joining NATO among Ukrainians, 2002-2023.

Source: “30 Years of Independence”, 2021; KIIS, 2023; Rating Group, 2023 and author’s compilations.

One framework for understanding this is the concept of social ambivalence, which has been highlighted as very typical for transitional societies such as Ukraine. For example, Reznik (2022) argues that, in the case of Ukraine the main reason for ambivalent geopolitical orientation is the need for “ideological ‘reconciliation’ of two civilizational directions different in essence and meaning within an unbalanced identity” (Reznik, 2022). Similarly, Golovakha and Panina (2003) suggest that in Ukraine, society simultaneously accepts the old social institutions, which have lost their legality during the transition times but have remained legitimate in the view of the public, and the new social institutions, which have gained legal recognition but have not yet been accepted by society. Ukraine is not unique in this context, similar processes have occurred in many transition countries, for instance in Poland, the Czech Republic, Hungary, Slovakia, Estonia, Lithuania, Latvia and others (see, for instance, Roland, 2000; Murrell, 2003; Gruszewska, 2014; and Becker, 2019). This literature documents a mismatch between old and new institutional structures in transforming countries, strongly associated with low levels of trust in society, resistance to new ideas, strong attachment to traditional behaviors and low social activity levels within society. However, such discordance can change drastically due to shocks facing a society, as illustrated by the change in attitudes towards a NATO membership in Ukraine from the early 2000s and onwards.

In the first decade of the 21st century the Ukrainian society gradually became more aligned against joining NATO. This process intensified after 2010, when Viktor Yanukovych was elected as the President of Ukraine. Soon after the election, the Verkhovna Rada (the Ukrainian Parliament) adopted the law “On the Principles of Internal and Foreign Policy”, establishing the principle of “non-alignment” (Verkhovna Rada of Ukraine, 2010). This implied a Ukrainian commitment not to participate in any military political alliances, including NATO. This decision, alongside successful efforts from pro-Russian authorities in the Eastern regions – including anti-NATO propaganda – resulted in as low as 18 percent support for NATO membership in 2013, and 67 percent of the respondents stating to be against a membership (see Figure 1). Such anti-NATO sentiments can be argued to not only have prepared the grounds for, but also to have been explicitly used as an argument for the Russian aggression in 2014.

However, the illegal annexation of Crimea and the Russian aggression in Donbas in 2014 drastically changed the public’s opinion on the military alliance, increasing the share of NATO membership supporters to close to half of the population and thus exceeding the share of opposing or indecisive respondents for the first time in history. At that point 47,8 percent of Ukrainians were in favor of joining the alliance and 32,4 percent were against it (“30 Years of Independence”, 2021), and in 2014 the “non-alignment” principle was officially repealed. It was even officially stated in the Comment On Amendments to the Law of Ukraine “On Principles of Internal and Foreign Policy”) that the policy had been a decisive factor for the Russian aggression in 2014: “In view of this, the further continuation of the so-called non-alignment policy, which has already led to the loss of Ukraine’s territorial integrity, is contrary to national interests, poses a constant threat to Ukraine’s state sovereignty and territorial integrity, holds back the processes of socio-political and economic reform of the country, and limits Ukraine’s prospects to become a developed European democratic country within the European Union.” (Verkhovna Rada of Ukraine, 2014).

Changes in public opinion in Ukraine is however not only limited to NATO membership attitudes. Naturally, there have been changes in election outcomes and voting patterns as well. Recently, Munroe et al. (2023) found a significant shift in voting patterns in Ukraine after 2014, reporting a dramatic decline in pro-Russian votes in Donetsk, Dnipropetrovsk and Odessa regions that had all traditionally been pro-Russian. Still, about one third of the respondents were continuously negative towards NATO until 2021, when the share of those in opposition of a NATO membership dropped to 24 percent. Potential explanations for the pertaining negative attitudes include a remaining influence from pro-Russian authorities in the Eastern and Southern parts of the country, along with a lack of knowledge and awareness about NATO among the population.

Motives, Regional Variations, and Information Gaps

In this context, it is essential to highlight the Ukrainian’s motives for support, or scepticism towards NATO membership. A nation-wide survey from 2017 shows that among the majority of NATO supporters in Ukraine the dominant motive was the expectation of “security guarantees for Ukraine” (86 percent). On the contrary, those who did not support joining the alliance expressed concerns that a NATO membership might “draw Ukraine into NATO’s military actions” (44 percent) or “provoke Russia to direct military aggression” (28 percent). 27 percent were convinced that “Ukraine, in principle, should be a non-aligned state” (27 percent), and finally, 22 percent were worried that “foreigners and foreign capital will start to rule in Ukraine” (DIF, 2017).

Stereotypes of NATO as either protection or conversely, a threat, for Ukraine are subject to significant regional differences. While in Western and Central Ukraine the perception of NATO as protection clearly prevailed (81 and 68 percent, respectively), attitudes in the Southern and Eastern parts were more uncertain. About the same number of respondents (19 percent) considered NATO as both protection and a threat, while 25 percent of the respondents in the South and 30 percent in Eastern Ukraine didn’t see NATO as either.

The basis for these opinions is most likely a lack of effective information and a lack of understanding of the alliance, as well as the complex geopolitical dynamics involving it. Research has attributed negative attitudes towards NATO to surviving Cold War stereotypes and a lack of information concerning NATO’s specifics, functions, decision-making procedures, and the rights and obligations of member states (Kermach, 2017).

In the 2017 survey, almost every other Ukrainian admitted that they were not well informed about NATO. Only 55 percent of the respondents claimed to “know something about NATO”, while 22 percent said they knew virtually nothing about it. However, a majority of Ukrainians (55 percent) “would like to know more” about NATO, while about a third (36 percent) of the respondents did not express such interest (see Table 1). Also in this regard, regional differences are remarkable. In Western and Central Ukraine, interest in NATO was much higher in 2017 than in the Eastern and Southern parts of the country.

Table 1. Interest in knowing more about NATO among Ukrainians in 2017.

Note: Responses to the question: “Would you like to know more about NATO?”
Source: DIF, 2017.

Public Opinion Consolidation

The most drastic change in attitudes towards a NATO membership has however occurred after the full-scale Russian invasion of Ukraine in February 2022, with the public almost converging in their support of a NATO membership. The ongoing share of NATO supporters exceeds 85 percent, and the increase in this group draws, to an almost equal extent, both from the number of those who previously were against the alliance and those who were previously indecisive. For the majority of those who consistently considered the “non-alignment” policy of Ukraine as optimal (26,6 percent according to Kermach (2017)), it has become obvious that this “non-alignment” strategy has failed to provide effective security guarantees.

Moreover, the perception of a NATO membership as a security guarantee is also changing. In the 2022 Kyiv International Institute of Sociology (KIIS) survey, just below 40 percent of the respondents considered a NATO membership as the ultimate and only security guarantee, while approximately the same number were willing to accept other security guarantees. In the 2023 survey, the share of the former response category increased to 58 percent (with a slight difference within regions – 64 percent in the West and 48 percent in Eastern Ukraine), – while the latter dropped to 25 percent. Furthermore, 76 percent were not willing to accept forgoing a NATO membership as a condition for peace (KIIS, 2023).

Conclusion

Public opinion in Ukraine, including attitudes towards a NATO membership, has been drastically affected by the Russian aggression in 2014, and even more so by the ongoing war. As survey results show, each subsequent round of Russian aggression on Ukraine has only increased the share of NATO membership supporters and decreased the number of respondents indecisive on whether Ukraine should join NATO. Additionally, regional differences in attitudes between the Eastern and Western parts of Ukraine have also smoothened. These changes imply a deep transformation in societal views, where the meaning of living in peace for Ukrainians has transformed from the idea of “non-alignment” into perceiving a NATO membership as a security guarantee and a prerequisite for future peace.

While the transformation of public opinion is important per se, it is only one example of the groundbreaking changes the Ukrainian society has especially undertaken since the invasion in 2022. The necessity to fight the Russian invasion brought about unprecedented consolidation and feelings of a national identity. This, in turn, provides an essential foundation for building trust and active political participation, strengthening the grounds for an effective democratic society.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes. 

Choosing Latvia: Understanding the Decision-Making Factors of Displaced Ukrainians

Posted on June 6, 2023 | Policy Brief

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This policy brief is based on an empirical examination of the early-stage migration of Ukrainian war asylum seekers to Latvia in 2022, following the Russian invasion. The study highlights the urgent nature of their displacement and identifies the pivotal role of kinship in Latvia in the decision-making. Three categories of refugees emerge based on kinship ties, employment opportunities, and cultural affinity. The study also reveals the substantial influence of the pre-existing Ukrainian diaspora and underlines the significance of network effects in refugees’ location decisions. Contrary to previous studies, refugees didn’t necessarily settle for the first country available. The research underscores the strategy of seeking support from personal networks in acute displacement scenarios, which appears to be the most influential factor for the choice of location in the decision-making process.

Ukrainian Displaced People in Latvia

The Russian invasion of Ukraine in 2022 triggered a geopolitical upheaval in Europe and resulted in a mass exodus that had not been witnessed since World War II. With the war showing no signs of cessation, return for many of these displaced people appears difficult in the near future. Latvia, although not a bordering country, have become a haven for 36 000 Ukrainian refugees.

