Sanctions, Russia, and the International System – by Dane Rowlands

There has been a lot of discussion, and sometimes confusion, about the use of sanctions against Russia because of its invasion of Ukraine. Economic sanctions have been an instrument of foreign policy for centuries, and disrupting an enemy’s international commerce is a common practice during wartime. After the First World War, the threat of sanctions imposed by the League of Nations was supposed to deter countries from using military power against one another; it did not work then, and clearly has not worked now. It is useful to consider why the threat of sanctions did not deter Russia, why they have not yet brought an end to the horrific violence in Ukraine, and what their current application means for the future.

To work, any deterrence must be credible (the target must know it will be punished in response to a transgression) and effective (the target must assess the punishment as being worse than any gain from the transgression). In this case it is likely that Russia knew it would face some form of sanctions, but probably calculated that they would not be extensive, which was their experience after annexing Crimea and its “proxy invasion” of Eastern Ukraine. The U.S., and to a lesser degree Europe, did clearly signal that extensive economic sanctions would be imposed if Russia carried through with its threat of invasion, but the details were vague. The damage of sanctions depends critically on their form, how many countries implement (or avoid implementing) them, and the dependence of the target country on international commercial relations. In addition, sanctions are a two-edged sword in that they damage the economies of both the target and the countries that impose them. The Russian government may well have calculated that many important countries (China, India) would not join in the sanctions, and that European dependence on Russian hydrocarbons would dilute the extent of the economic punishment. A quick win in Ukraine may well have discouraged Russia’s opponents from implementing severe and enduring sanctions, discounting their expected impact even further. The failure to deter Russia does not mean that sanctions, or their logic, are faulty. It just means that in this instance the threat was, correctly or not, deemed insufficient.

The list of general economic sanctions against Russia, and those targeting specific individuals, has been extensive. Why have they not brought the Russian economy to its knees and stopped the war? Economic sanctions work according to a cycle. The initial impact is often muted, as the target country uses up inventories and financial reserves to avoid disruption. As these disappear, and substitute sources become harder to find, firms and consumers are forced to adjust their behaviour and the pain increases. While adaptation can take some time, eventually domestic producers can shift activity to fill in some of the space left by foreign suppliers, leading to a respite. If the target economy is dependent on key foreign inputs that are harder to replace, however, there may well be a further economic decline as missing parts or other production inputs become scarce. Finally, if sanctions are imposed for an extended period (such as in Iran) the economy adjusts further to compensate for the loss of traditional suppliers and markets, reducing the effectiveness of the punishment. Russia is probably somewhere in the middle of this cycle, running out of some key inputs and seeking alternatives. Calculating these costs ex ante, though, is incredibly challenging, as it entails knowing the level of inventories, the dependence on key inputs, and the availability of substitutes.

The financial aspect of the sanctions caused considerable confusion in so far as the initial collapse of the Russian currency was eventually reversed, despite the lack of access to its foreign reserves. Part of the reversal was due to capital controls that limited the amount of foreign currency Russians could buy with rubles. Ultimately, however, Russia was in an advantageous position of having a large current account surplus due to a high volume of hydrocarbon exports that were only modestly affected by sanctions. As prices for this commodity increased, and as imports of foreign goods declined under sanctions, Russia’s external position remained strong, as has its hydrocarbon-based government budget. If the volume of exports collapses quicker than the price rises, Russia’s financial situation will soon deteriorate again.

The current tragedy also highlights serious deficiencies in the international system, such as it is. One of the key problems with economic sanctions as a tool has been the ad hoc nature of sanctions regimes, making it difficult to predict which countries will participate, how extensive the sanctions will be, and how long they will be maintained. As Ukraine’s allies have attempted to ratchet up the economic pressure on the Putin regime, sanctions have broken new, and potentially troubling, ground. Seizing sovereign assets, or those of foreign citizens, is understandably popular in states that impose sanctions, but may need to be more clearly defined and circumscribed by courts. More problematic, however, is whether the imposition of sanctions by large groups of countries on primary targets (and possibly secondary states that refuse to participate) will hasten the fracturing of the global economy and community into adversarial blocs.

Until recently, and due to humanitarian concerns, broad-based economic sanctions were eschewed in favour of targeted ones. Not all the catastrophic effects of war, however, are due to sanctions. The threat of an imminent global food crisis caused by the invasion of Ukraine is a reminder of how tragic the consequences of war can be for the countries involved, as well as for non-participants, and especially for the poor. There is no upside to the invasion of Ukraine, but it would be beneficial to learn from its horrors to reconsider the place sanctions should have in the international system, the rules that govern their use, and how to protect vulnerable people from the violence and disruption of war.

~ Dane Rowlands

Professor, Norman Patterson School of International Affairs, Carleton University