Ukraine War: The Price of Making More Countries Join Sanctions

Sanctions as a means of political pressure are more effective if they are put in place by a group of countries instead of just one, however powerful. But it is hard to enlist many countries in the sanction effort unless they receive economic rewards of some kind. Furthermore, the targets of sanctions can dodge them by exploiting shady offshore jurisdictions.

These findings, all the more relevant given the current geopolitical standoff between Western countries and Russia, are outlined by Kerim Can Kavakli of the Department of Social and Political Sciences in two different papers (When and How the United States Builds International Coalitions: Evidence from Economic Sanctions, with J. Tyson Chatagnier of the University of Houston and Sanctions Busting Through Tax Havens, with Giovanna Marcolongo of Bocconi and Diego Zambiasi of Newcastle University).

The United States wields the biggest economic clout in the world, but even this is not always enough to secure its geopolitical goals. When unilateral American sanctions are insufficient, the need arises to build a coalition and this is achieved by increasing economic aid and diplomatic attention. On average, the paper finds that participation in US-led sanctions is associated with 18% higher US aid, and 30% higher probability of visits by top US officials. Conversely, smaller countries can therefore enjoy some form of leverage with the US: as Kerim Can Kavakli explains, "both theory and anecdotal evidence suggest that the US often moderates its demands to secure others' participation. Developing better ways to measure sanction goals would improve our understanding of how states negotiate and choose between policy moderation and selective incentives."

So-called tax havens can and do help countries and individuals hit by sanctions mitigate their effect. Using in part leaked data, the paper explores the causal relationship between sanctions and the transfer of assets in the direction of tax havens. Results show that countries hit by financial sanctions increase the incorporation of offshore entities by 60 to 80 percent. Moreover, data on bilateral deposits from the Bank of International Settlements show that target countries reduce the funds they hold in sanctioning countries by 38% in response to the sanctions. However, at the same time, they increase the funds they hold in tax havens by 31%. "Our results provide systematic evidence proving the value of proposals that aim to reduce secrecy in international finance, Kavakli says. "In addition to combating tax evasion, these initiatives can strengthen efforts to hold human rights violators and dictators accountable."