Economic Pressure and Sanctions: Aim for the Wallet
Economic pressure is nothing new in global politics: trade wars, sanctions, and economic diplomacy have been a cornerstone of the international system since at least the Napoleonic Wars. While the threat may not be new, economic pressure has grown in significance in the post-Cold War world, and particularly in the past decade.
This series on hybrid threats has attempted to illustrate the huge diversity of channels which states can use to compete with one another on and off the battlefield. The term ‘hybrid threats’ is a broad one, characterised as threats involving both military and non-military pressure which blur the lines between war and peace. Within this categorisation, economic coercion is perhaps the broadest of all, encompassing everything from tariffs on barley to the suspension of states from the global banking system. Following the American Congressional-Executive Commission on China, economic coercion (or pressure) is taken to mean the “threatened or actual imposition of economic costs by a state on a target with the objective of extracting a policy concession”.
This article will instead focus on the largest weapon in the economic arsenal: sanctions. In recent years, two case studies have especially highlighted the power of economic sanctions. Firstly, the comprehensive response by Western states to Russia’s February 2022 invasion of Ukraine; and secondly China’s trigger-happy approach to economic pressure for states which have even minor disagreements with Beijing. The aim here is to demonstrate how contemporary economic pressure operates, whether it works, and what to expect moving forward.
A Brief Overview of Sanctions
Broadly defined, sanctions refer to effectively any commercial penalty imposed on a state or individual. Sanctions can be divided along several axes:
Economic or political: some forms of sanctions clearly fall under the remit of economic statecraft, such as protectionist tariffs. Others are explicitly political as when sanctions are imposed due to human rights violations or to punish aggressive state behaviour. The division between economic and political sanctions has been harder to maintain in the era of hybrid threats. Strategic and economic interests increasingly go hand-in-hand, as visible in the CHIPS and Science Act which bolsters the competitiveness of American chip production for economic as well as geopolitical purposes.
Comprehensive or smart: sanctions can be sweeping across an entire state (comprehensive) or targeted to specific individuals (smart). The effectiveness of comprehensive sanctions is hotly disputed on both strategic and humanitarian grounds: civilians are often disproportionately victimised, while regime leaders have the resources to not only evade the sanctions but also to enrich themselves through smuggling operations. Smart sanctions have been more popular by policymakers recently, particularly against Russian oligarchs. Comprehensive sanctions over conflict-related goods such as banning the sales of arms is also a common response.
Trade power or node power: sanctions traditionally involve cutting trade off from the targeted state, but since the end of the Cold War there has been a rise in a different style of sanction in which states are denied access to the infrastructure on which the international financial system is built. For example, the United States controls economic ‘nodes’ such as the global reserve currency as well as the SWIFT financial messaging service. Excluding target regimes from the perks of these nodes can also be a powerful economic force.
There is considerable disagreement about just how effective sanctions are at coercing target states. Evidence suggests that comprehensive sanctions are marginally better than smart sanctions for coercive purposes, although at considerable humanitarian cost. Nevertheless, the effectiveness of sanctions in general is questionable: scholars differ in their interpretation of the data, with the success rate of sanctions varying from 34% to as low as 4%. Given the potential weakness of sanction pressure, it is not surprising that some policymakers have dismissed sanctions as a tool primarily of rhetoric: Veteran diplomat Sir Jeremy Greenstock has described how sanctions are primarily used to send a stern message to the target regime: “there is nothing else between words and military action if you want to bring pressure upon a government.” Ultimately, sanctions are rarely used in isolation and are usually part of a wider response to states’ behaviour.
To help illustrate the current global climate around sanctions, it is beneficial to turn to two recent case studies. Firstly, there are the sanctions imposed on Russia in 2022 and 2023. And secondly China, in the context of delivering sanctions against unfriendly trading partners rather than being the recipient.
Russia: An Economic Manhunt
The sanction response to Russia’s 2022 invasion of Ukraine was unprecedented. Perhaps the most radical sanction of all was the freezing of $300 billion in Russian central-bank reserves held abroad – an unheard-of tactic. Russia was also disconnected from SWIFT, the critical messaging service for the international economy. The US, UK and EU issued a flurry of smart sanctions targeting politicians, oligarchs, and pro-Kremlin propagandists. Embargoes on arms and a plethora of Russian imports were imposed, decoupling Russia from western trade outside of hydrocarbons.
Economic warfare requires economic thinking. In December 2022, G7 states implemented a price cap on Russian Urals crude oil, and then in February a cap was introduced for refined oil. The price cap was an economist’s solution to the weakness of using a standard embargo: if Western states simply refused to purchase Russian oil, non-sanction-abiding nations could easily step in as new buyers and Russia’s revenue would be unchanged while Western economies suffered in the transition away from Russian imports. Instead, the price cap prevents firms which sell Russian oil from receiving insurance on their oil tankers if oil is being sold for more than the cap permits. G7 states comprise around 90% of shipping insurance providers (the UK alone accounts for 60% of global protection and indemnity insurance). As a result, the thinking behind the cap is that Russian oil must either be sold at a discount to compensate buyers for the unavailable or more expensive insurance, or otherwise Russian oil must be sold at below cap levels to warrant access to Western insurers. Either way, the outcome would be cutting the Putin regime’s funds. States such as India which are explicitly neutral in the Russia-Ukraine War are nevertheless incentivised to follow the price cap for their own self-interest: the price cap forces Russian oil to sell for cheaper in order to gain access to tanker insurance, offering New Delhi discounted oil. As the graph below indicates, preliminary evidence suggests the price cap has had some success at cutting Russian state revenue whilst avoiding a spike in demand for Russian oil exports.
