Along with providing military assistance to Ukraine in response to Russia’s brutal invasion, the U.S. has organized a coalition of 38 countries – mostly affluent democracies – to support unprecedented financial and economic sanctions on the aggressor. Now, a year and a half after Vladimir Putin launched his “special military operation,” it’s worth asking how well the sanctions are working.

Here, I first look in detail at the sanctions imposed and their probable impact on both Russia’s capacity to fight and its economic prospects. Then, I take up a related question: are the sanctions on Russia serving to deter either China’s inclination to materially support its ally or its aspirations to seize Taiwan? Finally, I consider whether America’s use of financial sanctions against Russia along with a number of countries in the Global South threaten to undermine the dominant role of the dollar in the world economy. Could sanctions speed a shift to a multicurrency world, in which the U.S. loses economic and geopolitical advantages conferred by the dollar’s primacy?

What Have Sanctions Accomplished?

The sanctions on Russia target finance, trade and travel. The U.S. Treasury has leveraged its authority over American financial institutions to sever Russia’s largest banks (those holding some 80 percent of the country’s banking assets) from the worldwide dollar-transaction system, blocking their ability to conduct business around the world. The sanctions also put non-Russian banks under notice that they will also be cut off from the dollar system if they facilitate transactions in Russian assets – a consequence that would amount to a death sentence for most of them. While the measures focus on the banks, they also prevent most large Russian companies from doing routine business abroad since these companies depend on the international banking system to pay or to be paid.

The United States and partner governments have also frozen some $300 billion of Russian central bank assets held abroad, preventing the Russian government from using those resources to mitigate the impact of sanctions. Moreover, American and European officials have discussed (but have yet to act on) proposals to seize Russian government assets that are frozen abroad to pay for war reparations and the reconstruction of Ukraine.

Trade in goods and services face more nuanced restrictions, and for good reason. The U.S., EU and the UK have halted sales of luxury items to Russia and are working to stop both direct and third-party sales of semiconductors and other advanced technology. But the coalition has been careful concerning Russia’s exports of energy and minerals, lest it cut off its proverbial nose. Russia had been a key source of natural gas for Europe and is the world’s third largest producer of petroleum. If the export window were simply shut tight – and the embargo proved enforceable – the resulting supply shock would cause great hardship for the world’s poor and might well tip the post-Covid-19 global economy back into recession.

Now, the U.S. and the UK have the luxury of banning imports of Russian hydrocarbons since they were minor purchasers to begin with. The EU has continued buying, albeit at a reduced rate, but announced plans to phase out all Russian hydrocarbon imports by 2027. A European embargo on tanker shipments of Russian oil and global regulation of insurance on tankers carrying Russian oil took effect at the end of 2022.

The world market price of crude petroleum is one barometer of how effective over-all these measures have been. With the initial Russian invasion and the imposition of Western sanctions, the price of oil ticked up. West Texas Intermediate, a frequently used benchmark, went from $92 per barrel pre-invasion to $119 per barrel a month later. But over the past year it has actually sunk below pre-invasion prices, implying that Western sanctions have not deprived the global economy of crude. As Russia’s exports to the West declined, India, China and Turkey have stepped in to significantly increase their purchases. In effect, the EU and China/India have switched places as purchasers of Russian oil. Pre-invasion, the EU bought 55 percent of Russia’s petroleum exports, while China and India took 20 percent. In 2022, through September, China and India had a combined 55 percent share, while the EU declined to 29 percent.

As a result of higher average prices during 2022 and the demand-offset from Asia, the value of Russia’s energy exports actually increased from 2021 to 2022. And in this sense, the oil sanctions seem to have failed.

