The Impact of Economic Sanctions – Our Economic Scenario Update

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As a result of the Ukraine conflict, the EU and the US started imposing economic sanctions on Russia in March 2014. Until August, these were of a rather soft nature: travel bans, asset freezes on certain individuals, ban on businesses with close ties to the Kremlin. Russia retaliated by banning selected US citizens from entering its territory.

Recently, however, the EU, the US and Russia cranked their sanctions up a notch. While Europe put restrictions on the export of high-tech goods and arms, the Kremlin banned food imports and transit flights by Ukrainian airlines.

Germany, Russia stand to suffer the most

Over 6,000 German companies do business with Russia, it being Germany's 11^th biggest trading partner. Exports are primarily cars, machinery and electronics, while the most prominent import is gas (39% of Germany's gas needs are met by Russian supplies). Due to this economic entanglement, the harder and longer the sanctions, the more Germany's economy and growth potential will suffer.

The Kremlin itself will also ache to a degree under the sanctions (including its own) since the EU is its most vital trading partner by far: in 2013, 50% of its exports went to and 47% of its imports came from Europe. While not to the same extent, the EU is significantly affected by the sanctions as well. Russia constitutes the fourth biggest export and the second largest import country to the Union.

In a Leaders Parliament survey recently conducted by Roland Berger Strategy Consultants and Die WELT Group among 159 German managers, almost two-thirds of the respondents believed that sanctions are likely to remain in place for up to two years. More than half of the participants voiced concerns that the impact on the German economy will constitute up to half a percentage point less GDP growth in 2014.

Although the German economy can rely on growing consumption, stable energy prices and a strong labor market, the economic sanctions cannot be left out of the calculation. Thus revising its economic scenario of January 2014 with a growth rate of 2.0%, the Roland Berger Strategy Consultants forecast sees a similar drop in growth to 1.7%.

"Had the economic sanctions not been tightened, we would not have revised our forecast at all," explained Prof. Dr. Burkhard Schwenker, chairman of the supervisory board of Roland Berger Strategy Consultants. Schwenker's rationale: "With its industrial expertise and its strength, the German economy has held up well in the face of unfavorable developments in countries like Japan or Brazil. The current geopolitical situation brings additional uncertainties, though."

Find out more in our latest Economic Update, which you can download here.