## THE SANCTIONS WEAPON

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### Summary of the current shock
- Not since the 1930s has an economy the size of Russia’s been placed under such a wide array of commercial restrictions.
- Sanctions on Russia have been imposed by 38 North American, European, and Asian governments.
- Russia is a major exporter of oil, grain, and other key commodities; sweeping sanctions have "drastically impeded Russia’s access to the world economy" and "vastly increased the range of commodities" removed from world markets.
- Global food prices rose 28 percent in 2020 and 23 percent in 2021, and they surged 17 percent this year between February and March alone.
- The loss of Ukrainian supply (closed Black Sea ports blocking wheat, corn, sunflower oil, and other goods) is amplified by sanctions and global supply chain disruptions.

### How today’s sanctions differ from past episodes
- Russia is the world’s 11th largest economy and a prime commodity exporter among emerging markets.
- Russia’s trade openness: trade-to-GDP ratio of 46 percent (World Bank data).
- Among the seven largest emerging markets, only Mexico and Turkey had higher shares in 2020: Mexico 78 percent and Turkey 61 percent.
- Historical parallels:
  - 1935–36 League of Nations sanctions on Italy (after invasion of Ethiopia): Italian industrial production fell by 21.2 percent from October 1935 to June 1936; in the first five months of sanctions, exports plummeted by 47 percent before stabilizing at roughly two-thirds of their pre-sanctions level.
  - Late 1930s–1941 sanctions on Japan: by late 1941, Japan’s trade had fallen by 20 to 25 percent in just 18 months; US oil embargo and asset freezes preceded Japan’s wartime expansion.

### Global economic environment and transmission channels
- Trade integration is much higher today than in the 1930s (merchandise exports as a percent of world GDP have risen substantially over the 20th and 21st centuries).
- Modern features that amplify or alter sanction effects:
  - Broad-based market integration increases the avenues through which sanction shocks spill over into the world economy.
  - A highly integrated dollar-based global financial system sustains international transactions and capital flows.
  - Current environment: inflationary pressure (not deflation), higher commodity prices, and supply chain bottlenecks.
  - Sanctions raise commodity prices and transaction costs, create bigger supply bottlenecks, and increase trade losses that affect more countries worldwide.
- Political economy implication: many net-commodity-importing emerging market and developing economies have not joined sanctions because they face higher balance of payments risk from tightened sanctions on Russian exports.

### Costs versus risks and new evasions
- Today’s sanctions can cause larger commercial losses than historical precedents because of higher interdependence.
- Modern sanctions are more vulnerable to weakening through trade diversion and evasion.
- Compared with the 1930s, modern sanctions are less likely to provoke direct military escalation but can produce significant economic spillovers.

### Policy recommendations to mitigate spillovers
- Advanced economies should focus on long-term infrastructure investment to ease supply chain pressures.
- Emerging market and developing economies should make income support a priority.
- Advanced economy central banks should avoid rapidly tightening monetary policy to prevent capital flight from emerging markets.
- Tackle looming debt and balance of payments problems in developing economies through:
  - Debt restructuring.
  - Increases in their allotments of the IMF’s Special Drawing Rights.
- Extend humanitarian relief to distressed economies, especially in the form of food and medicine.
- Major economic blocs should better organize their demand for food and energy to reduce price pressures caused by hoarding and competitive overbidding.
- Urgency: "Unless such policies are put in place in the next few months, grave concerns about the world economic outlook for 2022 and beyond will be justified."

*Nicholas Mulder — "The Sanctions Weapon", Finance & Development, June 2022.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/june/mulder.pdf_