Economic sanctions, understood in this paper as a political instrument whose aim is to coerce the target state into changing its political behaviour by lowering target’s economic welfare through various economic restrictions (Pape,1997; Hufbauer et al.,
2. EU and Russian sanctions: how big is the economic impact within the Union? 46 2013 export, mln EUR 0 − 1000 (7) 1000 − 2500 (5) 2500 − 5000 (8) 5000 − 10000 (5) 10000 − 20000 (1) 20000 − 40000 (1) 2015 export share in % 0 − 1 (12) 1 − 2 (7) 2 − 5 (4) 5 − 10 (2) 10 − 20 (2)
FIGURE2.1: EU-27 exports to Russia as a share of total world exports, in %
Note: EU-27 exports to Russia relative to total world exports before the Ukraine conflict in 2013 (left) and in the second sanctions year, 2015 (right). The number of countries in each category is shown in parenthesis in the legend.
foreign policy toolbox in the post-cold war world since they are often considered as nearly a single possible alternative to a military statecraft (Blanchard and Rips- man,1999). For example, the EU is currently engaging in 39 sanction episodes, both against states and organizations, for instance, Al Qaeda or ISIL (European Union. Re- strictive measures (sanctions) in force 2016). The growing popularity of sanction activ- ity in the last two decades has multidimensional economic and social consequences and is reflected in the modern scholarly research.
Several theoretical frameworks are usually applied to the analysis of sanctions. Generally, theoretical models dealing with economic sanctions display (1) the reac- tion of the target economy, (2) importance of the sanctioned goods, (3) the role and response of various interest groups (Caruso,2003) and (4) the welfare deprivation as a result of sanctions.
According to Rudolf,2007there are two basic kinds of models, macro- and micro- models, which explain the relation of sanctions and their political influence.
The classical macro-models are based on a cost-benefit function and suggest that a high maintenance in eliminations of the sanctions effects like supply shortages, increased unemployment etc., which is necessary for securing the power, will make a rational government give in when the costs of domestic support exceed the benefit of not conceding to the demands.
According to the Solow model (Solow,1957), the scarcity of capital increases the rate of return, which in turn leads to a higher growth in the short run. However, an assumption of the capital availability for investment, necessary for the growth deter- mination, is usually violated under the condition of sanctions. Sanctions in a target country lower the level of both foreign and domestic investment. It happens either directly or through worsening a general investment climate and making foreign and domestic investment also less attractive. An own empirical analysis (Chapter3) with respect to the FDI also supports this conclusion concerning the negative impact of sanctions with respect to the foreign investment. In other words, imposed export re- strictions may bring about a lower growth rate for the target economy through inef- ficiencies in employing labour and capital, worsening domestic expectations, drops in savings, investment, employment and a devaluation of the local currency. This would lead in turn to an inward shift of the target’s production possibilities frontier
(Carbaugh and Wassink,1988).
A group of theoretical models refer to welfare losses born by the target coun- try, which is straightforward taking into account the formal definition of sanctions. Without proper welfare deprivation, according to the sanctions idea, a successful cohesion of the target state is impossible. In line with this expectation, neo-classical general equilibrium models (see e.g. Porter,1979or Kaempfer and Lowenberg,2007) show that a targeted state ends up with worse terms of trades as a result of trade sanctions compared to the sender state. A higher level of elasticity of offer curves of both sender and target, the greater is the bilateral dependence on the mutual trade among all involved parties.
The micro-models are based on a plurality of interests of different groups and actors, which are variously affected by sanctions. According to this view, sanctions should target political elite and its closest supporters individually. These models comply with a concept of so called smart sanctions which was developed in the after- math of devastating humanitarian consequences of the comprehensive sanctions im- posed on Iraq (Lopez and Cortright,1997; Cortright, Lopez, and Gerber,2002; Beladi and Oladi,2015). Smart sanctions are especially associated with a game-theoretical approach (Eaton and Engers,1992; Drezner,2003etc.).
The empirical sanctions literature deals primarily with two questions: whether the sanctions work and how to improve their effectiveness. Most researches, how- ever, agree on the ineffectiveness of the sanctions, judging upon the compliance of the target (Drury,1998; Galtung,1967; Pape,1997; Wallensteen,1968).
