The Limits of Economic Warfare

Over the past decade, economic sanctions emerged as Washington’s preferred policy tool to deal with a range of concerns, from adversarial governments in Iran and Venezuela to international drug trafficking. Sanctions became popular because officials saw them as a low-cost tool that could hurt the United States’ foes. The 2015 Iran nuclear deal, which Iran agreed to after years of devastating sanctions, seemed to vindicate policymakers’ view that sanctions could force adversaries into strategic concessions. Under U.S. President Donald Trump, renewed sanctions against Iran and sanctions targeting Venezuela were widely seen as effective in debilitating those countries’ economies.

Against this backdrop, when Russian President Vladimir Putin launched an invasion of Ukraine in February 2022, the Western response was immediate: the United States and its allies slammed Russia with a raft of sanctions and other economic restrictions. But a year later, the effectiveness of these measures offers important lessons on their limits. Sanctions and export controls have been useful in undermining Russia’s financial resources and industrial base, but they have done little to change the Kremlin’s strategic calculus.

As Western policymakers dig in for both a protracted conflict with Russia and an era of geopolitical great-power competition with China, they should recognize that sanctions can do real damage to their targets but rarely succeed in making those targets change course. Sanctions are not a panacea, and, as Ukraine’s victories over Russia on the battlefield have demonstrated, economic warfare is no substitute for the real thing. The United States and its allies need to invest in a range of tools to defend their interests and values rather than expect too much of economic warfare.

U.S. policymakers began planning major sanctions on Russia in late 2021, as U.S. President Joe Biden grew concerned about the prospect of a wide-scale Russian invasion of Ukraine. Initially, policymakers sought to use the threat of sanctions, alongside bolstered security assistance to Kyiv and diplomatic overtures to Moscow, to dissuade Putin from invading. Western officials made clear that the economic damage of an invasion would be significant, and qualitatively different from the measures that Russia faced in 2014, when it first invaded Ukraine. But Putin was undeterred. He chose to invade—likely assessing that the toll of punitive sanctions would be an acceptable price for the quick capture of Ukrainian territory.

Once Russia invaded, the United States and its allies moved swiftly to impose economic costs, both to signal resolve and, in anticipation of a protracted conflict, to begin to degrade Russia’s financial reserves and military might. Within a week of Russian tanks crossing into Ukraine, the United States and its G­-7 partners had leveled sweeping sanctions on Russia’s central bank and on several of Russia’s most significant commercial banks, oligarchs, and political operatives, as well as on the country’s military-industrial complex. Moreover, the West instituted sweeping export controls to cut off Russian access to semiconductors and other key high-tech products.

Sanctions initially rattled markets, with the ruble plunging and Russia forced to double domestic interest rates to stem capital flight. Export controls had a compounding effect on Russian military-industrial production over the course of last year, with Moscow forced to turn to Iran and North Korea for ammunition and weapons, and with other metrics of industrial production, such as the manufacture of cars, slumping. But by late 2022, it was increasingly apparent that Russia had weathered the initial economic storm better than many Western officials and experts had expected: Russia’s economy contracted by more than two percent in 2022, a sharp reversal from the five percent growth in 2021, but a dip not nearly as severe as some initial estimates of a ten percent or greater decline in GDP.

Sanctions rarely succeed in forcing changes of strategy.

Russia’s economy proved resilient for three main reasons. First, Russia was initially able to profit off its own war. Oil and gas made up nearly half of Russia’s budget prior to the war, and geopolitical uncertainty surrounding the war led to high energy prices for most of 2022, allowing Russia to bolster its oil revenues by an estimated 20 percent—a significant cushion against the impacts of Western sanctions.

Second, Russia was prepared. In the years prior to the war, Russia had worked to insulate itself from Western sanctions. Moscow withdrew its reserves from the U.S. financial system in 2018 and bolstered holdings of gold. It built domestic interbank transfer and payment mechanisms that proved successful at handling domestic payments and those between Russia and its allies. Russia deepened diplomatic relations with China, India, and countries in the Middle East, providing new outlets after trade with the West collapsed. And once sanctions were imposed, Russia adopted macroeconomic policies, such as capital controls and bailouts to firms hit by sanctions, to blunt the shock. Such measures will not ensure Russia’s long-term economic health, but they did temper the near-term economic impact of Western sanctions.

Third, unlike the “maximum pressure” economic warfare that the United States has waged in recent years against Iran, North Korea, and Venezuela, sanctions on Russia have been somewhat more limited in scope. Consumer goods have generally been exempt. Dozens of Russian banks remain connected to the international financial system, providing a financial conduit for trade that has not fallen under sanctions. The West has broadly refrained from introducing secondary sanctions that seek to prevent countries such as China and the United Arab Emirates from trading with Russia.

To be sure, sanctions will continue to be a drag on Russia’s economy and its industrial base. Perhaps most important, the introduction of a price cap on Russian oil exports in late 2022, which effectively forces Russia to sell oil at prices well below global benchmarks, has contributed to Russia’s budget falling into a deficit and will further cut into revenues in the months ahead. Over the longer term, Russia will suffer from the loss of the estimated 500,000 Russians who have left the country, a talent drain that will have long-term ramifications. Export controls will continue to degrade Russia’s manufacturing base. Actions to target evasion and to go after broader categories of goods, such as those that the G-7 announced last month to mark the first anniversary of the war, will steadily cause further economic damage. In the months ahead, Western policymakers should also target other categories of Russian exports, such as metals, and try to further reduce Russia’s oil revenues by lowering the value of the oil price cap even more.

