Back in early 2022, there was a great deal of optimism that sanctions against Russia would cripple its economy. Those predictions have not come true. A recent article in The Economist shows why:
Prior to 2022, Kazakhstan sold relatively little electrical machinery to Russia. After the Ukraine invasion, Kazakh exports soared more than 7-fold. How was Kazakhstan able to boost output so rapidly? Notice that at the same time this occurred, Kazakh imports of electrical machinery from the EU also increased sharply. It’s pretty clear that Russia was using this former Soviet republic as a way of evading sanctions.
For Europe’s policymakers, this is all bad news. “We expected some leakage,” says one official, “but not on the scale we now know about.” In December, the eu’s 12th round of restrictions targeted firms in Armenia and Uzbekistan for the first time. Bureaucrats have since threatened more sanctions on third countries and Europeans exporting to them, but have taken action only against a few firms. For each firm added to the blacklist, another is registered elsewhere.
The same problem occurs when countries try to diversify their supply chains. The US put high tariffs on Chinese imports in order to reduce our dependence on that economy. As a result, US imports from neighboring countries like Vietnam increased sharply. Not surprisingly, Vietnamese imports from China increased at the same time. We are still buying lots of stuff from China, but in a more more roundabout way with higher transportation costs.
None of this means that sanctions are necessarily a bad idea. It’s plausible that sanctions on Russia have at least slightly reduced its ability to wage war. Rather the point is that we should not expect sanctions to be leakproof.
PS. After writing this post, I noticed another example:
Interestingly, the American media blames China but not Germany for aiding Russia’s war machine.
READER COMMENTS
Craig
Oct 1 2024 at 3:29pm
“Kazakh imports of electrical machinery from the EU also increased sharply. It’s pretty clear that Russia was using this former Soviet republic as a way of evading sanctions.”
Interesting post, as usual, I was just recently in NYC and took the ferry in from NJ with my son and that passes the USS Intrepid which has many aircraft on its deck. As a kid I was enamored with the SR-71 Blackbird because it was the fastest (or among the fastest) and it was not directly a machine of war, just a spy plane. I built a model of it no less and hung it from my bedroom ceiling as a boy. So naturally I absolutely had to point it out to my son . There’s a point of course which is that the US government set up a Byzantine array of entities to procure the necessary materials from the then-Soviet Union to build the SR-71. So the US does this itself.
“The same problem occurs when countries try to diversify their supply chains. The US put high tariffs on Chinese imports in order to reduce our dependence on that economy. As a result, US imports from neighboring countries like Vietnam increased sharply. Not surprisingly, Vietnamese imports from China increased at the same time.””
The Maginot Line of protectionism?
The US has come a long way from the rallying cry of the War of 1812, “Free Trade and Sailor’s Rights” — the ‘free trade’ reflecting Britain interdicting American trade bound for France. Essentially US merchantmen were circumventing the sanctions imposed by Britain during the Napoleonic Wars.
Scott Sumner
Oct 1 2024 at 3:54pm
“reflecting Britain interdicting American trade bound for France.”
Now that the US has replaced Britain as the number one global power, we are starting to adopt some of the same policies.
Jon Murphy
Oct 1 2024 at 6:45pm
I think the point you discuss here, namely that entities will find a way around sanctions imposed, explains why a lot of economic “fine-tuning” will fail. Economic theory tells us that as costs rise, people will find ways to reduce costs. It doesn’t tell us how they will do that. hey could reduce quantity demanded. Or they could adjust along other margins. Some of those margins could render the original intervention moot.
When we conceptualize the economy as an emergent system, rather than a “body” or a simple optimization problem with “given” constraints, the problems of such fine-tuning become much clearer.
Scott Sumner
Oct 1 2024 at 11:30pm
Very good observation. Health care is an example. The War on Drugs is another example.
steve
Oct 2 2024 at 12:39am
The literature on sanctions, at least as claimed by foreign policy writers, says that sanctions work about 15% of the time. As noted in this piece they are often avoided. They also fail because they broad and while they affect the entire country, they dont affect the ruling class who have the means to avoid the financial fallout. Finally, even when they appear to work they can create very negative long term effects by generating animosity towards the countries imposing sanctions.
