The European Union and the United States, together with its allies, have been implementing several rounds of sanctions against Russia in response to Putin’s invasion of Ukraine – and additional sanctions are very likely to come. This makes Russia the most sanctioned country in history, with more than 5,000 sanctions imposed by the international community.

All sanctions against Russia aim to interfere in Putin’s decision-making process for his war in Ukraine by increasing (mainly economic) costs for it. Sanctions against Russia serve three objectives.

• First, sanctions aim to dry out Putin’s war chest by limiting revenues. This shall undermine current war actions and impede further escalation.
• Second, sanctions aim to put pressure on important supporters like oligarchs in Putin’s network – spanning numerous institutions and organisations. Pressure on these supporters has been created with both economic and personal restrictions such as asset freezes and travel bans.
• Third, sanctions aim to inform the Russian people, e.g., limiting the supply of consumer goods, that their government is involved in operations foreign countries oppose, with the hope that approval of the Russian government shrinks in the longer run.

The overarching question is whether sanctions achieve their objectives. For the time being, answering this question is impossible. However, we can assess experiences with sanctions from the past, as sanctions have been applied numerous times against various countries – including Russia. In this blog post, I provide an overview of economic costs, reasons that sanctions fail, and implications in the current case of Russia.

Economic costs for the sanctioned country – and beyond

Economic sanctions impact economic output and, thus, income and the overall wealth of a sanctioned country. Depending on the measure and its design, the magnitude can vary substantially. That said, an analysis of the impacts of UN sanctions exploiting 68 sanctioned countries between 1976 and 2012 shows a decline in GDP growth by 2.3 – 3.5 percentage points.

For comprehensive sanctions targeting nearly all economic activity of a sanctioned country, the decline was more than 5 percentage points leading to a severe recession. And it is lasting: The decline in economic activity of the sanctioned country remains for 10 years on average.

Economic sanctions hit the society of the sanctioned country. However, like many other economic policies, burden sharing is not equal. An analysis of economic sanctions imposed by the US between 1982 and 2011 shows an increase in the poverty gap, the average shortfall in income of people living below the poverty line, by 3.8 percentage points.

An explanation for this result could be that both export- and import-intensive sectors are particularly hard hit by economic sanctions employing low-skilled, marginally employed labour which is more prone to impoverishment. The increased poverty gap is observable for the first 21 years of a sanction regime. This is a subject for concern, as hitting the poorest of a sanctioned country can become a humanitarian issue, making it hard to keep up sanctions.

In a globalized world, adverse effects of economic sanctions are not limited to the sanctioned country. Lower economic activity in a sanctioned country comes with untapped business opportunities for other countries, including those imposing sanctions. These second-round effects are hard to identify but can be severe. Therefore, when choosing economic sanctions, the objective is to maximize the impact on the sanctioned country’s economy while keeping the impact on countries imposing sanctions as low as possible.

Sanctions against Russia in 2014 worked, but decreasing oil prices more

For Russia, we have recent evidence of the effects of sanctions. Many countries imposed diplomatic and economic sanctions on Russia in response to its annexation of Crimea in 2014. The sanctions included travel restrictions for 877 individuals, asset freezes, and banning trade flows with Crimea and Russia. When looking at GDP (current values in USD), it dropped by one-third from 2014 to 2015. This was particularly severe for Russia, as there was no observable effect on the US economy and only a relatively slight decline for European economies.

A major reason for the decline in the GDP was the devaluation of the rouble, which accompanied the implementation of sanctions. The devaluation effect is accounted for by the GDP adjusted for purchasing power parity and therefore reflects the actual situation of an economy better. When looking at the adjusted GDP, the decline in Russian GDP is reduced to 6 per cent.

So, was the effect on GDP caused by sanctions imposed on Russia by the European Union and its allies 6 percent? Several studies tried to answer this question. The IMF, for example, quantifies the impact of sanctions on Russian GDP at 0.2 percentage points per year. A study by BOFIT (Bank of Finland Institute for Emerging Economies) estimates a decline in Russian GDP caused by sanctions of 1.2% between 2014 and 2015.

