A leading economics think-tank calls for a sanctions regime that works properly and constrains hostile states 

• Economic sanctions have become a central part of the West’s diplomatic toolkit;

• They remain hotly contested, with critics even going as far as to suggest they are totally ineffective;

• The evidence shows that sanctions can be effective at constraining the target state and making it harder for them to achieve their aims, but they are not particularly effective at making them abandon their policy;

• A new paper from the Adam Smith Institute (ASI) shows how the UK’s economic sanctions on hostile states will be much more effective if the UK’s primary objective is to erode the sanctioned state’s military and economic capacity;

•  The ASI also highlights that the UK’s sanctions regime needs enhancement. Sanctions can still be evaded via third-country parties, some Western businesses are still operating in sanctioned countries, and we are not doing enough to incentivise transfers of capital away from sanctioned states to the UK;

• Using Russia as a case study, this paper recommends a number of measures, including requiring Western businesses to cease operating in the sanctioned state unless granted a licence and penalising those who enable sanctions evasions.

Earlier this year, the previous UK Government published its sanctions strategy: Deter, Disrupt and Demonstrate. This stated that the purpose of sanctions is to “DETER future or continued malign activity; to DISRUPT current malign activity; and to DEMONSTRATE our readiness to defend international norms.”

A new paper by the Adam Smith Institute (ASI), a leading economics think-tank, builds on this strategy and outlines what an ‘economics strategy 2.0’ could look like. In particular, it argues that the UK’s primary objective should be to erode a hostile state’s ability to carry out its aggressive acts. In other words ‘disrupt’ should be the core aim, partly because this is how ‘deter’ and ‘demonstrate’ are best achieved.

The paper uses Russia as a case study for the sanctioned state, and outlines the following ways to prevent it from procuring economic and military resources to wage war on Ukraine, and from getting around any sanctions. These measures can be used in order to sanction other states which carry out hostile activity. 

Re-establish CoCom

Countries which are working together to sanction Russia should re-establish the Coordinating Committee for Multinational Export Controls (CoCom). During the Cold War it was effective at denying the Soviet Union access to Western tech. Its successor, the Wassenaar Arrangement, is not focused on restricting exports to a particular country, making it much less effective.

Require all Western businesses, including financial institutions, to cease operating in Russia unless they are granted a licence

Western businesses which are still operating in Russia should be given a deadline to exit from the Russian market. Licences could be granted if there is a very good reason for the business to continue to operate past this deadline, for example, to allow a proper wind-up of the business there.

Offer to remove individuals from the sanctions list if they publicly condemn Putin and contribute towards the re-construction of Ukraine 

Individuals who are currently subject to targeted sanctions could be ‘delisted’ for taking appropriate steps to distance their business activities from Russia, publicly severing ties with the Putin regime and contributing towards a fund for the post-war reconstruction of Ukraine. Of course, those who bear direct responsibility for the war in Ukraine should be excluded.

Expand the use of secondary sanctions to deter enablers of sanctions evasion, for example though adopting the equivalent of the USA’s FDP rule

Secondary sanctions deter actors from facilitating sanctions evasion or providing a loophole for sanctioned entities to access international markets. This could take the form of an equivalent of the United States’ Foreign Direct Product (FDP) rule, under which export controls are extended to goods that are composed of US-origin commodities, technology, or software over a certain threshold. Criminal and civil penalties would be imposed on anyone that breaks them.

Encourage hard currency outflows

The West should consider incentivising certain transfers out of Russia, such as capital outflow, provided that they pass beneficial ownership and ‘Know Your Customer’ (KYC) checks.

Maxwell Marlow, Director of Research at the Adam Smith Institute, said:

“Economic sanctions can play a meaningful part in the fight-back against hostile states and malign actors- but only if they properly constrain their ability to carry out their aggressive policies, rather than act as symbolic measures.

The UK’s sanctions regime urgently needs updating to reflect this, whilst dealing with sanctions evasion, getting Western businesses out of sanctioned states, and incentivising the transfer of capital out of the sanctioned states and over to the UK.”

-ENDS-

Notes to editors:  

For further comments or to arrange an interview, contact emily@adamsmith.org | 0758 477 8207.

James Gillespie is an Associate Fellow in the Centre for Financial Crime and Security Studies at RUSI, where his main research interests concern ransomware, illicit finance, and the use of sanctions in a cybersecurity context. James was previously a Policy Advisor at HM Treasury.

The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.