This brief seeks insight into Ukrainian displaced people’s preference for Latvia, using interviews conducted in March 2022, a month after the war began. With no common border between Ukraine and Latvia these refugees had to transit through other countries, making the question about the choice of Latvia as their ultimate destination particularly relevant.

Unlike during the migration crisis in 2015 and during the recent influx of Syrians and other groups, the Ukrainian refugees found themselves being welcomed with open arms, belying Latvia’s typically guarded stance towards immigrants. This unexpected warmth is influenced by a multifaceted kinship rooted in historical connections from the Soviet era, a pre-existing Ukrainian diaspora in Latvia, labor migration, and shared cultural elements.

These factors can also play a role in Ukrainian refugees’ choice of Latvia as their ultimate destination. The study underlying this policy brief seeks to explore these facets and unravel the reasons behind the Ukrainian refugees’ choice to seek safety in Latvia.

Migration Decisions

Two aspects are crucial in the analysis of migration decisions: the factors that influence refugees’ choice of destination and the process underlying this decision.

Traditional assumptions surrounding asylum-seeker migration, as emphasized by Böcker and Havinga (1997), suggest that when people are forced to flee, their primary focus is safety – not destination. However, more nuanced perspectives have evolved in recent studies (see Robinson and Sergott, 2002; Brekke and Aarset, 2009). They highlight the calculated and adaptable nature of refugee destination choices throughout the asylum-seeking migration journey, demonstrating that circumstances and journey stage significantly influence destination choices.

Research indicates that host country policies and economic conditions can both enhance and limit refugee flows (Czaika and de Haas, 2017; Ortega and Peri, 2013; Brekke and Aarset, 2009; Diop-Christensen and Diop, 2021; Kang, 2021; Suzuki,2020; Collyer, 2005). However, another line of research emphasizes that policy and economic factors are secondary to networks, cultural affinity, language, and perceptions in determining destination choices (Robinson and Sergott, 2002). Factors such as social networks (Koser and Pinkerton, 2002; Tucker 2018), kinship (Havinga and Böcker, 1999; Neumayer, 2005; Mallett and Hagen-Zanker, 2018), financial resources (Mallett and Hagen-Zanker, 2018), geography (Neumayer, 2005; Kang, 2021), destination country image (Benzer and Zetter, 2014), culture (Suzuki, 2020), and colonial links (Havinga and Böcker, 1999) have been established to be significant at various stages of migration. Economic and education opportunities are also found to have a marginal influence on destination decision-making compared to the possibility of resolving statelessness (Tucker, 2018).

These varying determinants of destination may also be contingent on the refugee journey stage. Policies may not dominate in acute cases of forced migration (Diop-Christensen and Diop, 2021). For individuals with time to prepare for migration, a cost-benefit analysis often informs their decisions. In contrast, those in urgent circumstances, such as during the Russian invasion of Ukraine, may have to take immediate refuge and put less emphasis on benefits and policies (Robinson and Sergott, 2002). Destination determinants differ by both origin and destination countries (Havinga and Böcker, 1999, Tucker, 2018, Gilbert and Koser, 2006). Thus, research on underexplored regions and countries is valuable for a comprehensive understanding of migration patterns.

Migration, voluntary or forced, involves intricate decision-making. As Mallett and Hagen-Zanker (2018) aptly state, the dynamic experiences ‘on the road’ shape refugees’ journey and destination choices. Robinson and Sergott (2002) and Brekke and Aarset, 2009 have pioneered models for asylum seekers’ decision-making, suggesting that factors such as networks, language, cultural affinity, and perceptions evolve across different stages of the asylum journey. Others, like Gonsalves (1992) and Shultz et al. (2020), have constructed models delineating stages of refugee passage and displacement, highlighting the changing needs and preferences of refugees.

While existing literature mainly focuses on the later stages of forced migration journeys, limited empirical evidence exists on the migration moves during acute displacement. Additionally, further understanding on migration induced by the war on Ukraine is needed. There is also incomplete coverage of asylum seeker and refugee topics in the Baltic countries, making such research particularly relevant. To address these gaps, this brief aims to provide qualitative findings on the decision-making and experiences of Ukrainian displaced people in Latvia.

Understanding the Decision

The research underlying this brief explored the reasons behind Ukrainian displaced people’s choice of Latvia as their migration destination during the early part of the invasion. The study is based on 34 semi-structured, in-depth interviews with displaced people conducted in March 2022. The dataset is part of a larger study that includes continuous interviews to understand Ukrainian displaced people’s lives, plans and needs in Latvia.

From the interviews, it was apparent that the predominant factor in respondents’ decision-making was the presence of kin or acquaintances in Latvia.

All but one participant had some connection to Latvia, whether through distant relatives, friends, or professional contacts. The one participant without such connections arrived from Russia and not from Ukraine, working on a contract. A minority of our participants considered staying in Ukraine. One example is Lidiia, who initially planned to move near Lviv, but redirected to Riga during the journey.

“She found a family that would host us, 100 km from Lviv… We agreed, but then our friends… called us on the way, we were leaving Kyiv under bombardment. Our train was delayed because of the air alarm. When we just arrived there, a shell exploded above the railway station… And on the way, friends from Riga called us and invited us: ‘Come, everyone will help here’. Therefore, everything changed while we were on the train, we decided everything“ (Lidiia).

Proximity of kin was not the primary concern for the interviewees; the mere fact that they had a relative in Latvia appeared more influential in their narratives. Indeed, the majority of participants had distant rather than close kin, though a few had close family in Latvia (grandparents, parents, common-law husband, and sister). As Olena explained, the presence of even distant relatives influenced her choice: “there are distant relatives, very distant… That’s why we came” (Olena). However, ties in Latvia were not the only determinants as many of the participants also had family connections in other parts of Europe.

The speed of decision-making was also striking – most decisions to migrate were not a matter of long-term planning but a reaction to the sudden crisis, often influenced by incoming offers of assistance. Nataliia remembered: “My mother said, ‘You have to leave because everything is so fatally bad. Take the children and leave.’ And literally overnight I packed up, bought the tickets. But first I went to Poland, to my brother” (Nataliia).

Maryana ended up choosing her destination only after leaving home. “At first, we thought to go to Poland, but it is completely crowded, and then we called to whoever we could. There are no relatives in other countries. No, there are relatives in other cities, but these are Luhansk, Donetsk, we are from Slobozhanska Ukraine, so all our relatives are from the side where very heavy fighting is going on now“ (Maryana). Such testimonies illuminate how, owing to the immediacy of the situation, the eventual destination of some displaced Ukrainians was not predetermined but evolved during their respective journeys.

From the interviews with the participants who knew someone in Latvia, one can identify three groups based on the main factor that determined their decision.

Network, First of All

For respondents who did not have family in Latvia, friends, acquaintances, and professional contacts in Latvia acted as anchors. Like family members, such acquaintances often reached out, offering assistance and lodging as soon as they heard the news of the war. The influx of supportive communication from Latvian acquaintances influenced the decision for many participants.

Olha decided to flee with her friend, who had a distant cousin residing in Latvia. Upon the onset of the conflict, the cousin reached out and urged them to come to Latvia. As Olha recalls: “As soon as she heard that there was a bombing in Kharkiv, she said, ‘Come’. My friend, with whom I came, Lesya, does not have a car, so she immediately told me… let’s run away’” (Olha).

Lidiia received an invitation from a Latvian friend she had met through her church, even as she was already in the process of fleeing Ukraine. Similarly, Andrii, who was vacationing abroad at the time of the war’s outbreak, remembered: “On the 25th our best friend wrote to us that, ‘There is housing, come here’ and we began to negotiate with the embassy to fly here” (Andrii).

Even in the absence of explicit messages, displaced individuals recalled having friends and family in Latvia and chose to make their way to Riga. Olena, like Lidiia, initially set off without a clear destination in mind. It wasn’t until she reached the border that she decided to head to Latvia: “Just at the border that you decided where to go?” (Olena).

Existing friendships and ongoing communication also influenced some people’s choice to opt for Latvia. Olha (2) was encouraged by her daughter to relocate to Riga due to her daughter’s friendships with Latvians that she had formed at a camp in Estonia: “Friends appeared, with whom she was in close contact for six months. That’s why for her there was no choice at all ‘Where?’. She immediately said: ‘To Riga’” (Olha (2)).

Opportunities and Realities

The turning point for many respondents was their arrival in Poland as, initially, Latvia was not the principal or only choice of destination. These respondents emphasized that, besides having friends and relatives in Latvia, they also contemplated where they might find better opportunities. Their narratives provide a contrasting perspective of Poland and Latvia. While traversing Poland, their general impression was that the country was already ‘overfilled’, which in turn kindled the notion that Latvia might harbor more possibilities. For this group of displaced individuals, the importance of employment prospects was paramount.

Nataliia took the decision to head for Latvia, choosing to stay with remote kin there rather than with her sibling in Poland, as she believed Poland lacked opportunities for her. In Myroslava’s case, a friend helped secure a job in Latvia: “We didn’t choose Latvia for any particular reason – better or worse, we didn’t care. We needed somewhere to stay, somewhere to work in order to live. Well, that’s why when a job turned up through acquaintances, they said that a person was needed here, we immediately gathered. Could not be found in Poland. In Poland, there was simply no work, no housing” (Myroslava).

