Category Archive: Sanctions

Sanctions are the most-used and least-examined instrument in modern statecraft. They are reached for because the alternatives are worse — doing nothing, or using force — and they are assessed, when they are assessed at all, on whether they were imposed rather than on whether they worked. This archive collects reporting on how the instrument actually functions.

The mechanism nobody explains

Most public discussion treats sanctions as a trade embargo: country A stops buying from country B. Modern measures rarely work that way. The effective instrument is financial rather than commercial, and it operates through the banking system rather than the customs post.

A payment denominated in a major currency clears through banks in that currency's home jurisdiction. That gives the issuing state a decision point over transactions between two entirely foreign parties, because the money passes through its territory even when the goods never do. The measure that bites is not a ban on buying oil; it is the unwillingness of an intermediary bank three countries away to touch the payment.

This is why the currency question keeps recurring in the coverage. A producer announcing it will settle in something other than the dollar or the euro is not making a statement about exchange-rate preference. It is attempting to move a transaction out of a jurisdiction — see our reporting on Iran's decision to exclude the dollar and euro from oil deals.

Why the alternatives are harder than they sound

The obvious response to financial exposure is to use a different currency. The obstacle is not political will but market depth. A currency of trade has to be somewhere a producer can hold large balances, borrow against them, hedge them and spend them. Very few currencies offer that, and the ones that do belong to the states doing the sanctioning.

Barter, third-country intermediaries, gold and non-convertible balances all exist as workarounds. Each imposes a discount, and that discount is the measure's real effect: not a cut-off, but a tax.

What the evidence supports

Three findings recur across the literature and are worth stating plainly. Comprehensive measures against a whole economy reliably damage the general population and unreliably change the behaviour of the government. Targeted measures against named individuals and entities are better on both counts but leak through nominees and shell structures. And measures are far more effective at deterring third parties — banks and firms that decide the compliance risk is not worth the business — than at coercing the target directly.

That last effect is the least discussed and probably the largest. Over-compliance by risk-averse institutions does more work than enforcement ever does.

The measurement problem

Assessing a sanctions regime requires a counterfactual — what the target would have done otherwise — and counterfactuals are unavailable. So the debate substitutes proxies: the currency's exchange rate, export volumes, the target's rhetoric. All are noisy, and all are cited selectively by whichever side is arguing.

Our approach in this archive is to report the mechanism and the observable numbers, note what would count as evidence either way, and decline to declare success or failure on a timescale that cannot support the claim.

In this archive

• Iran to Shun Euro, Dollar in Oil Deals — settlement currency as a sanctions-avoidance strategy, and its limits.
• Chinese Court Sentences US Geologist to 8 Years — the adjacent question of what a state may classify, and the commercial consequences.

Country-level production and export data referenced in this coverage is published by the US Energy Information Administration; producer policy is documented by OPEC; and the nuclear questions that underlie several sanctions regimes are reported by the International Atomic Energy Agency.

Browse also: World, Space, the July 2010 archive and the front page.