Inside the debate over the effectiveness of U.S. sanctions on Russia.
Last week, two experts on sanctions—Agathe Demarais and Nicholas Mulder—debated the effectiveness of U.S. economic pressure on Russia with FP’s Ravi Agrawal. On the one hand, both agreed, U.S. sanctions have weakened the Russian economy; on the other, it’s become clear that they are not a “magic tool.” As the two discussed, assessing whether sanctions are working requires understanding what they were meant to accomplish in the first place.
This edition of Flash Points dives into, and contextualizes, the sanctions debate, exploring the history of Washington’s reliance on sanctions, what their impact on Moscow has been, and how to make sanctions more effective.—Chloe Hadavas.
Over the course of an era of American dominance, Washington has built an unprecedented ability to inflict pain on what it deems to be rogue actors in the international system. The U.S. toolkit of sanctions and second- and third-order measures can cut off most countries—or companies—from global commerce and trade. This unparalleled strength, in tandem with the efforts of a network of allies, can have profound effects on geopolitics and the behavior of states. But conversely, if the United States overuses its ability to sanction other countries, then the effectiveness of those measures can erode; some large economies can seek to create alternatives to Western financial systems and to the U.S. dollar itself.
Over the last year, the United States has launched dynamic and escalating sanctions to hurt Russian President Vladimir Putin and his allies. The moves haven’t prevented Putin from waging war in Ukraine, but they have severely hurt the Russian economy. Even so, according to a forecast from the International Monetary Fund (IMF), Russia’s economy is set to expand by 0.3 percent in 2023, even as a country like the United Kingdom sees its GDP shrink. Does this mean sanctions haven’t worked?
As part of FP Live, the magazine’s forum for live journalism, FP spoke with two experts on sanctions: Agathe Demarais, global forecasting director at the Economist Intelligence Unit and author of Backfire: How Sanctions Reshape the World Against U.S. Interests; and Nicholas Mulder, an assistant professor of history at Cornell University and author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War.
Read the transcript
Foreign Policy: Nick, the IMF forecasts that Russia will grow by 0.3 percent this year. Sanctions were meant to have crippled the Russian economy. What happened?
Nicholas Mulder: There are a number of things that happened, but one place to start would be Russia’s policy response. Countries under sanctions are not passive. The West has learned to fight financial crises rather well, and other countries have taken on that toolbox and managed to avoid a big financial crisis.
On top of that, in a year of general economic turmoil recovering from the pandemic, Russia’s position as a big commodity exporter gave it a certain amount of leverage over other countries. It’s been able to readjust. It’s had more trade than we expected, and it’s found backchannels for that trade. Those things together account for much of why the sanctions have worked less efficiently than expected.
FP: Agathe, in December 2022, you argued in FP that sanctions on Russia were indeed working. Do you still think that’s true?
Agathe Demarais: Absolutely. Sanctions on Russia are working, but there has been a lot of confusion about the effectiveness of sanctions against Russia because the West’s objectives haven’t been stated very clearly.
The sanctions were never about Russia’s economic collapse. Russia is the ninth-largest economy in the world. I don’t think it was about regime change. We know from history that this never works. I also don’t think that Western countries thought that sanctions would be a magic tool that would change Putin’s thinking from one day to another.
The point of sanctions was twofold. The first was to send a diplomatic message of solidarity and unity with Ukraine and also a message of trans-Atlantic collaboration to the Kremlin. And from that perspective, as I wrote in Foreign Policy, mission accomplished. The second objective, which I think will be a slow, gradual, cumulative objective, is about making it more difficult for Russia to wage war in Ukraine economically, financially, and technologically.
Just to add to your point about Russia recording growth this year, the IMF forecast is an outlier. It is much more positive than other forecasts. It is worth keeping in mind that this comes after a recession last year in 2022, and even if there is stagnation this year, Russia’s GDP will not go back to its prewar level before at least 2027.
FP: Nick, sanctions aren’t stopping Putin from attacking Ukraine. Were they designed primarily for a longer-term impact?
NM: It’s clear that this is becoming a war of attrition, going into its second year, and the sanctions effort will be a long-term campaign of degradation. If the objective is to make things more difficult for Russia, then obviously the sanctions have worked. But I think it’s fair to ask a bit more of them. There were lots of claims made about how this would present insurmountable obstacles within a few months, and in that sense, now we’ve seen adaptation on both sides. That muddied the waters a little bit.
