This paper uses a theoretical model to understand the long-term consequences of sustained trade sanctions of the scale imposed on Russia after the full-scale invasion of Ukraine in 2022. When capital is allowed to adjust, long-run consumption declines are larger, 1.4 times larger for Russia and 2.2 times larger for Eastern Europe, against the intuition that long-run effects are milder than short-run effects due to greater adjustment opportunities. The reason is that for capital, adjustment opportunities amplify, rather than dampen, the initial effects. The losses are largest for Russia and Eastern Europe, and milder for the United States and other Western countries. Neutral regions like China and the rest of the world experience small gains. Real consumption and gross national expenditures (GNE) move roughly in line with one another for each region, reflecting the fact that the shock does not dramatically move either the ratio of nominal investment to consumption, nor the relative price of consumption to investment goods. The shock also tends to reduce the capital stock in the directly affected regions, since the disruption in trade raises the price of investment goods relative to labor. For a standard value of trade elasticity, Russian long-run consumption falls by around 8.5%, Eastern European consumption falls by around 2%, Western countries’ consumption falls by around 0.3%, and US consumption is almost unaffected.
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