Yet policymakers should recognize that sanctions and export controls are not going to affect Putin’s strategic calculus, which will be shaped much more heavily by events on the battlefield. Authoritarian regimes in recent years have withstood shocking levels of economic pain: the regime of Syrian President Bashar al-Assad survived a 50 percent economic decline between 2010 and 2020 and Venezuela’s economy shrank by three-fourths between 2014 and 2020. Putin views victory in Ukraine as essential to his ambitions, if not his survival. Sanctions should continue to focus principally on constraining Putin’s ability to sustain his war and forcing him to reckon with more severe domestic tradeoffs rather than on changing Russian objectives.

Authoritarian regimes have withstood shocking levels of economic pain.

That said, Western policymakers can use sanctions to support more immediate goals. First, the G-7 should redouble early efforts to use Russia’s frozen assets and other resources abroad to support Ukraine. The G-7 recently said that it would keep Russian assets in their member states frozen until Russia and Ukraine reach a diplomatic resolution and Russia “pays for the damage it has caused” to its neighbor. Practically speaking, however, any such settlement would likely be years in the future. Western countries will not be willing to finance Ukraine’s war indefinitely. Handing Russia’s frozen assets to Ukraine offers a way to continue providing necessary support to the defense of the country.

Western countries can also use the tariffs they have imposed on the Russian goods they continue to import as a source of support for Ukraine. Last month, for example, the United States hiked tariffs on aluminum imports from Russia to 200 percent. These tariffs force Russian exporters to offer lower prices and encourage Western importers to diversify to other suppliers. But the money raised with these tariffs should fund weapons purchases and financial support for Ukraine—sending a message to Putin that Russia’s exports will ultimately underwrite Ukraine’s war effort.

Finally, even if sanctions will not alter Putin’s calculus in the near term, history suggests that the prospect of lifting of sanctions can be a useful incentive over the long term. Fifteen years after Libya’s 1988 bombing of a passenger jet over Scotland, the prospect of sanctions relief helped encourage Libya to offer a settlement to the victims. In 2017, the prospect of relief from 20 years of sanctions helped persuade the Sudanese government to cease its support of terrorism and reduce its destabilizing regional activities. Years from now, after the Ukraine war is resolved on the battlefield, sanctions relief can still be a useful chip in broader negotiations aimed at reintegrating Russia into the West.

The primary lesson of Western sanctions on Russia is one that sanctions experts and practitioners have long noted: officials should not rely too much on such measures. Sanctions are a valuable supporting tool but are rarely going to be a magic bullet or radically alter the decision calculus of an adversary in the short term.

In the context of the West’s overall strategy toward Ukraine—a strategy that has been enormously successful in uniting the West, at repelling much of Russia’s initial assault, and at eliminating Russia’s chances of conquering Ukraine—a related lesson is also clear. Countries continue to operate in a hard-power world.

Ukraine’s fighting on the battlefield and Western support for Ukraine’s military have been by far the most important drivers of Russia’s failure in the conflict. And the success of Ukraine’s defense and the failures of the Russian military will be a greater deterrent to military adventurism by other potential adversaries, such as China, than will be the prospect of economic costs. The United States and their allies need to be prepared to credibly threaten—and use—force to preserve the broader peace and defend their interests.

The United States needs to boost its favored narratives in nonaligned states.

Fortunately, policymakers in the United States and around the world understand this fact. Planned military expenditures are up across G-7 countries. The United States is working to bolster military alliances with countries such as Australia and the Philippines, and is trying to expand and speed military deliveries to Taiwan. These are critical steps to protect U.S. allies and the United States’ own national security. U.S. officials also need to think more creatively about other tools. For example, discreetly aiding an ally such as Taiwan to bolster its offensive cyber-capabilities, which could be deployed in advance of a Chinese attack, could serve as a more effective deterrent than the prospect of economic sanctions.

Better information tools are critical, as well. In the run-up to Russia’s invasion of Ukraine, the Biden administration was quite creative in its disclosure of intelligence regarding Russia’s plans, helping Ukraine prepare for the invasion and galvanizing a global response. But the United States has been much less effective at countering Russia’s messaging in the developing world, where the Kremlin has expanded efforts to promote pro-Russian and anti-Western narratives regarding the conflict. The failure of the United States and its allies to develop tools in the information space is even more evident in Russia itself, where popular support for the war appears to remain strong. The United States needs to invest more heavily in information tools to ensure that it boosts its favored narratives not just in like-minded countries but also in nonaligned states and, to whatever extent possible, within Russia and other authoritarian countries themselves.

In late 2021, the U.S. Treasury issued a report on the U.S. use of sanctions. As it said in the opening, “After the September 11, 2001 attacks, economic and financial sanctions … became a tool of first resort to address a range of threats to the national security, foreign policy, and economy of the United States.” The principal lesson of U.S. sanctions on Ukraine is that sanctions are less valuable as a tool of first resort than as a supporting tool of U.S. national security. Washington should be at least as focused on developing and harnessing the other tools as it has been on deploying its tools of economic coercion.