S8 Ep63: Do sanctions work?

Episode Summary

Executive Summary: Moritz Schulerik of the Kiel Institute discusses the empirical effectiveness of economic sanctions, challenging classical trade theory. Based on a new historical database covering the 19th century to today, he finds sanctions are painful but not catastrophic, typically reducing GDP by 2-3% and 5% over five years. Financial sanctions are more effective than trade sanctions. The discussion critiques the piecemeal Western approach to sanctioning Russia in 2022, arguing that fuller, more decisive sanctions could have had greater impact without devastating the sanctioning economies.

Main Topics: Classical Trade Theory vs. Sanctions Reality (Priority: 4/5): Examining whether sanctions align with classical Ricardian trade theory, which predicts low costs for targeted countries and high costs for sanctioning nations. Empirical Database and Methodology (Priority: 5/5): Building a comprehensive database of sanctions from the 19th century to today, distinguishing between partial and full sanctions based on trade share. Measured Effects on GDP and Trade (Priority: 5/5): Sanctions typically reduce GDP by 2-3%, with financial sanctions being more potent than trade sanctions. Full sanctions are much more effective than partial ones. Case Study: Sanctions on Russia (2022) (Priority: 5/5): The Western sanctions on Russia were too gradual and incomplete, partly due to fears of oil price rises. A more decisive approach could have hurt Russia more while the domestic costs were manageable. Trade vs. Financial Sanctions (Priority: 4/5): Comparison between trade sanctions (affecting specific goods) and financial sanctions (e.g., Swift exclusion), with the latter being more binding due to secondary effects on dollar/euro transactions. Political Economy of Sanctions Design (Priority: 3/5): Politicians favor gradual, risk-minimizing sanction packages, but this piecemeal approach may be less effective and signal weak resolve.

Key Arguments: Classical trade theory suggests sanctions are not very costly for targeted countries due to diversification, but empirical evidence shows they cause meaningful pain (2-3% GDP loss). The impact of sanctions depends on their scope (partial vs. full) and the trade structure of the sanctioned country. Financial sanctions are more effective than trade sanctions because they leverage Western dominance in finance and create secondary effects on third-country transactions. The Western sanctions on Russia were too piecemeal and cautious, partly due to fear of oil price spikes hurting domestic consumers, which reduced their overall effectiveness. Politicians tend to prefer a gradual, risk-averse approach to sanctions, but this may undermine their impact, especially against major economies like Russia.

Data Points: GDP reduction: 2-3% - Impact of sanctions on GDP growth GDP reduction over five years: 5% - Five-year cumulative effect of sanctions Number of packages: 19 - Number of EU sanction packages on Russia as of the podcast Share of energy consumption from Russia: Roughly one-third - Germany's energy consumption from Russia before the embargo

Pivotal Quotes: "Sanctions work, they're painful, but there are no magic wand. So, the economic weapon hurts, it's there, but it's not a weapon that leads to the immediate collapse of the enemy or the sanctioned country within a short period of time." — Moritz Schulerik: Summarizing the core finding on the scale of sanctions' impact. "We're now at number 19. You could even say, like, that's an evidence of failure because what did you do in the last 18 days? Packages, if you need 19. So these 18 packages were too soft." — Moritz Schulerik: Explaining the ineffectiveness of the gradual approach to Russian sanctions. "The key fear was that the higher price of oil, even if Russia doesn't have any revenues anymore because you sanction all the quantities, that the higher price of oil in world markets would end. A derail or make life hard for American consumers in the American economy, and would potentially also derail the support for sanctions altogether." — Moritz Schulerik: Highlighting the political trade-off that limited sanctions' bite on Russia.

Implications: Sanctions are a blunt but real economic weapon, not a magic wand. Policymakers should design sanctions with greater precision and coordination, accepting manageable domestic costs for more effective outcomes. The slow escalation of sanctions on Russia may have reduced their impact, offering a lesson for future geoeconomic strategy.