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The economics of sanctions

economic policy with richard grossman

By Richard S. Grossman


Russia’s seizure of Crimea from Ukraine has left its neighbors—particularly those with sizable Russian-speaking populations such as Kazakhstan, Latvia, Estonia, and what is left of Ukraine—looking over their shoulder wondering if they are next on Vladimir Putin’s list of territorial acquisitions. The seizure has also left Europe and United States looking for a coherent response.

334px-Vladimir_Putin_12015Neither the Americans nor the Europeans will go to war over Crimea. Military intervention would be costly, unpopular at home, and not necessarily successful. Unless a fellow member of the North Atlantic Treaty Organization (which includes Latvia and Estonia) were attacked by Russia, thereby requiring a military response under the terms of the NATO treaty, the West will not go to war to check Putin’s land grabs.

So far, the West’s response—aside from harsh rhetoric—has been economic, not military. Both the United States and Europe have imposed travel and financial sanctions on a handful of close associates of Putin (which have had limited effect), with promises of escalation should Russia continue on its expansionist path.

What is the historical record on sanctions? And what are the chances for success if the West does escalate?

The earliest known use of economic sanctions was Pericles’s Megarian decree, enacted in 432 BCE, in which the Athenian leader “…banished [the Megarians] both from our land and from our markets and from the sea and from the continent” (Aristophanes, The Acharnians). The results of these sanctions, according to Aristophanes, was starvation among the Megarians.

Hufbauer, Schott, Elliot, and Oegg (2008) catalogue more than 170 instances of economic sanctions between 1910 and 2000. They find that only about one third of all sanctions efforts were even partially successful, although the success depends critically on the sanction’s goal. Limited goals (e.g. the release of a political prisoner) have been successful about half of the time; more ambitious goals (e.g. disruption of a military adventure, military impairment, regime change, or democratization) are successful between a fifth and a third of the time. Of course, these figures depend crucially on a whole host of additional factors, including the cost borne by the country imposing sanctions, the resilience of the country being sanctioned, and the necessity of international cooperation for the sanctions to be fully implemented.

Despite these cautionary statistics, sanctions can sometimes be effective. According to the US Congressional Research Service, recent US sanctions reduced Iranian oil exports by 60% and led to a decline in the value of the Iranian currency by 50%, forcing Iranian leaders to accept an interim agreement with the United States and its allies in November 2013. On the other hand, US sanctions against Cuba have been in place for more than 50 years and, although having helped to impoverish the island, they have not brought about the hoped for regime change.

Current thinking on sanctions favors what are known as “targeted” or “smart” sanctions. That is, rather than embargoing an entire economy (e.g. the US embargo of Cuba), targeted sanctions aim to hit particular individuals or sectors of the economy via travel bans, asset freezes, arms embargo, etc. Russian human rights campaigner and former World Chess Champion Gary Kasparov suggested in a Wall Street Journal opinion piece that the way to get to Putin through such smart sanctions, writing:

“If the West punishes Russia with sanctions and a trade war, that might be effective eventually, but it would also be cruel to the 140 million Russians who live under Mr. Putin’s rule. And it would be unnecessary. Instead, sanction the 140 oligarchs who would dump Mr. Putin in the trash tomorrow if he cannot protect their assets abroad. Target their visas, their mansions and IPOs in London, their yachts and Swiss bank accounts. Use banks, not tanks.”

If such sanctions were technically and legally possible—and that the expansionist urge comes from Putin himself and would not be echoed by his successor—this could be the quickest and most effective way to solve the problem.

360px-Abrakupchinskaya_oil_exploration_drilling_rig_in_Evenkiysky_DistrictA slower, but nonetheless sensible course is to squeeze Russia’s most important economic sector—energy. Russian energy exports in 2012 accounted for half of all government revenues. Sanctions that restrict Russia’s ability to export oil and gas would deal a devastating blow to the economy, which has already suffered from the uncertainty surrounding Russian intervention in Ukraine. By mid-March the Russian stock market was down over 10% for the year; the ruble was close to its record low against the dollar; and 10-year Russian borrowing costs were nearly 10%–more than 3% higher than those of the still crippled Greek economy—indicating that international lenders are already wary of the Russian economy.

A difficulty in targeting the Russian energy sector—aside from the widespread pain imposed on ordinary Russians–is that the Europeans are heavily dependent on it, importing nearly one third of their energy from Russia. Given the precarious position of its economy at the moment, an energy crisis is the last thing Europe needs. Although alternative energy sources not will appear overnight, old and new sources could eventually fill the gap, including greater domestic production and rethinking Germany’s plans to close its nuclear plants. Loosening export restrictions on the now-booming US natural gas industry would provide yet another alternative energy source to Europe and increase the effectiveness of sanctions. Freeing the industrialized world from dependence on dictators to fulfill their energy needs can only help the West’s long-term growth prospects and make it less susceptible to threats from rogue states.

If we are patient, squeezing Russia’s energy sector might work. In the short run, however, sanctioning the oligarchs may be the West’s best shot.

Richard S. Grossman is Professor of Economics at Wesleyan University and a Visiting Scholar at the Institute for Quantitative Social Science at Harvard University. He is the author of WRONG: Nine Economic Policy Disasters and What We Can Learn from Them and Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.

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Image credits: (1) Vladimir Putin. Russian Presidential Press and Information Office. CC BY 3.0 by kremlin.ru. (2) Abrakupchinskaya oil exploration drilling rig in Evenkiysky District. Photo by ShavPS. CC-BY-SA-3.0 via Wikimedia.

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