Bohdan, too, mentioned the crowdedness and the high cost of living in Poland, hence deciding to move further north to Latvia: “We didn’t have a specific plan because we weren’t at all sure we would succeed. In general, my wife benefits from going to Poland, she works for an IT company operating in Poland. And we thought about getting there at first, but when we got to Poland, everything was already full. There were such expensive options, $1600 a month, we were shocked” (Bohdan).

Anastasiia echoed similar concerns: “We arrived in Warsaw, reunited there and tried to stay in Warsaw and look for a place, but there are a lot of people there, and there is no place to live, very… food, maybe cheaper than in Latvia, but there is no place to live… no place to work. And I would like to work somehow… not to be dependent” (Anastasiia).

These stories illuminate another stratum of decision-making, that beyond familial ties, participants also considered the opportunities available at their chosen destination. They accumulate information on their journey and recalibrate their destination accordingly.

Cultural Kinship, Language, Diaspora

Not all participants had prior personal experience with Latvia, even if they had relatives there. A lot of their understanding about the country stemmed from stories they’d heard or news they’d come across. This third group of participants decided on Latvia not only because they knew someone in the country, but also because they saw value in shared language, culture, and history.

Political and cultural connections played a significant role in their choice. Being able to communicate in Russian and Ukrainian in Latvia was a crucial factor, as it was associated with a smoother integration process and increased job opportunities. Nadiia, who traveled to Latvia via Poland and Budapest, elaborated on this: “And I was in Latvia and here there is an opportunity to communicate in Ukrainian, in Russian” (Nadiia).

The possibility of being accepted and integrated into the local community was also mentioned as a decision-driver. Oksana shared that her father, who had previously worked in Riga, advised her to go to Latvia: “you guys, probably go to Riga, well, because you will be accepted there, accommodated” (Oksana).

Nonetheless, choosing Latvia because of the possibility to communicate in Russian does not come without complications. Nataliia B., for instance, found the topic of language stirring up strong emotions and confessed that she doesn’t wish to speak Russian anymore: “I had such a psychological reaction – I didn’t speak Ukrainian for many years, and when all these events began, I read, I remember well how I woke up in the morning and began to speak Ukrainian. My thoughts have become Ukrainian” (Nataliia B.).

Moreover, having knowledge of the Ukrainian diaspora in the country also proved an important factor. “I also found out that there is a Ukrainian diaspora in Latvia of about 50 000 people, as I heard in the Latvian news. And this also encouraged me, I realised that I could find help from my compatriots” (Nadiia). This observation underlines the role of cultural kinship in the decision-making process regarding destination, and it can indeed be seen as a decisive factor. As the diaspora expands with the influx of more displaced people, this rationale for choosing Latvia may become increasingly common.

Conclusion

The study underlying this brief provided empirical insight into the initial phases of Ukrainian war asylum seekers’ journey to Latvia in 2022, enhancing our understanding of the factors that influenced the choice of Latvia over other destinations.

Ukrainians fleeing the early stage of the 2022 Russian invasion were compelled to make swift and difficult decisions due to the pressing crisis. Leaving behind their familiar lives, properties, and dear ones – often the very individuals facilitating their exodus for safety reasons – was a harrowing reality. The support from kin and acquaintances in Latvia was crucial in endorsing their decision to seek refuge in the country.

Three groups emerged among the Ukrainian refugees in Latvia, all connected by personal relationships to some degree. The factors influencing their migration ranged from the presence of kin and considerations of employment prospects, to shared language, culture, and history. The fact that the initial outreach usually originated from the Latvian side underscores the profound solidarity and active support provided by Latvians to their Ukrainian counterparts. This likely also played a significant role in the refugees’ decisions. The pre-existing Ukrainian diaspora in Latvia, estimated at around 50 000 before the invasion, also significantly influenced the choice of Latvia as a refuge.

Financially-related factors such as seeking benefits were largely absent from the narratives, likely due to the geographic proximity, relatively low costs, and the urgent nature of the displacement. The most significant determinant in choosing Latvia as the destination appeared to be the network effect, contrasting with Robinson and Sergott (2002) findings that acute asylum seekers often settle for the first country available.

Given the emergency nature of the displacement, no unambiguous pattern in the location decision could be established. The narrative varied considerably among respondents with decisions often being made, or altered, on the fly. However, in most cases, personal relationships played a primary role in shaping the choices among Ukrainian refugees in Latvia.

For policy-makers planning and responding to acute migration crises, the study highlights the importance of mapping and understanding multifaceted kinships, as well as culture and history. The mapping can be used to plan support and allocate resources to give displaced people an opportunity of a place where they feel welcomed and connected, with hopes of greater integration.

References

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  • Gonsalves, C. J. (1992). Psychological stages of the refugee process: A model for therapeutic interventions. Professional Psychology: Research and Practice, 23(5), 382.
  • Havinga, T. and Böcker, A. (1999). Country of asylum by choice or by chance: Asylum‐seekers in Belgium, the Netherlands and the UK. Journal of ethnic and migration studies, 25(1), 43-61.
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  • Koser, K. and Pinkerton, C. (2002). The social networks of asylum seekers and the dissemination of information about countries of asylum.
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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Bleak Economic Future of Russia

Posted on October 31, 2022 | Policy Brief

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Is the Russian economy “surprisingly resilient” to sanctions and actions of the West? The short answer is no. On the contrary, the impact on Russian growth is already very clear while the economic downturn in the EU is small. The main effects from the sanctions are yet to be realized, and the coming sanctions will be even more consequential for the Russian economy. The biggest impacts are however those in the longer run, beyond the sanctions. Mr. Putin’s actions have led to a fundamental shift in the perception of Russia as a market for doing business. The West and especially EU countries are on a track of divesting their economic ties to Russia (in particular in, but not only, energy markets) and the country is simultaneously losing significant shares of its human capital. All these effects mean that the long-term economic outlook for Russia is not just a business cycle type recession but a lasting downward shift.

Introduction

The global economic outlook at the moment seems rather bleak. According to the International Monetary Fund’s (IMF) most recent World Economic Outlook, global growth is expected to slow from above 6 percent in 2021, to 3.2 percent this year, and 2.7 percent in 2023. For the US and the Euro area the corresponding numbers are slightly above a 5 percent growth in 2021, between 2 and 3 percent in 2022, while barely reaching 1 percent in 2023. At the same time inflation is up and central banks are trying to curb this by raising interest rates.

From an EU perspective it is an open question what proportion of the lower growth is caused by the economic consequences of the Russian invasion of Ukraine. Certainly, energy prices are affected as well as issues relating to natural resources and agricultural products (though the consequences of shortages in these goods are far larger for Middle Eastern, North African and Sub-Saharan countries). But it is not the case that all of the economic problems in the EU are due to the changed economic relations with Russia.

In assessing the economic impact of Russia’s war, and in particular the impact of sanctions, it is important to focus on both expectations as well as proportions. A widespread narrative portrays Russia’s relative economic resilience (compared to the expectations of some in March/ April 2022) as the Russian economy being surprisingly unaffected, while the EU is depicted as being badly hit, especially by high energy prices. In a European context, the Swedish daily newspaper Dagens Nyheter claims that “experts are surprised over Russia’s resilience” and the Economist, a British weekly newspaper, recently portrayed recession prospects for Europe as “Russia climbs out”. We argue that such point of view is misleading. To get a more balanced image of what is unfolding it is important to think both about the expected consequences of sanctions, including how long some of them take to have an effect, but also (and maybe most important when thinking about the long run), what economic consequences are now unfolding beyond the impact of sanctions.

Sanctions Against Russia

Let us start with what sanctions are in place, what types of impact these have had so far and what can be expected in the future. There are three types of sanctions currently in place. First, and most impactful in the short run, are limitations on financial transactions, especially those imposed on the Central Bank. In this category there are also the restrictions on other Russian banks disconnecting them from a key part of the global payment system, SWIFT, as well as measures targeting other assets: divestments from funds, investment withdrawals, asset freezes, and other impediments to financial flows. The main short-term aim of these actions was to reduce the Russian government’s alternatives to finance the army and their military operations. Second there are sanctions on trade in goods and services. At the moment these target particularly technology imports and energy and metals exports. These take a longer time to be felt and are potentially more costly to the sanctioning countries as well. They also contribute, in principle, to reduced resources for war. Besides affecting the government’s budget, both financial and trade sanctions disturb ordinary people’s lives as well and might create discontent and protests. A third group of sanctions are so-called sanctions of inconvenience such as limitations to air traffic, closure of air space, exclusion form sport and cultural events, restrictions of movement for both officials and tourists, and others, which aim at disconnecting the target country from the rest of the world. These are partly symbolic in nature, but can also impact popular opinion, including among the elites. However, a potential problem is that such sanctions can push opinion in either of two opposite directions: against the target regime in sympathy with the sanctioning parties; or against what is now perceived as an external enemy in a so-called rally-around-the-flag effect.

Along these dimensions the sanctions have so far had mixed effects in relation to the objectives listed above. We will return to this issue below, but in short, the sanctions on the Central Bank and the financial system, albeit powerful, fell short of causing anything like a collapse of the Russian financial system. Some of the trade restrictions, together with other global economic events, created an environment where lost trade volumes for Russia were compensated by price increases in resources and energy exports. When it comes to restrictions on imports of many high-tech components, these are certainly being felt in the Russian economy although still not fully. Public perceptions in Russia are hard to judge from the outside, especially given the problems of voiced opposition in the country, while public perceptions in sanctioning countries have mainly been favorable as people want to see that their governments are “doing something”.

