Economic Sanctions:

Trade as a Tool to Win the War against Putin?

The discussions revolved around the question: Do trade sanctions work? According to Jeffrey J. Schott, Senior Fellow at the Peterson Institute for International Economics, the answer depends on the objectives of the sanctions as  hen sanctions are imposed, there are a variety of domestic and foreign interests involved. It is important to deal with the domestic and foreign policy issues together because sanctions require strong domestic policy support. Mr. Schott explained what he called the “four Ds of sanction objectives:”

1. Dissuade action: The primary objective of sanctions is to threaten the target country of consequences if a particular action is undertaken. With Russia, the US and G7 countries gave very serious warnings of unprecedented sanctions, which, unfortunately, did not paint a clear picture to Russia of the damages and losses it will face, and failed to deter it from invading Ukraine.
2. Demonstrate resolve: This is primarily a domestic policy focus, where a government acts on the expectations of its citizens, to react to a tragic event. When Russia invaded Ukraine, there was a call for immediate action in support of the Ukrainian people and refugees, which led to prompt action by governments.
3. Deter: With sanctions, the sender country wants to deter the target country from further action and deter other countries from emulating the actions of the target country. This objective could not be fulfilled with respect to Russia, as the sanctions against Russia after the annexation of Crimea in 2014 were not enough to deter Russia from invading Ukraine in 2022. The Russia sanctions have also been a thinly veiled signal to China to not use military force against Taiwan.
4. Damage/Punish: The last objective of sanctions is to weaken the economy and military capabilities of the target country. This has been achieved by export controls of products that are essential for the productivity of the Russian military and industry. This objective pursues inflicting a corrosive effect on the target country over time.

Ms. Alexis Early, partner with King & Spalding’s International Trade Group, discussed the types of sanctions and their enforcement. In the US, the Department of Treasury’s Office of Foreign Assets Control (the OFAC) is the main implementer of sanctions. There are different types of sanctions being simultaneously applied to a country like Russia. Most of these are applicable to US citizens and permanent residents, wherever they are located; and foreign people located in the US. The four main types of sanctions, all of which are present in regards to Russia, are:

1. Comprehensive embargoes: US persons can do almost nothing with the targeted jurisdiction. These sanctions may affect an entire country or certain regions of a country.
2. Blocking sanctions: In the US these are known as “designations,” which is similar to an embargo on an individual or individual company.
3. Sectoral sanctions: This kind of sanctions allow US companies to deal with certain companies in the target country only on a limited basis.
4. Secondary sanctions: This kind of sanctions are not as popular as other forms of sanctions. In such sanctions there is no nexus to the US jurisdiction. An example may be a French company doing business with a Russian company, yet the French company can come under secondary sanctions, where they lose credits or certain other privileges in the US.  

Ms. Early also noted the profound and unprecedented impact of the Ukraine war on global economy generally. Today, some western banks do not want to participate in transactions involving Russian banks, even for legal transactions. This war has also affected the stock market in unprecedented ways.  Furthermore, since the global energy trade is denominated in dollars and that has also had important impact on energy trade and cost.

Ms. Inu Manak, Fellow for Trade Policy at the Council of Foreign Relations, argued that sanctions remain inefficient unless they are truly multilateral. US President Biden stated that this conflict between Russia-Ukraine is a conflict of democracy and autocracy. But in this conflict, the world’s biggest democracy, India, is not a part of the sanction’s regime. She further said that there is a possibility of using secondary sanctions to make the existing sanctions more effective, but no steps have been taken so far in this regard.

Ms. Manak stated that weaponization of trade has serious consequences and the policy makers must be mindful of such consequences. Russia has already block-aided relief for Ukraine in the Black Sea in order to pressure allies to lift sanctions. She also pointed out that the current war is having its impact not only on Ukraine but also on low-income countries which rely heavily on supplies from Russia and Ukraine. This shows in food shortages in those low-income countries.

In conclusion, the panel speakers agreed that, overall, the war will result in price increases and recessionary trends. A secondary result is also a stronger push towards renewable energy and a greater diversification of energy sources with the aim of reducing reliance on Russian energy sources.

“The four 'D's of sanctions objectives: dissuade, demonstrate resolve, deter and damage.”

Jeffrey Schott

Speaker at the Trade Panel at AUWCL on June 28, 2022