The false and failed logic of Western sanctions

In February 2022, a war began between Russia and Ukraine. On paper, the odds were lopsided. Russia had the second most powerful military in the world, while Ukraine ranked between Vietnam and Thailand. Many analysts expected a short, brutal war and Russian annexation. What we got was a long, bloody war, with the sides much more evenly matched. It is not out of the realm of possibility that Ukraine will end up reclaiming control over not just the Donbas but perhaps even Crimea. The United States and its allies in Europe and Asia leaned heavily on non-military forms of pressure. They instituted one of the most comprehensive packages of economic sanctions in history. These included freezing Russian assets — such as the foreign exchange reserves held by the Russian central bank in foreign central banks — and the expulsion of Russian banks from the SWIFT interbank payment network.  Major restrictions on goods and services trade were also imposed. The sanctions, obviously, did not stop the war, but they have evened the odds. The days when a middle-income power like Russia could hope to be self-sufficient in military production are long gone, particularly given the technological requirements for modern weaponry. Western sanctions crippled Russia’s ability to replenish its arsenal. This has made a real difference for Ukraine.  It is now likely that Russia will have to limit operations to conserve ammunitions that it cannot replace at the rate it needs. The medium-term impact of the sanctions regime on technology-intensive sectors like aviation is also starting to tell. The long-run consequences of Russia being unplugged from the global exchange of technology can be seen in the estimates of potential GDP growth. A country of its income level — per capita income is roughly on a par with China — ought to be able to manage respectable rates in the mid–single digits. Instead, Russia has a gloomy future of 1% growth, while its population is both aging and shrinking. The turmoil in global commodity markets, as Russian gas has been withheld, revealed that disconnecting a large country from the world economy comes with serious consequences. A sober analysis would show that these consequences could be contemplated in the event of armed conflict — a Chinese invasion of Taiwan for example — but should not become a regular tool of statecraft. A simulated invasion of Taiwan. Both the US and China would incur heavy losses in a conflict. Image: Facebook Unfortunately, that is precisely what policymakers are now putting into practice. Export controls are often considered an entirely separate phenomenon from sanctions, but economically speaking they are very similar. Controls on “sensitive” products — like extreme ultraviolet lithography machines necessary to produce semiconductor chips — have been put in place to prevent “Western” technology from reaching China.  Washington, not content to impose its own bans, is strong-arming its allies into complying with a far-reaching set of restrictions. Beijing’s response is to speed up plans to develop a relatively autonomous semiconductor industry. It is sometimes argued that it might be possible to devise a regularized system of sanctions to deter perceived as bad behavior that would not necessarily need to be put in place: a financial nuclear deterrent. But a resurrected Cold War logic of mutually assured destruction does not translate neatly to the logic of economic sanctions. If a would-be antagonist of the United States is aware of the likely actions that Washington might take in the event of a conflict — like seizing its financial reserves held overseas — the antagonist nation will do everything to avoid facing these penalties prior to the outbreak of conflict. Some costs are unavoidable, but many can be minimized with preparation. A world in which sanctions are routinely expected is one in which sanctions will become ineffective. If sanctions and export controls become a banal tool of interstate competition, they will not only lose their potency; they will damage the global order they are supposed to protect. The Biden administration suggests its new approach that combines aggressive industrial policy at home with strong economically coercive measures abroad will, in the words of the US National Security Advisor Jake Sullivan, “build a fairer, more durable global economic order.” While it is legitimate to contemplate the use of sanctions in a scenario in which China turns to military means to resolve the Taiwan question, the export controls imposed by the West have little deterrent value. The region with the most to lose from this scenario is Asia, which lies at the heart of a global economy built on the free movement of goods and capital, following economic rather than political logic. Some countries might gain from the relocation of foreign investment away from China towards more politically friendly te

The false and failed logic of Western sanctions

In February 2022, a war began between Russia and Ukraine. On paper, the odds were lopsided. Russia had the second most powerful military in the world, while Ukraine ranked between Vietnam and Thailand.

Many analysts expected a short, brutal war and Russian annexation. What we got was a long, bloody war, with the sides much more evenly matched.

It is not out of the realm of possibility that Ukraine will end up reclaiming control over not just the Donbas but perhaps even Crimea.

The United States and its allies in Europe and Asia leaned heavily on non-military forms of pressure. They instituted one of the most comprehensive packages of economic sanctions in history.

