Conform or challenge? Adjustment strategies of sanction‐torn companies

Abstract

The literature on sanctions often neglects the role of domestic firms in sender states, although sanctions only have a real economic effect when senders’ firms reduce their activities on the target's market. In contrast, sanctions avoidance and increasing investments in the target country (the observed behaviour of many companies facing the EU sanctions against Russia imposed in 2014) mitigate the impact of these restrictive measures. While sanctions increase the political risk for companies, they also offer economic opportunities—and previous studies could not settle the debate on which factor prevails. By evaluating responses from British, French, German, Italian and Polish enterprises to an online survey distributed in 2017, we analyse at the firm level how sanction‐torn companies adjust to new political orders and what drives their strategic decisions. We find evidence that resource dependency induces strategies that challenge sanction policies: in particular, non‐fungible assets in the target country incentivise companies to further increase their engagement. These defiance strategies diminish the real economic effect of sanctions and generate a new economic equilibrium, which has negative long‐term implications on the choice set of policymakers to further pursue the imposition of sanctions and which even outlasts the lifting of these restrictive measures.

Who cares about sanctions? Observations from annual reports of European firms

“…Belin and Hanousek (2020), using data for 2014-2017, assert that Western export restrictions had led to lost exports worth USD 1.5 billion, while Russian bans decreased imports by USD 12.6 billion. The real costs of trade sanctions, however, entail both enforcement costs and adjustment costs for actors both in the sender and target countries (Hufbauer and Jung, 2020;Weber and Stepien, 2020). Moreover, modern targeted sanctions also tend to affect trade in non-sanctioned goods (Crozet and Hinz, 2020).…”

“…We still understand precariously little about how European companies assess sanctions or why otherwise similar companies in different countries have different views on sanctions effects. The only study we are aware of using cross-country survey data on firm's views on Russia-related sanctions is the recent paper by Weber and Stepien (2020). Using an online survey of roughly 1,000 firms based in the UK, Poland, Germany, France, and Italy, they find that about a quarter of respondent firms were affected by sanctions.…”

“…Their final sample includes about 1,000 firms from the UK, Poland, Germany, France, and Italy. Although about a quarter of respondent firms were affected by sanctions, Weber and Stepien (2020) find that many of the affected firms had found ways to mitigate the impact of sanctions on their operations.…”

“…Generalization of membership-based surveys across the entire population of European enterprises is highly problematic, however. The only study we are aware of using cross-country survey data on firm's views on Russia-related sanctions is Weber and Stepien (2020). Their final sample includes about 1,000 firms from the UK, Poland, Germany, France, and Italy.…”

“…1 Firms tend to find ways to adjust to trade restrictions. These adjustments include diverting trade routes, finding new markets, and modifying their products (Luo, Sun, and Wan, 2020;Weber and Stepien, 2020). Here, we focus only on the year when major Russia-related sanctions were imposed and the following three years (i.e.…”