While aimed at curbing undesirable actions by target nations, economic sanctions often present a complex challenge with dual impacts. Primarily, they are designed to diminish the gross domestic product (GDP) and, thus, the prosperity of the nations they target, aligning with their strategic objectives. However, the repercussions for the economies of the imposing countries can also be severe. Nevertheless, these adverse effects can be considerably softened through the strategic selection of participant countries in the sanction measures.

This perspective is the crux of a recent study published in Economic Policy. The research, meticulously conducted by economists Sonali Chowdhry from DIW Berlin, Julian Hinz of Bielefeld University and IfW Kiel, Katrin Kamm from IfW Kiel, and Joschka Wanner from the University of Würzburg and IfW Kiel, delves into the economic sanctions imposed on Iran in 2012 due to its nuclear activities, and on Russia following its forceful annexation of Crimea in 2014.

Their analysis focused on the economic impacts of these sanctions, particularly in terms of price fluctuations, prosperity levels in the target countries, and changes in trade flows. Joschka Wanner, Junior Professor of Quantitative International and Environmental Economics at Julius-Maximilians-Universität Würzburg, outlined the methodological approach, noting that the initial step was to quantify the changes in these economic parameters as a direct result of the sanctions.

Their findings indicate a tangible reduction in GDP for the targeted nations; Iran saw a decline of 1.9 per cent, while Russia experienced a 1.44 per cent fall due to the 2014 sanctions. Wanner remarked, “Although 1.4 or 1.9 per cent might not seem significant, from an economic standpoint, these figures represent a severe recession.”

Moreover, the study assessed the real-world impacts against the theoretical maximum effect of the sanctions under various scenarios—either by broadening the coalition of sanctioning countries or applying the sanctions more comprehensively across all goods. For instance, the current sanctions coalition against Iran achieves only about 39 per cent of the potential GDP decline that could be realised if all countries participated. For Russia, the effectiveness is slightly better at around 58 per cent.

The disparity becomes even starker when comparing scenarios where the sanctions extend to all goods without exceptions. Here, the coalition’s effectiveness drops to only 47 per cent of Iran’s potential GDP decline and a mere 16 per cent for Russia.

The study also highlights the uneven burden of sanctions across different economies. Larger economies like the USA, Japan, and Germany experience relatively minor impacts, whereas smaller countries like Malta, Estonia, and Latvia face significant economic downturns. Wanner explained that for smaller nations, trading restrictions with an essential neighbour like Russia could lead to disproportionately large economic disturbances compared to larger economies.

The research suggests a strategic reshuffle could significantly amplify the effectiveness of sanctions. For example, if countries like China, Vietnam, Belarus, Turkey, and South Korea were to join the sanctions against Russia, the potential impact could increase from 58 per cent to 71 per cent, with China’s participation being particularly pivotal. This potential for a strategic reshuffle offers hope for the effectiveness of future sanctions.

Recognising the unlikely prospect of China joining a Western-led sanctions coalition against Russia, the study proposes a reassuring solution in the form of financial transfers to balance the economic scales for those nations severely impacted by the sanctions. According to the research, approximately 591 million US dollars would be required for Iran-related sanctions and 4.8 billion US dollars for those related to Russia, enabling coalition members to offset their welfare losses. The United States would be the major contributor to this proposed “compensation fund,” followed by the UK and Canada.

This comprehensive analysis underscores the complexity of international economic sanctions and points towards more effective strategies that could enhance their impact while mitigating adverse effects on the sanctioning countries.

More information: Sonali Chowdhry et al, Brothers in arms: the value of coalitions in sanctions regimes , Economic Policy. DOI: 10.1093/epolic/eiae019

Journal information: Economic Policy Provided by University of Würzburg