US Sanctions: Who Suffers the Most?

In the first year of the Russian invasion, almost 35% of Ukraine’s GDP was wiped out. This marked the most terrifying recession in the country’s history. This is despite aid of over $230 billion received by Ukraine. While Ukraine has the war to blame for its economic woes, the US has only itself to hold liable for the state of its economy.

The world’s largest economy is only narrowly escaping recession and one of the reasons could be the government’s love for sanctions. These sanctions are viewed as a powerful weapon that the US can wield to change the behaviour of a country. But are they effective and do they impact the country that wields the weapon as much as the target country? Let’s have a look.

Arm-Twisting Tactics: How Effective Are They?

Russia is not the only target. Through 2022 and 2023, the US issued multiple sanctions on various nations, apart from sweeping sanctions on Russia. The lack of effectiveness of these sanctions is highlighted by the war entering its third year. The US had no choice but to impose further sanctions. In February, America announced more than 500 new sanctions against Russia, which marked the second anniversary of the Ukraine invasion.

The Russian sanctions were issued to cut the supply of critical goods and technology to limit the country’s access to military warfare. However, Russian entities found workarounds by using third-party intermediaries to procure foreign-made goods and technology through transhipment points outside the country. The freezing of Russia’s dollar account pushed the country to accepting yuan as payment. Indian refiners used yuan and dirhams to pay for oil purchases from Russia. This also made other countries wary of their dependence on US dollars for international trade. The US must be careful about such moves, as it gives more incentives for de-dollarization.

The US has imposed sanctions on almost 30 countries around the world. We’ve lost count of the number of sanctions against Cuba over the last 65 years. America has other longest-standing sanctions against Iran, North Korea, and Syria. And the latest target is China. Earlier this month, the US imposed wide-ranging sanctions on Chinese companies and steep tariff hikes on imports to dissuade the Asian dragon from supporting Russia. Will this strategy work? Only time will tell.

The Extra-Terrestrial Nature of Sanctions

America not only issues primary sanctions targeting a nation, but also secondary ones that prohibit its domestic entities from conducting business with any company that has a relationship with the target country’s companies. Also, its domestic entities are prevented from conducting business with companies from countries that have a relationship with the sanctioned country. The embargo on third-party countries pulls them into a conflict they weren’t even a part of.

The Impact of Sanctions on the US

I am neither pro-war nor anti-sanctions. After all, what’s the alternative to sanctions? But it’s important to consider the cost of sanctions on the country that imposes them.

Although sanctions are designed to hurt the targeted country, they do inflict impose limitations on the imposing country. Sanctions on other countries means they will no longer buy American goods. Empirical data shows that US sanctions in 1995 reduced America’s exports by as much as $15 billion to $19 billion and this translated into more than 200,000 job losses.

The onus of adhering to America’s foreign policy lies on the compliance teams of domestic companies. After all, sanctions are just empty threats unless companies implement them. This increases both compliance and inputs costs for companies, while preventing them from making purely business decisions. They cannot source the cheapest resources or form the best partnerships or sell in markets that offer the best rewards.

The embargo on Russia’s exports led to rising crude oil prices and stroked the inflationary super storm that was already brewing. The US, UK, and EU hiked interest rates in 2022 to combat decade-high inflation. Higher interest rates are anti-growth, which led to these regions flirting with recession last year.

The effects of some of the sanctions could last longer even after they have been lifted. Companies in targeted countries may avoid buying from US exporters or feel nervous about partnering with American companies.

Ironically, sanctions are most effective when imposed on your allies, as these are the countries that would have the deepest trading ties with you. Sanctions that end these trading ties will have a meaningful impact on their economies. On the other hand, when sanctions are imposed on nations that do not have trade agreements with you and are not too dependent on your economy, the chances of sanctions failing is higher.