Sanctions Harm All Except Targeted Governments

The Wealth Cycle Principle

The United States recently instituted economic sanctions on Russia due to its conflict with Ukraine over the Crimea and is urging other world powers to follow suit.

But do sanctions really work? History tells us they are a passive-aggressive measure, and in the end, they hurt ordinary people while leaving subject governments—composed of a fluid body of individuals—virtually unaffected.  

No state (or group of states, in the case of the EU) nor NATO, the 28-member North Atlantic Treaty Organization, to which Ukraine has applied for membership, have been willing to risk an outright military confrontation with Russia. Earlier this week NATO member nations suspended cooperation with Russia because of the Ukraine conflict, and yesterday Russia recalled its ambassador to NATO, according to CNN.com.

Retired Texas congressman and former presidential candidate Ron Paul agreed, calling sanctions “acts of war.” He continued:

It is based on a moral principle of theft. They want to target sanctions against 20 or 30 bad Russians who they claim have committed a crime against humanity, and therefore we’re going to freeze their assets and steal them from them.

The dynamics of trade virtually guarantee that both parties suffer as a result of sanctions. For example, over half the annual Russian budget stems from oil and gas revenues from the European Union. At least 25% of the EU’s gas supply comes from Russia. Under full sanctions, Russian tax receipts may suffer, but Europeans will freeze. Who wins in this scenario?

Economic sanctions rarely work as planned. Sanctions have left North Korea isolated from the international community. The country’s people literally starve. North Korea’s leaders, however, want for nothing. In 2012, the regime spent£405 million on luxury items, including handbags, saunas, electronics and musical instruments.

In Iraq, sanctions utterly failed. From 1991 until 2003, the United States, the United Kingdom and the United Nations enforced sanctions against the regime of Saddam Hussein. The regime however, did not fall. As Hussein used the sanctions to reinforce his legitimacy, the Iraqi people died. According to a widely cited figure by UNICEF, 500,000 children died of starvation and deprivation between 1991 and 1998. The Security Council Panel on Humanitarian Issues summarized the true effect of Iraqi sanctions:

Even if not all suffering in Iraq can be imputed to external factors, especially sanctions, the Iraqi people would not be undergoing such deprivations in the absence of the prolonged measures imposed by the Security Council and the effects of war

In the end, only all-out war—the very outcome sanctions were supposed to prevent—brought down Saddam Hussein and his Baath party.

U.S. sanctions against Cuba are among the longest lasting in history. As a result of the Castro regime’s confiscation of foreign property and assets, President Kennedy implemented an economic embargo on Cuba in 1960. During the intervening 50-plus years, Fidel Castro and his brother Raul have ruled Cuba, untouched and unconcerned by the U.S. sanctions while the Cuban people suffer. As the Cato Institute concluded:

If the goal of U.S. policy toward Cuba is to help its people achieve freedom and a better life, the economic embargo has completely failed. Its economic effect is to make the people of Cuba worse off by depriving them of lower-cost food and other goods that could be bought from the United States. It means less independence for Cuban workers and entrepreneurs, who could be earning dollars from American tourists and fueling private-sector growth. Meanwhile, Castro and his ruling elite enjoy a comfortable, insulated lifestyle by extracting any meager surplus produced by their captive subjects.

Not only have ordinary Cubans suffered. According to the U.S. Chamber of Commerce, sanctions cost the American economy between $1.2 billion and $3.6 billion per year. In addition to lost income, the embargo has suppressed employment opportunities for thousands of Americans.

Afraid to directly confront Russian power, the United States and the European Union have decided to wage economic war on Russia over the fate of Crimea. As with all sanctions, however, the ordinary people of all parties will feel the effects while the Russian government will remain virtually untouched. Ultimately, these sanctions will share the fate of all such measures—failure.

What’s more, there is the risk credit is given to sanctions in the future, as a contraction in their supply of currency alongside central bank lending rate hikes will do more to contract the Russian economy, writes Frank Shostak of the Mises Institute:

According to some experts, sanctions imposed by the US and the European Union are likely to push Russia into a recession. We suggest that the key factor which is likely to push Russia into a recession is not sanctions as such but a sharp decline in the growth momentum of the money supply between May 2005 and September 2009. Given the possibility that major world economies are heading toward a renewed economic slowdown, we suggest that regardless of sanctions the pace of the demand for Russia’s exports is likely to ease.

http://wealthcycles.com/blog/2014/04/11/sanctions-harm-all-except-targeted-governments