Russian counter-sanctions and smuggling: Forensics with structural gravity estimation

Abstract

Trade and other economic sanctions are a common foreign policy instrument, but their imposition may induce smuggling. We develop and implement procedures to study smuggling after the food embargo imposed by Russia on Western countries after the annexation of Crimea in 2014. We construct predicted trade flows for the post-sanctions period using an estimated structural general equilibrium gravity model with many industry sectors and compare those predictions with actual trade flows. We identify a substantial value of suspicious trade flows which we associate with smuggling; especially importing banned goods through third countries such as Belarus. The structural gravity model systematically under-predicts trade volumes for country-product combinations used as channels for smuggling of the banned goods. We identify a quantity of smuggling equivalent to approximately 11 to 17 percent of the pre-embargo trade flows.