We can provide a more nuanced picture by asking not whether sanctions work or not but what are they doing and what are they not doing. Both Agathe and I agree they are degrading the Russian economy and they are forcing difficult adjustments for the Kremlin and also some adjustments for us, such as the G-7 price cap [on crude oil]. What are they not doing? Indeed, forcing Putin to break off the invasion or cause insurmountable problems that make him stop bombarding Ukrainian cities. I think that’s a better way of disentangling what is and isn’t working.
FP: Let’s move to China. I want to focus on last year’s unprecedented sanctions, where Washington tried to restrict Beijing’s ability to access advanced semiconductors. Agathe, you’re the author of a book called Backfire, so I have to ask: Are these sanctions going to backfire?
AD: It’s too early to say. I don’t think that we know the answer, but I think it is worth asking what the consequences of a decoupling of the U.S. and Chinese economies will be. Will American companies and possibly European companies lose access to the Chinese market? This goes back to Nick’s point about the Russian economy. We shouldn’t expect China to sit idly by and say, “OK, you want to decouple or cut our access to semiconductors: No problem.” There will be policy responses. We do not know what they will be, but we can bet that Western companies could lose access to a Chinese market, which would entail a loss in revenue and possibly less expenses for research and development in the tech sector in Western countries. China would probably double down on efforts to get access to advanced semiconductor technology. Since we know that semiconductors are used in both the civilian and military sector, what would it mean if China got hold of the best semiconductors in the world, especially in light of the Taiwan question? We don’t have the answers yet, but it is important to assume that China is going to respond and think about what that means in a fragmented geopolitical landscape.
FP: Nick, are China and Russia too big to target in this way? And on China specifically, surely developing economies don’t want to be caught in a fight between America and China. So how do you think through sanctions on large-sized economies?
NM: One of the key questions with China is whether its trade partners in the rest of the world could join in sanctions that the West would impose on China or whether they would try and carve out a nonaligned or neutral position like some of them have done vis-à-vis Russia. Chinese trade with many of these countries in Latin America, Africa, and the rest of Asia is many times bigger than Russian trade, so it stands to reason that they would probably try and preserve some of their autonomy.
There are all sorts of levers that the West can use to try and inflict damage on China, particularly its reliance on the U.S. dollar, in its financial system. It’s very heavily dollar-reliant. Commercially speaking, China is probably more protected than it is financially. But there again, a lot will hinge on the policy response.
One big question I have about this embargo and the restrictions on advanced microchips is whether the gain in the short run of this decoupling will outweigh the long-run loss of deterrence. Chinese dependance on U.S. technology will probably be reduced, and will that have been worth it? I think this decision was made in the fall when it seemed like China was stuck in a zero-COVID lockdown that it couldn’t escape from. Very quickly after that, we actually saw that they were able to respond much more quickly, dropping those measures painfully, but—at the same time—then engaging in a charm offensive.
FP: Agathe, since Nick brought it up, will an overuse of sanctions lead to countries looking for alternatives to the dollar?
AD: There are three main ways for countries to shield themselves from sanctions, to vaccinate their economies. The first is de-dollarization. It’s a very clear trend. The U.S. dollar is still used for about 40 percent of global trade. The other side of the coin is that the majority of global trade is conducted not in U.S. dollars. Since 2020, Russia and China conduct most of their bilateral trade in Russian rubles and in Chinese renminbi. And that’s obviously not a random thing. It’s a clear strategy. There’s been a lot of discussion about the freeze of the foreign exchange reserves of Russia’s central bank, which had about the equivalent of $640 billion in reserves. But only half of this was frozen because the other half was denominated in foreign currencies or in gold.
The second tool for shielding their economies from sanctions is alternatives to SWIFT [the Society for Worldwide Interbank Financial Telecommunications]. SWIFT is the global rolodex of banks connecting all banks to each other, and China has an alternative called CIPS [Cross-Border Interbank Payment System]. If China were to be cut up from SWIFT from one day to another, it would have a plan B. There is also an offensive capability from the Chinese perspective because one day, likely by 2040, China will become the world’s largest economy, and it could say, “To do business with us, you need to use our financial system.” It could cut off entire countries from the Chinese market.