A prominent strand of the sanctions literature is dealing with the regime type. Democracies are likely prone to comply with the sender demands rather than au- thoritarian regimes (Allen,2008; Bolks and Al-Sowayel,2000; Nooruddin,2002). In non-democracies, the economic burden is shifted on the governed broad masses, like in case of Iraq which lost 48% of its Gross National Product (GNP) (Bolks and Al-Sowayel, 2000; Pape, 1997). A political and/or economic instability of the tar- get also strengthens success (Hufbauer et al.,2010; Jing, Kaempfer, and Lowenberg,
2003; Lam,1990). An anti-government behaviour within the target state is generally positively correlated with the event of sanctions, although it is more likely to occur in more democratic target states (Allen,2008). Sanctions can thus increase a popular
support of the ruling regime, contribute to a rise of a new (industrial) elite benefiting from a country’s international isolation (Galtung,1967; Kirshner,1997).
A country regime of the sender also plays a role in the effectiveness: more demo- cratic senders achieve higher success levels (Lektzian and Souva, 2007). They are also more frequent sanctions imposers compared to other regime types (Cox and Drury,2006; Lektzian and Souva,2003). It can be explained through a broader group of interests to be satisfied. Democracies are also more likely to impose sanctions against non-democracies due to the goals which are more often applicable to other regime types (Cox and Drury,2006; Lektzian and Souva,2003).
Empirical evidence on export restrictions is quite controversial and did not find much confirmation (Bonetti, 1998; Lam, 1990), unless a pre-sanctioned target de- pended heavily on the trade with the sender (Hufbauer et al.,2010). Financial sanc- tions tend to be more successful (Allen, 2008; Dashti-Gibson, Davis, and Radcliff,
1997; Drury, 1998), although this fact is not always proved empirically (Hufbauer et al.,2010).
The duration of sanctions is also found to be controversial: whereas some schol- ars observe increasing welfare costs of sanctions with time (Brady,1987), others ar- gue the opposite (e.g. Bolks and Al-Sowayel,2000; Miyagawa, 1992). It might be due to a so-called selection bias (Drezner,1999; Nooruddin,2002). The main argu- ment of these studies is that the potential target changes its policies before the event of sanctions imposition and then alters its behaviour. In this case, coercion never materializes and the event of sanctions doesn’t exist, which creates a problem for the (previous) studies which look at the imposed sanctions.
A discussion about the effectiveness of sanctions is not possible without an anal- ysis of their impact in terms of welfare deprivation (Dorussen and Mo,2001). Costs, both to the sender and the target, are carefully considered in the sanctions’ analysis (Baldwin,2000). The logic behind this argument is that higher costs of compliance for the target go along with a higher probability of the government altering its be- haviour. The target country is stripped of trade gains and loses its welfare (Caruso,
2003). Harshness of the costs to the target is proved to be crucial for the success of sanctions (Bonetti,1998; Dashti-Gibson, Davis, and Radcliff,1997; Drury,1998; Jing, Kaempfer, and Lowenberg,2003; Lam,1990; Lektzian and Souva,2007). Dependent
on the degree of mutual integration and a resulting damage of the interactions, a sender can also be affected heavily. Despite some existing empirical evidence on the negative relationship between the costs of sanctions to the sender (Drezner,1999), costs to the sender still often remain disregarded in the dominant sanctions research (Caruso,2003; Dorussen and Mo,2001). Economic costs of the sanctions are some- times expressed by a significant drop in a bilateral trade (Hufbauer et al., 2010), especially multilateral and/or comprehensive sanctions are likely to disrupt trade (Caruso,2003). The pre-sanctions trade acts as a measure for pre-sanctions linkage between the countries and influences a potential welfare loss (Bonetti,1998; Miya- gawa,1992). When disentangled, international sanctions depress trade to a higher degree rather than war, not only between the belligerent parties, but also with third countries (Lamotte,2012).
Determining the costs of sanctions for the sender is also the primary object of the current empirical analysis.