Effectiveness of Financial Sanctions by authorship withheld

Effectiveness of Financial Sanctions

Putin “doesn’t give a s**t about sanctions’ and ‘the more the West pushes him, the stronger his response will be”, says Russian ambassador to Sweden. (UK Daily Mail 13/02/2022)

By a former senior Banker & Risk Officer of a major international bank who speaks for himself.

For a long time, I have shared the view by academics and critical politicians that sanctions often fail to achieve what they are meant for which is: A change in a foreign government’s behavior. Traditionally, because of a lack of international solidarity, enforcement was difficult and circumvention easy, which undercut the credibility and the effectiveness of the measures. Usually, it was not the governments and the ruling camarilla that suffered most from sanctions but those at the lowest end of society. This, in turn allowed their governments to put the blame for their misery on foreign intervention rather than their own misdeeds, and accounts for why sanctions even could become counterproductive. Prominent examples for sanctions and their limited effect are South Africa, Cuba, Northern Korea and Iraq (1). But even through the more stringent Iran sanctions, little change was evident, and the sanctions against Russia after the annexation of the Crimean Peninsula and the interference in Eastern Ukraine have not shown any signs of impact on the behavior of President Putin: rather to the contrary, as can be evidenced by the above quote from a senior Russian diplomat. Historically, sanctions come with a reputation of limited effectiveness partially due to a limited commitment by those who expressed the sanctions to protect the interests of their own constituencies.

The political view on the effectiveness of sanctions has changed fundamentally after 9/11 when the US Treasury discovered that monetary and payment related financial sanctions, in addition to traditional trade related economic sanctions can be used as a means of economic warfare. Traditionally, sanctions were more trade related (Trading with the Enemy Act) because the enforcement of sanctions on money movements was difficult and badly understood.  As evidenced in Juan Zarate’s book:  Treasury’s War: The Unleashing of a New Era of Financial Warfare (2015) this changed fundamentally when US Treasury realized how they could get a handle on financial/monetary sanctions and their enforcement which included efforts to dry up Bin Laden’s resources by freezing his assets worldwide. Therefore, US Treasury, in addition to the US Department of Defense became to play an important role in the war against terrorism and later against Iraq. In the first instance, US Treasury discovered SWIFT as a very valuable source of information on transactions with targeted parties (such as terrorists) and sanctioned countries (such as Iraq and Iran). As an additional benefit, SWIFT data could be used to monitor international banks’ compliance with the sanction regimes and thereby expose them to the risk of losing their license in case of non-compliance. This way, the US, through US Treasury, for the first time could make sure, that sanctions would be implemented by international banks without delay and exception because the US government through the use of SWIFT data no longer needed to go through independent governments to enforce compliance. The sanctions catalogue was widened when, as a further step of escalation, pressure was put on SWIFT to suspend member banks of a sanctioned country (in this case Iran) from the SWIFT network which de facto took away for these banks, without delay or time to react, their ability to transfer international payments in both directions, paying and receiving. The application of similar sanctions to Russian banks was first discussed in the UK as a potential reaction to the Crimean annexation, but never implemented. The SWIFT suspension has the great advantage of a one stop measure with an immediate and far-reaching effect, taking away an economy’s access to international liquidity – why some characterise it as the “nuclear option”. The potential downside is that such a measure allows for no differentiation and has never been tested large scale what could trigger unforeseeable collateral damage, which however in times of war is not an uncommon scenario (2).

On previous occasions sanctions were applied only “after the fact” and governments took long to agree on joint actions, which often were driven by the lowest common denominator and considerations for national interests, mainly economical. This time, the situation is fundamentally different. What is at stake in the current debate is whether sanctions as countermeasures to Russia’s threat against Ukraine will be an effective enough tool to change Russian behavior beforehand through an economic and financial threat rather than military force. As a first goal, a catalogue of potential sanctions is hoped to be a sufficiently forceful deterrent to stop a Russian invasion of Ukraine. The sanctions catalogue, this time agreed in advance, is intentionally kept from the Russians to create additional uncertainty. The surprise argument might be true but at the same time may undercut the credibility of the threat. Nevertheless, some of the potential sanctions are leaked to the press with the intention to increase uncertainty even further because the adversary may have to speculate even more about what to expect. However, based on past experience and in view of the above quote from President Putin the intention to stop the war from breaking out through the threat of sanctions – known or unknown – might be a vain hope.