But that’s not the end of the story. Without reducing the supply of oil to lower-income countries, Russian oil revenues were sharply cut in 2023 by price caps on Russian oil im- posed by the allies and enforced by denying Western-controlled maritime insurance to vessels that attempt to evade the caps. Moreover, the success of sanctions aimed at a host of Russian imports has been greater than anticipated. An important factor here was the decision of multinational companies to sever ties with Russia, in some cases, writing off billions in investments. Major shipping lines like Maersk and MSC have stopped serving Russia, hampering its ability to gain access to foreign products. As a result of these supply chain disruptions, Russia’s production of cars and appliances has collapsed.

Utilizing both sanctions and export controls, the United States and its allies are aiming to restrict technology sales to Russia’s strategic sectors – notably, military and energy industries. The immediate goal is to impair Moscow’s ability to wage war. Consequently, the coalition has banned sales of semiconductors, computers, lasers, telecom equipment and a range of other technical goods to Russia. And they have imposed sanctions on domestic Russian companies that are militarily strategic. Among them: Rostec, Russia’s largest military and defense conglomerate; Mikron, the country’s largest maker of microchips; and Tactical Missiles, which produces missiles the Russian military is using in Ukraine.

There are indications the measures are biting. Some Russian equipment seized by Ukrainian forces contained semiconductors scavenged from dishwashers and refrigerators. The Russian military is also resorting to the use of stockpiled older equipment, which is less effective on the battlefield. Beyond the effects on military hardware, the tech export controls should also hamper the development of strategic sectors such as aviation, shipping and energy extraction, squeezing the economy as a whole.

At first blush this may seem to indicate a failure of the sanctions regime, but on closer examination it is the best result possible. Russia’s exports of oil and gas continued almost uninterrupted, so the rest of the world did not face an energy supply shock. But the collapse of imports indicates that Russia cannot easily spend its foreign exchange earnings. It is impossible to run a modern economy without imports, and the bottom line is that Russia’s GDP declined 3.5 percent in 2022 and is forecast by the World Bank to drop a further 3.3 percent in 2023. Normally a war that is not fought on one’s own territory would tend to stimulate aggregate output, so the sharp recession – not to mention a number of recent studies – confirms that overall the financial and trade sanctions have worked.

The Biden administration has also imposed sanctions on hundreds of Russian government officials, executives and oligarchs, along with many of their family members. Those penalized include some of the most senior leaders of the Russian government, including Putin himself, Foreign Minister Sergey Lavrov and Russia’s top two military commanders, Defense Minister Sergei Shoigu and the chief of the general staff, Valery Ger- asimov. All 450 members of Russia’s lower house of Parliament and the 170 members of the upper house are also on the list.

U.S. sanctions on individuals generally block their access to any assets they command in the United States, prevent them from conducting market transactions with Americans, and deny them visas to enter the country. Few if any senior Russian officials are likely to have U.S. bank accounts, however, or for that matter, plans to vacation at Disney World anytime soon. But parallel sanctions imposed by major European countries including Britain, France and Germany are more likely to cause them distress, especially for the oligarchs who travel and do business outside Russia.

Are the Sanctions on Russia a Deterrent to China?

From the beginning of the war there’s been a debate over how Russian expansionism will affect China’s geopolitical stance. Just before Russia’s invasion, Putin visited Xi Jinping in Beijing, and the two autocrats publicly committed to an “unlimited friendship.” There was some early speculation that China might take advantage of the distraction – and the potential stretch on U.S. military assets – to seize Taiwan. Obviously, that did not happen. And given where we are now, it is likely that the financial, travel and trade restrictions on Russia are serving as a deterrent to China’s ambition to project power around the globe.

Start with the reality that the invasion of Ukraine, which has been defended by a smaller but more motivated armed force, has gone badly. The U.S. and Europe have stepped up, supplying Ukraine with sufficient arms to hold its own, and the Western technology has proved superior to Russia’s on the battlefield. China, it’s worth noting, relies heavily on Russian military technology. And China, like Russia, depends on troops that have never been tested in war. At very least, then, one would expect the Chinese to conclude that the results of unleashing its military across the Taiwan Strait are highly unpredictable.