These included freezing Russian assets — such as the foreign exchange reserves held by the Russian central bank in foreign central banks — and the expulsion of Russian banks from the SWIFT interbank payment network. 

Major restrictions on goods and services trade were also imposed. The sanctions, obviously, did not stop the war, but they have evened the odds.

The days when a middle-income power like Russia could hope to be self-sufficient in military production are long gone, particularly given the technological requirements for modern weaponry. Western sanctions crippled Russia’s ability to replenish its arsenal. This has made a real difference for Ukraine. 

It is now likely that Russia will have to limit operations to conserve ammunitions that it cannot replace at the rate it needs. The medium-term impact of the sanctions regime on technology-intensive sectors like aviation is also starting to tell.

The long-run consequences of Russia being unplugged from the global exchange of technology can be seen in the estimates of potential GDP growth.

A country of its income level — per capita income is roughly on a par with China — ought to be able to manage respectable rates in the mid–single digits. Instead, Russia has a gloomy future of 1% growth, while its population is both aging and shrinking.

The turmoil in global commodity markets, as Russian gas has been withheld, revealed that disconnecting a large country from the world economy comes with serious consequences.

A sober analysis would show that these consequences could be contemplated in the event of armed conflict — a Chinese invasion of Taiwan for example — but should not become a regular tool of statecraft.

A simulated invasion of Taiwan. Both the US and China would incur heavy losses in a conflict. Image: Facebook

Unfortunately, that is precisely what policymakers are now putting into practice. Export controls are often considered an entirely separate phenomenon from sanctions, but economically speaking they are very similar.

Controls on “sensitive” products — like extreme ultraviolet lithography machines necessary to produce semiconductor chips — have been put in place to prevent “Western” technology from reaching China. 

Washington, not content to impose its own bans, is strong-arming its allies into complying with a far-reaching set of restrictions. Beijing’s response is to speed up plans to develop a relatively autonomous semiconductor industry.

It is sometimes argued that it might be possible to devise a regularized system of sanctions to deter perceived as bad behavior that would not necessarily need to be put in place: a financial nuclear deterrent. But a resurrected Cold War logic of mutually assured destruction does not translate neatly to the logic of economic sanctions.

If a would-be antagonist of the United States is aware of the likely actions that Washington might take in the event of a conflict — like seizing its financial reserves held overseas — the antagonist nation will do everything to avoid facing these penalties prior to the outbreak of conflict. Some costs are unavoidable, but many can be minimized with preparation.

A world in which sanctions are routinely expected is one in which sanctions will become ineffective.

If sanctions and export controls become a banal tool of interstate competition, they will not only lose their potency; they will damage the global order they are supposed to protect.

The Biden administration suggests its new approach that combines aggressive industrial policy at home with strong economically coercive measures abroad will, in the words of the US National Security Advisor Jake Sullivan, “build a fairer, more durable global economic order.”

While it is legitimate to contemplate the use of sanctions in a scenario in which China turns to military means to resolve the Taiwan question, the export controls imposed by the West have little deterrent value.

The region with the most to lose from this scenario is Asia, which lies at the heart of a global economy built on the free movement of goods and capital, following economic rather than political logic.

Some countries might gain from the relocation of foreign investment away from China towards more politically friendly territory. But an economic order that is ruled by geopolitics will make the region, which depends on a production model characterized by complex international value chains, poorer.

Photo: Reuters/Jason Lee
Washington is scrutinizing more and more Chinese investments in the US economy. Photo: Agencies

The great and under-appreciated achievement of Bretton Woods was to divorce security concerns from economic ones. Japan was incorporated into the global economy through a system of clear rules that were in the mutual interests of both Japan, as a rising economic power, and the established powers of Europe and the United States.

The endeavor to incorporate Japan into the rules-based order was so successful that it is easy to forget that it was not inevitable.

The challenge of finding a durable modus vivendi between China and the United States is admittedly of another order of magnitude. But the catastrophe of the interwar years is a reminder of what happens when a rules-based order breaks down.

No set of institutional rules can prevent a country from behaving irrationally, as Russia did. But the economic order can be organized around principles that maximize the benefits of peaceful engagement.

Resurrecting and strengthening that order is the most important task facing Asia and the world.

Tom Westland is a Postdoctoral Researcher at Wageningen University and a Non-Resident Fellow at the East Asian Bureau of Economic Research.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.