Therefore, in case deterrence should fail to prevent a war, a second step is more probable. It must be made clear to the aggressor that, contrary to the past, there will be an immediate, well-prepared implementation of severe sanctions (not only the announcement thereof) as soon as “the first Russian toecap crosses the border”. This sanctions catalogue, again different from the past, will no longer need lengthy political discussions and finally be moderate and considerate, but intentionally will be calibrated to create a very high economic damage and this without delay. In the true sense of economic warfare, which this must be intended to be, the tool kit must have the power to be so harmful to the aggressor and its supporters that it will have an immediate impact on their behavior, which has never been the case in the past.

Two aspects of effectiveness are at stake: The credibility of sanctions as a deterrent against aggression and as a second instance, the effectiveness of sanctions to create sufficient economic and financial harm to stop military action once initiated. To be considered effective the impact will need to be immediate because its effectiveness will be measured by its achievement as a means of financial warfare and not a long-term bleeding strategy as in the past.

An admittedly, farfetched analogy could be helpful to describe what should be expected from sanctions to be effective in achieving the desired goal against Russia. If we deprive a human being of air supply, death of suffocation is almost immediate. Taking away liquidity leads to death of thirst after a few days whilst withholding food takes much longer to have an effect before it finally leads to death by starvation after up to 100 days. It is untested whether such an approach can be transferred to the sanction’s sphere and applied against a country and its economy. But what we know with certainty is that financial sanctions that cut of a country from the international payment stream and stop access to international liquidity must have an immediate and very forceful impact because the absence of international currency and the ability to transfer funds will trigger automatically the breakdown of the transfer of all money, services and goods. Pre agreed implementation will be broad. Circumvention with today’s compliance and monitoring regimes is almost impossible. Therefore, a sanctions regime, worth its name, that should be deterrent enough must cut of a country with immediate effect from access to its foreign currency funds, its ability to transfer such funds and finally lead to a total boycott of the transfer of goods. Suffocation should arrive long before starvation.

In practice, the necessary tool kit is available and sufficiently tried, even though on a smaller scale. Closing SWIFT membership to Russian banks is the quickest way to achieve an immediate effect which will need minutes only for implementation. Subjecting Russian banks and their branches and subsidiary banks to the proven sanctions regime will have similar, slightly slower (a few hours) effects, but in practice be more far reaching because it will cover a wider spectrum of financial products (including to stop the financing of trade and the access to money and capital markets). Going through the banking channel rather than the SWIFT approach may allow for greater differentiation and avoid unnecessary collateral damage whilst being as effective if not more so.  Further sanctions should trigger a worldwide freezing of all Russian or Russia related accounts (including Russians abroad (the UK have signalled such actions against Russia friendly oligarchs)) as well as off shore accounts and domiciliary companies with Russian BOs or strawmen) and finally, the freezing of assets such as real estate, ships and goods. Listings of Russian companies on western exchanges, the trading of their shares and their direct access to the capital markets should be reviewed. 

Catherine Belton in Putin’s People (3) has demonstrated at length how inextricably interlocked public and private wealth in Russia are, both domestic and internationally. Nothing happens without public or KGB control and true ownership of Russian companies, at home and abroad, often is not what it looks like. This is why a preventative freeze of these assets would give their apparent owners the opportunity or rather force them to prove the legitimate origin of their wealth and their independence from KGB and government, an action which under financial crime aspects has been overdue for a long time.


Whilst Russia may be sitting on considerable currency (app USD 498bn) and gold (USD 123bn) reserves (sometimes referred to as “Fortress Russia”) these become almost useless once they are frozen and can no longer be moved due to effective international sanctions. Such sanctions are highly effective because the holding and moving of western currencies and to a certain degree that of physical gold, ultimately requires the use of western banks as a necessary prerequisite. Only in the case that “Fortress Russia“ should be held in cash under Putin’s mattrass – which is improbable and impractical – this would not apply .Even Bitcoin or other Crypto Currencies should not offer themselves as alternatives to transfer value because that would confirm concerns about the opaqueness of these currencies and give the western regulators and monetary authorities a good opportunity (which they have been on the lookout for quite a while) to close them down completely or at least, increase supervision whilst substantially reducing their legitimate business opportunities.

