What do sanctions help achieve? An expert explains

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Jonathan Hackenbroich, Policy Fellow, European Council on Foreign Relations (ECFR), Abhinav Chugh, Content and Partnerships Lead, Strategic Intelligence, World Economic Forum

• Economic sanctions imposed against Russia for invading Ukraine are the most comprehensive and coordinated actions taken against a major power since World War II.
• Multinational companies across all sectors are pulling out of the country, taking their products, services, and jobs with them.
• Russian citizens are seeing their purchasing power and livelihoods sharply eroded because of the depreciation of the Russian ruble.

Economic sanctions have been used as a tool of war for centuries. In 17th- and 18th-century Europe, economic sanctions were frequently implemented by countries at war. They included prohibitions on trade, the closure of ports against enemies, and bans on trade in certain commodities. Economic sanctions continue to play an important role in the response to terrorism, nuclear proliferation, military conflicts, and other foreign policy crises.

The primary objective of imposing sanctions is to deter bad behaviour, enforcing economic punishment on the targeted country, and to force rehabilitation, or changed behaviour by that country. However, the success of sanctions depends on their enforcement and effectiveness. Sanction efforts are most effective when coordinated and implemented multilaterally with allies, and poor design and implementation of sanctions policies often leads to them falling short of the desired effects.

After Russia initially invaded Ukraine in February 2014, the United States imposed a series of sanctions designed to punish and weaken the Russian economy through restrictions on trade and finance. However, these sanctions failed to deter further aggression and we’re now witnessing a worsening conflict. Given these circumstances, we’re now observing the most severe and coordinated sanctions effort led by the United States and the European Union to deter further Russian military advances.

In the long term, all these measures will have dire consequences for the Russian economy. We asked Jonathan Hackenbroich, Policy Fellow, European Council on Foreign Relations to provide us with some context relating to the historic use of sanctions, insights into how the current sanctions policies are being shaped by geopolitical movements of the past decades, and what various leaders and policymakers need to take into consideration as they work on efforts to absorb the economic aftershocks of sanctions.

The legitimization of sanctions as an economic weapon

How have sanctions as an economic weapon come to be seen as an alternative to military action?

Jonathan: Economic sanctions have been a tool of statecraft, alongside military tools, for some time. But the world has entered a new phase of globalization characterized by the increasing use of economic tools for geopolitical purposes (or geo-economics) and systemic rivalry. We may see proxy wars and indirect military confrontation, but the relations between the different key powers will be shaped by economic warfare first and foremost. This is chiefly because these powers will try to avoid direct confrontation to fend off the use of nuclear weapons and because they can more easily use asymmetric dependencies in economics – for example access to US financial markets – to pressure the other.

We may see proxy wars and indirect military confrontation, but the relations between the different key powers will be shaped by economic warfare first and foremost. —Jonathan Hackenbroich @j_hackenbroich @ecfr

We can see precisely this preference for economic tools to avoid nuclear war play out currently in most great powers’ relations with Russia over its aggressions in Ukraine. In economic warfare, tools include everything from positive economic instruments, such as trade deals, to coercive ones, such as curbs on imports, formal sanctions, and informal sanctions (including so-called “popular boycotts”) – from investments in strategic competitiveness to regulations designed to change company behaviour.

Were economic sanctions successful in the 20^th century? What were some of the false assumptions relating to sanctions?

Economic sanctions can only be one tool in the toolbox for enforcing global peace. While they have imposed great economic pain in the past, they have been more unsuccessful than successful in achieving their political goal. The key determinant of sanctions’ success is how the sanctions target (in this case Russia) versus the cost of changing its behaviour (withdrawal from Ukraine) compared to the economic cost imposed (that is disconnection from international financial markets).

Sanctions on Iran were successful in bringing the country back to the negotiating table – and indeed to agree to the Iran nuclear accord – when the Obama administration clarified the sanctions goal: it stated it was not regime change (something Tehran would have always considered to be more costly than sanctions pain), but to persuade Iran to refrain from building a nuclear weapon.

