The best test of the effectiveness of US sanctions policy over Ukraine will be if it deters Russia from invading and encourages a negotiated solution.

Once the military has moved, sanctions are unlikely to prompt a change of Russian heart, any more than did the sanctions imposed after Russia annexed Crimea in 2014.

In comments last week, Russian President Vladimir Putin flagged that he was weighing the risks. Presenting the conflict over Ukraine as a US strategy to ‘contain’ Russia, he declared ^[1]: ‘[The US can] drag us into some kind of armed conflict and with the help of their allies in Europe impose against us the very tough sanctions that the US is talking about today.’

US officials have been crafting a set of sanctions to be applied against Russia calculated to inflict maximum political damage on Putin, while minimising, so far as is possible, any blowback for the US, European or world economies.

It is a tricky course to tread. The risk that sanctions will cause collateral damage to allies and the global financial system is balanced by the risk they will prove ineffective.

US Secretary of State Antony Blinken warned ^[2] Russia two weeks ago not to underestimate Washington’s capacity to act. ‘If Moscow chooses the path of further aggression, we will impose swift and massive costs.’

Some wondered if this was a coded message to the Russian Federation that the US would seek to exclude it from the SWIFT global financial settlement scheme. SWIFT—an acronym for Society for Worldwide Interbank Financial Telecommunication—is a Belgium-based cooperative of 11,000 financial institutions that provides secure messaging of global financial transactions.

The US and the European Union agreed to exclude Iranian banks from the system in 2012 as part of a campaign of sanctions that was ultimately successful in persuading Iran to negotiate a deal curtailing its nuclear ambitions.

When US President Donald Trump revoked the deal despite European objections, he ordered SWIFT to again exclude Iranian banks, threatening that the viability of SWIFT itself would be in jeopardy if it continued to deal with organisations that were the target of US sanctions. The cooperative reluctantly bowed to the US demand.

The threat of expelling Russian institutions from SWIFT was raised in the wake of its annexation of Crimea in 2014 and again in 2018 when it sought to block Ukraine access to the Sea of Azov, adjacent to the Black Sea. Russia’s prime minister during that period, Dmitry Medvedev, warned ^[3] that exclusion from SWIFT ‘would in fact be a declaration of war’.

In the wake of those threats, both Russia and China have established their own national financial messaging services to ensure their institutions could still function, although blockage from SWIFT would still require special arrangements to be constructed for the entirety of their international transactions.

In practice, the US is unlikely to press for exclusion of Russian banks from SWIFT for the same reason it will not seek to shut down Russia’s energy exports: the damage to European allies would be too great. The EU relies on Russia for 40% its gas imports, and European customers need a continued ability to transact with Russian suppliers. There are also extensive business links between Russian and European countries.

The US is attempting to devise its sanctions package in tandem with the EU, although the latter requires the unanimous approval of all 27 members before implementing anything.

It is anticipated that the sanctions package will include some financial and energy components. The new Nord Stream 2 gas pipeline under the Baltic Sea to Germany could be barred from starting up, although that would leave Germany and much of Europe with a continued dependence on the pipeline through Ukraine. Europe’s power industry is anxiously seeking to secure alternative supplies of LNG in case Ukrainian trans-shipments are blocked.

The financial measures could include sanctions on major Russian banks, although, again, there’s debate about whether that would cause too much difficulty for European businesses. Once a bank is placed on the US ‘Specially Designated Nationals’ list, banks and businesses around the world can’t deal with it without themselves becoming subject to US sanctions including a prohibition on dealing in US dollars.

Confining financial sanctions to second-tier banks or to particular divisions of major banks could be seen as a signal of weakness.

Secondary trade in Russian government bonds could be sanctioned. However, Russian government debt is only 20% of GDP and it has abundant reserves.

Oligarchs in Putin’s orbit are fair game, though even here there are some risks. In 2018, the Trump administration imposed sanctions on several Russian business leaders, including Oleg Deripaska, who owned the aluminium producer Rusal. The market immediately halted purchases of Russian aluminium, and the resulting shortage forces prices up 15%. Rusal was also a major supplier of the intermediate product, alumina, and the blockage of that trade caused difficulties for major aluminium smelters in the West. Ultimately, the US backed down.

Joe Biden’s administration has broadly continued the use of economic sanctions as an instrument of foreign policy coercion that was practised under both Donald Trump’s and Barack Obama’s administrations. In 2021, it imposed 765 new sanctions designations, compared with 777 in the final year of the Trump administration. Under the Obama administration, there were around 600 new sanctions designations each year.

The focus has shifted away from Iran under Biden, with Belarus receiving the most country-specific sanctions last year (100), followed by Burma (76), China (70) and Russia (54). Unlike Trump, Biden has coordinated several sanction actions with allies.

Australia participated in a joint sanctioning ^[4] of Russian business leaders and companies associated with the construction of a bridge linking Russia with the Crimean peninsula. The EU, Canada and the UK imposed similar sanctions.

While the process of imposing economic sanctions is firmly institutionalised in the US and increasingly so in other Western nations, there’s little empirical research into their effectiveness.

Over the past four years, the toughest economic sanctions ever implemented short of outright sieges have failed to produce the least change in the policies of the governments of North Korea, Iran or Venezuela, while Cuba has now resisted US economic coercion for six decades.

On the other hand, it’s possible that the sanctions imposed on Russia following its annexation of Crimea and of the Donbas region of Ukraine deterred a more extensive invasion. If a negotiated solution to the Ukraine impasse is reached, the US threat of sanctions may share the credit.