The power and pitfalls of sanctions

Now, as I mentioned, Russia is the most important sanctions case the world has seen in decades. And it matters so much not just because of the breadth of the sanctions, which is unprecedented, it also matters because Russia is a major country, indeed, as we all know, a member of the UN Security Council.

But it also matters, this massive round of sanctions that we have seen in the past couple of years, because it's the first case of a country that's fully passed-- it's the first case of a country that's fully part of the globalized economy being sanctioned using every aspect of the globalized economy.

And we're talking everything from oil, to airplanes, to diamonds. The sanctions the west has imposed on Russia since the invasion of Ukraine in February 22 are, of course, a continuation of the sanctions it began imposing when Russia annexed Crimea nine years ago.

Sir Laurie Bristow has observed the sanctions up close. Between 2016 and 2020, he was the UK's ambassador to Russia. That period included the Skripal poisoning, which led to more measures by the UK and other western countries. Laurie is a veteran diplomat who has also served in Romania, Turkey, and Azerbaijan, among other places. And he has also been director of intelligence and national security.

Welcome, Laurie.

LAURIE BRISTOW: Hello.

ELISABETH BRAW: My other guest is Sam Wilkin who is WTW director of political risk analytics, which means that he constantly monitors emerging and existing politically-linked threats to companies. He also leads WTW's annual political risk survey, where one can read black and white, how concerned multinationals are about politics these days.

The most recent survey showed massive increases in the number of companies foreseeing intensified economic nationalism, and deglobalization, and indeed accelerating decoupling between the west and some other major parts of the world. Welcome, Sam.

SAM WILKIN: Thanks, pleasure to be here.

ELISABETH BRAW: Now, Laurie, you were there as it all intensified, the sanctions against Russia, the pressure on Russia to return to the rules-based international order, to perhaps give up Crimea or at least to become a more constructive member of the global community of nations. Can you tell us what you observed during those years, the effect of the sanctions, or indeed perhaps the lack of an effect?

LAURIE BRISTOW: Sure. Well, first of all, it's maybe worth stepping back a bit and looking at what actually is the purpose that you're trying to achieve when applying sanctions. So you mentioned my time as ambassador in Moscow. I mean, looking back on the time I was dealing with Russia, actually, it included dealing with the consequences of two poisonings in the UK by the Russian special services, the killing of Alexander Litvinenko in 2006 and then the attempted murder of Sergei Skripal in 2018.

It also included the military action against Georgia in 2008, the annexation of Crimea, and the stirring up of Something close to civil war in the Donbas in 2014, and then of course culminating in the attack in February last year, the full on invasion of Ukraine.

So in terms of the purpose that we're trying to achieve here, I think probably sanctions are best understood as part of a spectrum of tools that you apply when a foreign state is doing something that deeply, profoundly, negatively impact your interests.

And that, of course, that spectrum can include anything from calling in an ambassador for an interview without coffee through to military action at the other end. Sanctions lie somewhere on that spectrum. So in terms of what you're trying to achieve and, of course, you can be trying to achieve all of these at the same time, part of it is sending a message. It's sending a message that you are deeply concerned about something that's being done. And. You intend to take action against that.

The action, I think, has a big element of imposing a cost. That costs can take many forms. You're to, essentially, restore deterrence for the action that you find unconscionable. It can be about constraining capabilities, essentially, making it difficult or impossible for your opponent to do things, to do the things that you find threatening.

It's also important to understand the limits of the possible here. I mean, looking at Mr. Putin and his regime over the years, I think we all need to be realistic that sanctions alone are not likely to change the behavior of a regime like that. It's not that directly a causal relationship. I think it can change their calculations. And that's certainly the intention over time.

ELISABETH BRAW: If I can interrupt you there, since you mentioned that economic sanctions alone are unlikely to convince a regime like that of Russia or indeed of other autocratic countries to change their ways, am I right in thinking that perhaps Putin and leaders like him are not that bothered about how the citizenry is doing and the cost for the general population of western sanctions, but they would be bothered by sanctions targeted to them, and their very close associates, and indeed their family members?

LAURIE BRISTOW: Yeah, so sanctions, of course, don't need to be solely economic. And their effects don't need to be solely economic. Looking back at the Skripal poisoning and the attack on Alexander Litvinenko, the sanctions that we and our allies applied then were mostly around damaging the reputation of Russia and its agencies and damaging their operational capabilities.