What Do We Know About Sanctions in General?

A key question when judging whether sanctions “work” is to study what a reasonable benchmark can be. As discussed in a previous FREE Policy Brief (2012), sanctions don’t enjoy a reputation of being very effective. This is true both in the research literature as well as in the public opinion. There are reasons for this that have to do with both how “effectiveness” is intended and the limits that empirical enquiries necessarily face in trying to answer the question of effectiveness. This does not mean, however, that sanctions have no effect. Another FREE Policy Brief (2022) summarizes a selection of the most credible research in this area. In short, a majority of studies find that sanctions affect the population in target countries through shortages of various kind (food, clean water, medicine and healthcare), resulting in lower life expectancy and increased infant mortality. The types of effects are comparable to the consequences of a military conflict. In the cases where it has been possible to credibly quantify the damage to GDP, estimates are in the range of 2 to 4 percent of reduced annual growth over a fairly long period (10 years on average and up to 3 years after the lifting of sanctions). One has to keep in mind that lower growth rates compound over time, so that the total loss at the end of an average period is quite substantial. As a comparison, the latest estimate of the total loss in global GDP from the Covid-19 crisis stands at “just” -3.4 percent. Other studies find similarly significant negative effects on other economic outcomes such as employment rate, international trade, public expenditure, the value of the country’s currency, and inequality. There is of course variation in the effects depending on the type of sanctions and also on the structure of the target economy. Trade sanctions tend to have a negative effect both in the short and long run, while smart sanctions (i.e. sanctions targeting specific individuals or groups) may even have positive effects on the target country’s economy in the long run.

Sanctions and the Current State of the Russian Economy

When it comes to the Russian economy’s performance in these dire straits, the very bleak forecasts from spring 2022 have since been partly revised upwards. Some are surprised that the collective West has not been able to deliver a “knock-out blow” to the Russian economy. In light of what we know about sanctions in general this is perhaps not very surprising. Also, one can recall that even a totally isolated Soviet economy held up for quite some time. This however does not mean that sanctions are not working. There are several explanations for this. As already mentioned, some of the restrictions imply by their very nature some time delay; large countries normally have stocks and reserves of many goods – and on top of this Mr. Putin had been preparing for a while. Also, the undecisive and delayed management of energy trade from the EU reduced the effectiveness of other measures, in particular the impact of financial restrictions. Continued trade in the most valuable resources for the Russian government together with spikes in prices (partly due to the fact that the embargo was announced several months ahead of the intended implementation) flooded the Russian state coffers. This effect was also enlarged by the domestic tax cuts on gasoline prices in many European countries in response to a higher oil price (Gars, Spiro and Wachtmeister, 2022). This is soon coming to an end, but at the moment Russia enjoys the world’s second largest current account surplus.

The phenomenal adaptability of the global economy is also playing in Russia’s favor: banned from Western markets, Russia is finding new suppliers for at least some imports. However, although they are dampening and slowing the blow at the moment, it is difficult to envision how these countries can be substitutes for Western trade partners for many years to come.

The Russian Economy Beyond Sanctions

Given all of this, the impact on the Russian economy is not nearly as small as some commentators claim. Starting with GDP, an earlier FREE Policy Brief (2016) shows how surprisingly well Russia’s GDP growth can be explained by changes in international oil prices. This is true for the most recent period as well, up until the turn of the year 2021-2022 and the start of hostilities, as shown in Figure 1. Besides the clear seasonal pattern, Russian GDP (in Rubles) closely follows the BRENT oil price. This simple model, which performs very well in explaining the GDP series historically, generates a predicted development as shown by the red dotted line. Comparing this with the figures provided by the Russian Federal State Statistics Service, Rosstat, for the first two quarters of 2022 (which might in themselves be exaggeratedly positive) indicates a loss by at least 8 percent in the first and further 9 percent in the second quarter. In other words, GDP predicted by this admittedly simple model would have been 19 percent higher than what reported by Rosstat in the first half of 2022. As a comparison, Saudi Arabia – another highly oil dependent country – saw its fastest growth in a decade during the second quarter, up by almost 12 percent.

Figure 1. Russian GDP against predictions

Source: Authors’ calculations on GDP in rubles based on figures from Rosstat and the BRENT oil price series. Note that GDP is denominated in Rubles to avoid confusion due to the USD/Rubles exchange rates being volatile (given the lack of trade post invasion) and thus hard to interpret.

Other indicators point in the same direction. According to a report published by researchers at Yale University in July this year, Russian imports, on which all sectors and industries in the economy are dependent, fell by no less than ~50 percent; consumer spending and retail sales both plunged by at least ~20 percent; sales of foreign cars – an important indicator of business cycle – plummeted by 95 percent. Further,  domestic production levels show no trace of the effort towards import substitution, a key ingredient in Mr. Putin’s proposed “solution” to the sanctions problem.

Longer Term Trends

There are many reasons to be concerned with the short run impact from sanctions on the Russian economy. Internally in Russia it matters for the public opinion, especially in parts that do not have access to reports about what goes on in the war. Economic growth has always been important for Putin’s popularity during peace time (Becker, 2019a). In Europe it matters mainly because a key objective is to make financing the war as difficult as possible, but also to ensure public support for Ukraine. A perception among Europeans that the Russian economy is doing fine despite sanctions is likely to decrease the support for these measures. However, the more important economic consequences for Russia are the long-run effects. Many large multinational firms have left and started to divest from the country. There has always been a risk premium attached to doing business in Russia, which showed up particularly in terms of reduced investment after the annexation of Crimea in 2014 (Becker, 2019b). But for a long time hopes of a gradual shift and a large market potential kept companies involved in Russia (in some time periods more, in others less). This has however ended for the foreseeable future. Many of the large companies that have left the Russian market are unlikely to return even in the medium term, regardless of what happens to sanctions. Similarly, investments into Russia have been seen as a crucial determinant of its growth and wellbeing (Becker and Olofsgård, 2017), and now this momentum is completely lost.

Energy relations have been Russia’s main leverage against the EU although warnings about this dependency have been raised for a long time. In this relationship, there has also been a hope that Russia would feel a mutual dependence and that over time it would shift its less desirable political course. With the events over the past year, this balancing act has decidedly come to an end, if not permanent, at least for many years to come. The EU will do its utmost not to rely on Russian energy in the future, and regardless of what path it chooses – LNG, more nuclear power, more electricity storage, etc. – the path forward will be to move away from Russia. Of course, there are other markets – approximately 40 percent of global GDP lies outside of the sanctioning countries – so clearly there are alternatives both for selling resources and establishing new trade relationships. However, this will in many cases take a lot of time and require very large infrastructure investments. And perhaps more important, for the most (to Russia) valuable imports in the high-tech sector it will take a very long time before other countries can replace the firms that have now pulled out.

Yet another factor that will have long-term consequences is that many of these aspects are understood by large parts of the Russian population, and those with good prospects in the West have already left or are trying to do so. It has been a long-term goal for those wanting to reform the Russian economy, at least in the past 20 years, to attract and put to fruition the high potential that have been available in terms of human capital and scientific knowledge. However, these attempts have not succeeded and the recent developments have put a permanent end to those dreams.

Conclusion

In the latest IMF forecast, countries in the Euro area will grow by 3.1 percent this year and only 0.5 percent in 2023. In January the corresponding numbers stood at 3.9 percent and 2.5 percent. This drop, caused in large part by the altered relations with Russia, is certainly non negligible, and especially painful coming on the heels of the Covid-19 crisis. However, it is an order of magnitude smaller than the “missed growth” Russia is experiencing. When judging the impact from sanctions on the Russian economy overall, the correct (and historically consistent) counterfactual displays a sizable GDP growth driven by very high energy and commodity prices. Relative to such counterfactual, the sanctions effect is already very noticeable. In the coming months, economic activity will slow down and many European household will feel the consequences. In this climate it will be important that, when assessing the situation with Russia perhaps performing better than expected, the following is kept in mind. Firstly, Russia is still doing much worse compared to the EU as well as to other oil-producing countries. Secondly, and even more important, what matters are the longer run prospects. And these are certainly even worse for the Russian economy.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Sanctions Enforcement and Money Laundering

Posted on October 3, 2022 | Policy Brief

US dollar hang out to dry representing Sanctions Enforcement and Money Laundering

With sanctions becoming an increasingly important tool in ostracising autocratic regimes from western markets, the need for effective enforcement of Anti-Money Laundering (AML) policies is increasing. The global AML regime will be the backbone in detecting evasion of sanctions. This regime has, however, been widely criticised as ineffective. In this brief, we discuss issues with the current AML regime and propose a reward scheme for whistleblowers to enable asset seizures. A powerful feature of our proposal is that it does not rely on the effectiveness of the AML regime.

Introduction

Before Russia’s invasion of Ukraine, we wrote a FREE Policy brief expressing concerns over the ability of the current Anti Money Laundering (AML) regime to keep money launderers out of the international financial system. In the brief, we concluded that “The ease with which criminals have evaded present detection methods should cause concern about the effectiveness of sanctions”. The issue has now received renewed attention as the current sanctions against Russia will only be effective if it is difficult or costly to circumvent them. Sanctions evasions have a lot of similarities with money laundering, and the methods for detecting both is very similar, such that the proposal we discuss in this brief is applicable to both.

