The Economics of Sanctions: how costly they are to impose, how damaging they are.

Abstract: these is a growing reliance on economic sanctions as a tool of foreign policy, but do sanctions deliver the political outcomes they promise? Drawing on recent empirical research, we knowthat sanctions do reduce economic output, but their effects are typically modest, uneven, and slow to materialize. Large, diversified economies tend to adapt, while poorer and more specialized countries bear disproportionate costs—often with little evidence of internal political change. Financial sanctions are more disruptive than trade restrictions, but they also expose vulnerabilities in sanctioning economies and encourage long-run efforts to bypass Western financial systems. Ultimately, sanctions emerge not as instruments of rapid coercion or regime change, but as costly, politically constrained tools that narrow options over time and require realistic expectations from policymakers and the public alike.

Over the past decade, sanctions have become the foreign-policy instrument of choice for Western governments. From Russia and Iran to Venezuela and Myanmar, trade embargoes, financial restrictions, and payment-system exclusions have replaced military intervention as the preferred response to geopolitical transgression. Yet this modern reliance on sanctions has revived an old question—one debated long before today’s globalized economy existed: do sanctions actually work?

More precisely, what are sanctions supposed to achieve? Soon after the invasion of Ukraine many commentators were very ready to preach on how Russia’s economy would have been down to its kness within months, or on how Russia would not have been able to fly a plane within weeks. Four years on, the European Union is close to release the nineteenth (sic!) sanction package, and while Russia’s economy is under serious pressure because of the war, there is no obvious collapse in sight. Moreover, the strife imposed by sanctions does not seem to have triggered any political process within Russia.

Sanctions are not a new tool. Already in the late 18th and early 19th centuries, trade restrictions were already being weaponized as tools of statecraft. Napoleon’s Continental System sought to cripple Britain by excluding it from European markets, while Britain responded with naval blockades designed to starve France of commerce. Even before that, sugar trade from the Caribbean was subject to very strict rules enforced by British and French ships (and by-passed by pirates and privateers often linked with the enemy’s armies). Sanctions weakened enemies, but they also punished allies and civilians, and they rarely produced the clean political outcomes their architects envisioned. Smuggling and by-passing of sanction was also quite large, just as it was during the first Iraq war through “oil for food” programmes, or as it can be seen today through the sky-rocketing trade of the EU countries with countries such as Armenia or Kyrgyzstan.

A growing body of empirical work—most notably by economists associated with the Kiel Institute in Germany—moves beyond anecdote to measure sanctions systematically. As we can see from Figure 1, the use of sanctions has widened in the last decades, involving more and more countries, both developed and developing.

A recent research paper by Bernstein et al. (2025) advance our understanding of how sanctions work calculating a continuous index of sanction intensity, which catches the share of a country’s GDP specifically hit by sanctions, including both trade and financial restrictions. This methodological shift is crucial. It allows researchers to compare a minor sectoral embargo with a near-total trade cutoff, and to observe how different export structure and networks are affected by sanctions.

Figure 1. Sanctions across time (Bernstein et al., 2025).

The central finding is sobering: sanctions work, but modestly. On average, sanctioning trade equivalent to 1% of a country’s GDP reduces its real GDP by roughly 0.3 percentage points over five years, with a small but persistent rise in unemployment. Even relatively strong sanctions—those affecting several percentage points of GDP—do not generate economic collapse. Instead, they impose a one-off level loss that economies slowly adapt to, rarely fully recovering but also rarely imploding.

This helps explain why regimes like Maduro’s or Russia’s have proven more resilient than many policymakers expected. Sanctions are not a magic wand. They are not designed to engineer depressions or instant regime change. As Moritz Schularick has emphasized in a recent interview to the VoxEu, even historically severe sanctions tend to shave a few percentage points off output rather than destroy an economy outright. Adjustment happens, trade is rerouted, substitutes are found, and political elites often shield themselves better than ordinary citizens.

Crucially, research shows that sanctions do not affect all economies equally. Countries with diversified trade structures and multiple trading partners are far more resilient than those dependent on a narrow set of exports or a single dominant market. Low-income and developing countries—especially those reliant on primary commodities—suffer disproportionately. For them, sanctioning even a small share of GDP can translate into losses several times larger than the global average.

This asymmetry has uncomfortable implications. While sanctions are often justified as precise tools aimed at political elites, the evidence suggests they hit poorer, less diversified economies hardest. By contrast, large, diversified economies can absorb shocks more easily. Russia’s experience since 2022 illustrates this point vividly. Despite unprecedented sanctions following its invasion of Ukraine, Russia avoided a financial collapse. Energy exports continued, prices surged, and trade was redirected toward non-sanctioning countries. The result was not immunity—Russia suffered real income losses—but far less damage than early forecasts predicted.

Financial sanctions, however, tell a different story. Measures that restrict access to international payment systems, freeze central-bank reserves, or sever links to global finance tend to have stronger and faster effects than trade sanctions alone. Exclusion from systems like SWIFT disrupts not just trade with sanctioning countries but also transactions with neutral third parties, magnifying the impact. This reflects a structural reality: Western countries exert far greater control over global finance than over global trade flows.

Yet even here, the costs are not one-sided. The same research shows that financial sanctions expose vulnerabilities in sanctioning economies as well. Countries with large financial sectors—several of them in the European Union—are themselves highly sensitive to disruptions in cross-border capital flows. Sanctions may therefore undermine the very financial systems that give Western states their coercive power in the first place. In the long run, they may also increase the incentives to by-pass Western financial insitutions and currencies as means of trade.

This brings us back to the political economy of sanctions. If sanctions impose limited damage unless they are extreme, why are governments so reluctant to go further? The answer lies not in economics alone but in politics. Sanctions that truly bite—such as rapid embargoes on oil and gas—also raise prices at home. They test voter tolerance for inflation, job losses, and industrial disruption. For example, some analysts believe that the Biden administration was not keen on sanctioning Russian oil too strongly to avoid hikes in world-wide oil prices: these would have hurt American consumers and (potentially) also increased Russian revenues from the little oil they would manage to sell.

A recent research I brought forward together with other colleagues based in Italy (Bonfatti et al., 2025) highlights how areas of Italy more hit by sanctions to Russia – i.e. areas which were more exposed to exports towards Russia – saw an increase support for a pro-Russia populist party. As Schularick notes, sanctions only work as intended if sanctioning countries are willing to accept some pain themselves and if political leaders can avoid political cleavages and convincingly explain why that sacrifice is necessary.

The European debate over Russian energy since 2022 illustrates this dilemma. Research suggests that a faster, harsher embargo would likely have inflicted greater long-term damage on Russia at manageable cost to Europe. Instead, fears of price spikes and political backlash led to a gradual, piecemeal approach—one that reduced immediate risk but also allowed Russia time to adapt and reorient its exports.

Seen in this light, sanctions resemble the 19th-century blockades they echo: instruments that signal resolve, impose friction, and shape long-term incentives rather than deliver quick victories. They are most effective when expectations are realistic, coalitions are broad, enforcement is credible, and the public understands that economic coercion is not free.

Sanctions narrow options. They raise the cost of repression and aggression. Over time, they may help create the conditions in which negotiations, or political transitions become possible. But both history and economic empirical  research warn against expecting more than that.

References:

• Bernstein, Martin, et al. Economic insecurity: Trade dependencies and their weaponization in history. No. 2295. Kiel Working Paper, 2025.

• Bonfatti, Roberto, Emanuele Bracco, and Orestis Troumpounis. "The League of (No) Sanctions." Available at SSRN 5146023 (2025).