Xi Jinping also has to be impressed by how the U.S. rapidly assembled a formidable coalition to arm Ukraine and sanction Russia. It is a common view in China that the U.S. is in decline and is so politically divided that it can no longer accomplish big things. Certainly, Chinese analysts (like their Western counterparts) initially expected that Europe’s extreme dependence on Russia for natural gas would limit its enthusiasm for defending Ukraine. But, to date, there has been near-unity within the U.S. in support of Ukraine (admittedly after Biden’s assurances he would not send troops), and Europe has shown impressive backbone in resisting the impulse to stay out of the conflict in order to secure fuels.

By no coincidence, China has largely limited its support to rhetoric and willingness to increase trade with Russia (on highly advantageous terms). It has, moreover, been careful not to violate Western sanctions on selling weapons to Putin.

The financial and trade sanctions against Russia can also be considered a preview of what China might face if it invaded Taiwan. It might prove harder to assemble a coalition against China because Taiwan is acknowledged to be part of China, and the legal case for third-party intervention is more problematic than the case against Russia’s invasion of Ukraine. Moreover, some U.S. allies, notably South Korea, would pay a heavy economic price if they joined sanctions against China.economic sanctions And French president Macron’s visit to Beijing in April certainly created the impression that there’s some daylight between American views on China/Taiwan and French ones.

Still, it is likely that the core four – the U.S., Japan, Germany and the UK – would stick together. President Biden has said four times that the U.S. would come to Taiwan’s defense in an attack by the People’s Republic. But public opinion polls in Taiwan show skepticism, and probably for good reason. The U.S. does not have diplomatic relations with Taiwan and certainly no treaty obligation to defend it. Whoever is U.S. president is likely to think twice before starting a shooting war with China.

That is one reason why sanctions would be an attractive alternative. The core of the Western alliance would probably support sanctions if Beijing blockaded or invaded the island. What’s more, a good argument can be made that the impact of equivalent sanctions would be more harmful to the Chinese economy than it has been to Russia’s economic machinery.

Russia has a very specialized economy based primarily on energy and minerals. It is not an important producer of manufactured goods. Indeed, in a sense, it is more like Saudi Arabia than Europe. China, on the other hand, produces about one-quarter of global manufacturing value-added, most of it with the use of complex value chains that depend on the cooperation of many other countries, especially developed economies. Sanctioning China would thus have a large, negative effect on virtually every country’s GDP. But China is more trade-dependent than the U.S., so the disruption to the Chinese would be greater. And if China were cut off from Western technology and markets for a matter of years, it would be hard for the economy to reach the leadership’s goals of convergence with high-income nations in the foreseeable future. All told, this seems to me to be a pretty serious deterrent to military adventure.

Does Reliance on Sanctions Undermine the Primacy of the Dollar?

The power of U.S. financial and economic sanctions rests on the primacy of the dollar in international transactions. A reasonable question to ask, then, is whether the use of sanctions – and particularly, the frequent use of sanctions – might lead to changes in international finance that undermine the primary role of the dollar as the dominant medium of exchange and store of liquid wealth. The sanctions against Russia are supported by most advanced democracies, but not by most countries in the Global South. Furthermore, the U.S. imposes sanctions on a large number of other countries, and those sanctions are generally not supported by anyone else.

This naturally leads to efforts to circumvent sanctions by avoiding use of the dollar. Countries including China, Russia, Iran and North Korea try to transact their trade outside the dollar system. Even some democratic quasi-allies of the U.S. have raised the issue of shifting away from the dollar. Brazilian President Lula was recently in China (Brazil’s largest trading partner), calling for the use of their own currencies in bilateral trade.

