What goes around comes around: The effects of sanctions on Swedish firms in the wake of the Ukraine crisis

• DOI: http://doi.org/10.1111/twec.13000
• Author: Joakim Gullstrand
• Date: 01 September 2020
• Published date: 01 September 2020

World Econ. 2020;43:2315–2342.

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© 2020 John Wiley & Sons Ltd

wileyonlinelibrary.com/journal/twec

Received: 19 November 2018

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Revised: 1 June 2020

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Accepted: 8 June 2020

DOI: 10.1111/twec.13000

INVITED REVIEW

What goes around comes around: The effects of

sanctions on Swedish firms in the wake of the

Ukraine crisis

JoakimGullstrand

Department of Economics, Lund University, Lund, Sweden

Funding information

Jan Wallanders och Tom Hedelius Stiftelse samt Tore Browaldhs Stiftelse; Torsten Söderbergs Stiftelse

KEYWORDS

embargo, export, production, sanction, Sweden

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INTRODUCTION

Economic sanctions have a long history in international policy as a tool for curbing aggression or

misbehaviour of states and their ruling elites.1 The underlying idea is that sanctions should inflict an

economic cost on the targeted economy through rolling back gains from trade, or from other forms of

international transactions, such as investments and capital flows. Hence, the ruling elite is incentivised

to change their policies to avoid these costs. The success of economic sanctions in coercing targeted

regimes has, however, been questioned (see, e.g., Hufbauer, Schott, Elliott, & Oegg, 2009), and an

oft-cited early failed embargo is the one Athens employed on Megara in Ancient Greece to force them

into becoming an ally.2 Instead, the sanction acted as a spark for the Peloponnesian War (see

Drezner,1998).

Bergeijk (2009) stressed that one should assess the fine-grain effectiveness of sanctions instead of

using a binary assessment on whether they were successful or not, especially since economic sanctions

‘cannot be expected to succeed if, for example, economic linkages are too weak, so that no or hardly

any damage can ever be done’ (Bergeijk,2009, p.119). That is, the probability that a trade embargo

or an economic sanction actually coerces misbehaviour depends on the costs it inflicts on the targeted

economy. The importance of trade links when it comes to predicting the costs of economic sanctions

is also emphasised by Kaempfer and Lowenberg (2007), who used the traditional trade model and

terms of trade to anticipate the welfare costs. In other words, sanctions roll back the targeted country

1Although positive sanctions, such as aid or different types of cooperation, are also used to influence the behaviour of states, I

will focus completely on negative sanctions in this study.

2The comprehensiveness of this embargo was, however, questioned by Stantchev (2012).

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GULLSTRAND

to a nontrade equilibrium, so that welfare gains from trade disappear or are mitigated. The magnitude

of the cost of sanctions therefore depends on the relationship between the sender and the target before

they are implemented. A larger sender economy (or group of senders) implies that the target economy

is more dependent on the sender market, and hence, trade sanctions will roll back the target economy

closer to its autarky equilibrium. This analysis also highlights the costs inflicted on the sender, since

trade goes in both directions. The larger the targeting country, the costlier it is for the sender, since

their gains from trade are also rolled back. This aspect of sanction costs has, however, attracted little

attention. Two exceptions are Besedeš, Goldbach, and Nitsch (2018) and Crozet and Hinz (2016), and

the former found support for a 'friendly fire' effect (i.e., costs inflicted on the sender economy) when

they studied the sanctions against Russia after 2014, while the latter found very limited effects when

they studied the impact on German firms due to financial sanctions.

The effects of trade barriers on welfare, due to the size of trade flows, are also manifested in the

workhorse model of today's international trade (see Anderson & Wincoop,2003). Feenstra (2016)

showed how gains from trade in newer trade models could be estimated with the help of changes in

trade shares.3 A higher share of imports in domestic expenditures implies greater gains, which also

implies potentially greater losses from sanctions. Bergeijk (2009) assessed the importance of trade

links when it comes to the efficiency of trade sanctions, using the database collected by Hufbauer et al.

(2009), and he found that the probability of a sanction being successful increased with stronger trade

links between the sender and the target.

The effectiveness of sanctions is not only about inflicting the highest possible cost on the target

economy, since the dynamics of sanctions also depend on, for example, future expectations and inter-

nal dynamics. Drezner(1998, 1999) argued that a target expecting further conflicts in the future may

take these into consideration and thus be less likely to make concessions. In addition, the targeted

economy should not be viewed as an aggregate, but instead as a complex composite of different

groups (exporters vs. importers, rural vs. urban, political leaders/elite vs. others, etc.). The distribution

of sanction costs across groups may be more important than the size of the total costs when it comes

to concessions (see, e.g., Kirshner,1997 and Kaempfer & Lowenberg,1988).4 The very high human-

itarian costs that resulted from the unsuccessful sanctions targeted against Iraq, the former Yugoslavia

and Haiti in the 1990s also raise the question of the distribution of costs, since these sanctions seemed

to strengthen rather than curb the targeted regimes.5 To minimise humanitarian costs and, at the same

time, increase the precision of sanctions, sending countries have started to use ‘smarter’ and more

precise sanctions (see Drezner,2011; Kaempfer & Lowenberg,2007; Kirshner,1997) with the objec-

tive of targeting a certain group.

The preceding discussion highlights several important aspects when it comes to sanction effects:

first, the total impact on the economy; second, that sanctions may influence both the target and the

sender economy; and third, the internal dynamics or the allocation of sanction costs within an econ-

omy. The aim of this paper was to contribute to the literature on all these aspects by focusing on

Swedish firms, and how they were influenced by the sanctions implemented after the Ukraine crisis

against Russia and the counter-sanctions by Russia. The sanctions in the wake of the Ukraine crisis

3The exact relationship between gains from trade and the trade share depends on the specification of the model, as discussed

in Arkolakis et al. (2012), Feenstra (2016), and Melitz & Redding (2015).

4The empirical findings of Bergeijk (2009), that democracies are more likely to concede to sanctions (see also the survey of

Kaempfer and Lowenberg (2007), also indicate that the internal dynamics of sanctions may differ across countries with

different regime types.

5The humanitarian costs of sanctions, according to Allen & Lektzian (2013), can be as severe as those that occur during a

military conflict.