I like many others have been contemplating lessons learned in the year since February 24, the Russian renewed invasion of Ukraine, which took an ongoing conflict and took it to a whole new level. While its too early to tell all lessons, its a useful time to consider what we’re learned about sanctions effectiveness, the shifting economic tectonic plates and the amplifying impact of the war on the global impacts of the pandemic, US-China competition and of course a new desire for realignment or national interest in many countries.
The following tries to hit some of these lessons and draw upon presentations I recently made at Princeton and at the Stimson Center in DC as well as many many recent discussions with, experts and clients.
What have we learned about sanctions effectiveness? – It reinforced some things we knew
- its difficult to use sanctions as deterrence and coercion, especially on a larger economy or one that has a major natural resource. In this case, the sanctioning coalition quickly pivoted to a new goal of degrading economic and military capacity. Being clear about goals, mapping intended and unintended consequences is key.
- Impact of sanctions depends on breadth of sanctioning coalition and whether other countries provide alternate channels. (see size of economy)
- Prior coercive statecraft on the target or other economies may complicate the deployment. For example – Sanctions on Iran/Venezuela (oil), and Belarus (fertilizer) may amplify impact of
- Sanctions can reinforce power structures in target countries as larger players even if sanctioned may either be too important to fail or have more savings to hedge vs private sector. An example is the consolidation of power around Russia’s military base or the increasing role of the IRGC in Iran.
- Paradoxically, some sanctions impacts build over time, especially export controls and investment restrictions. And at same time coping mechanisms, new intermediaries and new trade routes also develop over time in the absence of new sanctions.
“Surprises”
Things that people worried about that didn’t materialize (yet)
- western lack of cohesion and inaction.
- Dollar dominance challenge (for now) – rate cycle and coordination of G10 reduced benefit of diversifying into new currencies. One important trend to watch – ongoing experiments to use alternate currencies in bilateral trade but these have been limited by Chinese concerns about loss of monetary control.
- Quick collapse of Ukraine.
- Massive energy shortages at global level. Partly a reaction of weak Chinese demand and also a choice of sanctions priorities (price cap not just embargo)
Things that did happen many of which are concerning for the future.
- Divide between developing and emerging economies. While no one expected China to comply, US partners have been quite willing to operate in grey zone despite political concerns. The development of new hedging choices from countries like Turkey, UAE, Saudi Arabia among others has complicated enforcement
- Underestimation of the food and fertilizer price risk complicated these ties. This misjudgment was partly driven by lower exposure of developed economies and partly because intelligence feared a quicker overrun. Some more recent measures including the Grain Initiative and sanctions general license exemptions helped to alleviate shortages.
- fragmentation of oil markets and greater fuel traveling longer distances – less transparency and more ship-to-ship transfers which can make it harder to assess end users. It also includes the unintended consequences of a greater role of Russian in transport.
- Greater role of governments in energy markets and critical supply chains. This reflects both the developments of the war and lessons learned from the pandemic, zero covid, and the China challenge. There can be opportunities and challenges from this. This includes both natural gas coordination, energy subsidies and other measures from west, greater use of the SPR as a tool
- Competition and experimentation in financial channels/some alternate payment and to lesser extent savings.
- Competition between allies over how to deal with China threat and indeed Russia. Watch the IRA discussions, implementation of friendshoring and potential competition to develop critical mineral supply chains in the context of regional agreements such as IPEF as well as climate clubs.
Ziemba Insights 