Designing ‘optimal’ sanctions on Russian imports

Abstract

Restricting Russian imports is an important instrument in Allies' sanction toolbox. Rather than arbitrarily choosing the set of targeted imported products and the level of import tariff increases (as is typically done in the literature), we follow the recent contributions on ‘optimal sanction’ strategies. We apply a workhorse computable general equilibrium (CGE) model, GTAP, in a way that enables us to endogenise the scope of sectors targeted, the magnitude of tariff increases and the disbursement of tariff revenues. This allows us to identify sets of Allied import restrictions that best achieve the Allies' objectives of inflicting the highest economic pain on Russia while at the same time keeping self-harm to Allies as low and as equitably distributed as possible. With regard to scope, we find that, instead of targeting Russian imports across the board, the Allies fare better when limiting their import sanctions to products from the eight most-imported Russian sectors. Regarding optimal tariff levels, we find that, rather than imposing all-out import bans, tariff increases in the range of 20–25 percentage points best achieve the Allies' objectives. Finally, the Allied coalition could benefit from a burden-sharing arrangement in which proceeds generated from the additional tariff rents are redistributed among Allies, and other cash transfers are allowed for. Doing so would result in a more equitable distribution of economic losses among Allied countries—at hardly any additional ‘cost’ to the coalition (in terms of extra losses to Allies or reduced losses to Russia). Such arrangement could significantly strengthen cohesion, resilience, and longevity of the Allied coalition, and thus ought to become a component of an optimal sanction strategy. As an alternative to redistributing tariff rents among coalition countries, Allies could consider using those funds towards supporting Ukraine directly. Doing so would involve a small sacrifice by Allies and would scarcely compromise the effectiveness of Allied sanctions. However, it could greatly help mitigating the human catastrophe unfolding in and around Ukraine.