Going Dutch? Firm exports and FDI in the wake of the 2014 EU-Russia sanctions

Abstract

We examine the 2014 European Union economic sanctions on exports to Russia and the Russian retaliatory measures on imports from several Western countries. Using the universe of highly disaggregated international trade and taxation data for firms in the Netherlands, we systematically analyze the impact of these economic sanctions on Dutch firms' exports and foreign direct investment. Our analyses account for the product-specific EU restrictions on arms, equipment used for oil exploration and extraction, and dual-use products suitable for civilian and military use, as well as the Russian import ban on various primary commodities. Our empirical findings highlight the overall negative impact of sanctions on the intensive margin of exports. However, having a foreign affiliate in Russia helps to mitigate the otherwise negative impact of sanctions on the extensive margin of exports. We also show that exporters do not circumvent sanctions by setting up a local affiliate in Russia. In fact, exposure to Russian countersanctions may even force firms to close their Russian affiliates.