While an initial shock due to unexpected sanctions may generate disruptions, prohibited goods can later be imported/exported through third-party intermediaries in non-sanctioned countries to circumvent the sanctions. False labelling of origin, misinvocing, etc., are likely to occur and may be very difficult to detect. Analogously, sanctioned individuals’ assets may shift hands, and be laundered through shell companies without known beneficial owners.

In this brief, we consider a way to enhance enforcement, as outlined in a recent paper (Nyreröd, Andreadakis, and Spagnolo, 2022). The approach builds upon the US Kleptocracy Asset Recovery Rewards Program which offers up to $5 million “for information leading to seizure, restraint, or forfeiture of assets linked to foreign government corruption” (US Treasury, 2022).

The AML Regime

To justify the enforcement mechanism we later propose, some background on the AML regime is necessary. The global standard-setter for AML is the Financial Action Taskforce (FATF), which has since 1989 issued recommendations to countries on how to combat money laundering and terrorist financing. While initially focusing on drug money, the regime expanded in the last decades and has now received increased attention as it will be an important tool in ensuring sanctions against Russian oligarchs are effective.

The regime imposes numerous obligations on financial and other entities as they must assess risks and conduct due diligence along various dimensions, collect documents, and send reports to the national Financial Intelligence Unit. This regime has been widely criticized. Widespread AML non-compliance within banks, lack of rigorous supervision and enforcement by national supervisors and high costs relative to verifiable benefits are some of the issues that have been identified (Spagnolo and Nyreröd 2021; Nyreröd, Andreadakis and Spagnolo, 2022). The World Bank estimates that between 2 and 5 percent of global GDP is laundered annually, and that only around 0.2 percent of the proceeds from crime, laundered via the financial system, are seized and frozen (UNODC, 2011). Researchers have also been critical – for example Pol (2020), cites 22 papers that have “identified gaps between the intentions and results of the modern anti-money laundering effort, including its core capacity to detect and prevent serious profit-motivated crime and terrorism” (p.103).

Recent responses by the European Commission and others have focused on ensuring compliance within covered entities. Yet, increasing compliance with current AML rules may be costly and non-sufficient to stem the flows of illicit money in the international system. Even if widespread compliance within covered entities is obtained, and the AML procedures are effective, this may not be enough – even minimal non-compliance rates may result in major damages. We have seen how Danske Bank Estonia, a relatively small branch, managed to transfer around $230 billions of suspicious funds within the span of a couple of years (Bruun and Hjejle, 2018).

Some have suggested providing whistleblower rewards to those who report significant violations of AML rules by covered institutions (Spagnolo and Nyreröd, 2021; Scarcella, 2021). Yet, such rewards are only desirable if the AML regime is effective in achieving its policy objectives, which is not a given (we elaborate on this in Nyreröd, Andreadakis and Spagnolo, 2022). Enhanced compliance with the AML regime does not necessarily entail increased detection and deterrence of e.g., money laundering.  Numerous laundering methods exist that circumvent the reporting rules required under AML. A better option may be to incentivize facilitators of money laundering to provide information leading directly to asset seizures, as they have the best information that can lead to such forfeitures.

Incentivizing Facilitators

Money laundering is a derivative crime and requires what is called a “predicate offense” (such as human trafficking, drug sales, or corruption) that generates illegal money whose source needs to be obscured. The EU Directive (2018/1673) stipulates 22 categories of criminal activities that constitute predicate offenses.

There is a large infrastructure facilitating money laundering including financial advisers, real estate agents, tax advisors, and lawyers – crucial to criminals seeking to launder money. Bill Browder, famous for his work on advocating the Magnitsky Act, describes how he was aided by Alexander Perepilichnyy, a financial adviser for individuals involved in a large tax theft in Russia. Perepilichnyy helped launder the money for those involved in the tax theft, but eventually turned whistleblower when he provided bank statements to Browder that led to the freezing of $11 million related to this fraud (Browder 2022, p. 39). His information provided a “road-map” to even be able to start investigating where the illegally stolen assets had ended up. Perepilichnyy later died while jogging near London in 2012, which some believe was a murder in retaliation for blowing the whistle. A reward scheme would aim at people like Perepilichnyy, persons who are unrelated to the predicate offense, yet have information on the source and location of illicit funds.

Reward Programs in AML

The US has used whistleblower reward schemes in several regulatory areas including tax, procurement fraud, and securities fraud. These programs offer 10-30 percent of the recoveries or fines to whistleblowers that bring information crucial to issue the fines or recover public funds. Rewards to whistleblowers are therefore paid by the wrongdoing party, not the taxpayer.

These programs have received increased attention as several studies have found that they are effective at uncovering and deterring wrongdoing (Dyck, 2010; Wiedman and Zhu, 2018; Raleigh, 2020; Leder-Luis, 2020; Dey et al., 2021; Berger and Lee, 2022, see Nyreröd and Spagnolo, 2021 for a review). Agencies managing these programs have widely praised them, and studies show they are highly cost effective. More countries are also starting to experiment with offering rewards for information.

A salient feature of the US programs is that some degree of culpability in the wrongdoing does not disqualify an individual from an award. In 2012, Bradley Birkenfeld received $104 million under the Internal Revenue Service’s reward program despite serving a jail sentence for his involvement in facilitating tax evasion. In fact, when one of the most effective and famous whistleblower laws was enacted, the US Senator who tabled the bill argued that the bill aimed at “setting a rogue to catch a rogue” which “is the safest and most expeditious way I have ever discovered of bringing rogues to justice” (Howard, 1863).

Motivated by these experiences, we propose that AML should incorporate a whistleblower reward scheme, targeting those facilitating money laundry, with three central pillars:

Witness protection: aim at shielding whistleblowers and their families from negative consequences, if there are concerns that they might become victims of retaliation, harassment, or mistreatment of any kind. If the whistleblower is based in a hostile country, guaranteed asylum should be granted.

Leniency: offer immunity for any reported offense related to money laundering, but not for any other crime. Without immunity, a whistleblower will have no incentive to turn to authorities as they would immediately incriminate themselves and risk jailtime for money laundering.

Large, scaling, and mandatory rewards:  offer large, mandatory rewards that scale with the level of recoveries. As noted above, successful US programs pay 10-30 percent of the recoveries to whistleblowers. In the money laundering case, this percentage range may be lowered. Also, similarly to whistleblowers’ rewards in other cases, AML rewards would come from confiscated funds.

Numerous other design dimensions are important, but due to space limitations we refer the reader to other lengthier pieces that go into further detail (Nyreröd, Andreadakis and Spagnolo, 2022; Spagnolo and Nyreröd, 2021; Nyreröd and Spagnolo, 2021; Engstrom 2018).

Conclusion

The Russian aggression against Ukraine and the subsequent sanctions have put increased emphasis on the ability and effectiveness of the current AML regime to detect money laundering. Justified concerns about this regime have been raised, and its performance record is still under question. Programs offering whistleblowers witness protection, leniency, and large rewards could be an effective complement to this regime.

References

  • Berger, P. and Lee, H. (2022), “Did the Dodd-Frank Whistleblower Provision Deter Accounting Fraud?”, Journal of Accounting Research, early view, available at: https://doi.org/10.1111/1475-679X.12421
  • Browder, B. (2022b). Freezing Order, Simon & Schuster, New York, NY.
  • Bruun and Hjejle. (2018). “Report on the Non-Resident Portfolio at Danske Bank’s Estonian Branch”. Danske Bank.
  • Dey, A., Heese, J. and G. Pérez-Cavazos. (2021). “Cash-for-Information Whistleblower Programs: Effects on Whistleblowing and Consequences for Whistleblowers”, Journal of Accounting Research, Vol. 59, No.5, pp.1689-1740.
  • Dyck, A., Morse, A. and Zingales, L. (2010). “Who Blows the Whistle on Corporate Fraud?”, The Journal of Finance, Vol. 65, No.6, pp.2213-2253.
  • Engstrom, D. (2018). “Bounty Regimes.” In Arlen, J. (ed.) Research Handbook on Corporate Crime and Financial Misdealing, Edward Elgar.
  • Howard, J.M. (1863). Congressional Globe, Senate, 37th Congress, 3rd Session, pp. 955-956.
  • Leder-Luis, J. (2020). “Whistleblowers, Private Enforcement, and Medicare Fraud”, Working Paper, Massachusetts Institute of Technology, available at: https://sites.bu.edu/jetson/files/2020/07/False-Claims-Act-Paper.pdf.
  • Nyreröd, T. and Spagnolo, G. (2021). “Myths and numbers on whistleblower rewards”, Regulation and Governance, Vol. 15, No.1, pp.82-97.
  • Nyreröd, T., Andreadakis, S. and Spagnolo, G. (2022). “Money laundering and sanctions enforcement: large rewards, leniency, and witness protection for whistleblowers”, The Journal of Money Laundering Control, early view available at: https://www.emerald.com/insight/content/doi/10.1108/JMLC-05-2022-0068/full/html
  • Pol, R. (2020). “Responses to money laundering scandal: evidence-informed or perception-driven?”, Journal of Money Laundering Control, Vol.23, No.1, pp.103-121.
  • Raleigh, J. (2020). “The Deterrent Effect of Whistleblowing on Insider Trading”, University of Minnesota Working Paper, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3672026.
  • Scarcella, G. (2021). “Qui Tam and the Bank Secrecy Act: A Public-Private Enforcement Model to Improve Anti-Money Laundering Efforts”, Fordham Law Review, Vol. 90, No.3, pp.1359- 1395.
  • Spagnolo, G. and Nyreröd, T. (2021). “Financial Incentives to whistleblowers: a short survey”, Sokol, D. and van Rooij, B. (Ed.), Cambridge Handbook of Compliance, Cambridge University Press, Cambridge UK, pp.341-351.
  • Spagnolo, G. and Nyreröd, T. (2021a). “Money Laundering and Whistleblowers”, report written for Centre for Business and Policy Studies (SNS), available at: https://snsse.cdn.triggerfish.cloud/uploads/2021/11/money-laundering-and-whistleblowers.pdf.
  • UNODC. (2011). “Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes”, Research Report, United Nations Office on Drugs and Crime, available at: https://www.unodc.org/documents/data-and-analysis/Studies/Illicit-financial-flows_31Aug11.pdf.
  • US Treasury. (2022). “U.S. Departments of Treasury and Justice Launch Multilateral Russian Oligarch Task Force”, March 16, available at: https://home.treasury.gov/news/press-releases/jy0659.
  • Wiedman, C. and Zhu, C. (2018). “Do the SEC Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting?”, 2018 Canadian Academic Accounting Association Annual Conference, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3105521.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Foreign Aid to Ukraine: Lessons from the Literature on Strategic Foreign Aid

