The following is an adaptation of a presentation I made in early November on a panel about economic warfare for the Canadian Association of Security and Intelligence. Thanks for including me!
The following will take an expansive view of economic restrictive measures which are increasingly being used for a variety of reasons political and national security. I’ll end up focusing my remarks on the US case, which I know best, and which is most comprehensive, but will also talk about programs in the EU, UK, and of course Canada.
Financial sancitons are being used for a wider set of targets and goals, for human rights, to induce policy change, to degrade capacity of a group or military. Being clear on those targets and what “success” looks like is important to assessing cost and benefits.
Policy makers are using “all the tools’ . Export controls which until recently were the purview of defense are now being applied to a wide range of dual use goods including in Russia’s case household appliances.
What are these tools?
Financial sanctions – restricting nationals and financial institutions from financial transactions with the target (individual or entity), This includes freezing central bank reserves. uses extraterritorial power of USD based and North Atlantic financial system.
Export controls – restrictions on the export of specific goods including military goods and dual use items. The US is also using foreign direct product rule, which forbids not just US producers but any around the world to limit exports of that item if it includes US technology
Import bans – ban on energy imports (US), alcohol, luxury goods etc.
Investment bans – cuts to future investment (FDI, credit etc).
Downgrade role in international Institutions like WTO debt and equity issuance.
Cutoff from multilateral and bilateral aid – less an issue for Russia (or China), but could be for others.
This whole package is not used on all countries/targets,.
Sanctions became attractive both because they allowed US (and allies to use the extraterritorial power of financial system even on countries with which there was no direct trade. They also could provide something to do when there was no military or other dynamics.
Goals are important both for broadening coalitions and assessing these tools against their costs. Often “success” is hard to measure especially if the targets are broadened. Hard to identify which if any measures would trigger sanctions relief for a country like Russia.
Lessons from Russia
What did we learn from Russia? Coordination matters – breadth of coalition deepens impact and increases the compliance and overcompliance. And as we learned from other countries – availability of alternate supplies and payment matters. In this case combo of conflict, escalation led to overcompliance and self sanctioning. This faded a bit over time as countries willing to operate in grey zone.
Export controls and restricting imports may be more powerful than cutting off transactions per se.
Deterrence difficult especially with a already sanctioned country when a key interest is threatened. It may also challenge when the country already is subject to significant sanctions for overlapping reasons. this is relevant also for China.
Larger a target is, the less likely pain will be asymetric or costless. That doesn’t mean don’t do it, but increases the importance of planning, mitigation and broadening coalition. Smaller countries may be less systemic and thus more likely to face economic stress from unified set of larger economies. larger economies or those systemic in certain industries are likely to shape what measures can be taken given ability to incur pain on sanctioning coalition or find alternatives.
Sanctions in time of war may amplify global impact as it can add to logistics and supply chain issues. In this case, not only was “derisking hitting energy and food” but also supply chain issues.
Agency of target matters, – not just a lesson from Russia but also Iran. Governments may be able to protect dominant actors. Often sanctions may consolidate power.
Agency of other countries also matters – grey zone countries. May avoid formal violations but continue to operate in trade that’s on the margin. It may increase activity of Illicit finance or in dark corners. There aren’t a lot of alternate financial channels at scale
It can be challenging to maintain large sanctions programs on many important commodity producers at the same time. We see that with Russia (and Iran, Venezuela), but also relating to Belarus (potash)
Choice of targets/sectors matters – The first rounds of sanctions focused on immobilizing Russian assets and making it more difficult for them to use new revenues by cutting off imports. They did not target the major energy sources of revenue, but other sectors.
Differences between China and Russia.
Chinese involvement in global economy very different than Russia and much larger., China greater source of imported goods – capital and consumer and technology. Supplier of critical minerals such as those used in renewable supply chains. Also as a source of capital. Russia smaller economy and much more based on natural resources.
Similarly supply chain disruptions associated with invaded country are different, While Ukraine is critical supplier of agricultural products, some manufacturing (glass) and some key metals, Taiwan is critical in the semiconductor supply chain. Chinese blockades and coercive policies cuts could undermine supply of semi-conductors needed for a wide array of products.
China also bigger source of investment in US – holds close to 1 trillion in US Treasuries. Weaponizing has been called mutually assured destruction, by Dan Drezner among others. It would be costly for China to do so, tho not impossible. If so would expect Fed to come in. China is also major investor in US and source of production for many US companies. Some onshoring yes and some shifting of supply chains due to Chinese policies to restrict business and the cost of zero covid policies.
China likely to care more about triggering policies that undermine its strategic economic interests than Russia. Not to say that Taiwan is not a strategic economic interest, but China might be more concerned about the costs and seeming unreliable to other countries. China might want to reduce the degree of coalition via threats etc. However, shift to wolf warrior diplomacy makes this more difficult.
What’s likely to happen – a mixture of tools as with Russia – continued military arming, financial restrictions, export controls. Military response might be more extensive. CB reserves unlikely as a deterrence target. More likely to continue to weaken military supply lines and cut off Chinese financial institutions.
Irrespective of what happens with Taiwan, US and China are likely to impose measures that reduce bilateral trade and block many investments. The US has called for a more offensive policy using export controls, ensuring that US doesn’t just have relative advantage vs adversaries on technology but also absolute. New measures to monitor and perhaps restrict outbound foreign investment are coming too.
What do we do from here
- spend more time modelling impact and outcomes
- Invest in enforcement including new staff
- Shore up domestic financial system and alternate supply chains in ways that serve LT interest
- Boost coordination among allies and indeed among countries willing to operate in Grey zone.
Ziemba Insights 