Do Sanctions Work?

by Daniel Wagner CEO of Country Risk Solutions. 08.05.2015

Economic sanctions have long been used as a foreign policy tool, sometimes perceived as the tool of choice for nations where diplomacy has failed to yield desired results. Yet as widely used as they are, and despite the fact that some sanctions may remain in place for years, they generally fail to achieve their objectives. One of the most definitive studies on the effectiveness of sanctions -- covering the period from 1915 to 2006 -- has shown that comprehensive sanctions are effective at best 30 percent of the time, and that the more comprehensive the level of sanctions, the lower their degree of success. In spite of this, sanctions remain one of the few internationally accepted means (short of military conflict) of attempting to change the behavior of national leaders.

The success of sanctions have actually had a mixed record. While they worked well in South Africa, for example, they have failed to stop Iran from pursuing its nuclear weapons program. In Russia, sanctions have certainly hurt the economy, but not nearly as much as the collapse in global oil prices, and have not resulted in a change in Russia's behavior vis-à-vis Ukraine. The ruble has basically risen in tandem with the rise in global oil prices, in spite of sanctions.

While sanctions are often intended to impact a country's leadership or elite, sometimes it has the opposite effect. For instance, in Russia, Mr. Putin's popularity has rarely been as high as it is today, and in Iran, it is the country's elite that have largely benefitted from the implementation of sanctions as a result of their ability to engage in widespread illicit trade beneath the international radar. Sanctions rarely succeed in banning products from a country, merely supporting black market trade and driving the price of those products significantly higher. Currency speculators are often the greatest beneficiaries of sanctions. By contrast, it is almost always the case that a country's poor and most vulnerable suffer the most when sanctions are imposed.

In Haiti in the 1990s, more than ten thousand Haitians tried to leave the country to get to the U.S. as a result of sanctions, and up to a quarter of a million children are estimated to have died when sanctions were imposed on Iraq during the same period. It is the unintended consequences associated with sanctions that are perhaps the greatest argument against them, yet they may receive the least amount of attention in the press.

Among the other unintended consequences of the imposition of sanctions are the knock-on effect sanctions can have on trade and investment between the impacted nations and their neighbors and business partners. The value of EU trade with Russia is 13 times that of the U.S., so while the U.S. isn't impacted greatly by the sanctions it has led against Russia, some European nations are greatly effected. While the U.S. Congress must remove sanctions against Russia in order for them not to be in force any longer, European nations must actually re-impose them, and there is growing pressure on Germany and other nations that have been hit hard by the sanctions not to renew them. The U.S. has put itself in a difficult position, as the conservative-dominated U.S. Congress are unlikely to remove the sanctions any time soon. What happens if Europe decides not to renew them?

Will sanctions against Russia ever have the desired impact? Probably not. It is unusual for sanctions to be imposed on a country with the large foreign exchange reserves, which implies that Russia has a lot more wiggle room than most countries would have under similar circumstances. That said, one study shows that financial sanctions have a lot more impact on the target country than trade sanctions. When GNP declines more than 2.5 percent as a result of sanctions, it has some impact, but after GNP declines more than 5 percent, it has a substantially negative impact on the targeted country 90 percent of the time. In Russia's case, the price of oil is likelier to be the most important determinant on whether sanctions will have a profound impact on the country's economy.

If the U.S. wanted to really take a swipe at Russia, it would cut it out of the SWIFT banking clearance system. But doing so would risk that Russia could initiate an alternative system to SWIFT with China and other countries, which could end up doing more harm than good to the U.S. Perhaps that is why the U.S. has rarely done so in the past. It did so against Iran, but one of the results was that Iran became one of the most self-sufficient countries in the world.

In today's world of shifting alliances and alternative currency arrangements, sanctions face ever greater challenges at being effective. Using Russia as an example again, Mr. Putin could change the terms of its gas trade with Europe to insist that future sales be made in rubles. And while the dollar remains the reserve currency of choice, much of the world's trade is also conducted using bilateral currency swaps. The dollar may end up becoming one of several currencies used as a "basket" of trade currencies going forward, particularly if the yuan were to become fully convertible.

If regime change is an objective of sanctions, how can the West know that whatever comes next will be preferable to what it replaced? Using the example of Ian Smith, who was ultimately removed from power in Rhodesia in 1979 in large part as a result of the impact of sanctions, his long-term replacement ended up being the equally detestable Robert Mugabe, who has been in power since 1987. Who might replace Vladimir Putin, Ali Khameini or Bashar al-Assad? It is unlikely to be anyone more moderate. The West should be careful what it wishes for.

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Daniel Wagner is CEO of Country Risk Solutions and author of "Managing Country Risk", please see below for link to Amazon. For Country Risk Solutions' web site, please click here.

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