However, these exports made up just 2.7 per cent of Italy’s total domestic exports, which reached $517 billion in 2013. (Data from Coeweb, ISTAT).

While the overall economic cost of export and job losses resulting from the sanctions may not have been significant at the European aggregate level [Dillen 2015], it had a substantial impact on individual EU member states, particularly those geographically and historically more involved in trade with Russia and dependent on agri-food exports. Certain sectors closely linked to the sanctioned areas experienced a significant decline, and losses were also attributed to the «friendly fire» effect [Crozet and Hinz 2020].

Several studies have highlighted the need to analyse the impact of restrictions at the level of individual EU member states. For instance, Skvarciany, Jurevičienė and Vidžiūnaitė [2020] applied a cluster analysis using the gravity model and demonstrated that countries experienced different direct economic impacts within the same clusters. However, this analysis did not consider the possible indirect and complementary effects. Analysing the economic effects is complex, as they are not solely determined by the imposed restrictions but also influenced by preceding market dynamics such as the collapse of oil prices and the destabilisation of the ruble. These factors redirected European producers’ exports to third countries, resulting in a 39.6 per cent decrease in exports to Russia between 2013 and 2016 (Data from Eurostat).

To assess the economic consequences beyond individual sectors, the Austrian Institute of Economic Research conducted an analysis starting in 2014. It converted export losses into direct value-added and employment effects and then analysed the indirect impact by estimating the linkages between different sectors and countries using a global input-output model of the 27 EU member states and major partner countries, including Russia. The findings revealed an overestimated and inaccurate macroeconomic impact when the effects of sanctions were not ¶{p. 97}distinguished from other contributing factors. The overall effects are heavily influenced by sectoral factors and national repercussions, i.e., indirect channels of transmission [Fritz et al. 2017].

Despite strong political divergences between Russia and the EU, trade relations continued until the military escalation in Ukraine in February 2022. In 2021, Russia remained an important export destination for the EU, ranking fifth, accounting for approximately 5.8 per cent of the EU’s total trade in goods with the world. The main exports included machinery and equipment, motor vehicles, pharmaceuticals, electrical equipment and machinery, and plastics, according to the data published by the European Commission [https://policy.trade.ec.europa.eu].

Mardones [2023] uses multisectoral models to estimate international disruption of trade with Russia. He uses the hypothetical extraction in a multi-regional input-output model with 189 countries to simulate the direct and indirect economic effects if Russia disappears from international trade. As is to be expected, countries close to Russia experienced the biggest loss of production, including Lithuania, Latvia, Estonia, Finland, Hungary and Poland. Similar to Mardones [2023], we use multi-sectoral models to estimate the direct and indirect economic effects of stopping exports to Russia from Spain and Italy. However, instead of using a hypothetical scenario where Russia disappears, we conducted a simulation that calculates the impact on demand by just stopping exports to Russia for each country. This approach provides an immediate overview of the current situation and can be useful for policymakers in defining appropriate policies for exporting.

In multisectoral models, the economic structure of each different country determines the magnitude of the indirect effects and for this reason, we perform the analysis for two different Mediterranean countries.

In conclusion, the deterioration of the relationship between Russia and the EU has had significant economic consequences, particularly for individual EU member states that are more heavily involved in trade with Russia and dependent on agri-food exports. The imposition of sanctions and reciprocal bans has led to losses in specific sectors, including agriculture, and had a negative impact on the incomes of millions of people.

The impact on the overall economy is complex and heavily influenced by sectoral factors and national repercussions. ¶{p. 98}

Despite the economic costs, trade relations between Russia and the EU continued until the military escalation in Ukraine in 2022. As demonstrated by recent studies, multisectoral models can provide insight into the direct and indirect economic effects of trade disruption with Russia, which can help policymakers make informed decisions in the future.

Multisectoral models, and in particular, the input-ouput model originated in the early work of the Nobel Prize-Winner Leontief. The input-output table (IOT) shows the productive intersectoral relations of an economy in a particular moment in time, usually a year. These intersectoral interdependencies can be expressed as a system of equations that satisfies the final demand of an economy. Using matrix notations, we can express this model as [Miller and Blair 2009]:

where x represents the production of a country or region, and can be calculated based on the final demand f and the intermediate inputs requirement from other sectors ${\left[I-A\right]}^{-1}$ which allows the indirect effects to be calculated. Thus, matrix A is composed of technical coefficients aij representing what sector i needs to produce a unit of product of sector j.

Using this model we calculate a demand effect, in this case a decrease in exports, by changing f. In order to estimate this model, we use the Smart-TIO which automatically calculates direct and indirect impacts based on the input-output model [3] .

Several sectors may be affected by the closure of the Russian market and we need to identify the weight of the loss for each of the sectors to understand the share that should be reduced in our model to estimate the direct and indirect effects on the Italian and Spanish economy. Thus, on the one hand, the Database Datacomex, from the Spanish Ministry of Industry, Commerce and Tourism, provides information on total exports and the exports sent from Spain to Russia in 2021 by sector. ¶{p. 99}

On the other, the Coeweb Database from Italy’s National Institute of Statistics (ISTAT) also provides information on total exports and exports sent from Italy to Russia in 2021 by sector [4] . By examining two countries, namely Spain and Italy, we can observe different responses to the shock caused by the outbreak of war and the related sanctions imposed by Western bloc countries on Russia (fig. 1). In particular, it seems that Italy has a stronger bond with Russia [5] .

In fact, Spain and Italy, two countries with comparable GDP levels (Italy’s estimated GDP for 2021 is around 1.6 trillion USD, as reported by the International Monetary Fund (IMF), while Spain’s GDP is approximately 1.5 trillion USD), exhibit notable disparities in their economic structures. Spain faces a higher unemployment rate of 15.2 per cent in contrast to Italy’s 9.7 per cent, and has a lower debt-to-GDP ratio of approximately 123 per cent, whereas Italy’ s ratio stands at around 155 per cent, according to Eurostat data from 2021.

Moreover, the manufacturing sector plays a more prominent role in Italy’s economy, contributing approximately 23 per cent to its GDP in 2020. Conversely, the manufacturing sector’s contribution to Spain’s GDP is approximately 14 per cent, based on data from the United Nations. However, both countries possess substantial service sectors, with Spain’s tourism industry being particularly crucial to its overall economic performance.

For the above reasons, the sectors that depend most on exports to Russia are completely different for Spain and Italy, as shown in figure 1: mining of non-energy products and textiles for Spain, and professional, scientific and technical activities and arts, entertainment and recreation for Italy. The correlation between sectoral export dependence on Russia between Italy and Spain is quite low at 0.15, indicating no significant correlation. When considering all sectors, including those with zero shares in both Italy and Spain, there is a small positive correlation of 0.37, which turns out to be significant.¶{p. 100}

In this section, we analyse the direct and indirect effects of a one-year suspension of exports from Italy and Spain to Russia, without considering other potential effects such as reductions of imports from Russia or increases in energy prices among others. Thus, the results will mainly be affecting exporting firms and their suppliers.