Despite finding mixed results in terms of magnitude, the studies commonly find that the effects of the sanctions on the Russian economy were heavily outweighed by the 50% drop in oil price which occurred at the same time. Hence, the oil price drop had greater adverse effects on the Russian economy than the sanction regime, as crude oil and oil-based products make up about half of Russian exports.

Sanctions often do not achieve their objectives because of three reasons

Did the sanctions imposed on Russia after annexing Crimea in 2014 achieve their objective? Obviously not. But this is not the exception: When looking into the past, only  34% of the sanction regimes imposed on various countries were the overall objectives of sanctions at least partially met. Sanction regimes as policies to impede war show an even lower success rate of 15%. Many things can lead to the failure of sanctions. But, there are three noteworthy reasons they fail: 1) Inadequacy for the task, 2) non-intended effects offsetting the intention of sanctions, and 3) conflicts with the imposing country’s interests.

Sanctions can be inadequate for achieving a task. This is the case when the objectives of a sanction are either too elusive or too gentle to initiate binding constraints. Especially when the sanctioned country can cooperate with other countries to circumvent sanctions, the likelihood of failure is large. We can observe this circumvention, especially in Iran.

When not designed carefully, sanctions can unfold side effects leading to a more diametrical outcome than was intended. For example, if the majority of people are disproportionally affected by sanctions with no ideological support for the underlying reasoning, sanctions can unify the sanctioned country by means of government support. This has been observed for more than 60 years in Cuba.

For the Russian case, the most important reason that sanctions fail is conflicts of interest for the imposing countries. If economic costs are considered too high for the imposing country, sanctions are hard to maintain in the long run and are therefore doomed to fail.

This is what happened in the aftermath of the imposition of sanctions against Russia in 2014. As soon as they were implemented, corporate representatives and lobbyists warned about potential job losses. In the years following, business opportunities with Russia were considered to be too lucrative by the private and public sectors to leave them out.

Four implications for current sanctions against Russia

What can we learn from the current situation with Russia? First, bold sanctions, even with severe economic costs for the Russian economy, will not necessarily be successful, as the case in Russia in 2014 demonstrated. Despite the current sanction regime being substantially more harmful (recent forecasts point to a drop in Russian GDP of 15% or more), Putin probably considers economic costs unavoidable collateral damage. At least, he prepared for them by accumulating federal reserves, balancing the budget, and minimizing foreign debt.

Second, the sanctions chosen need to be adequate to fulfill the task. In particular, sanctions must be hurtful as well as binding  – such that they cannot be circumvented to be effective. For being binding, the positioning of China is crucial: Russia could circumvent trade bans by replacing import flows with Chinese ones or by engaging in the Chinese payment system CIPS to mitigate adverse effects caused by the partial exclusion from SWIFT. In another blog post coming this week, Alicia García Herrero will have a closer look at this.

Third, the unintended effects of sanctions need to be kept in mind. In particular, sanctions can lead to the opposite of the intended effect, namely additional support for Putin from his political network and the Russian people. The Russian people, especially, may promote Putin’s politics if they perceive sanctions as unfair and disproportionate. Broad economic sanctions with high costs for the Russian people might contribute to this unintended effect.

Here, the sanctioning countries need to walk a tightrope: on the one hand, they must stick to severe sanctions, maybe even tougher ones than already imposed, to have a significant impact on the Russian economy. On the other hand, they face the communications challenge of making credibly clear to the Russian people that the heavy measures are not directed against them.

Fourth, sanctions should not infringe the interests of sanctioning countries. If they do, imposed sanctions can be undermined due to missing support in execution. This conflict of interest is reinforced in the current situation because some sanctioning countries face critical dependencies on oil and gas.

Imposing an import ban on Russian oil and gas leads to adverse effects in the sanctioning countries of different magnitudes – making unified support for such actions particularly hard. This leads to a dilemma: those sanctions, which would have the biggest impact on Putin’s war chest, are politically hardly feasible for the EU27.

BIO NOTE

Thomas Schwab is Project Manager for the Europe’s Future Program at the Bertelsmann Stiftung. He applies a data-driven approach to economic analysis by employing data science and econometric methods. 

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