Posted on September 19, 2022 | Policy Brief

Image of the map of Ukraine representing Foreign Aid to Ukraine

Ukraine is currently receiving substantial inflows of foreign aid from western donors to help the country withstand the Russian aggression. The foreign aid flows partly reflect altruistic motives from the donor side, but also donor’s domestic strategic foreign policy objectives as the war is seen as part of a battle over the future world order. In this brief, I discuss the academic literature that has analysed the existence and consequences of strategic motivations behind aid flows more generally, and draw some preliminary insights for the case of Ukraine.

One of many consequences of the Russian war on Ukraine is that western countries have responded by providing substantial bilateral financial support to Ukraine. This support has taken the form of humanitarian, financial and military aid. As of August 3rd 2022, the US has provided the most support in absolute terms (44,5 billion euro), followed by EU institutions (16,2 billion euro) and the United Kingdom (6,5 billion euro). Relative to GDP, countries in Eastern Europe have however been the most generous, led by Estonia and Latvia (0,9 percent of GDP) and Poland (0,6 percent of GDP) (Antezza et al., 2022). Meanwhile, a discussion on the reconstruction of Ukraine has started, following the massive destruction of physical capital from the Russian aggression. The immense costs of this destruction increase every day, and the reconstruction effort for a future “Ukraine 2.0” will likely require thousands of billions of $US, mainly in the form of foreign aid (Becker at al., 2022).

Against this background, it is important to consider the academic and policy-oriented literature on aid effectiveness, i.e., to what extent aid impacts economic development and social welfare. Aid effectiveness involves many different dimensions such as issues of donor coordination, responsibility for reforms and investment choices of government and people (ownership), how to avoid corruption and so-called “white elephants” (expensive and useless investments), and how to effectively implement evaluation and evidence-based policy choices (e.g. OECD, 2008). In this brief, I will focus my attention on one such dimension, the underlying donor purpose of aid giving, and its implications for the contribution of aid inflows to human welfare in partner countries. More specifically I will discuss strategic aid, aid given primarily for the purpose of donor’s own broader foreign policy agendas. I will discuss what the literature has to say about the existence of such strategic aid, and what it has to say about its implications for aid flows and aid effectiveness. This will be done on basis of the existing literature, including a few of my own contributions. It is important to note that this literature focuses on development aid, defined by the OECD as “Official Development Assistance” (ODA). ODA does not include for instance military aid but is rather defined as official flows that explicitly target economic development and social welfare in the partner country. This literature is thus most relevant when talking about the reconstruction of Ukraine and to some extent the current financial and humanitarian aid given to the country.

Identifying the Existence of Strategic Aid

In the quantitative literature, there are primarily two approaches to measuring the strategic incentives behind aid disbursements. The first approach looks at the distribution of foreign aid across partner countries with different levels of needs, institutional capacity to absorb aid inflows, commercial potential, historical ties to donors, and strategic importance. If aid was based only on altruistic motives we would expect aid allocation to strongly favour partner countries with low human development (measured by, e.g., GDP per capita levels, poverty headcount ratios and child mortality) and the capacity to turn aid inflows into social welfare (measured by e.g., indices of macroeconomic policies, democracy scores and corruption indicators). While the empirical literature suggests this is partly true, although more so for some donors than others, it is far from the whole picture. Many donors tend to favour former colonies or countries of commercial interest, observed by flows of trade and foreign direct investments (e.g., Neumayer, 2003; Berthelemy and Tichit, 2004). The same is true for strategic interests, although their importance varies substantially across donors (more so for the US and less for the Scandinavian countries, for instance). This is also true across a broad set of proxies for strategic relevance, all trying to capture foreign policy alliances or foreign policy importance, such as arms imports (Hess, 1989; Maizels, and Nissanke, 1984), arms expenditures (Schraeder et al., 1998), the correlation of voting records in the UN General Assembly (Alesina and Dollar, 2000), and dummies for Israel and Egypt (capturing the significance of the Israel-Palestine peace process).

In Frot, Olofsgård and Perrotta Berlin (2014), we take a closer look at the Central and Eastern Europe (CEEC) countries and the Commonwealth of Independent States (CIS) in the early years of their transition towards market economies. As these countries opened up a substantial amount of western aid became available, but the allocation of aid across countries varied substantially, as did needs, commercial potential and strategic significance to major donors. We argue that these motivations may have also played a different role at different times. In particular, there is a strategic advantage of early market access if aid flows are driven by commercial interests, suggesting that trade and investment relationships may play a more prominent role for aid allocation early on and less so as private partnerships have been [increasingly] established. Similarly, some strategic considerations were particularly salient early on, such as supporting nuclear disarmament and building a bulwark in Eastern Europe against the perceived remaining military threat of Russia. When disaggregating the data over time, we do indeed find that commercial interests played a much more prominent role in the first half of the 1990’s than in later years. Similarly, we find that countries with nuclear arms and countries located geographically closer to Brussels benefit particularly during these early years. As time went by, commercial interests became less important, needs variables gained more traction, and aid seems to rather have been used to reward countries undergoing deeper democratic reforms (Frot, Olofsgård and Perrotta Berlin, 2014).

The second approach is to focus on how aid flows are generally affected by changes to the strategic importance of a partner country, or partner countries, over time. In Boschini and Olofsgård (2007) we estimate the role of the intensity of the Cold War on aggregate levels of foreign aid from western donors. It is commonly argued that foreign aid was (partially) used as an instrument to gain political loyalty from leaders in the developing world during the Cold War and that the substantial drop in aggregate aid levels witnessed in the 1990’s can be explained by the disappearance of an important strategic motive behind foreign aid altogether (e.g. Lancaster, 2008). This had however not been tested in quantitative terms, and thus we collected data on military spending in the Eastern bloc to serve as a proxy for the intensity of the Cold War. We found that there was a positive correlation between military expenditures in the east and western development assistance during the period 1970-1990. After the Cold War, military expenditures in the east have no correlation with western development assistance. This suggests that development assistance was used as a complement to recipient’s domestic military spending in producing strategic security within donor countries. Once the Cold War ended though, the immediate need for such investments in security and loyalty abroad largely disappeared, ending the connection between military spending in the east and western development assistance and causing overall aid levels to drop. Kilby and Fleck (2010) find a similar but reverse effect of the war on terror following the 9/11 attack on the US in 2001. Overall aid flows increased, and the allocation across countries became biased in favour of countries of greater importance to the US in the War on Terror.

Another strand of literature has focused on what happens to aid inflows when a country becomes a temporary member of the UN Security Council (UNSC). This literature looks primarily at the impact on aid from multilateral aid agencies such as the World Bank and the International Monetary Fund (IMF). The rationale for the analysis is the notion that (western) permanent members on the UNSC have strategic interest in showcasing broad majority support for their resolutions at the council. This gives them an incentive to “buy support” from temporary members through influence over multilateral aid agencies.

Accordingly, Dreher et al. (2009a) find that partner countries receive a greater number of aid projects from the World Bank during years of UNSC membership than during the years before and after membership. Similarly, Dreher et al. (2009b) find that participation in IMF programs increases during membership years, and that agreements have fewer policy conditions.

In a recent paper (Berlin Perrotta, Desai and Olofsgård, 2022) we look at temporary UNSC membership and World Bank aid. Following the previous literature, we analyse whether temporary UNSC members receive more aid projects, but with a larger data set. Providing originality, we also test whether partner country governments are given more leeway to allocate aid projects regionally for political purposes during the years of UNSC membership. The argument is that donors can give partner country governments benefits not only in terms of the amount of aid, but also the extent to which they are free to spend resources based on political interests rather than needs. More specifically, we test whether birth region of political leaders, and regions dominated by co-ethnics of the political leader in question, receive a particular boost to aid inflows during membership years. We select these indicators of domestic political importance based on an existing literature which suggests governments at times favour such regions for public spending (e.g., Bommer et al., 2022; Briggs, 2014).

