Steel yourselves : Effects of a price cap sanction on Russian steel

Abstract: This thesis examines the potential effects of a price cap sanction on semi-finished steel products against the Russian steel industry. The research question is: "What are the effects on the Russian economy of a price cap on semi-finished steel products?”. By constructing a theoretical model and applying empirically-based parameters, estimation of the sanction's effects on Russia and the world is possible. The findings suggest that a severe price cap, such as capping Russian steel prices at 72 $/tonne (90 % of original price), only results in a 2,7 % decrease in supplied quantity but causes a significant loss of profit (approximately 10 billion dollars annually). In the long-run, market rebalancing somewhat diminishes these losses. An alternative model however indicates that Russian exporters would cease exports at a minimum price of 502,5 $/tonne, leading to a dramatic increase in global prices. Therefore, a recommended price cap of 30 % or less of the current market price is advised – leading to 3,4 billion dollars in annual Russian losses. This study contributes to the understanding of sanctions as an economic tool and informs the ongoing debate on the efficacy of price cap sanctions against a sizable economy like Russia's and on inelastic products such as semi-steel.