What Are Sanctions—And How Effective Are They?

On Feb. 24, Russia began its invasion of Ukraine—and within hours, the United States and European Union announced economic sanctions against Russia as part of their condemnation of the attack. Those moves have thrust the Russian economy into a financial crisis, as the country is isolated and sees assets frozen.

Sanctions have long been a tool in the diplomacy arsenal and are often the most effective way to avoid a larger military conflict. But not everyone understands what they are and what they can do. Here’s a closer look:

What are sanctions?

At their core, sanctions are the temporary (or, in some cases, permanent) ending of trade or other financial relationships with a country, generally for foreign policy or security reasons. They can manifest in a variety of ways, from frozen assets to travel bans to export restrictions. They’re meant as a form of economic pressure to convince a nation to change its policies or behavior.

Who is most impacted by them?

The current round of sanctions has had a far-reaching effect. The Russian Stock Market has been closed since the invasion began. The Russian Ruble is at an all-time low, worth just 7/10s of a penny as of March 11. Interest rates have doubled and Russians have lined up at ATMs for hours, ignoring savings rates above 20% as they look to withdraw U.S. dollars.

Many oligarchs, some of Russia’s wealthiest, most powerful people, are also feeling the effects, as their belongings (like a $120 million yacht) have been seized and they lack access to much of their money. And Russian businesses that rely on semiconductors and other pieces of high-tech have been impacted, which could impact their ability to manufacture machine tools, smartphones, game consoles, tablets and televisions.

Do sanctions work?

They certainly can. Sanctions against South Africa (and the economic impact they had) were cited as the reason the government released Nelson Mandela from prison. And in 1993, Guatemalan president Jorge Serrano dissolved that country’s Congress and said he would rule by decree. The threat of sanctions prompted business leaders to force Serrano out of power.

They’re not a guaranteed solution, though. U.S. trade sanctions on Cuba have caused economic hardships, but they did nothing to unseat the country’s conversion to Communism. They also haven’t ended the rule of Venezuela’s President Nicolas Maduro. And as nations turn away from the dollar and to other currencies, including cryptocurrencies, that could make sanctions as they exist now less powerful.

Has the U.S. ever issued sanctions on Russia before?

Yes. In 2014, when Russia annexed the Crimean Peninsula, President Obama put sanctions into place against the country, including travel bans and the freezing of certain assets. The EU followed suit a few days later—and the sanctions were increased in the following months. That led to a Russian recession and prevented a preannounced military offensive into Ukraine that summer. The U.S. also levied sanctions after the invasion of Afghanistan in 1979.

How long do sanctions last?

There’s really no expiration date on sanctions—and sometimes it can take years to really see an impact. The 1979 sanctions took quite a while to have an impact, but the 2014 ones kept Russia’s economic growth slow enough that Putin chose not to invade Ukraine at the time.

How does China factor into the 2022 sanctions against Russia?

China, as it often is, is the wildcard when it comes to sanctions against Russia. China and Russia are tight allies—and as the world’s second-largest economy, it has the strength to do what it wants, and officials there also distrust the U.S. Chinese companies have regularly ignored trading restrictions on countries the U.S. and EU are sanctioning, but doing so with Russia would take things to a new levels.

China, though, could supply tech components to Russia and offer an alternative to the Swift bank money-transfer system, which Russia has been locked out of. The two countries have nearly $150 billion in trade, and 20 days before the invasion, Chinese President Xi Jinping and Russian President Vladimir Putin signed a statement decrying “power politics…bullying, unilateral sanctions, and extraterritorial application of jurisdiction, as well as the abuse of export control policies.”

China has said it plans to continue normal trade relations with Russia, but that could be posturing, as large-scale assistance to Putin could result in further sanctions against China.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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