Bearing the cost of politics: Consumer prices and welfare in Russia

In August 2014, the Russian Federation implemented an embargo on select food and agricultural imports from Western countries in response to the economic sanctions. The measure was designed to harm producers in United States, European Union, Norway, Ukraine, along other Western countries. In this study we quantify the effect of the embargo for welfare and consumer prices in Russia. We first provide evidence for the direct effect on consumer prices with a difference-in-differences approach with a highly detailed monthly dataset of consumer prices in Russia between 2011-2016. The results suggest that the embargo caused consumer prices of embargoed goods to rise in the short run by 8.9% - 12.6%. Regions of Russia with previously above-average levels of food imports from sanctioned countries experienced a stronger impact. In the medium run the effect reduces to 1.2% - 6.3%. The results also indicate that the policy shock has been transmitted to non-embargoed sectors by means of domestic inputoutput production linkages. We then use a Ricardian model of trade with domestic sectoral linkages, trade in intermediate goods and sectoral heterogeneity in production to perform counterfactual simulations, isolate the direct and indirect price effects, and compute welfare measures for a situation without embargo. Our simulations suggest that the self-imposed embargo caused a decline in Russian welfare by 1.88% and an increase in the overall price index by 0.19%.