What are Economic Sanctions?
Economic sanctions, also called restrictive measures, are penalties imposed by one or more countries against another country (or countries), its officials, a group, or individuals. Sanctions are imposed in an effort to create economic pressure, instill regime change, or dissuade certain policies, behavior, or activities.
- Sanctions are penalties imposed against a party in an effort to create economic pressure or dissuade certain actions.
- Sanctions can be used to achieve goals such as counterterrorism, human rights promotion, conflict resolution, etc.
- There are numerous forms of sanctions, such as travel bans or restrictions, capital flow restraints, asset freezes, arms embargoes, etc.
Understanding Economic Sanctions
When dealing with foreign challenges where diplomatic talks fail to generate a resolution, sanctions are often seen as the most important tool by governments that is short of military force. They aim to create economic hardship and pressure on those it is imposed on.
Naturally, the world’s largest economies, such as the United States and the European Union, have the greatest sanction powers at their disposal. Outlined by the European Union, their purpose of imposing sanctions is to:
- Promote international peace and security;
- Prevent conflicts;
- Support the rule of law, democracy, and human rights; and
- Defend the principles of international law.
In the past, sanctions were used to achieve foreign policy goals such as counterterrorism, human rights promotion, conflict resolution, democracy, and non-proliferation of nuclear weapons.
Different Forms of Economic Sanctions
Sanctions can be imposed unilaterally (by a single country) or multilaterally (by a group of countries or an international organization). They can take numerous forms:
- Travel bans or restrictions: Being denied travel access to sanctioning countries and/or being unable to access the airspace of sanctioning countries
- Capital flow restraints: Being prevented from having capital flow through sanctioning countries and/or having investments from sanctioning countries restricted
- Reduced/Removal of foreign aid: Having humanitarian assistance, military aid, transfer of commodities, financial resources, etc. reduced or removed
- Trade restrictions/barriers: Having export and/or import restrictions, and/or tariffs
- Asset freezes: Having assets in sanctioning countries frozen or seized
- Arms embargoes: Being prevented from having weapons and military equipment leave or reach your country
Are Economic Sanctions Effective?
Whether sanctions are effective depends on the desired outcome. If the goal is to create economic hardship, according to numerous studies, sanctions have had a statistically significant impact on target countries by reducing their GDP growth, with the negative effects lasting for over a decade.
With that said, sanctions also impact the sanctioning countries – for example, when Russia was sanctioned in 2022 for its invasion of Ukraine, the price of oil spiked, contributing to higher inflation globally. Regarding using sanctions to dissuade policies, behavior, or activities – the effectiveness is mixed. Consensus in academic literature is that conventional trade and financial sanctions result in meaningful behavioral change in targeted countries about 40% of the time. Examples of sanctions that “failed”:
- Sanctions imposed by global economies in 2022 on Russia to dissuade its invasion of Ukraine failed.
- Sanctions imposed by the United States on North Korea throughout the 21st century to pressure the latter to abandon all weapons of mass destruction programs failed.
- Sanctions imposed by the United Nations Security Council starting in 1990 on Iraq to get Saddam Hussein to withdraw from Kuwait failed.
When Do Sanctions on Countries Work Best?
Sanctions are likely to work best if:
- The sanctions generate a high immediate cost to the sanctioned country. The higher the immediate cost, the less likely that the targeted country can adjust its policies to evade the sanctions.
- The economic pain of the sanctions is felt primarily by the inner circle of the sanctioned country’s government. It could create pressure on the sanctioned country’s government to appease its inner circle.
- Sanctions are imposed multilaterally. The greater the number of sanctioning countries, the more economic damage and less likely the target country can defy the sanctions.
Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To keep advancing your career, the additional CFI resources below will be useful: