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2 May, 2022

Essence of Economic Sanction: a Few Opinions Against the Backdrop of the War

IPN

Not only with “word” 

The ongoing war in Ukraine has firmly introduced a few words in our vernacular. One of them is “sanction.” In response to Russia’s armed aggression against Ukraine, renewed on 24 February, several waves of sanctions imposed by the collective West on Russia have attracted attention of media, analytical and government circles. Hardly a day will pass without various media – domestic or foreign, discussing the essence as well as a particular scope of application of this or that package of sanctions. Hence, the key question, we think, can be formulated as follows: what is the actual impact of sanction on deterring the aggressor, stopping military actions and stimulating process of negotiations to end the war? 

It must be noted that despite frequent use of the word, a common opinion about the essence, effectiveness and desired outcome of sanction has not been formed not only in our country but also abroad. Even more, the tone and scope of such discussions is rather diverse and often, contradictory: starting from emphasizing a mythologized power of sanctions down to underscoring their practical uselessness in the effort to achieve the set aim.

It would not be correct to say that the practice of using sanctions is a “new science,” because it counts 2,400 years, dating back to the Peloponnesian War. However, such a mechanical count of years for drawing valid conclusions is not appropriate: evolution of conflict and war has its stages. Each such stage is distinguished for its authenticity – be it a degree of codification or execution of international relations or, say, technologies for waging a war available at that time. Furthermore, when talking about international relations on global scale, it is also important to consider how tempting, in a given historic context, it is for a revisionist and aggressor country to infringe another country and what means it has for that, on the one hand, and on the other hand, whether a political will and material resources exist to confront and stop such infringement. 

From the perspective of history, the use of sanctions as a universal recipe for deciding the fate of war and peace evokes a number of conflicting facts, parallels and observations. It has become topical today to generalize them against the backdrop of the largest military confrontation since the Second World War, going on in the center of Europe – the war between Russia and Ukraine. Any aspect related to this war is absolutely decisive because there is a plan of adjusting European security rules to the brutal force on the one side of the war while on the other side, the necessity to thwart this plan and along with it, to remodel the European order so as to adequately contain modern challenges.

In such a serious process, the phenomenon of sanction, its role and purpose, along with other measures of containment, require constant observation, comprehension and revision of conclusions. The aim of this article is to share some observations or views with the readers. Towards this end, we will first refer to so-called “sanction theory” and recall several aspects. We believe that without these, talks about the effectiveness of Western sanctions in the prevention of Russian aggression in Ukraine would be one-sided and incomplete.  

Realistic (non-celebratory) side of theorization 

Economic sanction is a midway “stop”, between unsuccessful diplomatic efforts and armed intervention, for solving a problem. In other words, by enacting sanctions, the initiator or a group of initiators of sanctions admit that political efforts have largely failed; however, it does not mean that the initiators have a desire, intention and readiness to resort to military methods in order to put things to the rights.

We need to recall that the modern history of using sanctions is not distinguished for continuity and consistency. For example, sanctions to deter the war were used at various frequencies - and often unsuccessfully - between the first and second world wars. At those times, the essence of sanction differed from a modern understanding and mainly meant the economic blockade. Such blockade, expressed primarily in restricting the international trade relations, was viewed as the most optimal economic tool for the punishment of the aggressor or accused, or to put it in modern military terminology, it was a “nuclear” weapon of that time. Although applied, that tool failed to achieve a universal aim of deterring military interventions and to spare the mankind from the devastating Second World War.

A relatively more robust sanctions policy reemerged and was adopted in the world practice in the 1980s. 

With regard to realistic expectations of “miraculous” results of sanctions, a general comment is that the impact of sanctions is rather “mixed” and is not always strong and conspicuous. Judging by the achievement of set goals, only one third of various measures enacted to sanction and punish in the past decades proved fully effective. A broad use of sanctions instead of armed forces, gives a civil and political leadership a lever to manage crises in a better way in a less explosive situation. At the same time, compared to engagement in military actions, the use of sanctions involves less physical and political risks.

And still, what are those necessary theoretical nuances that will make a package of sanctions more targeted and tailored to a specific situation and hence, more effective while people’s expectation of the results more realistic?

Good understanding of the aim

It is one thing to timely and correctly assess a breach of norms of international law and behavior, condemn it and call on the violator to rectify it, though it is still political-declarative evaluation of the breach. A significantly more difficult thing, however, is to develop, alongside assessment and condemnation, effective countermeasures envisaging, inter alia, economically “lethal” weapon – sanctions.

We have mentioned the economic “lethality” – a deadly effect of sanctions in economic sense, intentionally because a general purpose of any sanction is to undermine a country’s economic and social resources in the conditions of nominal peace.

Despite a rather clearly formulated purpose, a precise tailoring of sanctions to a concrete situation is, as practice and reality show, an extremely difficult task. This, in fact, is not surprising considering a political-economic-military overlapping of different actors in the modern world.

In any case, the initiator of sanctions should understand perfectly well: what is the aim of punishment measures? What result does it expect from these measures? A sanctions-oriented response requires that there are clear answers to these fundamental questions form the very start, because ambiguity about the key aims and objectives of sanctions, as well as the revision of aims and objectives after the imposition of sanctions will damage the reputation of the initiator and undermine the effectiveness of sanctions.

A common opinion is that the motive for imposing a sanction is to inflict that amount of harm – pain, on a target country that will discourage it from undertaking a certain short-term action or pursuing a long-term policy. Hence, a proper understanding of aims and objectives of sanctioning measures from the very start is one thing, while another thins is a proper and impartial monitoring of their management. To put it in other words, equally important in the process is….

… the management of sanctions

A process of proper management is related to a few essential aspects.

One is the largest possible coalition of participants around a relevant political decision, firmness and unity of coalition members for ensuring a higher degree of effectiveness of large-scale sanctions. Otherwise, the target of sanctions will find loopholes to continue its harmful political-military line of action, which, over time, will minimize the effectiveness of sanctions to almost zero. When talking about the coalition unity it must also be noted that various participants in the package of sanctions, especially if they are many, may hold different attitudes and motives. Therefore, the effectiveness of large-scale sanctions depends not only on the number of participants, but also the identities of participants.

Another issue to be considered is the perception and attitude of a target country and its population towards expected sanctions. This also needs few comments. First, sanctions are likely to be more effective in a more open target country than in an authoritarian country. Even more: the tougher the control of public opinion and perception of events by the authoritative regime, the higher the likelihood of society to rally around the regime. Thus, a correct selection of target is of particular importance.

Another aspect with regard to the management of sanctions is a constant assessment of implementation of sanctions for the aim of modifying the existing measures or adding new ones. At the same time, an opinion that the effectiveness of sanctions depends on the increase in their severity and amount is faulty. Consequently, the word “management” is not limited to its semantic meaning alone, it acquires a rather specific functional connotation. Therefore, the management needs to be constantly monitored and assessed because with such complex approach the “pain” inflicted by sanctions will be neither less nor more severe than intended by this political decision.

With regard to the management process, we should also note that in order to achieve set goals and objectives, it is necessary to adequately match escalation and de-escalations measures determined in the sanctions policy, which allow to communicate with the target country and its government by applying a carrot and stick approach. This is a necessary flexibility that serves a result-oriented use of sanction.

A recent practice shows problems of legal nature in terms of management. For example, the regulators and courts does not an entirely clear position about secondary sanctions or individually sanctioned persons acting under a “corporate guise,” etc. All this is a very specific issue and goes beyond the scope of the discussion in this article.

However, one shall note a topic of so-called “smart” sanctions, especially with regard to management demand. The main point here is that the initiators of sanctions must avoid unexpected outcome (for example, a humanitarian disaster, damaging of partner country’s economy) and choose a correct package of sanctioning measures in order to determine a “sanction pain” that is commensurate to goals and objectives. Let us add here that in parallel with the decision to impose sanctions, it is necessary to have a correct understanding of gradual exit from sanctions, because speed or delay as well as any spontaneity in the exit will harm a functional aspect of the mentioned economic weapon.

It is a fact that in the implementation of modern sanctions, the aforementioned and other issues discussed in this section require practical knowledge, depoliticized analysis and technocratic assessment. Otherwise, the effectiveness of “economic war” will be questionable because the word “sanction” does not automatically mean success.

Ukrainian (intermediary) lessons

Questions raised since the start of the war are pressing today: Can sanctions enacted in several various stages stop Russia? How effective are already enacted sanctions? What can additionally be enacted to achieve full effectiveness of sanctions?

The above questions are even more pressing when the war machine instead of slowing down is, at the time of writing this article, playing out with a new force, alongside the increase in the scale of human tragedy and a sharp decrease in efforts of direct or indirect participants in the war towards a political resolution…

Economic sanctions imposed by the Western world are, however, unprecedented. Among the diverse measures applied, one should single out two: financial and energy sanctions.

A relative effectiveness of financial sanctions can be explained by two factors: one is the role of US dollar as a global reserve currency and another is a close integration of international banking transfers in the US banking system. Both factors combined facilitate the effectiveness of financial sanctions. Because of this fact, the USD 640 billion currency reserves available to Russian as of 24 February decreased sharply as a result of, first, freezing the assets of the Central Bank of the Russian Federation and then, restricting the use of gold in transactions. Hence, the reserve assets available to Russia has dropped to estimated USD 160 billion (it is unknown how much of this has already been spent on the war – by various estimates, it ranges between USD 40 billion and 60 billion). It must be noted, however, that despite the impressive measures that have already been implemented, the full mechanism of financial-banking sanctions has not been enacted yet, which mainly implies a complete disconnection of Russia from international payment systems. 

