Why US-led sanctions on Russia are a failure

Since the end of the Cold War, the U.S. has meted out economic punishment both as a means of coercion and a moral warfare tool, rendering it a de facto accompaniment in the naming and shaming of various foes of the United States.

The largest sanctions of all have been imposed on Russia in response to the invasion of Ukraine. Unfortunately, this case has also become the greatest example of the failure of sanctions to achieve their desired results. Together with the failure of the Ukrainian counter-offensive, this has contributed to the growing belief that this war may end in stalemate, or even Russian victory.

By 2021, the U.S. had already imposed over 8,000 sanctions on individuals and companies globally, targeting regional sectors in a range of countries. In the last two years, this number has seen an astronomical increase. According to a Columbia University database, the Office of Foreign Assets Control (OFAC) holds comprehensive sanctions on six countries and three regions. Targeted export sanctions extend to 19 countries including Belarus, Afghanistan, Libya, Sudan, and Zimbabwe, prohibiting under U.S. law any financial and commercial relations with designated companies or individuals.

On multitudinous occasions, these U.S.-led sanction regimes have been found to inflict asymmetrical burdens on impoverished foreign citizens, hinder democratization, and in the most serious cases exacerbate humanitarian crises in violation of international law.

In the days following Russia’s invasion of Ukraine in late February 2022, President Biden introduced a series of allies-coordinated sanction packages targeting Russia’s weapons industry, technology exports, foreign assets, banks, energy companies, and wealthy businessmen. Western states then went on to completely isolate Russia from the global financial market. In these measures lay a hope that such a severe sanctions regime would not only impede Russia’s warmaking capabilities but cripple support from political elites so drastically that Putin’s technocratic regime would collapse.

Nearly two years into the war, Biden’s introduction of new sanction packages every other month since February 2022 has not toppled the Russian regime or led it to agree to Western demands for a withdrawal from Ukraine. Russia’s increased allocation of national GDP to defense, which is predicted to reach an all time high of 6%, stands as proof of this unpleasant truth.

James Galbraith of the Institute for New Economic Thinking remarks that most Western studies on the Russian economy today begin with the question of how badly it is doing. This framework — focused on finding pain in the Russian economy and highly reliant on confirmation bias — forgoes the intellectual distance necessary to accurately pinpoint the roots of sanctions failure.

There is no doubt that Russia’s economy is feeling the impact of sanctions and faces a rather bleak future. Its aviation and car manufacturing sectors were particularly affected with a decline of 80% due to inaccessible components. The collapse of Western direct investment, combined with capital flight and severe brain drain, foreshadows decades of economic struggle for Russia’s future generations.

Still, this is nowhere near the outcome promised by U.S. officials. Claims that the Russian economy is about to collapse seem to stem from a need to reassure voters who are suffering from collateral sanctions damage, be it rising energy prices or deteriorating living standards.

The most widely discussed reasons for the failure of Russia sanctions focus on issues in their enforcement: Their bypassing by southern states in complex supply chains, the loopholes of dual-use goods exports, and companies’ reluctance to completely halt business with the Russian market. It is also clear that Western planners greatly underestimated the worldwide willingness (including by Western partners like India) to reject sanctions and continue buying Russian energy. Most recently, a POGO report found that even the U.S. Department of Defense has remained a loyal client of Russian oil.

However, one can also credit Russian economic planning for cushioning the blow of sanctions. At the very outset of the war, the government and the Central Bank promptly reacted with a combination of restrictions on the free flow of capital and a 20% increase in interest rates. In only two months after the invasion, banks saw 90% of initially withdrawn funds returned to Russian accounts.

After 20 months, a war economy has replaced Russia’s pre-war export diversification and technological innovation priorities. Moscow’s GDP shows a resilient growth of 2.2% this year, with the IMF only recently altering its prediction for the year 2024 from 2.8% to 1.1%. Despite severe capital flight, Russia’s current account surplus grew to $16.6 billion in the third quarter of this year, reflective of a large increase in foreign trade despite Western sanctions regimes. There are, however, questions about the reliability of official figures, especially given that Russian trade statistics were made private for over a year, resuming only in March 2023.

In line with Fortress Russia economics, the government recently imposed new measures compelling Russian exporters in energy, metals, and agriculture to convert their foreign currency earnings into rubles, and released new duties on non-oil exporters.

Overall, anti-dollar strategies and currency swaps have pushed Russia closer to countries such as China, Iran, and Turkey, some of which share the aim of curbing American financial influence. This illustrates another danger in U.S. sanctions: Far from strengthening U.S. global power, they are in fact spurring other countries to reduce their economic dependence on the U.S.

It appears therefore that the West may have to rethink its sanctions policy. As each side of the conflict begins to fathom the possibility of a non-military resolution, Western states must also face the difficult truth that sanctions (and Russia’s frozen sovereign debt) could become be a necessary sacrifice in negotiations if Russia is to be brought to make peace.

Indisputably, timing would be of key importance to what is perhaps still at present an unimaginable step for most U.S. officials. If proposed prematurely, an initiative to ease sanctions on Russia would also risk backfiring politically, which is why it should be broached in entirely confidential talks with Russia. Sanctions relief should come only as part of a settlement, and should be accompanied by firm and binding guarantees that the sanctions would be automatically reimposed in the event of fresh Russian aggression.

The failure of sanctions against Russia echoes a long series of such failures, against Cuba (for sixty years), Iran, Iraq, North Korea, and elsewhere. While they may have some utility as bargaining leverage in negotiations, this only applies — as in the case of Russia — if the United States is prepared to lift them in return for agreement. What is more, sanction-setting betrays a pattern of stickiness: Once legislated by Congress, U.S. sanctions have historically tended to become permanent.

It is high time that the United States recognized the clear lessons of modern history and modified its approach to the intermittently useful — albeit deeply flawed — strategy of economic coercion.