Sanctions are a means of extraterritorial punishment which in its extreme are a substitute to military action why they need to be applied with care. However, in view of their purpose in this concrete case, where the independence of a sovereign nation through military intervention is at stake, such strong financial and economic actions are not only justified by their cause but of the greatest necessity because their effect contrary to military action is non-lethal. It is important for the wider Russian public to see that the sanctions are directed at the state and its upper echelon cronies, why subjecting the wealthy oligarchs to sanctions is so important beyond their economic impact. And, as in the case of military and political actions there is always room for the relaxations of sanctions once they have proven effective or counterproductive. The true purpose of the threat of possible sanctions should remain to be deterrence but in case this does not succeed, escalation through the tightening of the screw, until it shows effects, is unavoidable. To limit unwanted consequences and preempt negative publicity, the impairment of sanctions on the public food and medical supply should be avoided.

In the past, sanctions were announced “after the fact”, took time for international political agreement and often came more moderate than necessary to be effective, as we have experienced in the case of sanctions against the Russian invasion of the Crimean. This past weakness reflects the political compromise among the acting governments and above all, their counterproductive efforts to put their self-interest before the effectiveness of the sanctions. When you plan to apply very serious sanctions as a means of economic warfare and want to be credible with your threat, the acceptance of own collateral damage is a necessary consequence. To be credible to the adversary, this needs to be politically accepted in advance. Such determination was demonstrated today by the UK government when, as a first indication of its committeemen to sanctions, it has waved the Golden Passport access for Russians – an effort that had failed on numerous occasions before. Enforcing financial sanctions on Russia will have, without doubt, negative impacts on the financial system in the west. However, to be convincing and effective, own losses, like in war, have to be accepted for the threat to be credible. But, as the chairman of the Financial Stability Board (4) in Basel has mentioned in a recent interview with the FT, sanctions might cause turmoil to the financial system and some actions should be carefully considered, but the western banks are well prepared to cope with such a situation which may not be the case for Russian banks. This however should not be a worry because the state of the Russian banks might become a headache for its government but is  are of no systemic relevance to the West. Similarly, schmoozing Russian oligarchs, in many countries, may have sounded a good business model for many years and governments and political parties of different colors may have pushed these relationships. It is now the time to realize the downsides of such a dance on a razor blade. For too long it seems, that the national interest prevailed over reason and the readiness to apply international standards and credible and effective sanctions. If sanctions this time should bring success it will have to be at the sacrifice of at least some self-interest of all the countries concerned.

Russia has indicated that they may retaliate against financial sanctions by e.g., cutting of the gas supply to the west, but, contrary to financial sanctions, this – apart from creating angst – will have no immediate impact and can be dealt with over time. The head of the European Commission, Ursula von der Leyen has just confirmed that enough gas is available for Western Europe to cover the 2022 demand why cutting off additional gas supply by Russia is not a credible counter-threat. In addition, Russia will have to be careful about the impact of such action on OPEC and international oil and gas prices. As Russia is not an international financial power and not of systemic relevance to the Western financial system its possibilities for retaliation are limited in dimension and speed. The often-quoted possibility of the circumvention of sanctions through alternative clearing systems looks like an illusion because they are primarily domestic and the share of Rubel or Renminbi as international exchange currencies is almost neglectable and barter trade, whilst a possibility, very limited in its applicability.

Financial sanctions of the magnitude and severity discussed are unchartered waters and their outcome and true effectiveness difficult to foretell. There will be negative consequences on all sides. But, in view of the threat of the military invasion of a sovereign country – a violation of one of the most fundamental and globally agreed principles of peaceful international coexistence – such severe financial sanctions in our view, are worth the effort and the risk, to avoid worse to come.


  1. Doug Bandow, How our Economic Warfare Brings the World to Heel, Cato Institute, January 2, 2020.
  2. Top finance watchdog urges West to “think twice” about Russia sanctions. Chair of financial Stability Board warns of “severe disruption” if country cut off from payments, FT 16 February, 2022
  3. Catherine Belton, Putin’s People: How the KGB Took Back Russia & Then Took on the West, London 2020
  4. Top finance watchdog urges West to “think twice” about Russia sanctions. Chair of financial Stability Board warns of “severe disruption” if country cut off from payments, FT 16 February, 2022
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