Impacts of Sanctions on Foreign Trade Analyzed with the Gravity Model Approach: A Case Study of Iran and Russia

Introduction: Economic sanctions are one of the tools to exert negative pressure on a country's economy to achieve political goals. They have been used in several cases in recent years due to their lower cost than war for the country that imposes them. What matters is the cost of economic sanctions for the imposing country and what it gains from it. The gain of sanctions for this country is the effects on the economy of the target country. Experimental observations show that, despite the same political disputes of different countries with one country (USA), the severity of sanctions imposed on these countries is different. Even despite the same sanctions imposed on the target countries, the economic responses of these countries to sanctions are different. Many studies have been conducted on economic sanctions and their impacts on the economic and welfare situation of the target countries. Not all of them have reacted the same way. In this article, we have discussed the differences in the impacts of economic sanctions on different countries, focusing on the situation of Iran and Russia. Due to the differences between the sanctions severity imposed on the two countries, the sanctions variable was initially quantified to provide an equal basis for our analysis. We entered resilience and vulnerability indices into our model to explain the different effects of the sanctions on the two countries. We also modeled the sanctions severity to consider the its differences in the case of different targets.
Methodology: By comparing the effects of sanctions on the export and import of the target country to and from important trading partners, we estimated those effects using panel data with interactive dummy variables. The model proposed by Raul Caruso in 2005 was used to examine the impact of sanctions on the trade of the target countries. The trade data of Iran and Russia with five important partners between 1992 and 2018 were used in the model. We also used the US Congress report on the sanctions against Iran and Russia to quantify their sanctions. In the discussion of scoring sanctions, number zero is related to the period when no sanctions were imposed, numbers 1 and 2 are related to the mild and severe sanctions of the United States, numbers 3 and 4 are related to the mild and severe sanctions of Europe, and number 5 is intended for the sanctions imposed by the United Nations. Finally, by determining the severity of sanctions in different sectors of Iran's trade (different partners), we sought to show the effects using vulnerability and resilience as two indicators.
Results and Discussion: he results showed that economic sanctions have had significant and negative effects on Iran's trade with its important partners, but they have had no significant effect on Russia's trade with its partners. Since economic sanctions enter the economic systems as a negative shock, the difference in their impacts is considered to be related to the indicators of vulnerability and resilience. It was observed that resilience has reverse and vulnerability has direct effects on sanctions. This important finding shows that, by modifying resilience and vulnerability, we can affect the impacts of sanctions. Increasing resilience and reducing vulnerability can reduce the impact of economic sanctions on Iran. On the other hand, since Russia's economy is more resilient and less vulnerable than Iran, the difference between the impacts of economic sanctions on these two countries is explicable.
Conclusion: In this study, we tried to examine the reason for the differences in the impact of economic sanctions on different target countries. We focused on Iran and Russia because of the similarities in the nature of the exports and political disputes with Western countries. For the severity of sanctions imposed on the target countries, we used six levels (0-5). We also considered the trade of Iran with five important partners (i.e., Germany, China, India, Turkey and UAE) and Russia Trade with its partners (Netherland, China, Belarus, Germany and Turkey) as an index for measuring the sanctions impacts. It emerged that the sanctions have had significant negative effects on Iran's trade with its important trading partners, but thet have had no significant effects on Russia's trade. We entered resilience and vulnerability indices into our model to explain the difference of the effects on the trades of Iran and Russia. It was observed that the impact of sanctions is inversely related to resilience and directly related to vulnerability of an economy, meaning that the higher the resilience and the less vulnerable a country is, the less affected by sanctions.