This research analyzes the economic impact of the sanctions on the Russian economy and explores measures to stabilize economic cooperation between South Korea and Russia. Even if the war between Russia and Ukraine are resolved in any manner, it is highly likely that Western sanctions on Russia may persist in the long term, given the difficulty in resolving deep-rooted traditional conflicts between Western ideologies and Russian ideologies. Therefore, there is an urgent need for a systematic analysis of the long-term impact of the sanctions on the Russian economy. Additionally, it is crucial not to passively observe a deterioration in economic cooperation between the two countries due to the sanctions. This is because the potential for economic cooperation between the two countries has not yet been fully realized, and expectations are high for a mutually beneficial collaboration through dense future economic cooperation. Consequently, exploring measures to stabilize economic cooperation between South Korea and Russia in the face of anticipated prolonged Russian sanctions is a highly meaningful undertaking.

For this purpose, this study comprehensively compares and analyzes the diverse characteristics of Western sanctions against Russia after the 2022 Russia-Ukraine War with those imposed after the 2014 Crimean Peninsula crisis. While the 2014 sanctions primarily exhibited targeted and cautionary features in specific areas, the 2022 sanctions are characterized by an all-encompassing comprehensiveness and substantial punitive nature without sectoral limitations. Due to these contrasting features, the impact of the 2022 sanctions on key macroeconomic indicators of the Russian economy was profoundly severe.

To rigorously analyze the impact of Western sanctions on the Russian economy, this study employs Vector Autoregressive Models (VAR) for time-series analysis as well as a new theoretical framework, extending and modifying a general macroeconomic model dealing with structural transformation to suit the economic conditions of Russia. Through this framework, the prolonged duration of the sanctions and their potential effects on Russian economic growth are systematically examined. Initially, we construct a comprehensive index measuring the overall intensity of the sanctions by categorizing the sanctions imposed by the United States, the European Union, and the United Kingdom from March 2014 to June 2023. The analysis considers a VAR model composed of the constructed sanction index, natural gas prices, industrial production index, export/import ratio, and real effective exchange rate. The results confirms the long-term impact of the sanctions on the Russian economy. In particular, VAR analysis reveals that the sanctions shock significantly contributed to a sharp decline in Russian industrial production, with the negative effects persisting over a year.

This study theoretically analyzes the long-term effects of the sanctions on the Russian economy from the perspective of structural transformation. Considering that the core elements of the sanctions include deepening financial constraints, restricting imports of intermediate goods crucial for advanced industrial development, and limiting technological cooperation, the study rigorously examines the potential impact on Russia’s economic structural transformation when financial friction intensifies and sectoral productivity declines due to the sanctions. To achieve this, a multi-sector growth model is constructed, accounting for varying productivity across sectors and the presence of financial friction. The theoretical analysis suggests that when financial friction intensifies, the productivity of high value-added sectors decreases, delaying the necessary industrial structural transformation for Russia’s long-term growth. Following the same logic, if technological advancement in high value-added sectors is hampered by the sanctions, resulting in delayed productivity improvement, structural transformation further delays. Consequently, by delaying a crucial structural transformation for Russia’s long-term growth, the sanctions may increase the risk of the Russian economy falling into what is commonly referred to as the middle-income trap.

If the long-term impact of the sanctions on the Russian economy is deemed significant, the Russian government recognizes the imperative to exert various domestic and international efforts to mitigate these adverse effects. Accordingly, this study examines the Federal Government of Russia’s external and internal strategies in response to the sanctions. Russia’s post-war external strategy, addressing changes in the existing external cooperation environment, revolves around countering threats to the national economy due to sanctions-induced economic and technological isolation. Within the structural shifts of the international order, Russia indicates its intention to strengthen efforts for survival and development, seeking diverse partnerships across various domains. Moreover, Russia has unveiled a post-war industrial development strategy focusing on high-value-added manufacturing sectors such as automotive, metal, microelectronics (semiconductors), and communication industries. In light of deepening credit constraints resulting from the financial sanctions, efficient restructuring in the financial sector is essential for successful industrial transformation toward high-value-added industries perhaps necessary for the qualitative growth. Therefore, Russia has announced a financial industry development strategy aimed at modernizing its domestic financial market. This study also examines this financial market development strategy.

Finally, based on the analysis presented earlier, we explore short-term and medium- to long-term directions for stabilizing economic cooperation between South Korea and Russia. Specifically, we consider the short-term scenario, assuming South Korea is in a situation where lifting sanctions against Russia is inevitable. We examine the directions for cooperation stabilization required in such circumstances. Additionally, we contemplate the directions for cooperation when South Korea can impose more flexible (relaxed) sanctions in the future.