So that's why, with allies, we expelled over 150 active Russian intelligence officers after the Skripal attack. That was a serious hit on both their operational capability and their prestige, internationally and within the Russian system. Of course, you're right. When you're applying sanctions, you need to try to think about the impact on decision makers.

I mean, Russia is the kind of state where oligarchs, the big economic players, they are not decision makers about the really big questions of peace and war. That's a much, much tighter group around President Putin. But certainly, they have views.

And one of the things that sanctions can do if properly applied here is to cause tensions, frictions within the system, cause discontents within the system, and to make it very, very clear that there is a price, a personal price, as well as a systemic price for what is being done here.

ELISABETH BRAW: I want to bring you in, Sam, to better understand the second order effect of sanctions. But before that, I do have to ask you, Laurie, western governments have long held the view that we shouldn't punish children for the sins of their fathers. And the result is that we have all manner of children of various unsavory leaders who engage in aggression vis a vis their neighbors and indeed against the western community. Those children have been living in our countries.

Now since the invasion of Crimea, there have been sanctions imposed on such children. But do you think-- is that a fork in the road, where Western governments have decided that we can't afford this luxury of not imposing sanctions on the children of foreign countries, hostile countries' officials?

LAURIE BRISTOW: It's a fair question. And of course, there's a basic principle here of not punishing one person for the actions of another. That said though, I think we are now in a situation where-- I mean, we've known for some time that members of the Russian elite arbitrage between their system and the freedoms of the west and the ability to store wealth out of the reach of the Russian authorities.

The ability to enjoy the freedoms and safeties of life in the west. And for example, to put their children through school and university. And there have been some remarkably high profile individuals who have put their children through UK schools and universities, including some of the more vehement critics of the UK and our allies.

Probably the most important thing, though, to focus on here in the current situation is closing off the ability of people who we wish to sanction to protect their assets by transferring them into the names of other people. That's a clear loophole. And I think it's a well-established principle that where loopholes exist and they are used to circumvent the purpose of sanctions. Then you try to close them down.

ELISABETH BRAW: Yes, that is a good point to continue on with Sam. Because Sam, there is the easy to understand face of sanctions, which is that it hits another country's economy, then that country will inevitably try to make arrangements so they can continue functioning in a way. And we've seen many cases of that over the years, including a certain dynasty in Asia, let's say. The other second order of function of sanctions is, of course, the way it affects western companies.

And since, especially since 2022, the beginning of 2022, lots of western companies, a whole procession of western companies have left Russia or tried to leave Russia because they decided it was no longer viable for them to do business there, either because their sector was sanctioned, or because general sanctions just made it commercially unviable. So how do we measure the effect on western companies of the recent slew of sanctions on Russia? And what can we learn from that?

SAM WILKIN: Well, or because of social pressure, actually. That was another reason. It wasn't necessarily the sanctions, it was ESG, I guess you could say, ESG pressure that caused a lot of companies to leave. So the impact of sanctions on western companies has changed really dramatically over the past couple of years.

And to explain this, let me give you a little bit of background. So the number of sanctioned programs in the world in the post-war era gradually expanded during the Cold War, plateaus in the '90s when the Cold War ends, although then you pick up UN sanctions often on human rights issues. And then around, say, 2005 to 2008, the number of sanctioned programs just explodes as sanctions becomes a cornerstone, particularly, of United States national security policy.

And there's also, at that time, the change that Sir Laurie just alluded to where sanctions aren't just economic sanctions anymore. Now, we have all sorts of smart sanctions. We have secondary sanctions that apply to third countries beyond the sanctioned and sanctioning country. You have travel sanctions and financial sanctions.

And so there's this explosion in sanctions and also an explosion in sanctions innovation. But through all those post-war changes, there is one constant. And this gets to your question. There's one constant. And that constant is sanctions are a tool imposed by the rich against the poor.

In other words, close to 90% of all sanctions programs since 1960 are imposed by advanced larger economies or multilateral institutions against poorer emerging market, smaller emerging market economies. And the reason for that is to limit the impact on our own firms, I guess you could say, on the United States on its own firm. The UK limiting the impact on certain firms.

When the relationship, the economic relationship between the US and Myanmar is cut off, that's a big deal for Myanmar because it removes access to a major world market. It is much less of a big deal for the US. That limits the impact. And so you get the US will sanction Myanmar. Myanmar will not sanction the US or very rarely would respond by sanctioning the US.

