The unintended consequences of unconstrained economic sanctions

Author: Editorial Board, ANU

It’s now been a year since Russia invaded Ukraine. In response to an unprovoked act of aggression, Western countries imposed a sweeping set of sanctions designed to force the Russian army back behind its own borders. These included disconnecting Russian banks from the SWIFT interbank communication system, export controls on technologically advanced goods and the freezing of Russian reserves held in overseas central banks. The sanctions provoked a massive devaluation of the ruble, requiring drastic action from Russian monetary authorities that inflicted deep economic pain on the country.

Hopes were high in the West that the pain would deepen over time, eventually making the invasion politically and economically unsustainable for Moscow. This proved an overly ambitious goal. Some sanctions, particularly those targeting Russian military procurement, probably did give the Ukrainian army the breathing space it needed to mount its effective counter-offensives in Kharkiv and Kherson.

But Russia’s substantial weight in the supply of oil and gas, particularly to Europe, has allowed it to cushion the economic blow, preventing a complete collapse of the currency and allowing a large fiscal expansion that has enabled Moscow to reorient the economy toward a war footing. It has found ways around Western sanctions with the help of countries like China and Turkey which have acted as conduits for Russia to access technology which it can no longer import directly from sources like the United States or Taiwan. Europe, meanwhile, is weaning itself off its dependence on Russian gas through a big expansion of LNG import capacity as well as investing in renewable energy and efficiency measures.

The most important lesson to draw from this messy picture is one that economists stress and strategists forget at their peril: any attempt to use economic tools for geostrategic purposes tends to result in unexpected and unpredictable consequences. Shutting Russia out of global financial markets provoked Moscow into upending world energy and food markets, causing pain to consumers and industry across the world, but particularly in low-income countries. Russia’s attempt to squeeze Europe by restricting gas exports inflicted short-term pain but has encouraged Brussels to intensify the shift away from carbon-intensive fossil fuels, a move which will seriously dampen demand for Russia’s exports in the medium term.

This is a lesson that applies not just to Western sanctions. China’s attempts to use its trade and investment relationships with countries like Australia, South Korea and Lithuania to extract geopolitical concessions have not only largely been unsuccessful, but have also greatly damaged the country’s reputation as a reliable trading partner and hastened efforts, private and public, to diversify supply chains away from China. Whenever a country attempts to use the leverage it has, it risks squandering what gave it that leverage in the first place.

The effectiveness of sanctions as a meaningful deterrent depend largely on two things: the extent of well-governed global economic interdependence, and the extent to which leaders feel the economic prosperity of their own nation is inextricably bound up within that system. States that have flouted the international order tend either to be small and autarkic, like North Korea, or large and confident that they can rely on their own resources, like Russia, China and the United States. For smaller, open economies, the threat of being excluded from global trade and financial flows will weigh much more heavily. For these countries, most especially for trade-reliant middle powers in Asia, the challenge is to preserve the open order upon which their economic success depends as well as to convince increasingly protectionist major powers like the United States and China that in the long run large countries have a lot to lose from a general breakdown of the liberal economic order and the normalisation of coercion as a principle of global economic interactions.

In this week’s lead article, Ken Heydon offers a sober look at the Russian sanctions one year on. He argues that it is crucial that any effort to use sanctions — whether to dissuade the Putin regime from continuing its war of aggression in Ukraine or to compel China to address human rights abuses in Xinjiang — incorporate a mix of sticks and carrots. The carrots, in Russia’s case, must involve a clear path towards reintegration in the world economy, conditional on an end to aggression.

Sanctions have always been considered a permissible tool of statecraft to punish violations of the peace. But there is a danger in allowing them to expand into a general acceptance of coercion in global economic affairs. As Heydon points out: ‘Aside from fostering peace and human rights, sanctions should also avoid further dismantling the globalisation that has underpinned three decades of international growth and development. The need for the carrots of classic diplomacy to help resolve the paradox of sanctions has never been more pressing.’

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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