Finally, the third tool is about central bank digital currencies. China leads the way here. Three hundred million Chinese already use such a currency that is completely immune to U.S. sanctions and obviously gives the Chinese leadership some surveillance capability.
FP: Nick, we’ve focused so far on sanctions measures on large economies. I’m curious how all of these tools are different when you’re looking at a smaller economy. Think of Myanmar back when there were sanctions on Myanmar, or North Korea today, or even a mid-sized economy such as Iran. Are those more effective than sanctions on a big-sized economy?
NM: They can definitely do a lot of damage. One issue that doesn’t exist with these smaller economies is creating a very large international sanctions coalition because it is simply much easier to get a large part of the international community to agree on putting sanctions on a small economy like North Korea or Venezuela. The spillover effects for the rest of the world are not that significant, and as a result, that part of the equation is easier.
It doesn’t necessarily mean in the long run, politically speaking, we get the kind of policy changes that we want to see, like the end of nuclear proliferation or improvements in the human rights situation.
There are also other resources. Not all of them are economic. A lot of these regimes also manage to use ideology and their own historical experiences as a rallying point for popular resistance.
The other thing that you could point to is the sanctions evasion technology. It might be small on a financial and military scale, but it’s clear now that a growing number of countries under sanctions are exchanging and sharing sanctions evasion techniques. No one would have predicted a year ago that most Russian oil exports would be transported by a ghost fleet similar to that of Venezuela and Iran—and yet, that’s happened very quickly. So there are still links that these economies have to larger trading partners.
FP: Agathe, I’m curious about the role of the global south in this as the world becomes more multipolar. How does this change the way in which Washington thinks through sanctions?
AD: This is the big question. I think that there is a lot of resentment in the global south against former colonial powers, mainly European countries, such as France and the United Kingdom. This narrative against former colonial powers now has another element, and it is resentment against sanctions. What that shows is that Russian disinformation campaigns are working in full steam. For instance, Russian propaganda is making the claim that sanctions are fueling food insecurity in developing countries. This is technically not true. There are no sanctions preventing Russia and Ukraine to export grains. But this narrative is gaining traction. And I think what this shows is that there is a lack of knowledge about what sanctions are, what they really do, how they really work.
I would expect in the coming years and decades that the battle to win hearts and minds in a multipolar, fragmented world will be about winning these hearts and minds in the global south because we have two blocks already being formed. We have a Western block; that is very clear. We have another block including China and Russia and other so-called rogue countries. But where will the global south be? About two-thirds of the global population live in countries that are either neutral or Russia-leaning when it comes to Ukraine. There will be a lot of work for the United States and other Western countries to regain hearts and minds in the global south.
FP: Nick, if sanctions produce all these second-order problems, then what can a country or a consortium of countries do when another country flouts international law and goes rogue? In other words, is there anything else in the toolbox?
NM: I would say that there is a whole spectrum of means that a country like the United States can employ, but we have to take a step back and think about what the full range of tools in our toolbox actually is—all the way from diplomacy to threats of military action. Of course, if you can solve anything without military action, it’s always much better. But the ideal sanctions—and when they do really work—are sanctions that are powerful enough to not be merely symbolic but not so powerful as to needlessly antagonize and force a kind of fortress and entrenchment response in the targets. And that means that the sanctions must go hand in hand with some set of demands that could reasonably be acceded to. And that seems to me to be the best way of making sanctions work.
There are also positive means, and I think right now, for example, that’s helping Ukraine. We do much more to help Ukraine just by focusing on the economic restructuring of Ukraine in the long run because it has lost a third of its GDP. It’s lost a third of its economy. So thinking about actually how we can help our allies is sometimes even more important than how we can restrain the aggressors also.
The final thing I would say is that it demands a balance between carrying a big stick and continuing to show proof of engagement with China. From a deterrence point of view, if you think about what withholds China from invading Taiwan, I’m not sure that decoupling is actually the right way to go when it comes to preventing a China-Taiwan conflict. It may, in fact, be best to militarily prepare and militarily counterbalance China while continuing maximal economic engagement to keep China as dependent on the West as possible. So, policymakers need to be thinking about the full range of options—and not only about technical sanctions enforcement.