Figure 1: Russian Oil Revenue and Seaborne Export Volumes
Debate has continued around the effectiveness of the sanctions in general against Putin’s regime. It’s clear that the sanctions have been less effective than was first assumed. While the rouble initially crashed, it has since rebounded higher than pre-invasion levels, and unemployment is recorded at an all-time low. Luckily for Putin, Russia’s budget has also been boosted by high energy prices since the invasion began. However these figures have been heavily massaged by the Russian state, and much of the data is questionable: the official statistics do not include a variety of hidden forms of unemployment, and when accounted for the corrected Russian unemployment rate is comparable to the worst points of the financial chaos of the 1990s. Even if the Russian budget has been propped up by higher hydrocarbon prices, this boom is unsustainable given the regime’s revenue from sources other than oil and gas exports has dropped by 20% – a startling amount.
China: An Economic Gunslinger
Economic warfare relies on a large economic base. As China’s economy increasingly rivals the United States, the bite behind Beijing’s sanctions has grown stronger. China imposes significant tariffs, sanctions, or embargoes on trading partners who deal with Taiwan, support democratic Hong Kong, call out human rights abuses in Xinjiang, or mention the suppression of Tibet.
China has embraced the reality of hybrid threats and now wields economic pressure as its primary response to international snubs. For opening a Taiwanese embassy in the Lithuanian capital of Vilnius, China banned the import of Lithuanian goods including EU goods that contained Lithuanian parts. Non-state actors and businesses are also vulnerable to China’s strong-arm tactics. Marriot Hotel’s website was put offline for a week following the mention of Taiwan on their website, and the American National Basketball Association was heavily sanctioned after a player for the Houston Rockets tweeted “Fight for freedom, stand with Hong Kong”. Even Norwegian salmon was heavily restricted from entering China after the Oslo-based Noble Prize Committee awarded the 2010 Peace Prize to a Chinese dissident.
Some states have stood up to China’s economic pressure and survived. Australia did just that after a trade war starting in 2020. Sanctions are always a double-edged sword: cutting trade ties injures both parties, but the power of sanctions lies in the assumption that the target will suffer more. While Australia was deeply exposed to Chinese economic influence (37% of Australian exports were to China), it turns out the relationship went both ways and Beijing eventually had to back down after an 80% tariff on Australian barley hurt Chinese beer-makers more than anyone else.
China is certainly not the first nation to use punitive sanctions, but what is novel is how freely they use their economic power for authoritarian and even petty ends. In the Australia episode, Beijing’s justification for their sanctions included a complaint that Australia’s parliament were openly criticising the Chinese Communist Party and that Australian media was especially hostile to Beijing. Not every state is large enough to weather the sanctions, and a significant portion of the world could easily be bullied by Chinese economic might.
Sanction Saturation
Looking ahead, there are consequences to the overuse of sanctions. Targeted states will innovate new economic channels to avoid dependence on rivals who weaponize their trade against them. This concern was voiced as early as the 1990s when President Bill Clinton warned that the US had become “sanction happy” and that the overuse of economic tools for strategic purposes would breed global resentment.
Some strategists have argued that given China’s frequent use of economic pressure, the natural response is to form an anti-coercion coalition: Norway may not be able to fight back against China’s sanctions, but a united coalition which includes the G7 could counter-sanction Beijing and thereby deter any economic pressure in the first place. Decoupling between the United States and China is a further potential consequence of sanction overuse. Economic pressure turns business into a security issue, resulting in states reducing their exposure to one another, as could potentially be the case between China and the US.
By weaponizing control over the global financial system and America’s status as an economic superpower, the US has pushed Russia and China away from the dollar’s dominance towards alternative global financial models. China has experimented with the digital renminbi as a counter to the dollar, and members of the Shanghai Cooperation Organisation (a trading bloc that includes Russia, China and India) have increasingly relied on bilateral currency swaps which evade the dollar altogether. China has also constructed the Cross-Border Interbank Payment System (CIPS) as an alternative to the SWIFT messaging service. As the developing world becomes increasingly integrated into the global economy, they will face a choice between remaining with SWIFT and the America-led global economic order – or moving to an international financial system with Chinese characteristics.
Conclusion
Sanctions and economic pressure turn international trade into a weapon, and as a result, the line between beneficial trade and potential vulnerabilities is blurred. Economic power may not be a magic bullet against rival states, but sanctions are not useless – especially against smaller states or to complement other forms of pressure. Sanctions have grown more sophisticated with experience and are much more widely used in the 21st century than ever before. The power of economic pressure on commercially weaker states such as Russia is significant, even if sanctions have not been as successful as was initially assumed at the start of the war. However, the same method of sanctioning will not work on an economic juggernaut like China which can turn around and apply the same pressure back. As the economic battle between China and the United States continues (in the semiconductor industry and beyond) we can expect China to develop parallel financial institutions to avoid American node power, and for greater decoupling as the private sector increasingly becomes a security issue.