Russian sanctions created a new world—and it can’t be undone

The European Union is set to propose new sanctions on Russia in response to reports of atrocities against civilians in Ukraine, even as Moscow’s military blunders have raised hopes of a peace deal. Regardless of the outcome, history shows that the effects of economic growth will be long-lasting.

Between 2000 and 2015, Washington and its allies imposed sanctions on Iran, eventually disconnecting its banks from the SWIFT messaging network. The US Treasury consistently punished those working with the country, even imposing “secondary sanctions” for non-US firms.

Restrictions were eased after 2015. But Iran’s banks are still struggling to reestablish correspondent banking ties and reach foreign exchange clearing. While cases such as the $9 billion fine of BNP Paribas are still fresh, Western lenders were cautious. They turned out to be prescient: In 2018, the Trump administration revived sanctions, tripping companies like aircraft maker Airbus, which hasn’t been able to make good on its 2016 deal to sell 100 jets to IranAir.

Although the EU is trying to maintain ties with Iran, most of its banks and corporations have not. Even French car brands Renault and Peugeot quit despite having no US operations and investing heavily there. Iranian manufacturers are now making versions of French cars with even more domestic components. Iran is exporting more to China, and officials are looking for ways to circumvent sanctions on banks through bilateral agreements and alternative financial networks.

With the controversial exception of trading in commodities, the US has implemented an Iran road map for Russia, froze central bank foreign reserves and delisted some banks from SWIFT. Sales of key technologies in sectors such as aerospace and semiconductors have been halted. Multinationals such as Amazon, Ford, McDonald’s and Samsung have given up fearing reprisal backlash and further sanctions. Moscow is trying to develop alternatives, backing Russian fast-food copycats and claiming that Sukhoi Superjet 100 regional planes could be built without western parts by 2024.

Many such attempts at economic independence will likely fail or involve extreme economic suffering, especially given the size of Russia. Yet, even under dire circumstances, an oil-exporting nation like Iran has had some moderate success in substituting imports and diversifying its economy, and Russia may not have many other options. Foreign corporations are unlikely to back down, even if existing restrictions are eventually lifted.

Sanctions have historically failed to spark regime change. in your book”Economic weapons: the rise of sanctions as a tool of modern warfarePublished in January, Cornell University historian Nicholas Mulder described how America was buoyed by the success of the post-World War I economic war against smaller countries such as the Balkan states and fascist Spain. This was followed by a disastrous backlash with Japan and Germany.

The West’s decision to weaponize its monetary system against Russia as a first resort, rather than initially acknowledging the pain of losing its fuel, comes at a cost. Besides giving Moscow a lifeline, the sanctions strategy has alerted countries like China to the risks involved in exchanging goods for dollar and euro reserves.

The current situation probably does not spell the end of the hegemony of the US dollar, as there is no alternative system to replace it. But it does lead to militarization, stockpiling of commodities and devising supply chains toward geopolitical allies. As Prof. As Mulder explains, the end of the gold standard in the 1930s “did not kill the sterling and dollar reserve standard, but it did volume trading.”

No matter how the war in Ukraine ends, investors cannot expect the global economy to remain as tightly integrated as it was before.