Steve
Robert Benkeser
Oct 2 2024 at 2:50am
If Anthony Blinken is to be believed, China is supplying key materials (machine tools and the like) that are allowing Russia to wage war. Plus, China has developed lethal attack drones for use against Ukrainians. When will the Chinese people rise up and demand that their government stop aiding a genocidal, imperialist conquest not only economically but also militarily?
raja_r
Oct 2 2024 at 8:19am
“When will the Chinese people rise up and demand that their government stop aiding a genocidal, imperialist conquest not only economically but also militarily?”
Right after the US people rise up and demand that the US stop supporting terrorist states like Pakistan and Saudi Arabia.
Scott Sumner
Oct 2 2024 at 12:38pm
I agree that’s bad, but aren’t the Germans doing the same? India’s also providing massive help for Russia, with its surge in oil imports.
Mark
Oct 2 2024 at 12:48pm
So you think Germany should impose sanctions on every country that doesn’t impose sanctions on Russia? Then won’t there just be another middleman, and they’ll have to impose sanctions on countries that fail to impose sanctions on any country that fails to impose sanctions on Russia?
Scott Sumner
Oct 3 2024 at 12:09pm
“So you think Germany should impose sanctions on every country that doesn’t impose sanctions on Russia?”
Just the opposite, I’m saying the US should not impose sanctions on China.
nobody.really
Oct 2 2024 at 10:38am
Struggling to find merit in Trump’s tariff proposals, Noahpinion suggested that the US could impose tariffs on all nations other than those in Central and South America–and perhaps especially Mexico. This would cause business to shift to those locations, which might bolster the economies there, which might (ta da!) reduce immigration. Protectionism wouldn’t be the point of the tariffs after all.
Scott Sumner
Oct 2 2024 at 12:40pm
Policies with that sort of convoluted rationale rarely work out in the long run.
Enopoletus Harding
Oct 2 2024 at 4:32pm
“Interestingly, the American media blames China but not Germany for aiding Russia’s war machine.”
I mean, Germany, at least on paper, has sanctions on Russia and China doesn’t.
Scott Sumner
Oct 3 2024 at 12:10pm
“at least on paper,”
On paper? Well, if that’s what you care about.
Jose Pablo
Oct 2 2024 at 5:59pm
the American media blames China but not Germany for aiding Russia’s war machine.
Well, maybe Germany is mostly aiding Germany’s war machine (or Germany’s welfare state machine, or Germany’s leisure industry machine, or …)
The issue with sanctions is that, by imposing them on a third party with whom you’ve previously engaged in voluntary trade, you are, in effect, sanctioning yourself as well. After all, you very likely entered that agreement for sound economic reasons.
Robert EV
Oct 3 2024 at 11:24am
The ‘solution’ is for Germany to not sanction its trading partners, but to put export limits on trade with those partners, such that exports are limited to what they used to be. This doesn’t work unilaterally, of course, and there would be middle-man middle-man issues, but that’s the thing that has to be done if avoiding equipment shipments to Russia is the goal.
Jose Pablo
Oct 3 2024 at 12:22pm
“Germany” wasn’t trading with “Russia”. German individuals and German companies were trading with Russian individuals and Russian companies. Putting a halt to those mutually beneficial trades harms the German individuals involved in that trade.
They have every incentive to circumvent the centrally imposed bans that harm them. Human ingenuity is effective when used to avoid harm.
Sanctions are easy to defend by “governments” and by individuals unaffected by them. It is a completely different game for the, for instance, German individuals affected by the sanctions.
You should always expect individual resistance to the ending of mutually beneficial trades (and this is, precisely, what “sanctions” are). It is a matter of incentives.