ELISABETH BRAW: If I can interrupt you there, isn't the challenge though that today, western economists are not the only wealthy countries out there. And indeed, some non-western countries have a higher GDP per capita than western countries do.

And can essentially thwart the power of sanctions that we impose, the west imposes on other countries by trading with those countries. And we've seen certain countries increase their trade with Russia since the west imposed its sanctions.

SAM WILKIN: Yeah, so you think you're going to have to go back to Laurie on that one. But in general, I don't know if I'd call it a challenge. I would say, this is a big deal because now-- well, as you're alluding to, now major world economies are imposing sanctions on each other. And this is new. This is over the past couple of years.

So nearly 90% of new sanctions designations around the world target Russia over the past couple of years. The US exchange control program-- sorry, export control programs, about 30% target Russia. 20% target China. These are major world economies. When you impose those kind of sanctions against these large economies, it hurts western businesses.

So western businesses, this is starting to change. I don't think it's-- are they doing this because they found some magic new way to limit the damage to western businesses? No. What's happening now is that governments just have a much higher tolerance to impose pain on their own businesses in order to use sanctions. I think that seems to be what's changed over the past couple of years. And it's certainly caused a lot more economic damage when you have these major world economies sanctioning each other.

LAURIE BRISTOW: There's a very important more general point here, which is about how you design sanctions when you're deciding that that's the policy route you're going down, but also, I mean, how you maintain them, and eventually how you lift them. So I mean, if you look at, for example, the sanctions that have been applied in relation to Russia's invasion of Ukraine over the last year or so, the G7's at the core of it.

And one of the reasons for that is that is the forum in which you can bring together a serious alliance of economies that have, between them, a strong asymmetric economic power relationship with a country like Russia. So you can cause damage to Russia. You can do what you're trying to do through sanctions.

But of course, there are a couple of things to watch in there. One is you can't really not work with allies on this because you then almost instantly come into the question of, who is paying the costs of sanctions? And going back 10 years, at the time of the Crimea sanctions, around 2014, a great deal of the debate within the European Union and more widely was, so who is actually picking up the tab for this? Who's picking up the bill for this.

So there has to be an attempt to achieve a equality of pain for those paying the costs if they're to be seen to be there. But also, not to create perverse incentives. So if what you're actually doing is setting up a system where an ingenious actor can capture rents as a result of what you're doing with your sanctions, then you're going backwards.

And that, of course, is very corrosive when holding an alliance together. The really tricky bit comes over time because, of course, countries can-- their positions can evolve over time. But you still basically want to keep that alliance together. And keeping people inside the 10 can be a really big part.

The hardest part of all is how you use sanctions lift to change behavior or to reinforce behavior that has changed, including the threat of snapback. It's relatively easy to lift sanctions. It's much, much harder to reimpose them if there's then backsliding.

ELISABETH BRAW: Yes, and since Sam brought the challenge back to you, can I ask you the same question I asked him, which is, is it even workable or has the time passed where western liberal democracies can try to keep order in the world by using economic sanctions against other countries?

Considering that now, thanks to the globalization that we were so keen to promote, we have a number of other countries that are part of the globalized economy and are thriving but are not liberal democracies. So has the power of sanctions been reduced or perhaps even minimized by the rise of non-democratic, prosperous countries?

LAURIE BRISTOW: I think it's a fair point. I describe it more as a fact of life that we're having to deal with. It is, of course, desirable. And it's been the policy of successive governments in the UK and elsewhere to help lower income countries develop, to get richer. We believe that's good for them and good for us. That's the way it is. I wouldn't say, though, that it's as simple as non-democracies aligning against sanctions.

Name the country, but there is at least one very, very large democracy which has not aligned with the G7 sanctions, the G7-led sanctions on Russia. And that's why we're looking at tools like for example price caps on Russian oil to essentially recognize that fact, but to minimize the revenue flows to the Russian state from the geopolitical fact that not everybody is going to join these sanctions.

I think there's a wider question also, which I think we have identified, but I'm not sure we've really thought through yet how to deal with it. There's a disconnect in the international community. And I really illustrate it this way. About 140 countries voted with Ukraine in the General Assembly in early 2022 against Russia's attack on Ukraine. About 140 countries in the General Assembly voted with Ukraine in 2023 against the Russian attack on Ukraine. Less than 140 countries have applied sanctions against Russia.

