Costs and Benefits of Sanctions

“A nation that is boycotted is a nation that is in sight of surrender. Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It does not cost a life outside the nation boycotted, but it brings a pressure upon the nation which, in my judgment, no modern nation could resist.” - U.S. President Woodrow Wilson, 1919.

President Wilson was an early proponent of sanctions as an alternative to war, and he was ahead of his time. In recent decades, sanctions have become a vital tool of governments’ foreign policy. The idea behind sanctions is to restrict trade and financial flows towards or from the target nation to punish an unsolicited action or coerce compliance with some policy goals.

Unfortunately, the outcomes have often been different from what the former president envisioned. History shows that sanctions don’t work reliably and have rarely produced desired results. In the runup to World War II, boycotts and bans against Germany by the allied forces and against Italy by the League of Nations didn’t bring about their collapse. More recently, the vigorously imposed sanctions against Iraq since the 1990s delivered only limited outcomes; over 2,000 accumulated sanctions on North Korea neither impacted its trade with China, its largest trading partner, nor led to de-nuclearization.

Therefore, the effectiveness of new economic sanctions on Russia is rightly facing scrutiny. Several Russian agencies, companies and individuals close to President Putin were already facing sanctions since its annexation of Crimea in 2014. The U.S. and its allies upped the ante by imposing further punitive measures on Moscow, immediately following its invasion of Ukraine. Today, Russia is the world’s most sanctioned country.

Sanctions can cause great economic pain, and this time is no different. Western sanctions are imposing far-reaching consequences upon the Russian economy. Since April, the country’s import flows have been cut in half. Moscow is highly dependent on imported electrical and electronic equipment, with several European and American firms acting as key suppliers of these products. As a result, activity in industries like pharmaceuticals and auto manufacturing has taken a major hit from disruptions in supplies of components. The ruble tumbled in the weeks after the invasion, causing the central bank to impose capital controls and raise interest rates. As well as sanctions, several Russian banks have been removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform, in a bid to isolate Moscow from the global financial system.

Even back in the 1930s, Italy under Mussolini experienced substantial economic hardship from an embargo on arms and metals. Industrial production and exports plummeted, with prices of all commodities hitting the roof.

Western sanctions are taking a heavy toll on the Russian economy.

Chart: Most sanctioned countries & Russian trade

But sanctions can be a double-edged sword, leading to unwanted economic consequences, including for sanctioning nations. This is the first time in almost a century that a country as big as Russia has been subjected to far-reaching punitive measures. The implications were bound to be have wide-ranging ripple effects.