Warren Platts
Oct 3 2024 at 1:20pm
Exactly why Trump has the right idea: apply a 20% tariff to EVERYONE in order to avoid such workarounds..
Warren Platts
Oct 3 2024 at 1:28pm
Hey coincidences happen! 😉
Robert Benkeser
Oct 3 2024 at 8:31pm
Quantity of trade only tells part of the story. Russians are paying a high, high price for their imports…
http://jpkoning.blogspot.com/2024/10/a-glass-half-full-take-on-caucasus.html?m=1
Jon Murphy
Oct 4 2024 at 7:41am
Russians are paying the price. That’s the problem. The point of the sanctions was to harm the Russian Government, to hinder the government’s ability to wage war. That is not occuring
Jim Glass
Oct 6 2024 at 12:06am
Let’s imagine Russia didn’t lose access to those $300 billion of foreign exchange reserves, that Gazprom didn’t lose $7 billion last year (with gas sales down 40%), and that Russia’s revenue from fuel exports wasn’t down 40% from before the war, still falling. So it could right now use all these extra billions to openly buy first-tier weapons en masse from China and wherever else it wanted, along with all the other war technology it desires, in a “no sanctions” world. Are you saying that, compared to today, its ability to wage war would be only “slightly” enhanced?
One accurately judges the effectiveness of sanctions by comparing the world with them to the world without them — not by anecdotes of goods leaking through them via the Trashcanistans and third world (warranties and customer service attached?) at substantial extra cost to the importer, not the exporter. Which gets to a second basic point…
The purpose of sanctions is very rarely to absolutely “blockade” anyone, to end trade — not even during open warfare. Both sides gain from trade. The goal is to shift the *terms of trade* so one side suffers minimally while the other side suffers a good deal more. Trade continued between the Western nations and Germany even during WW1 and WW2. Sarah Paine has an excellent lecture on the history of sanctions at the US Naval War College. (I don’t have the link, but Google is our friend.)
The Epic Example is World War I. At the start of the war the British Admiralty had an “Armageddon” plan to break Germany quickly by totally destroying its trade. In 1914 world trade was controlled in one place, London, as never since. Cables, trade financing, insurance, shipping coordination, everything ran through London. The Admiralty was going to destroy all German trade in a day. Historians say it would have been devastating. TOO devastating — trade runs both ways, and the rest of the government and Britain’s allies said, “No, no, hurts us too much, hurt them less”.
So they fell back to the old-fashioned naval semi-blockade. “Semi” because British trade with *neutral* Denmark, Sweden, Norway and the Netherlands continued, and “leakage” from them into Germany was massive. So do historians say the trade blockade failed? No, it was a huge success that broke the economy and largely won the war. It just took until 1918.
By the same token, the world continuing to buy energy from Russia is an intentional feature of the sanctions, not a bug. The world gets its oil happily as before while Russia’s revenue from it is slashed by the price cap (some), and China and India extorting bargain prices out of it, and the huge new cost inefficiencies of re-routing flows, using “black market” tankers and the like. Also, smuggling what one can through Trashcanistan is not a bargain. Neither is having your entire auto industry destroyed, then “beating sanctions” by paying to rebuild it all over again and ending with it being owned by the Chinese.
Which brings up another basic point. “Sanctions Often Fail to Work”? By who’s measure? I just looked at Blinken’s statement about the purpose of the sanctions when they were first imposed. “Stop the war” and “cripple its economy” were not among them. They were #1: “degrade” Russia’s ability to fight the war (see first paragraph above); #2: Show other countries (guess who) that the West will resist cross-border aggression; #3: Impede Russia’s economic ability to grow as military threat to the West in the future.
The West imposed ample sanctions on the Soviets post-WWII, there was plenty of leaking, and the Soviets didn’t collapse until 1991. Did those sanctions not work? As Prof Paine says, you set the terms of trade that are best for you “to take a piece out of the other side’s GDP growth rate, and just wait as it compounds.” That’s how they work.