Home Finance Have Global Economic Sanctions Reached a Tipping Point?

Have Global Economic Sanctions Reached a Tipping Point?

by internationalbanker

By John Manning, International Banker


Recent history involving the world’s great powers has demonstrated that while the war on the battlefield is certainly the most viscerally brutal for nations to endure, it is not the only form of conflict proving effective today. The information war, for example, also profoundly impacts the world through propaganda and how media outlets in various countries transmit information to their respective citizens. The tech war also sees nations vying for global primacy, out-competing each other in innovation and digitalisation. But arguably, the economic war currently being waged more intensively than at any point in recent years—and more specifically, the use of economic sanctions, particularly by the Western powers led by the United States—has been the most consequential for the world.

Given the events of the last 18 months, have the impacts of measures once deemed effectively severe been blunted? On the surface, it may not seem that economic sanctions can have as much impact on the world as full-blown military conflicts. But evidence suggests that because of the damage they inflict on ordinary civilians, the truth is quite the opposite. And given that sanctions typically achieve their aims through a variety of channels—including travel bans, asset freezes, arms embargoes, capital restraints, foreign-aid reductions and trade restrictions—economies in the crosshairs of these penalties can end up being comprehensively debilitated, not to mention thoroughly isolated from the global economic community.

Among the most impactful measures faced by such economies are the harsh restrictions they face when doing business with other countries (with those countries facing strict penalties from Western powers for not “holding the line” on the sanctions policy), as well as the limitations placed on governments’ access to foreign exchange. Such constraints usually mean that vital imports are much tougher to obtain, including food, fuel and medicine, while declines in aggregate income typically require domestic government spending to be slashed on public services, including education, health, food assistance and other forms of poverty-alleviation support.

Indeed, several vulnerable recipient nations have struggled under the hugely oppressive weight of such punishment with poverty, starvation and even death. “The magnitude of the harm is dramatic. One study estimated that sanctions would lead to a decline in a state’s gross domestic product by as much as 26 per cent—equivalent to that in the Great Depression,” Francisco R. Rodríguez, professor at the Josef Korbel School of International Studies, University of Denver, noted in an article in the Financial Times. “Another found falls in female life expectancy of 1.4 years—similar to the estimated effect on global mortality of the pandemic. In many cases, the harm is similar to that suffered during armed conflicts, making economic sanctions possibly the deadliest weapon used by western powers.”

A May 4 report, “The Human Consequences of Economic Sanctions,” conducted by Rodríguez for the Center for Economic and Policy Research (CEPR), found that more than one in four countries today are subject to sanctions by the United Nations (UN) or Western governments and that 29 percent of global GDP (gross domestic product) is produced in sanctioned countries, up from only 4 percent in the 1960s. Having reviewed 32 studies that assessed the impacts of economic sanctions on living standards, the report also found significant declines in living standards and widespread deaths in sanctions-targeted countries, including Afghanistan, Iran and Venezuela.

Indeed, Venezuela provides arguably the clearest example of the sheer devastation inflicted by sanctions in recent years. Known for having the world’s largest crude-oil reserves, the South American nation has been the subject of sanctions for well over a decade, with those measures being successively intensified since 2014. An earlier CEPR study by Mark Weisbrot, the research institute’s co-director, and Jeffrey D. Sachs, professor of economics and director of the Center for Sustainable Development at Columbia University, found that sanctions on Venezuela had reduced the public’s caloric intake, increased disease and mortality (for adults, children and infants), and displaced millions of Venezuelans who fled the country as a result of the worsening economic depression and hyperinflation.

“They exacerbated Venezuela’s economic crisis and made it nearly impossible to stabilize the economy, contributing further to excess deaths. All of these impacts disproportionately harmed the poorest and most vulnerable Venezuelans,” the report published in April 2019 found. “We find that the sanctions have inflicted, and increasingly inflict, very serious harm to human life and health, including an estimated more than 40,000 deaths from 2017–2018; and that these sanctions would fit the definition of collective punishment of the civilian population as described in both the Geneva and Hague international conventions, to which the US is a signatory. They are also illegal under international law and treaties which the US has signed, and would appear to violate US law as well.”

But while such abject devastation is hugely concerning, sanctions are increasingly being questioned over whether they possess the same effectiveness in weakening target-nation economies as they once did. Having largely failed to achieve their aims concerning Russia, one might be inclined to believe that this is now the case, especially given that Moscow remains far from being economically or financially isolated on the global stage.

Following its invasion of Ukraine and annexation of the Donetsk, Luhansk, Zaporizhzhia and Kherson regions in the eastern part of the country, the United States and the European Union (EU) imposed unprecedented and wide-ranging sanctions against Russia, thus adding to existing measures in place since 2014 following Moscow’s decision to annex Crimea. “The aim of the economic sanctions is to impose severe consequences on Russia for its actions and to effectively thwart Russian abilities to continue the aggression,” the European Council of the EU explained. “The individual sanctions target people responsible for supporting, financing or implementing actions which undermine the territorial integrity, sovereignty and independence of Ukraine or who benefit from these actions.”

But with the EU having most recently approved an 11th package of economic sanctions against Russia on June 23, such punitive measures do not appear to be having the desired effects. Indeed, even glancing at the headline economic figures underlines that Russia’s economy remains relatively robust in the face of this economic onslaught. Although the country reported annual negative GDP growth for the first quarter at -1.8 percent, growth rates have continued on a decisively upward trend, with the more recent months of April and May registering strongly positive growth rates of 3.3 percent and 5.4 percent, respectively. Inflation in Russia, meanwhile, has slowed dramatically to just 2.3 percent and 2.5 percent for the same months, having shot up to 17.8 percent in April 2022. And with the Russian central bank (Bank of Russia) having kept its benchmark interest rate unchanged at 7.5 percent for the sixth consecutive occasion during its June meeting, few signs are more convincing that the economy has achieved sufficient stability.

Part of this resilience can be explained by the ineffective nature of the sanctions themselves, with solutions to consistently evade and circumvent them still in play, even from the same nations that imposed the measures in the first place. A May 31 report published by Norway-based risk consultancy Corisk focused on the total estimated Western circumventions of sanctions against Russia. “Through a combination of top-down and bottom-up methodological approaches, we estimate the indirect trade of 16 Western countries with Russia at 8 billion Euros (6-9 bn) of indirect exports via third countries, and the indirect imports at 6 billion Euros via third countries in 2022,” the report found. “Germany and Lithuania present the largest indirect exports to Russia, while Germany and France present the largest indirect imports from Russia.”

As far as attempts to throttle Russia’s thriving fuel-export business are concerned, moreover, the implemented sanctions have been severely blunted by the dramatic ramp-up of sales to China and India, both of which have welcomed with open arms those Russian exports rejected by the West. “European countries, previously the largest buyers, now play a negligible role and have been replaced almost entirely by China and India, with the latter appearing as the key ‘new’ buyer over the past twelve months,” an April report from the Kyiv School of Economics found. “In 2023 Q1, the two countries together accounted for close to 75% of total Russian crude oil exports.” Indeed, India’s becoming the largest supplier of refined fuels combined with its refiners buying record amounts of crude oil from Russia puts the notion of sanctions as an effective tool of foreign policy and economic warfare under the microscope.

Of course, not all countries suffering under the weight of sanctions have the luxury of a voluminous fuel business on which to fall back, as is the case with Russia. Nonetheless, as the West’s economic hegemony over the world continues to wane in the face of the rising economic might of China, India and other Eastern powers, vulnerable countries now have increasing trading options to leverage to build crucial defence lines against such severe economic warfare.


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