ACADEMIA

An advanced simulation by the Complexity Science Hub Vienna shows in detail how shocks on the Russian economy spread through the world's economic networks

The international sanctions imposed on Russia are expected to lead to a double-digit contraction of the Russian economy, according to a new Policy Brief by the Complexity Science Hub Vienna (CSH). Considering China and India follow the current sanctions imposed by Western countries, the Russian economy would contract by 17%. With a worldwide embargo on Russian oil and gas, the country’s economy would shrink by another 12.4%. 

"We use a combination of economic models that allow us to estimate supply and demand shocks of many economies simultaneously," the senior author of the policy brief, Stefan Thurner, points out. "Our extension to classical input-output analyses shows shock waves which started in one place running through the world's economies and give us a feeling of how strong they play out in a global context," says the CSH President.

The methods consider economic networks, thus allowing the scientists not only to estimate the direct broadscale effects of sanctions imposed on Russia and the sanction-imposing countries but also to estimate indirect outcomes of an economic shock.

Two scenarios

The CSH team analyzed two scenarios. The first one models the effects of the current set of economic sanctions imposed on Russia by Western countries. The second scenario simulates the effects of a hypothetical global embargo on Russian oil and gas. The scientists used data from 66 countries and 45 industries provided by the Organization for Economic Co-operation and Development (OECD).

In the first scenario, the simulations indicate an expected contraction of the Russian economy by 6%. If India and China follow the sanctions, the decline is 17%. The most affected industry sectors in Russia are Motor vehicles (–52%), Electrical equipment (–39%) and Machinery (–36%), followed by Manufacturing of other transport equipment (–34%) and Computer, electronic, and optical equipment (–33%).

In contrast, the demand shock effects for European countries from missing Russian exports are marginal and are often below the percent range, says Tobias Reisch, the first author of the policy brief. "However, there will be supply chain disruptions that we can presently not model and that could cause much more severe damage," he adds.

A global ban?

Simulating the short to medium-term effects of a hypothetical worldwide embargo on Russian oil and gas, the modeling predicts an additional 12% contraction of the Russian economy. Assuming that the international demand for fuel remains constant and is satisfied by other countries, the global ban on Russian fossil energy exports would benefit Saudi Arabia, Norway, the US, and Australia. The Saudi Arabian mining and oil and gas extraction sectors could grow up by 6.9%, the same sectors in the US and China by 6.7% and 6.4%, respectively, according to this paper.

The CSH team also created an interactive visualization tool that allows users to explore the effects of economic shocks in different countries and on various economic sectors. Users can even impose their sanctions and watch how they play out. The tool can be accessed via https://vis.csh.ac.at/sanctions-on-russia/