So there's a question there for us, western policymakers and analysts, why is that? But why is it that they agree with us on the principle, the assault on the UN Charter, and all the basic principles of international law, but their hierarchy of interests says to them, it's not actually in our interests to go down the route of applying sanctions. That's something where I think we've got a lot more work to do.

ELISABETH BRAW: Yes, what a diplomatic conundrum dilemma. And I know we'll all be watching it. Sam, I want to ask you about one thing that seems to me another big challenge, which is, considering how the rules based international order is crumbling, there would be more countries, including ones weaker than Russia that we will-- that the global community led, perhaps once again, by liberal democracies will want to deter from whatever it is they may be up to.

And we will want to deter them once again, by using economic sanctions. And that means that once again, companies need to somehow determine, have an educated guess about how it will affect them. What do you think are the lessons learned from the Russia round, so to speak, that companies can apply so that they are as prepared as possible?

SAM WILKIN: Yeah. OK, let me answer that in the form of a story. And you're Elisabeth, you're in this story. You're a character in the story. So we were at-- we were at an event, a closed door event in Washington DC that you had organized about maybe a couple weeks or a few weeks ahead of the seizure of Russia's foreign exchange reserves.

And there was an individual at this event who was very highly placed and was about to be appointed to a senior position dealing with, precisely, these policies in the Biden administration. And this person said not a word about this coming policy. In fact rather gave the misleading impression that the administration was at a loose, at its wits end trying to figure out what to do when, in fact, this major wave of innovation was just right around the corner.

And I understand why that has to be the way. If you advertise, in advance, what is going to happen, then you diminish the effectiveness of these kind of innovations in sanctions that you mentioned. Sir Laurie mentioned the price caps. There's tremendous wave of innovation that's been taking place. But my takeaway from that story is you're not going to be told in advance what's going to happen.

The burden is going to fall on businesses to work out what the impacts on them might be, and what might be done, what might be the next wave of sanctions innovation. I don't think there's any way around that. I think the burden is going to fall on companies to work it out.

ELISABETH BRAW: But they need to work it out by applying the lessons from the Russia round, right? They need to wargame game and ideally wargame perhaps, with one another and perhaps with former government officials because just sitting there, and waiting for the sanctions to, arrive and then make decisions is not going to work.

SAM WILKIN: Now, my favorite personal tool is scenarios to this end. We commission a lot of scenarios from a lot of the private geopolitical consultancies around the world. I find them extremely useful. We had Ukraine conflict scenarios involving the major escalation of the conflict in Ukraine since 2018.

In the tool, we survey our clients every year, what's the big risk they're worried about. And then we commission scenarios based on those risks. And I think it is, to some degree, gosh, it would have been hard to work out in advance that the exchange reserves were going to be seized because, of course, that is a measure that has so many implications for this-- the US dollar, for the primacy of the US dollar.

The implications are just staggering. So trying to work out in advance that that's going to happen is inevitably going to be tricky, but I think scenarios can be a useful tool for trying-- or as you call it, war gaming can be a useful tool for trying to do that.

LAURIE BRISTOW: Can I just put something else in here too, to think about, what your listeners might find useful to think about. So I've had to do a lot of thinking the hard way in recent years over something called optimism bias. So I dealt with Russia for a very long time. I was ambassador in Afghanistan at the time of the fall of the Republic to the Taliban.

My point here is that just because you don't want it to happen doesn't mean that it might not happen. And I think one of the lessons that I've learned from dealing with this is apply the what if. What if we're wrong that actually things are not going the way that we thought they were going? Or what if actually our reasonable worst case scenario transpires?

What are we going to do about that? You might have options if you act early that you won't have if you really don't see that coming or you come to it too late. A basic principle of risk management, but I think it's just worth stepping back and asking ourselves, what did we learn from the last 18 months?

ELISABETH BRAW: And Laurie, on that note, what if Russia adapts to life under sanctions just the way Iran has done, Venezuela has done, and indeed North Korea has done? Essentially joining a shadow economy. What if?

LAURIE BRISTOW: Well, I think to some extent, it's already happening. And I go back to what I said earlier, I don't see any realistic prospect, whatsoever, that Mr Putin's view on the world, or on us, or on Russia's place in the world will change. I think what the business we're in here is about constraining his options, trying to incentivize less damaging behavior than we're seeing to the extent possible.