In the past, there were instances when sanctions or the threat thereof, were successful in changing the target’s behaviour: when the League of Nations threatened sanctions against Yugoslavia under Article 16 in 1921 to keep it from seizing land from Albania, for instance, Yugoslavia did not do so. There are other examples, especially when sanctions goals were not overly ambitious. But a prominent one might be the end of South Africa’s Apartheid regime, where sanctions had an important role in achieving success.

The impact of sanctions on global governance

What has shaped the new dynamics of economic sanctions in recent times?

The US war on terror in the 2000s revolutionized sanctions policy. The US used its centrality in the world’s financial system to coax banks around the world to refrain from facilitating terrorist financing, close down accounts and freeze assets that Al Quaeda could no longer access for its operations.

Targeted sanctions became much more central to sanctions policy after the crippling sanctions on Iraq during the 1990s, which primarily had the effect that the Iraqi people suffered, but did not succeed in fundamentally changing the calculations of the Iraqi regime. Donald Trump’s unilateral policies of maximum pressure failed in changing Iran’s or Venezuela’s policies, even though they brought back comprehensive sanctions.

The latest Russia sanctions now are a combination of targeted measures against oligarchs, massive financial sanctions and longer term trade sanctions, put in place by a broad coalition of many key countries of the international economic system.

What could be the possible consequences of the current global alignment on economic sanctions against Russia? Could this lead to “expansionary autarky”?

An increasing share of world trade will become power-based rather than rules-based. This is the more important trend. A country like Russia will have to deal with the difficulties that come with disconnection from large parts of the international financial system and rapid, and broad decoupling.

China is, of course, closely watching the West’s sanctions playbook, and one lesson is that US power and control over the world economy’s key chokepoints remains unparalleled. But using the same playbook on China would be extremely difficult for the West. Europe’s energy dependence has shown the continent can be vulnerable. The key question might be how far-reaching the lessons will be that Europe draws from this.

An increasing share of world trade will be power-based, not rules-based anymore. —Jonathan Hackenbroich @j_hackenbroich @ecfr

Navigating a global economic reconfiguration

What is the role that developing economies play when such geo-economic reconfiguration takes place? What can they do to reduce the economic fall-out from sanctions?

Developing economies are much more concerned by shortages of essential goods, even at a time when we primarily discuss Europe’s dependence on Russia’s energy. It is in developing countries that we will see, and are already starting to see, prohibitively high food prices and shortages which impact their populations most.

Those that will cope best tend to have best networks for economic diplomacy and have the ability to substitute more imports locally. But it will be very difficult for some. More generally, developing countries may have to cope with the (out-)flow of capital into safe havens in developed economies, and it is possible they stand less of a chance to attract parts of global supply chains and production, as the world’s economic hubs care more about security of supply chains than the highest degrees of efficiency.

But the picture tends to be more complex than that overall. Some of them – especially those geographically or value-wise close to certain developed economies – might benefit from near-shoring efforts as the global trade order becomes more polarized. And if (mostly partial, but at times more comprehensive) decoupling advances, especially if the world’s big markets become more difficult for each other’s companies, different players of the so-called developed world may turn to parts of the developing world much more. We’re already seeing that many countries in Africa are hedging their bets when they abstained in the UN GA vote over Ukraine.

What kind of measures would policy makers and private corporations need to undertake in the medium-term when the global economy starts to move towards correction after taking a hit from the economic damage of sanctions?

Much is still in flux, and depends on how the current imposition of sanctions and the current war play out. It is safe to say that many companies need much greater geopolitical expertise and will have to factor in geopolitical risk to a much greater degree in their investment and trade choices.

This is a particular challenge for SMEs, but even bigger corporations may need more political competence. There will also be a need for permanent geo-economic dialogue between policymakers and private corporations. The EU, for instance, has put in place its public-private Industrial Forum aiming to ensure the EU receives the information from companies it needs for effective implementation of the digital and green transitions. But it lacks such a format for the third big change the world is undergoing – that is the geopolitical one.

In general, state policies and corporate policies will be more intertwined in a world in which geopolitics and trade are much more intertwined. Both sides will have to develop innovative forms of dealing with a trade world that will be more split into power-based and rules-based, and more polarized between democracies and autocracies, as well as many countries that will try to hedge between these two worlds.