In practice, however, there are good reasons why the dollar is solidly entrenched. First, there is incumbency advantage. About 80 percent of foreign exchange transactions worldwide have the dollar on one side of the exchange, and this share has not budged in recent years. If a firm wants to exchange, say, Chinese yuan for Brazilian real, banks would normally break it down into two transactions – first from yuan into dollars, and then dollars into real – because the dollar markets are so much deeper and more liquid.

China has been promoting the use of its currency in trade settlements, and has even created a Cross-Border Interbank Payments System (CIPS) to compete with the Western (Belgian-based) SWIFT network. Still, the number of banks connected to CIPS is small. And promotion of the yuan as a global currency has not gotten very far, with only 2.5 percent of settlement worldwide in Chinese currency.

That means Brazilian firms trying to tap markets in China and accepting yuan in payment may have to contend with large unanticipated swings in the exchange rate between the yuan and real. By the same token, the firm would have difficulty in hedging against changes in future exchange rates between the yuan and real, a necessary part of fulfilling business contracts that involve delivery and payment down the road. Nations that are barred by U.S. sanctions from clearing transactions in dollars do have incentives to find workarounds, but these are difficult and expensive.

It is important to remember, too, that the dollar has more going for it than liquidity. The U.S. is, of course, the largest economy with the largest inflow and outflow of capital, so dollars are needed in many transactions. But the U.S. also has good institutions to back business contracts written in dollars: strong property rights and rule of law, flexible exchange rates and open capital markets. The EU has these institutional strengths as well – and the euro does play a significant role in the settlement of international transactions. But a host of factors, among them the fact that the EU consists of many separate nations, has held back its currency as a competitor to the dollar.

The Chinese yuan is not in the same league as the dollar (or euro) for now, and the difficulty of getting from here to there is intuitive. If a Brazilian firm sells soybeans to China and gets paid in yuan, completing the transaction is circuitous, which translates as expensive. The firm cannot easily move money in and out of China unless it happens to have a shopping list of Chinese goods. China does not have an open capital account, nor is the exchange market for yuan deep and liquid. If the firm were paid in dollars to begin with, it could easily deposit the funds on-shore or off-shore for whatever period it prefers, and eventually use it to pay suppliers, either directly in dollars or by converting to any other currency.

Governments may agree to transact some trade in Chinese yuan, as is the case with Russia, Saudi Arabia and Brazil, but this will be awkward and costly for firms and the motivation will be more political than economic. It is not likely to take root as a general form of settlement until China addresses its institutional weaknesses. China is likely to gradually reform its financial system, and the yuan will almost surely gain a growing role in world commerce. But the point here is that this will be a long, slow process.

The extensive use of sanctions by the U.S. would, however, likely accelerate this process, as more countries are unable to store or spend in dollars. But a major role for the yuan, or other currencies, is likely to only develop gradually. This means that the use of financial sanctions remains a potent policy tool for the U.S., but one whose heavy use could have unwelcome consequences in the long run. It works best when we have support from other countries, and frequent use or use without allied support is likely to be ineffective and hasten the gradual rise of competitor currencies.

The Big Picture

The West’s financial sanctions have not stopped the Russian invasion, nor did they prevent Russia from earning foreign exchange from its energy exports. But the sanctions have severely curtailed imports into Russia. And they have unfavorably affected the terms of trade between Russian exports that must be sold at a discount and imports bought in China or funneled quietly through third countries. This certainly hampers the war machine and has thrown the economy into recession. Moreover, Russia will not be able to develop economically without sanctions relief – for that matter, it wasn’t doing all that well before. This gives the West leverage in the event of settlement negotiations, which must come sooner or later.

The sanctions have also prevented China from giving full-throttle support to Russia’s invasion, though they have not prevented China from increasing trade with Russia (and profiting at Russia’s expense). This, one would hope, will serve as a warning to China that the cost of blockading or invading Taiwan would be high. Finally, it’s worth remembering that sanctions are weapons that have costs as well as benefits to the U.S., and someday they could undermine the role of the dollar as the world’s reserve currency.