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The rouble is rubble - but do economic sanctions work?

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The rouble is rubble – but do economic sanctions work?

By Tim Cohen
07 Mar 2022 1

Tim Cohen is editor of Business Maverick. He is a business and political journalist and commentator of more years than he likes to admit. His freelance work has included contributions to the Wall Street Journal and the Financial Times, but he spent most of his life working for Business Day. After a mid-life crisis that didn't include the traditional fast car, Cohen now lives in the middle of nowhere in the Karoo.

Among the many issues that have arisen as a result of Russia’s invasion of Ukraine is an old and hoary question: Do financial sanctions work?

In some ways, the conflict  between Russia and Ukraine has resulted in what could be described as the first global financial war. But is it really?

Many countries have been sanctioned before, including our own. The results can be contradictory. In some cases, the effects of financial sanctions can lead to resilience and innovation, and we saw some of that in apartheid South Africa. Oil-from-coal producer Sasol is perhaps the best example.

But, ultimately, financial sanctions did work in South Africa, or at least they arguably contributed to change. Economic growth tapered downwards in 1980s, and SA defaulted on its international bond repayments in 1985. And the sanctions weren’t even particularly severe by modern standards.

There was some opposition to sanctions because they hurt the very people they were intended to help. But sanctions and, perhaps even more so, the disinvestment campaign were contributory factors to forcing the hand of the then National Party government to seek a negotiated solution.

Sanctions against apartheid SA illustrate one of the problems with economic sanctions campaigns, and that is the difficulty identifying the causality. In SA’s case, there is still some dispute about how much the sanctions campaign contributed. Former president Nelson Mandela was adamant they helped; whereas FW de Klerk, the last apartheid-era president, maintained the pressing issues were much more geopolitical than economic.

But there are contrary examples where sanctions not only don’t work but have the precise opposite effect of those intended.

Economic sanctions have been imposed on Iran for almost a decade now. The result has been huge currency volatility, high inflation and lower economic growth. Sanctions have pushed millions of Iranians below the poverty line and have enhanced systemic corruption. But the Iranian economy has not collapsed. Neither is Iran any closer to coming to terms with the West. By some accounts, all the sanctions have done is strengthen the autocratic tendency that was apparent in the society already.

And that is the central contradiction in the logic of sanctions – they are intended to hurt ordinary citizens, who, the proponents hope, will then turn on their errant government, and political change will occur. But what if the opposite takes place? What if the country becomes even more belligerent? Then the only thing achieved would be more misery and an even higher security risk.

An analysis by the World Economic Forum points out that, according to Dursun Peksen, a sanctions expert at the University of Memphis, economic sanctions result in meaningful behavioural change in the targeted country only about 40% of the time.

And it’s worth remembering that sanctions hurt both sides, not at the same quantum, of course, but they do bite the hand of the imposer as the booming global oil price is about to demonstrate.

Each case, of course, has its own dynamics and, in the case of Russia, the sanctions campaign is unfolding extraordinarily fast and it is unusual in some respects. The entire Russian stock market is effectively uninvestable; the country has gone from having investment grade debt to being junked in days.

Some of that, I suspect, is because people around the world are so revolted by what Russia has done. The result is that hundreds of companies – from Toyota to Netflix – have walked away from their Russian investments. Ford continued building cars right through apartheid, but it took only two days for Ford to suspend its operations in Russia.

The sanctions campaign has taken on a populist bent particularly in Europ and my guess is that Russian President Vladimir Putin could never have anticipated that. The other thing he plainly did not anticipate was sanctions being applied to the Russian central bank.

The US and the EU along with many other countries have prohibited any entity from transacting with Russia’s central bank, the finance ministry or any sovereign wealth fund. This is a novel measure, which makes it tricky for Russia to monetise the huge financial holdings it has been building up in anticipation of global financial attack.

There are ways around these measures, including currency swaps with China. In some ways, the measures are likely to strengthen the alternative to the dollar-based international system and boost the use of the yuan. But they do hurt, and that is visible in the collapsing value of the rouble.

How this all works out remains to be seen. But at the start of the sanctions campaign against Russia, I would have bet that it would never work. Now I’m not so sure. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.


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  • Sanctions make us feel better as a minimum. The confiscated jets and yachts and frozen billions feel like some reward. Sanctions must create room for doubt in Russia about what Putin is doing. When the ruble hits ½ an american penny there will be lots of doubt.

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