How Economic Sanctions Work

German Chancellor Olaf Scholz announced Tuesday that, in response to Russia moving troops into two separatist regions of eastern Ukraine, Germany halted certification of the Nord Stream 2 pipeline that would deliver natural gas from Russia.

(Investopedia) Economic sanctions are penalties levied against a country, its officials or private citizens, either as punishment or in an effort to provide disincentives for the targeted policies and actions.

Economic sanctions can range from travel bans and export restrictions to trade embargos and asset seizures. By definition, such sanctions apply to parties not readily subject to law enforcement by the sanctioning jurisdiction.

Economic sanctions provide a policy tool short of military force for punishing or forestalling objectionable actions. They're widely applicable beyond the sanctioning country's borders and can be costly to their targets amid increased global trade and economic interdependence.

Economic sanctions can also be a blunt and ineffective policy tool, imposing insufficient costs on the targeted governments and disproportionate ones on their most vulnerable populations.

As the world's largest economy and largest trade bloc, the U.S. and the European Union have disproportionate sanctions powers at their disposal.

Sanctions Can Take Many Forms

Economic sanctions can be imposed unilaterally by a single country or multilaterally by a group of countries or an international organization. Sanctions measures include:

  • Embargoes – A trade embargo is a broad ban on trading with a country, though it can sometime include exceptions for the supply of food and medicines on humanitarian grounds. Cuba, Iran and North Korea have long been subject to U.S. trade embargoes.

  • Export controls – Export restrictions bar the supply of specified products, services and intellectual property to targeted countries. They often restrict sales of weapons, technology with military applications or, as currently for Russia, oil drilling technologies and equipment.

  • Capital controls – Capital controls can restrict investment in targeted countries or industries, or broadly bar access to international capital markets for a country's issuers.

  • Trade sanctions – Trade sanctions can include import controls for specific countries, regions or industries.

  • Asset freezes or seizures – Assets within sanctioning jurisdictions can be seized or frozen, preventing their sale or withdrawal

  • Travel restrictions – Officials and private citizens as well as immediate family members may be denied travel access to sanctioning jurisdictions.

Sanctions Examples

Economic sanctions include restrictions on U.S. imports from China's Xinjiang region imposed for human rights abuses committed against Uighurs.8 The U.S. and the European Union also imposed sanctions against Russian officials, industries and companies following Russia's annexation of Crimea from Ukraine in 2014.

Economic sanctions against apartheid-era South Africa were often credited as a contributing factor in the peaceful transition to majority rule there.11 Sanctions against Saddam Hussein's Iraq, on the other hand, failed to end his rule and were called by some a "humanitarian disaster."

The Bottom Line

The success of sanctions can be measured by the achievement of the desired policy goals, or simply by their cost to the targeted countries and individuals, if punishment is the aim. They can also impose costs on the targeted country's citizens as well as the sanctioning country's companies.

If the goal is to change the behavior of targeted countries and individuals, their incentives and options will ultimately matter at least as much as the sanctioning powers' leverage.