Sanctions against Russia: What will and won’t work

A short post today about when economic sanctions work and when they don’t.

Sanctions don’t work when:

  • They’re not targeted, as with Cuba. As we learned from prominent dissidents there more than a decade ago, the U.S. embargo on trade with Cuba may have done more than almost anything else to keep the Communist regime in power by enabling it to use the embargo as an excuse for Cuba’s poor economic performance.

    Elizardo Sanchez, who had spent eight-and-a-half years in prison in Cuba and is still a prominent dissident there, was typical and unequivocal:

    I believe the embargo is the best ally the totalitarian government has, because it justifies its failures. When there’s no medicine, or transport, or food, everyone says, ‘it’s Washington’s fault.’ For that reason, when politicians in Washington try to lift the embargo, the [Cuban] government doesn’t help. The embargo serves the interests of the government here.

  • They’re targeted at the wrong things. Oil, for example. I’ve learned this from Yale economist William Nordhaus, who visualizes the world oil market as a giant bathtub. If there’s more production than demand, the bathtub fills. If there’s more demand than production, it drains. But sanctions like an oil embargo have no effect on the world’s demand for oil — in fact, they might even raise it, as buyers hoard it in anticipation of a shortage and speculators bid up its price accordingly.

    As for an effect on supply, it’s not obvious. As long as there’s sufficient demand, why not keep supplying? Some consumers — in China, say — will buy what you’ve got. And surely, as a producer, you want to sell it.

    So then, why impose sanctions at all? Which leads us to those instances in which sanctions do work.

    Sanctions do work when:

  • They’re targeted at the most vulnerable parts of an economy: at the financial system and the very rich. One of my staple insights into economics is that the word “credit” comes from the Latin verb credere: to believe. Money flows into those countries with high credibility and flows out when credibility wanes. If the inflow of money is curbed due to sanctions from major economies like ours, credibility wobbles and credit contracts accordingly. And when global money starts to leave, domestic money has an incentive to leave too: what’s called “capital flight.” Panic — by definition — is a self-fulfilling prophecy.

    As for the rich, if they can’t operate easily in the global economy due to a freeze on their foreign assets, say, well — to the extent they have influence over government policy, they have reason to pressure it in ways that bring the embargo against them to an end.

    In evaluating sanctions against Russia, then, it would be wise to see if its oligarchs are being seriously targeted, especially in England, where so much of their money has gone in recent years (a large part of London’s remarkable boom). And I’ll be watching the extent to which the Russian banking system and stock market tremble. Oil sanctions? I could be wrong, but I won’t take them all that seriously.

    Fore more, The New Yorker’s John Cassidy has done a nice job of summarizing the sanctions debate in this piece from last year about sanctions against Iran.