Economic sanctions have always acted as a double-edged sword which at times have done more harm to the countries imposing them than the ones facing the ban.

Manish K. Pandey | The Dollar Business

Sanctions… There’s been a lot of talk about them lately. The world has been debating and discussing them since the day (July 14, 2015) Iran and the six world powers – United States, United Kingdom, France, Germany, Russia and China – agreed to a deal that lifted sanctions on Iran.

While some view the deal as “a new chapter of hope” for Iran, many believe it to be nothing else but a “colossal failure” that will only bring in more instability to the Middle East. Only time will tell whether it was the right decision and what the widespread ramifications of the Iran deal on global trade dynamics will be. What is more intriguing is the effectiveness of this ‘economic lever’ that the developed world has been using for years now to suppress emerging powers or those that obstruct foreign policy objectives of the geopolitical big daddies.

So, have sanctions really been successful in achieving what they were (or are) deployed for as a primary weapon of geo-economics? Or, is it just a zero-sum game? I would say: It depends on the situation and the countries party to it – the size and the capacity of the economy being sanctioned, the power and the influence of the country or the economic coalition imposing the sanctions and, of course, the countries contradicting them. Let’s consider an example, an old one – the US sanctions against Cuba in 1960s. From an economic standpoint, the direct impact of America’s trade restrictions on this largest island in the Caribbean was swiftly dampened. Why? Because United States’ arch rival former Soviet Union quickly stepped in to fill in the economic void and poured in large amount of monetary aid that would last for decades.

Another case in point (a more recent one) could be the EU-US sanctions on Russia (since September last year over its annexation of Crimea). At first glance, it appears as if restrictions have literally ripped apart the Russian economy and because of them the country is approaching a financial breakdown (Russia’s recession worsened in Q2 2015 as gross domestic product shrank by 4.6% y-o-y). However, a closer look and one can easily figure out who to blame for Russia’s ongoing financial misfortune – falling prices of crude oil, a commodity on which the Russian economy heavily depends on.

It’s not that the economic sanctions haven’t worked in these two cases. If the impact was not direct, there were certainly some indirect negative consequences. While economic sanctions raised the cost of capital in Cuba and slowed down its economic development, the restrictions (targeting Russia’s state finances, energy and arms sectors) have certainly affected some of Russia’s biggest firms that have been contributing to the country’s forex reserves in a big way. Further, economic sanctions have always acted as a double-edged sword which at times have done more harm to the countries imposing them than the ones facing the ban. For instance, while the European machine-makers and shipbuilders like Germany and France have had to reduce their exports to a big market like Russia, American multinationals have lost a big ground in Iran.

Considering all this, we can say that not every country, on which an economic ban is imposed, meets the same fate as Iran or Georgia (a country which is facing Russian sanctions). The effectiveness of an economic sanction always depends on the following factors: (a) the level of economic leverage the sanctioning country has on the target nation; (b) type of economic sanction – broad or narrow; (c) the reaction time – immediate or time consuming; and (d) resilience of the target’s political and economic institutions. It’s the combination of these factors that decides both the efficacy and the impact of a sanction.

While one cannot accurately gauge the near-term outcome of such bans, they definitely have the potential to cripple economies in the long run. But to me, they are nothing but a no-winners game where international trade always loses!