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Data Shows Austria Took a Major Hit From Russia Sanctions

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Originally Appeared at German Economic News. Translated from German by Werner Schrimpf

Without any further discussion, EU decided to prolong sanctions against Russia. Just looking at the data for Austria, it’s easy to realize that the damage is tremendous. The situation in other for EU member states will be similar.

News magazine „Deutsche Wirtschafts Nachrichten“ conducted an interview with the Austrian Institute of Economic Research (WIFO) concerning the impact of EU sanctions against Russia on Austria’s economy. The bottom line is that the pure figures show that the consequences are dramatic.

Deutschen Wirtschafts Nachrichten: What have been the major effects of the sanctions against Russia on Austria’s economy so far?

WIFO: First we have to emphasize that the impact of sanctions on Austria’s economy and its export industry cannot be analyzed without taking into account other dependent factors as well. Besides the specific goods and services, which have been hit by sanctions, we have to recognize a general deterioration of mutual trade relations and this will clearly worsen our expectations for the export sector.

In an addition to that, recessionary tendencies in Russia, the price slump in crude oil, and the devaluation of the ruble, all have a negative influence which makes life much harder for Austrian exporters. January to September 2015, Austrian exports to Russia declined by 39.1% compared to the same time frame from the previous year. In 2014, the respective figure was just 8%.

Deutschen Wirtschafts Nachrichten: Which business sector was affected most by sanctions?

WIFO: EU sanctions against Russia are affecting very specific goods and equipment. EU restrictions concerning trade with Russia comprise in general just the contracts that have yet to be closed and there are some exceptions for current contracts. We have additionally, various limitations concerning financial transactions. The branches hit hardest are:

  • production of military equipment
  • production of dual purpose goods which can be used for either military services or civil
  • applications (listed in appendix I of the ruling VO 428/2009) and
  • production of equipment for the oil and gas industry which can be used for exploration and drilling of deep sea oil, arctic oil, and fracking (listed in appendix II of the ruling VO 833/2014)

As a counter measure, Russia imposed an embargo on imports of agricultural products, food, and commodities – the ban includes all beef and pork products, poultry, sausages, milk and milk-based products, raw milk and any food made with milk products, as well as fish, vegetables, and fruits (including root vegetables and nuts.)

The most important economic sectors exporting to Russia are engineering (export ratio of 25.0%), chemistry (24.8%) and the car industry (8.5%). Other branches with a significant export quota are metallurgy (4.5%) and food industries (4.3%). The branches which suffered most from export losses to Russia were:

 - automotive engineering (decline January to September 2015: 82.5%)

 - engineering (decline January to September: 32%)

 - metallurgy (decline January to September: 67.5%)

 - food industries (decline January to September: 51.5%)

But in general, a wide range of businesses and economic sectors has been severely damaged by shrinking exports.

Deutschen Wirtschafts Nachrichten:  What would be your estimate concerning further losses in the case that sanctions will be prolonged another six months?

WIFO: In a study we assessed the negative impacts based on the empirical data from the fourth quarter in 2014 and the first quarter in 2015. Our main assumption in this analysis was that there won’t be any options of redirecting lost export potential from Russia to other export markets. In order to assess and to quantify the financial losses in a scenario of extended and prolonged sanctions, we have to check whether the empirical data will support our basic assumptions in our model. For the time being, the data is not yet available.

Having said this, and if we assume there is no option of redirecting lost export volumes from Russia to other markets, we will face an increase of negative effect due to the fact that long term sanctions and the losses will lead to unemployment and a decline of consumer demand. This would not be the same if it were a case characterized by short-term sanctions.

But we have to admit that the negative consequences of the EU sanctions are overlapped by further general economic developments and the general economic environment in Russia so that sanctions are just one piece of the overall picture.

Deutschen Wirtschafts Nachrichten: According to your opinion what could improve the situation? Should sanctions be lifted immediately?

WIFO: We are concerned that the recent extension of the sanctions is an indication that the underlying political issues are not yet solved and sanctions are unlikely to be lifted in the near future.

From an economic point of view, sanctions will always hurt both partners and do not make sense. Sanctions have to be seen in a political context but in terms of economic matters, the sanctions should be cancelled as soon as possible.

Deutschen Wirtschafts Nachrichten: Have these sanctions fulfilled the expectations to punish Russia or would you argue that Austrian mid-sized companies have been damaged as well?

WIFO: In fact, we noticed a decline in economic growth of Russia’s economy even before sanctions were imposed which was mainly caused by a sharp decline of international commodity prices. A massive devaluation of the ruble currency which increased Russia’s inflation rate is in part a consequence of these sanctions and has damaged Russia’s economy.

But as I stated before, sanctions will always hurt both parties and should be avoided as much as possible. It is difficult to judge who has suffered more as a result of the sanctions, Russia or its Western trade partners.

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