Long-Run Consequences of Sanctions on Russia

This paper examines the long-run economic consequences of Western sanctions on Russia. Using a new framework for balanced growth path analysis, we find that the long-run declines in consumption are significantly larger when capital stocks are allowed to adjust --- 1.4 times larger for Russia and 2.2 times larger for Eastern Europe. This is contrary to the common intuition that long-run effects should be milder due to greater adjustment opportunities. In our model, Russian long-run consumption falls by 8.5%, Eastern European consumption by 2%, and Western countries' consumption by 0.3% in response to sanctions. The model also reveals important distributional effects: as capital adjusts, Russian real wages fall more than rental prices in the long run. These findings show that accounting for capital adjustment is quantitatively important when analyzing trade sanctions.