But also frankly, I mean, we are now dealing with a country that is-- it's basically elected itself a strategic opponent. There's a very important part of the sanctions that we've been applying over the last year or more, which is about degrading Russia's ability over time to cause a military threat to us and our allies. This is the technological side of the sanctions. We really shouldn't underestimate that.

ELISABETH BRAW: No, we shouldn't. And Sam, on that note, what if whatever it is companies do to prepare, what if it doesn't work and things happen completely differently? Is there any way for companies to continue on a somewhat certain path in a globalized economy where we are likely to see more and more sanctions being imposed because more and more capitalism is behaving?

SAM WILKIN: Yeah, it's a good question. If you go through what Laurie talked about, the what if, there's a lot of what if out there. And by the same time, it's a vital, absolutely vital world market. So I think that exercise-- you do end up going over the same question again and again. But at the same time, I do think preparing in advance and considering advance is absolutely crucial.

I also think-- and this is just more of a personal view. I also think, I would like to see a better accounting of what the costs of sanctions are, in the sense that I know what the cost of-- national security policies have costs. I get that. And I know what the cost of an aircraft carrier is or I can find it out. I don't know, usually, what the cost of these kinds of sanctions, the new sanctions programs that we've been imposing. I don't know what they are.

I mean, ideally-- and this is not a complaint about sanctions. If I had to choose between American boys and girls dying on a foreign battlefield and paying a national security cost, think of sanctions and national security tax, in some ways, as a hidden tax because much of the cost is borne by companies and consumers. I'd rather pay that hidden tax than send troops overseas. So it's not a complaint.

But I would-- even in an official-- ideally an official accounting, I would like to have an accounting of what the cost of sanctions are so that we can make these kinds of decisions in a more informed way about, is this really-- is the cost of businesses really large? Or is it completely manageable?

LAURIE BRISTOW: I agree with that. One of the things we're all struggling with here is metrics that enable you to understand costs and also opportunity cost. So there's another side of this equation, which is that if you apply a counterfactual argument that actually sanctions-- we're going to take sanctions out of our repertoire of instruments. What does that leave you with?

You then got the two ends of the spectrum, which are essentially performative statements, which can take you backwards if that's all that you've got. Or the really, really high-end, coercive measures, including military action, which brings all its own unique costs and risks to that.

Just a point of caution though. I mean, not all of the benefits and costs can be quantified in terms of financial benefits. So going back to my point right at the beginning about the measures taken against the Russian special services over the attempted killing of Sergei Skripal.

What we were trying to do there was very much not impose an economic cost but to impose an operational and reputational cost on the GRU and the FSB. They have essentially limited unlimited resources for these purposes. So attacking the resource base isn't going to get you there, attacking the things that matter to them. And in that world, having operatives who can operate freely and having a reputation that other people fear, that matters.

SAM WILKIN: And I think that's fair. And I understand the point. And I also think that, as Laurie says, it's better to have more options, rather than the two extremes of just making angry statements and shooting someone. For that reason, I think there is a big benefit to retaining as much of globalization as we can because then you do have more options.

If you don't have any economic relationship between a country, then your options for reacting to whatever that country does are much more limited and potentially just much more violent, whereas this is going-- this is a standard investment peace argument.

But also, it's more of an investment. It gives you more options to achieve whatever objectives, whether that's a financial cost, whether it's operational cost. It gives you more of a degree to which we are integrated gives us more of a range of options, strategic options to deal with situations that arise.

ELISABETH BRAW: And that makes it all the more important for companies to war game, or scenario plan, whatever word you want to use. But it is indispensable, especially considering that we're seeing more and more countries engage in behavior that we are trying to change through the use of sanctions. We're out of time. We'll have to come back to the subject because we'll see more sanctions innovation and indeed more countries that may need to be sanctioned.

So I want to thank Laurie Bristow. And I can't sign off without mentioning that, not only was he ambassador, the UK's ambassador to Afghanistan during that final turbulent year that ended with the withdrawal, but he was also at the airport until the bitter end. Personally, his issuing visas to Afghans who needed to flee and come to the UK on top of his other diplomatic service. But we still, I think, we all remember that vividly.

And thank you, Sam Wilkin as well. And of course, thank you to our producer Robin Pegg. And above, thank you all for listening to Geopolcast. In upcoming episodes, we'll examine supply chain risks, evolving cyber risks, and much else. To get the episodes as soon as they are released, make sure to subscribe to Geopolcast. You can find us via your usual podcast players. And please recommend us to your friends and colleagues. Until next time, see you then.

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