The topic of Russian energy resources has become a subject of even hotter discussions. Readers are already well aware of relevant steps taken by the USA and the EU and therefore, we will avoid repetition and only focus on a few key points.

It is well-known that the EU is way more exposed to Russian energy resources than the USA: the EU consumes 60% of natural gas and 50% of oil products imported from Russian. Therefore, depleting the financing of the Russian military machine mainly depends on the EU’s principled position: the thing is that the purchase of energy resources by Europeans results in Russia receiving between USD 800 million and 1 billion every day, to say nothing about the moral aspect of the issue.

The EU found it relatively easy to terminate (though, stage by stage) the import of coal from Russia, partially because the share of Russian coal in common European energy structure was small; moreover, the decrease in coal dependence is in line with the EU strategy of gradual transfer towards the use of alternative energy sources. However, it has proved significantly more difficult for the EU to say no to Russian oil products and natural gas. This difficulty is directly related not only to political and electoral conjuncture of several countries, but also to a more subtle aspect of international sanctions: it is impossible to inflict harm on a large integrated economy so that to keep your own economic system absolutely harmless. Thus, the contribution of the European constituencies to law and justice has become a challenge.

While the USA has already rejected Russian oil and natural gas, the EU is still considering the ban on the Russian oil import. According to reports, a relevant document has already been drafted but a public discussion of that document will only start after the presidential elections in France. Opposition from several countries in this matter is also apparent and we have to wait and see the specific conditions on which oil imports from Russia will gradually decrease with a view to a possible total ban on such import. For example, an assumption is to set different deadlines for banning various categories of oil products; also, for banning means of oil import (for example, a faster embargo on tanker shipments than pipeline shipments).

One must also mention a necessary precondition for replacement: what will replace the Russian oil? One of possible sources is the Middle East, but here geopolitical contradictions of different nature have emerged between the USA and other large oil exporter countries.

The issue of Russian natural gas is significantly more complicated which is directly related to a political capital of imported gas for European politicians as well as a years-long adjustment of European infrastructure to the receipt of this energy resource. Factors in the policy of reducing the dependence on the import are the rise of commercial and consumer prices as well as the identification of alternative routes of supply (for example, a possibility of importing liquified gas from the USA, Australia and Africa). In any case, the rejection of Russian gas belongs to the category of “revolutionary” decisions that lead to a fundamental transformation of the political-social and economic-social fabric of Europe. Today, a number of practical mechanisms of replacement are considered, but this is a topic of another discussion. We now wait for the sixth package of EU sanctions, which will enable us to have a more detailed discussion. At the same time, ahead of common decision by the EU bodies, several European countries have already enacted on the national level or are about to enact the ban on Russian oil and gas.

It is, however, apparent that it takes time for a real and desired effect of already taken decisions, let alone future decisions, to materialize: this is an extremely precious time for deescalating the situation in Ukraine and ending the human tragedy. It is even more puzzling if we recall that under the plan of the European Commission, the EU will fully free itself from Russian energy resources not earlier than by 2030. This makes it is extremely difficult to estimate how long it will take Russia to make such changes to its foreign and military policy that will adjust this policy to established norms… unless, until then, the domestic Russian political life undergoes, with the efforts of Russian population, such a fundamental change that proves acceptable for the civilized world.

“Continuity” of essence and “indefiniteness” in time

The topic of sanctions can be discussed extensively. Therefore, the aim of this article is to express opinion about only few narrow aspects of this very important topic of international relations and order. We have also tried to point out the issues extremely selectively and while partially theorizing them, to maintain the link with the existing reality.

Because of diversity of this topic, we will come back to it not once, especially in the context of ongoing war in Ukraine and its results. In general, the necessity of contextual reading of sanctions is not accidental: rarely a real policy and practice have such a strong influence on forming a problem as it is in case of sanctions. The international conjuncture, a new redistribution of influences and interests, actually, precedes theoretic prerequisites of sanction topic, while this or that political decision adds substance to norms of material and procedural law related to sanctions. No doubt that, such feedback between a practical need and lawmaking is extraordinary. When talking about the practice and rule of behavior it is indicative that the weapon of geo-economic compulsion and fight, known as the “gradual sanction” of the 24 February war, has already took the form of economic war. In future conflicts or wars it will, perhaps, remain as such: distinguished for its totality, diversity and multiple layers. Sometimes this war/weapon will prove fully effective but more often, partially or even less effective. Such gradation has its explanation too.

Therefore, a further and even more so, deeper research around sanctions on the national level, serves a correct positioning of the Georgian state in relation to a regional and international agenda. With a growing functional role in geo-economic relations, the development of sanctions, adherence to them or implementation in any other way will become a routine of “unorderly” order. With this in mind, the objective of Georgia is to remain on the correct, in our understanding, side of the process. This, however, means avoiding a harmful influence of the economic weapon and obtaining maximal political and economic benefit.