Bearing the cost of politics: Consumer prices and welfare in Russia

Abstract

In August 2014, the Russian Federation implemented an embargo on select food and agricultural imports from Western countries in response to previously imposed economic sanctions. In this paper we quantify the effect of this embargo on consumer prices and welfare in Russia. We provide evidence for the direct effect on monthly consumer prices with a difference-in-differences approach. The embargo caused prices of embargoed goods to rise by up to 7.7% – 14.9% in the short run and by on average 2.6% – 8.1% until at least 2016. The results further suggest the shock was transmitted to non-embargoed sectors through domestic input-output linkages. We then construct a general equilibrium Ricardian model of trade with input-output linkages and goods that are tradable, non-tradable or embargoed. The model-based counterfactual analysis predicts the overall price index in Russia to have increased by 0.33% and welfare to have declined by 1.84% due to the embargo.