Imposing sanctions is all the rage these days, especially in the U.S. President Trump issued new sanctions against Iran, focusing on individuals and (Chinese) companies that allegedly “supplied missile-applicable items to a key Iranian defense entity”. He went on to reverse the policy of his predecessor Barack Obama to normalize relations with Cuba by limiting travel options and doing business with companies controlled by the Cuban army. Not to be outdone, his Republican compatriots in the Senate approved a bill to impose punitive measures for anyone helping Russia to build gas pipelines (like Nord Stream II) whereas existing sanctions are to be codified into law (making it more difficult for Mr. Trump to lift sanctions simply by sending a tweet). The law still needs to pass the House of Representatives and to be approved by Mr. Trump. The new sanctions supposedly are to punish Moscow for meddling into the 2016 U.S. presidential elections as well as Moscow’s involvement in Ukraine and Syria. Not only the U.S. is a fan of sanctions: also Saudi Arabia and Middle Eastern allies imposed sanctions on Qatar for financing Islamic terrorist groups (though not for staging the cruel 2022 FIFA World Cup). Surely, all this sanctioning activity must imply that sanctions are a very effective tool to achieve stated political goals. Unfortunately, this often is not the case and sometimes sanctions can have undesired or unintended consequences.

Holy Moly, another sanction…

Cuba is a case in point. The U.S. imposed sanctions in 1962 to foster regime change but a Castro still rules the country. Cuba found a sugar daddy, first Russia and then Venezuela, and engaged in a form of modern-day slavery by sending qualified medical doctors to countries with lesser resources in exchange for money or food. The effect has been that the sanctions impoverished Cuba’s masses whilst the Castros continued to fume their cigars (well, one died from doing so). Thanks to sanctions, Cuba is a tourist hotspot, being one of the very few places without a McDonalds. When Russia was sanctioned in 2014 as punishment of invading Crimea and Ukraine, much was made of the colossal impact these sanctions would have on Russia’s economy. Sure, the sanctions were uncomfortable and Russia’s economy crashed into a deep recession but this had more to do with a collapse in oil prices than anything else. Actually, thanks to the sanctions Russia was able to build up a more competitive non-hydrocarbon industry, specifically in agriculture and food processing. Apart from the Russian populace the main loser was Europe, whilst China – a clear winner – could impose highly favourable terms of trade on oil purchases and borrowed money to Russian corporates at attractive interest rates. We do not recall that making China richer was an objective of the Ukraine-related sanctions. The recent proposed sanctions on gas pipelines is causing a rift between U.S. and EU policymakers as especially Germany claims that Europe’s energy security may be jeopardized. An already tense relationship between Donald Trump and Angela Merkel is made worse whereas it is unlikely to change Russia’s behaviour. We bet that the U.S. will cave in on this point. As China saw a good opportunity to exploit the rift between the West and Russia, Turkey is eying Qatari business and immediately sent food supplies. Today, Turkish ruler Recep Tayyip Erdogan is the second most popular person in the country after Sheikh Tamim bin Hamad al Thani, Qatar’s homegrown despot.

The basic idea of economic sanctions is to lower economic wealth of the sanctioned country to change its political behaviour, either directly by putting pressure on the government or indirectly through a popular uprising. This rarely happens. It is not how much pain the sanctioning country can impose, but how much pain the sanctioned country can tolerate. In the case of Russia, the pain barrier is pretty high as WW2 and the collapse of the Soviet Union showed. The Russian people see the annexation of Crimea as a matter of national interest and are rallying around the flag. Putin never has been more popular than now. Targeting the clique surrounding Mr. Putin (with asset freezes and travel bans) has made regime change (if that were the goal) even more remote as they are rid of the option to join the other side. Sanctions don’t work well in countries with authoritarian leaders and where the press is tightly controlled. Sanctions actually may provide an excuse for poor economic growth: just blame the foreigners! An exception, in our view, would be Venezuela. There is strong opposition to the government of Nicolás Maduro, who helped to crash the country’s economy and plunged its citizens in deep misery. By cutting off oil sales to U.S. refineries, we believe Maduro’s government could be swept away as the benefits to his supporters (army leaders and other corrupt officials), who make money from the dollar flow, would evaporate. It is puzzling why Trump is holding back. Maybe Gary Cohn is telling him that this would be bad for Goldman Sachs, which bought a chunk of sovereign bonds recently. Yes, sanctions can hurt companies in the sanctioning country.

Another problem with sanctions is that it may interfere with international law, especially when threatening non-compliant foreign countries or corporates with fines (so-called secondary sanctions) as the U.S. habitually does. This extraterritorial application of domestic law is a rather disturbing development (as the Nord Stream II case shows). Further, (trade) sanctions make a joke of the WTO, the global trade body. It is easy to introduce sanctions but often difficult to lift them, especially when the objectives are not well spelled out.

So why are sanctions used? They are often meant for domestic consumption, to appease the public. It looks better than doing nothing and is less drastic than sending in the marines. Diplomacy generally works better, in our view, but looks weak to the voter base. So, sanctions are often used as a fig leaf: look, we did something! Sanctions really are for sissies…