Consistent with earlier findings, we confirm that temporary members of the UNSC receive a greater number of World Bank projects during membership years than what they would otherwise receive.  We also find partial support for the hypothesis that partner country governments have greater leeway to redirect projects to politically favoured regions. More specifically, co-ethnic regions get a boost in the number of projects and total aid inflows during membership years, whereas we find no similar impact in the leader’s home regions. More detailed analysis reveals that our results are driven by countries that persistently vote in line with the US in the committee, further supporting the interpretation that this reflects a trade of favours (Berlin Perrotta, Desai and Olofsgård, 2022).

The Consequences of Strategic Aid

But does the underlying motive behind foreign aid matter? Development aid can of course benefit social and economic welfare in a partner country if invested in activities with positive social rates of return (e.g., schools, health care and infrastructure), irrespective of any underlying motivation. A strategic motivation can even be beneficial if it means that partner countries receive more aid than they would do in its absence. Consider the drop in total western aid budgets after the end of the Cold War, and the increase after the start of the War on Terror, as previously mentioned. Similarly, often referred to as the first example of foreign aid, the Marshall Plan to help rebuild Europe after the 2nd World War, was not only motivated by altruistic reasons. It was explicitly motivated by the need to maintain US national security and safeguard US access to European markets. Yet, the plan is hailed as a success, vital to the reconstruction of Europe after the war. It is also evident that popular support for aid to Ukraine in western donor countries partly depend on the conception of a threat to Europe and the free world, facilitating/enabling governments to be generous in their support.

There are however also examples of where strategic considerations have motivated aid with very limited or even negative impact on economic development and social welfare in partner countries. In particular during the Cold War, in order to gain loyalty in the ideological battle between the superpowers, western aid often went to highly corrupt regimes with low absorptive capacity (e.g., Easterly, 2006). A frequently mentioned example is the case of the Democratic Republic of Congo (DRC) during the regime of Mobutu Sese Seko. The US provided the country with more than a billion $US in development aid between 1962 and 1991, under a kleptocratic regime that impoverished the country (see here). This without doubt helped the regime stay in power, and the aid was thus not just a waste of resources but directly counterproductive.

Another argument at the global level is that there always exists an opportunity cost in the sense that strategic objectives reallocate limited aid resources from where the need is the greatest, to countries more politically salient. Burnside and Dollar (2000) run a simulation based on their empirical findings, changing the actual (partially donor interest based) allocation of aid across partner countries to an allocation based on need and absorptive capacity (which they associate with macroeconomic policies). Within their sample, they estimate such a reallocation to increase per capita growth by 0,2 to 0,3 percentage points, from a mean growth rate of 1,1 percent. Such calculations are of course rough estimates, yet they give a ballpark figure.

In the case of Ukraine however, the first of these arguments carry little weight. Aid is not sustaining a dysfunctional government with little interest in its own population, rather the opposite is true. On the other hand, the argument of allocative efficiency may carry some weight at a global scale. The needs and the human suffering in Ukraine are immense but unfortunately there are other places in the world with such extensive suffering (Ethiopia, Yemen, and Somalia to mention a few examples). There is thus concern within the donor community that the attention to Ukraine will negatively affect resources and attention to other places in need of support, in particular since the war has externalities in the form of increased food and energy prices in low-income countries. Such argument however relies on the assumption of crowding out resources from a budget of given size. While hard to prove, it is probably safe to say that the strategic interest in Ukraine has in fact increased the total budget available. As for now, it is therefore not entirely clear to what extent resources to other nations in need will be crowded out. Yet, the UN’s appeal for Ukraine is more than 80 percent funded for this year, whereas the UN’s response plan for Afghanistan is around 38 percent funded, Yemen’s is around 27 percent funded and Sudan’s is around 20 percent funded (see here).

A third lesson from the literature concern the (lack off) strings attached when aid is strategic. Continuous aid to the corrupt and violent regime of Mobutu Sese Seke in DRC is an extreme example of this phenomenon. But, as previously discussed, it’s also been shown that temporary UNSC membership comes with fewer conditions in IMF agreements (Dreher et al., 2009b) and with more leeway to partner governments to allocate inflows for domestic political purposes (Berlin Perrotta, Desai and Olofsgård, 2022), which has been shown to have efficiency consequences. Dreher et al. (2018) use a typical panel growth regression setting to compare the contribution of aid to economic growth during the period around UNSC membership to that same contribution in other time periods and for comparable countries that have never been temporary UNSC members. They find that aid is less effective during UNSC membership years, which they allude to the strategic use of aid under these special circumstances. The point is that donor oversight and monitoring may be weaker when aid is strategically motivated. Alignment of the partner country government to the goals of economic development and social welfare, therefore, becomes even more important. At a time of massive aid inflows in a setting with less than perfect institutional control and a history of corruption, as is the case of Ukraine, this may have a detrimental impact on aid effectiveness unless proper safeguards are in place.

Conclusion

Foreign aid from western donors to Ukraine is partly motivated on altruistic grounds but it also reflects wider foreign policy objectives of the donors. The Russian aggression is perceived not only as an attack on Ukraine but as an attack on the existing rules-based world order and as part of a broader conflict between liberal democracy and authoritarianism. More donor-oriented motives behind foreign aid are referred to as strategic in the academic literature, and in this brief, I have given a short and selective introduction to that literature. In terms of foreign aid to Ukraine, the good news is that the combination of altruistic and strategic motives can generate greater aid flows and that, irrespective of the underlying motivation, such inflows can be effective if the priorities of donors and partner country government align around initiatives spurring economic development and social welfare. A potential concern is that the literature suggests that donors are more accepting of abuse of such funds, so the need to evade corruption and mismanagement may become particularly acute. On a global scale, there is also a concern about crowding out of aid resources away from other places in need when attention is focused on Ukraine. The severity of such crowding out will be a function of the extent of additionality of support to Ukraine, to the existing total aid budgets. It is thus important that governments in donor countries manage to maintain support for Ukraine, without forgetting about the needs elsewhere. With tough economic times ahead in Europe, this may unfortunately become a challenge.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Bleak Economic Future of Russia (audio test)

Policy Brief

20221031 Economic Future of Russia Image 01

Is the Russian economy “surprisingly resilient” to sanctions and actions of the West? The short answer is no. On the contrary, the impact on Russian growth is already very clear while the economic downturn in the EU is small. The main effects from the sanctions are yet to be realized, and the coming sanctions will be even more consequential for the Russian economy. The biggest impacts are however those in the longer run, beyond the sanctions. Mr. Putin’s actions have led to a fundamental shift in the perception of Russia as a market for doing business. The West and especially EU countries are on a track of divesting their economic ties to Russia (in particular in, but not only, energy markets) and the country is simultaneously losing significant shares of its human capital. All these effects mean that the long-term economic outlook for Russia is not just a business cycle type recession but a lasting downward shift.

Introduction

The global economic outlook at the moment seems rather bleak. According to the International Monetary Fund’s (IMF) most recent World Economic Outlook, global growth is expected to slow from above 6 percent in 2021, to 3.2 percent this year, and 2.7 percent in 2023. For the US and the Euro area the corresponding numbers are slightly above a 5 percent growth in 2021, between 2 and 3 percent in 2022, while barely reaching 1 percent in 2023. At the same time inflation is up and central banks are trying to curb this by raising interest rates.

From an EU perspective it is an open question what proportion of the lower growth is caused by the economic consequences of the Russian invasion of Ukraine. Certainly, energy prices are affected as well as issues relating to natural resources and agricultural products (though the consequences of shortages in these goods are far larger for Middle Eastern, North African and Sub-Saharan countries). But it is not the case that all of the economic problems in the EU are due to the changed economic relations with Russia.

In assessing the economic impact of Russia’s war, and in particular the impact of sanctions, it is important to focus on both expectations as well as proportions. A widespread narrative portrays Russia’s relative economic resilience (compared to the expectations of some in March/ April 2022) as the Russian economy being surprisingly unaffected, while the EU is depicted as being badly hit, especially by high energy prices. In a European context, the Swedish daily newspaper Dagens Nyheter claims that “experts are surprised over Russia’s resilience” and the Economist, a British weekly newspaper, recently portrayed recession prospects for Europe as “Russia climbs out”. We argue that such point of view is misleading. To get a more balanced image of what is unfolding it is important to think both about the expected consequences of sanctions, including how long some of them take to have an effect, but also (and maybe most important when thinking about the long run), what economic consequences are now unfolding beyond the impact of sanctions.

Sanctions Against Russia

Let us start with what sanctions are in place, what types of impact these have had so far and what can be expected in the future. There are three types of sanctions currently in place. First, and most impactful in the short run, are limitations on financial transactions, especially those imposed on the Central Bank. In this category there are also the restrictions on other Russian banks disconnecting them from a key part of the global payment system, SWIFT, as well as measures targeting other assets: divestments from funds, investment withdrawals, asset freezes, and other impediments to financial flows. The main short-term aim of these actions was to reduce the Russian government’s alternatives to finance the army and their military operations. Second there are sanctions on trade in goods and services. At the moment these target particularly technology imports and energy and metals exports. These take a longer time to be felt and are potentially more costly to the sanctioning countries as well. They also contribute, in principle, to reduced resources for war. Besides affecting the government’s budget, both financial and trade sanctions disturb ordinary people’s lives as well and might create discontent and protests. A third group of sanctions are so-called sanctions of inconvenience such as limitations to air traffic, closure of air space, exclusion form sport and cultural events, restrictions of movement for both officials and tourists, and others, which aim at disconnecting the target country from the rest of the world. These are partly symbolic in nature, but can also impact popular opinion, including among the elites. However, a potential problem is that such sanctions can push opinion in either of two opposite directions: against the target regime in sympathy with the sanctioning parties; or against what is now perceived as an external enemy in a so-called rally-around-the-flag effect.

