Can Russia Survive Economic Sanctions?

Abstract

Motivated by recent events, this paper studies the welfare impact of extreme sanctions regimes on Russia. To do so, it models the demographic and fiscal transition of the Russian Federation under free trade and autarky. Unlike previous studies of sanctions, our paper utilizes a large scale overlapping generations model with productivity growth, demographic change, region-specific policies, and an energy sector. This model is uniquely suited to understanding the long term impacts of different trade and fiscal regimes. Consequently, this paper investigates the most dramatic sanctions possible, forcing Russia in to long term autarky, under a variety of scenarios. It is consider the role of Russian capital controls as a response to sanctions as well as impacts on labor productivity and the energy sector. The paper finds that older currently living Russian generations are hurt the most by the sanctions. When Russia seizes foreign assets, this is in part due to lower interest rates on the assets of retirees. When the sanctions also reduce Russian government energy revenues, the old are hurt through increased consumption taxation. In all scenarios but the most benign, all generations currently living are made worse off.