How effective are economic sanctions?

The United States, Europe and other developed economies, faced with challenging fiscal postures and weak domestic political support for engagement, are increasingly unwilling to pursue foreign policy objectives through the projection of military force.

To compensate, these powers continue to seek to project power through their influence over the global economy (including the dollar and euro) and through their control over multinational corporations (MNCs) domiciled in their countries.

Recent Western sanctions against Russia signalled the beginning of the first great-power conflict since the end of the Cold War. Their stated goal is to change Russia’s policies, though Moscow is convinced that the sanctions are aimed at replacing the existing Russian political regime and holding the country down.

The world has also seen the emergence of Western trade controls in recent years aimed at Iran, Myanmar and Venezuela. Indeed, the US and EU in recent months have come up with new forms of sanctions (e.g. the Treasury Department’s Sectoral Sanctions Identifications or “SSI” list). Increasingly, Washington policy- makers see sanctions as the drones of the future – highly targeted weapons that can be deployed to devastating effect.

The West’s use of economic levers mirrors the tactics of emerging powers with less powerful militaries. Russia has introduced sanctions towards Georgia, Moldova and Ukraine to prevent their drift to the West, while China has used sanctions against Japan and the Philippines over maritime issues.

Economic sanctions and restrictions are a prime tool of geo-economics and can span from stricter sanitary controls to a full-blown economic blockade. What matters is the size and capacity of the country being sanctioned, and the power of the sanctioning country or international coalition. These tools stand alongside economic incentives such as trade regimes, the use of export credits, tied aid and other forms of sovereign-backed finance.

Applying sanctions is usually a double-edged sword. The country applying sanctions hurts its own businesses that trade with or invest in the target country. US companies have had to stay away from Iran, German machine-builders have had to reduce their exports to Russia, and French shipyards have suffered through the freezing and potential cancellation of the sale of Mistral ships to Russia. Sanctions can also provoke counter-sanctions. In 2014, Russia retaliated against Western measures by banning food imports from the countries that had joined sanctions against Moscow.

The consequences of this trend are evolving, but they potentially include companies’ “de-globalization”. That is, as companies are increasingly forced to think of themselves as tied to their home governments, they will think twice before investing in certain markets abroad. Other consequences include changes in traditional foreign trade patterns in line with new geopolitical alignments. Faced in 2006 with the Russian wine embargo, Georgia had to look for new markets in the West, where it was headed politically. When in 2014 Russia faced Western sanctions, it accelerated its rapprochement with China, the one major power that refused to condemn its actions and shared Moscow’s opposition to US global dominance.

The outcome of these geo-economic campaigns is not a zero-sum game. The stronger economy backed by other forms of power can incur more damage on the target country than it will sustain in return, but it does not always alter the political behaviour of the government to be “punished”. Sometimes sanctions can make that behaviour even more problematic. Ironically, the true winner may be a third party that jumps into the opening: European countries in the initial phases of US-Iran sanctions; China in the case of current Western sanctions against Russia; Russia in the case of the post-Tiananmen Western weapons ban on China; Turkey in the situation when EU pressure made Russia abandon its South Stream gas pipeline project.

Politically, sanctions are most effective against friends and allies; in the case of adversaries, they can stiffen their resolve – at least in the short term. The sanctions imposed on Russia in 2014 during the crisis over Ukraine have contributed not just to a surge in Vladimir Putin’s popularity but, more importantly, to the growth of Russian patriotism and nationalism. In moments of bravado, the Kremlin even hopes that a long period of sanctions can guarantee political stability in the country for many years (although the downturn in the Russian economy might have the opposite effect).

Whether or not they achieve their objectives, sanctions have great economic impact on target countries: their technological development slows down and their populations grow poorer. This breeds popular resentment, to be sure, but “regime change” is not always the outcome. More liberal regimes, like Slobodan Milosevic’s in Serbia, may be swept away, but the harsher ones, like Saddam Hussein’s in Iraq, cannot be toppled from the inside. Western-headquartered multinational corporations, even the presumably stronger ones, lose their markets.

The (relative) “winners” of this development are the US/ EU (as long as they maintain sufficient leverage over the global economy to be able to make sanctions “bite”), and China (whose companies are often turned to, when Western firms are barred, and that is most active in supporting its companies in global markets). The “losers” are targets of Western sanctions, such as Russia and Iran, and Western- headquartered MNCs that are relatively disadvantaged, as well as, above all, the multilateral institutions designed to safeguard the free flow of trade and investment, such as the World Trade Organization (WTO), that lose credibility by appearing irrelevant.

The report, Geo-economics: Seven Challenges to Globalization, is available here. 

Authors: Karan Bhatia, Vice-President, Global Government Affairs and Policy, General Electric Company. Dmitri Trenin, Director, Carnegie Moscow Center

Image: People play hacky sack on Manezhnaya Square near the Kremlin on a sunny afternoon in Moscow March 26, 2008. REUTERS/Denis Sinyakov