Along these dimensions the sanctions have so far had mixed effects in relation to the objectives listed above. We will return to this issue below, but in short, the sanctions on the Central Bank and the financial system, albeit powerful, fell short of causing anything like a collapse of the Russian financial system. Some of the trade restrictions, together with other global economic events, created an environment where lost trade volumes for Russia were compensated by price increases in resources and energy exports. When it comes to restrictions on imports of many high-tech components, these are certainly being felt in the Russian economy although still not fully. Public perceptions in Russia are hard to judge from the outside, especially given the problems of voiced opposition in the country, while public perceptions in sanctioning countries have mainly been favorable as people want to see that their governments are “doing something”.

What Do We Know About Sanctions in General?

A key question when judging whether sanctions “work” is to study what a reasonable benchmark can be. As discussed in a previous FREE Policy Brief (2012), sanctions don’t enjoy a reputation of being very effective. This is true both in the research literature as well as in the public opinion. There are reasons for this that have to do with both how “effectiveness” is intended and the limits that empirical enquiries necessarily face in trying to answer the question of effectiveness. This does not mean, however, that sanctions have no effect. Another FREE Policy Brief (2022) summarizes a selection of the most credible research in this area. In short, a majority of studies find that sanctions affect the population in target countries through shortages of various kind (food, clean water, medicine and healthcare), resulting in lower life expectancy and increased infant mortality. The types of effects are comparable to the consequences of a military conflict. In the cases where it has been possible to credibly quantify the damage to GDP, estimates are in the range of 2 to 4 percent of reduced annual growth over a fairly long period (10 years on average and up to 3 years after the lifting of sanctions). One has to keep in mind that lower growth rates compound over time, so that the total loss at the end of an average period is quite substantial. As a comparison, the latest estimate of the total loss in global GDP from the Covid-19 crisis stands at “just” -3.4 percent. Other studies find similarly significant negative effects on other economic outcomes such as employment rate, international trade, public expenditure, the value of the country’s currency, and inequality. There is of course variation in the effects depending on the type of sanctions and also on the structure of the target economy. Trade sanctions tend to have a negative effect both in the short and long run, while smart sanctions (i.e. sanctions targeting specific individuals or groups) may even have positive effects on the target country’s economy in the long run.

Sanctions and the Current State of the Russian Economy

When it comes to the Russian economy’s performance in these dire straits, the very bleak forecasts from spring 2022 have since been partly revised upwards. Some are surprised that the collective West has not been able to deliver a “knock-out blow” to the Russian economy. In light of what we know about sanctions in general this is perhaps not very surprising. Also, one can recall that even a totally isolated Soviet economy held up for quite some time. This however does not mean that sanctions are not working. There are several explanations for this. As already mentioned, some of the restrictions imply by their very nature some time delay; large countries normally have stocks and reserves of many goods – and on top of this Mr. Putin had been preparing for a while. Also, the undecisive and delayed management of energy trade from the EU reduced the effectiveness of other measures, in particular the impact of financial restrictions. Continued trade in the most valuable resources for the Russian government together with spikes in prices (partly due to the fact that the embargo was announced several months ahead of the intended implementation) flooded the Russian state coffers. This effect was also enlarged by the domestic tax cuts on gasoline prices in many European countries in response to a higher oil price (Gars, Spiro and Wachtmeister, 2022). This is soon coming to an end, but at the moment Russia enjoys the world’s second largest current account surplus.

The phenomenal adaptability of the global economy is also playing in Russia’s favor: banned from Western markets, Russia is finding new suppliers for at least some imports. However, although they are dampening and slowing the blow at the moment, it is difficult to envision how these countries can be substitutes for Western trade partners for many years to come.

The Russian Economy Beyond Sanctions

Given all of this, the impact on the Russian economy is not nearly as small as some commentators claim. Starting with GDP, an earlier FREE Policy Brief (2016) shows how surprisingly well Russia’s GDP growth can be explained by changes in international oil prices. This is true for the most recent period as well, up until the turn of the year 2021-2022 and the start of hostilities, as shown in Figure 1. Besides the clear seasonal pattern, Russian GDP (in Rubles) closely follows the BRENT oil price. This simple model, which performs very well in explaining the GDP series historically, generates a predicted development as shown by the red dotted line. Comparing this with the figures provided by the Russian Federal State Statistics Service, Rosstat, for the first two quarters of 2022 (which might in themselves be exaggeratedly positive) indicates a loss by at least 8 percent in the first and further 9 percent in the second quarter. In other words, GDP predicted by this admittedly simple model would have been 19 percent higher than what reported by Rosstat in the first half of 2022. As a comparison, Saudi Arabia – another highly oil dependent country – saw its fastest growth in a decade during the second quarter, up by almost 12 percent.

Figure 1. Russian GDP against predictions

Source: Authors’ calculations on GDP in rubles based on figures from Rosstat and the BRENT oil price series. Note that GDP is denominated in Rubles to avoid confusion due to the USD/Rubles exchange rates being volatile (given the lack of trade post invasion) and thus hard to interpret.

Other indicators point in the same direction. According to a report published by researchers at Yale University in July this year, Russian imports, on which all sectors and industries in the economy are dependent, fell by no less than ~50 percent; consumer spending and retail sales both plunged by at least ~20 percent; sales of foreign cars – an important indicator of business cycle – plummeted by 95 percent. Further,  domestic production levels show no trace of the effort towards import substitution, a key ingredient in Mr. Putin’s proposed “solution” to the sanctions problem.

Longer Term Trends

There are many reasons to be concerned with the short run impact from sanctions on the Russian economy. Internally in Russia it matters for the public opinion, especially in parts that do not have access to reports about what goes on in the war. Economic growth has always been important for Putin’s popularity during peace time (Becker, 2019a). In Europe it matters mainly because a key objective is to make financing the war as difficult as possible, but also to ensure public support for Ukraine. A perception among Europeans that the Russian economy is doing fine despite sanctions is likely to decrease the support for these measures. However, the more important economic consequences for Russia are the long-run effects. Many large multinational firms have left and started to divest from the country. There has always been a risk premium attached to doing business in Russia, which showed up particularly in terms of reduced investment after the annexation of Crimea in 2014 (Becker, 2019b). But for a long time hopes of a gradual shift and a large market potential kept companies involved in Russia (in some time periods more, in others less). This has however ended for the foreseeable future. Many of the large companies that have left the Russian market are unlikely to return even in the medium term, regardless of what happens to sanctions. Similarly, investments into Russia have been seen as a crucial determinant of its growth and wellbeing (Becker and Olofsgård, 2017), and now this momentum is completely lost.

Energy relations have been Russia’s main leverage against the EU although warnings about this dependency have been raised for a long time. In this relationship, there has also been a hope that Russia would feel a mutual dependence and that over time it would shift its less desirable political course. With the events over the past year, this balancing act has decidedly come to an end, if not permanent, at least for many years to come. The EU will do its utmost not to rely on Russian energy in the future, and regardless of what path it chooses – LNG, more nuclear power, more electricity storage, etc. – the path forward will be to move away from Russia. Of course, there are other markets – approximately 40 percent of global GDP lies outside of the sanctioning countries – so clearly there are alternatives both for selling resources and establishing new trade relationships. However, this will in many cases take a lot of time and require very large infrastructure investments. And perhaps more important, for the most (to Russia) valuable imports in the high-tech sector it will take a very long time before other countries can replace the firms that have now pulled out.

Yet another factor that will have long-term consequences is that many of these aspects are understood by large parts of the Russian population, and those with good prospects in the West have already left or are trying to do so. It has been a long-term goal for those wanting to reform the Russian economy, at least in the past 20 years, to attract and put to fruition the high potential that have been available in terms of human capital and scientific knowledge. However, these attempts have not succeeded and the recent developments have put a permanent end to those dreams.

Conclusion

In the latest IMF forecast, countries in the Euro area will grow by 3.1 percent this year and only 0.5 percent in 2023. In January the corresponding numbers stood at 3.9 percent and 2.5 percent. This drop, caused in large part by the altered relations with Russia, is certainly non negligible, and especially painful coming on the heels of the Covid-19 crisis. However, it is an order of magnitude smaller than the “missed growth” Russia is experiencing. When judging the impact from sanctions on the Russian economy overall, the correct (and historically consistent) counterfactual displays a sizable GDP growth driven by very high energy and commodity prices. Relative to such counterfactual, the sanctions effect is already very noticeable. In the coming months, economic activity will slow down and many European household will feel the consequences. In this climate it will be important that, when assessing the situation with Russia perhaps performing better than expected, the following is kept in mind. Firstly, Russia is still doing much worse compared to the EU as well as to other oil-producing countries. Secondly, and even more important, what matters are the longer run prospects. And these are certainly even worse for the Russian economy.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.