America’s new weapons of economic coercion may be more powerful than they seem
In the battle for ideas, economic sanctions have rarely enjoyed the upper hand. Economists have long argued that they seldom hurt where they are supposed to: targets often seek to dodge the bullet by turning to alternative trade partners or using counterstrategies; political elites find ways to shift the brunt of costs to the population. Scholars also underscore how costly they can prove for the sender, should they deprive it of a valued customer or supplier. And empirical studies have mostly concurred that, bar limited exceptions, sanctions fail to trigger behavioural change.
Yet the debate may be about to shift – thanks to innovation. As Cuba can still attest today, the US has long used trade sanctions to isolate geopolitical foes. But most punitive measures imposed over Russia’s annexation of Crimea were only developed after September 2001 – when the State Department enlisted the Treasury to help neutralise alleged financial sponsors of terrorist groups. They rely on another facet of America’s economic power: the central role its currency plays in the settlement of international transactions. Washington now leverages this by warning banks around the world that, if they want to continue doing business in dollars, they ought to cut ties with blacklisted institutions.
In a world where US payment systems dominate, such sanctions are powerful, credible and easy to trigger. They can also asphyxiate economies with limited trade links to America – thereby creating advantageous asymmetry – and allow for “surgical strikes” against selected people or institutions. Early evidence seems to suggest they work better, too. The difficulties of Persian banks to process international payments, over six years of financial blockade, are largely credited for helping cause the near-collapse of Iran's economy – eventually bringing the country back to the nuclear negotiation table.
Economic theory has yet to fully comprehend this new state of play. But recent work by Baran Han, a fellow at the Korea Institute for International Economic Policy, suggests encouraging progress. In a paper published last November, he explains how game theory has so far failed to account for the effectiveness of “triadic sanctions” – where a sender threatens a third party to join a campaign against the final target. Earlier research by John Hopkins scholars also shows how, by assuming perfect information among “players”, existing models are often wrong. Miscalculating the impact of sanctions early in the game, researchers say, can lead a target to yield once they are imposed – even if threats had failed to deter in the first place.
Shortly after the Russian flag started to float over Crimea's capital, Washington blacklisted a handful of people and banks closely connected to the Kremlin. Whether this prompted Moscow’s late agreement to diplomatic talks can’t be ascertained: political isolation and retreating markets may have also played their part. Nor can Russia's intention to compromise be fully trusted, as persistent stalemate suggests. But at a time when serious EU sanctions – costly and divisive – remain a remote prospect, there’s probably no harm in giving America's new breed of economic weapons a bit more currency.
Photo credit: Mikhail Mihin