Do sanctions work? Not sure, but they will keep getting more complex

After Russia and Ukraine ran into some issues a few months back, the US gathered international support and imposed sanctions.

Most people think that sanctions sound like a good idea. But do they work?

Whether sanctions work is a deeply controversial topic. You can view sanctions through many different lenses. I will not be able to answer that question in this blog. It is interesting to note that the sanctions against Russia over the Ukraine situation are some of the most complex in history. I think the trend will continue. Here’s why.

Previously, sanctions would be imposed on a country that is doing things the sanctioning entity does not want to happen. Country-wide sanctions are fairly easy to understand and implement. For example, sanctions against Iran for nuclear enrichment. Sanctions in the past could be levelled at an entire country or a category of trade e.g. steel or high performance computers. But they have to be balanced. In the case of Russian and Ukraine, the EU obtains significant amounts of energy from Russia.  Sanctions against the energy sector would hurt both the EU and Russia.

Sanctions today often go against individuals. The central idea is to target individuals who have money at stake. OFAC publishes a list of sanctioned individuals and updates in regularly. If you are on the list, you are not allowed to do business with those sanctioned individuals, that is, you should not conduct financial transactions of any type with that individual (or company).

The new Russian sanctions target certain individuals, a few Russian banks (not all of them), and allows certain forms of transactions. For example, you cannot transact with a loan or debenture longer than 90 days maturity or new issues. Instead of blanket sanctions, its a combination of attributes that apply as to whether a financial transaction can be made.

Why are the Russian sanctions not a blanket “no business” set of sanctions?

By carefully targeting (think targeted marketing) the influences of national policy, the sanctions would hurt the average citizen a bit less, perhaps biting them, but no so much that the average citizen turns against the sanctioning entity. Biting into the influencers and others at the top is part of a newer model of making individuals feel the pain. This approach is being used the anti-money laundering (AML) and regulatory space in the US in order to drive change in the financial services industry e.g. hold a chief compliance officer accountable if a bad AML situation develops.

So given the philosophical change as well as the new information-based tools that allow governments to be more targeted they will keep getting more complex.

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