How Sanctions Work: Economic Pressure in Global Politics

What Are Economic Sanctions?

Economic sanctions are coercive measures taken by one or more countries to restrict trade, financial transactions, or other economic interactions with a target country, entity, or individual. They are one of the most widely used tools of foreign policy, occupying the space between diplomatic protest (too weak) and military action (too costly and risky). Sanctions aim to impose economic pain severe enough to compel behavioral change — to convince a target government that the costs of its current policy exceed the benefits.

Sanctions have been used throughout history but became dramatically more prevalent and sophisticated after the Cold War. The United States is the world's most prolific user of sanctions, maintaining comprehensive sanctions programs against Cuba, Iran, North Korea, Syria, Russia, and many other countries, as well as thousands of targeted sanctions against individuals and entities. The European Union, United Nations, and regional organizations also impose sanctions, sometimes in coordination with the United States and sometimes independently.

The popularity of sanctions as a policy tool stems from their apparent low cost to the sender — they seem to impose pain on the target without requiring the blood and treasure of military action. However, this perception is partially misleading. Sanctions do impose costs on the sender through lost trade and investment, alliance friction, and the administrative burden of enforcement. And their effectiveness in actually changing target behavior is considerably more limited than their popularity suggests.

Types of Sanctions

Comprehensive sanctions cut off all (or nearly all) trade and financial relations between the sanctioning country and the target. The United States has maintained comprehensive sanctions on Cuba since 1962, North Korea for decades, and Iran under various forms since 1979. Comprehensive sanctions aim to maximize economic pressure but are blunt instruments that harm the entire economy, including civilian populations, and often serve to rally domestic support behind the sanctioned government.

Targeted or "smart" sanctions were developed in the 1990s as a response to concerns about the humanitarian impact of comprehensive sanctions on Iraq (which contributed to significant civilian suffering in the 1990s). Targeted sanctions focus on specific individuals (government officials, oligarchs, military commanders) and entities (companies, banks) connected to the behavior being targeted, while sparing the broader population. Asset freezes (blocking targeted persons' foreign assets), travel bans, and financial blacklisting are common targeted measures.

Sectoral sanctions target specific economic sectors — particularly energy (oil and gas), financial services, and defense — without imposing a comprehensive embargo. They aim to deprive the target government of revenue and access to crucial inputs (technology, financing) while limiting collateral damage to civilian populations and preserving some economic relationship with third countries. The sanctions imposed on Russia following the 2022 Ukraine invasion began as sectoral measures before progressively expanding in scope.

How Financial Sanctions Work

The most powerful American sanctions tool is exclusion from the U.S. dollar financial system. Because most international trade and finance is conducted in dollars, and dollar transactions must flow through American correspondent banks, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) can effectively cut off any entity from the global financial system by placing it on the Specially Designated Nationals (SDN) list. Banks anywhere in the world that do business with SDN-listed entities risk losing access to the U.S. financial system — a consequence so severe that most banks worldwide comply voluntarily with American sanctions even when they are not legally required to.

This "extraterritorial" effect of U.S. financial sanctions — compelling third-country banks and companies to comply with American sanctions law even when their home countries have not imposed the same restrictions — is one of the most contentious aspects of modern sanctions practice. European companies were blocked from doing business with Iran under U.S. sanctions even while the EU maintained its own separate Iran policy, creating significant transatlantic friction.

Secondary sanctions extend the reach further, threatening to sanction foreign entities that do business with the primary target. By threatening European, Chinese, or Indian companies with loss of U.S. market access if they continue trading with Iran or Russia, American secondary sanctions leverage the attractiveness of the U.S. market to extend American sanctions policy globally. This approach amplifies pressure but also generates significant resentment and has motivated efforts by other countries to develop alternative financial infrastructure that reduces dependence on dollar clearing.

Key Case Studies

Iran represents one of the most extensively sanctioned economies in the world. Comprehensive U.S. sanctions have been in place since 1979, supplemented by multilateral UN sanctions over the nuclear program. The most severe measures — targeting Iranian oil exports and cutting Iran off from SWIFT international financial messaging — substantially reduced Iran's oil revenues and GDP. The economic pressure contributed to Iran's willingness to negotiate the 2015 Joint Comprehensive Plan of Action (JCPOA), under which Iran accepted constraints on its nuclear program in exchange for sanctions relief. However, the U.S. withdrawal from the JCPOA in 2018 and reimposition of sanctions did not collapse the Iranian economy or government, demonstrating sanctions' limits against a resilient, determined adversary.

Russia following the 2022 Ukraine invasion received the most sweeping sanctions package ever imposed on a major economy. Western countries froze approximately $300 billion in Russian central bank assets, cut major Russian banks off from SWIFT, imposed export controls on advanced technology, sanctioned hundreds of oligarchs and officials, and reduced purchases of Russian oil and gas through a phased embargo. Russia's economy contracted sharply in 2022 but proved more resilient than initial projections, partly because Russia redirected trade to China, India, and other non-Western markets, and partly because high energy prices during much of 2022–2023 offset reduced volumes.

North Korea has been subject to escalating UN Security Council sanctions since 2006, targeting its nuclear and missile programs. The sanctions have not stopped North Korea's program — the country has continued developing nuclear weapons and long-range missiles — demonstrating that sanctions alone are insufficient to reverse a determined government's strategic weapons programs when those programs are seen as essential to regime survival.

Effectiveness: What Does the Research Show?

The academic literature on sanctions effectiveness reaches broadly pessimistic conclusions. A landmark 1990 study by Hufbauer, Schott, and Elliott surveying over a century of sanctions cases found a success rate of about 34% — a figure that subsequent researchers have challenged, arguing it overstates effectiveness by defining "success" loosely and misattributing outcomes. More recent scholarship suggests that sanctions succeed in changing target behavior in perhaps 10–25% of cases, depending on the definition of success and the methodology used.

Sanctions are more likely to succeed when: the sender is a major trading partner of the target, making economic pain more severe; the target's goal is limited (making it cheaper to comply than resist); the sender maintains credible threats of escalation; the target's domestic politics create pressure for accommodation; and sanctions are combined with diplomatic off-ramps that allow the target government to comply without appearing to have capitulated.

Sanctions are less likely to succeed when: the target government is willing and able to shift costs onto its population; alternative suppliers or buyers reduce the sender's leverage; the demand involves fundamental national security or prestige issues; the sanctioned government can use the external pressure to rally nationalist sentiment; or the sanctions coalition is incomplete, allowing circumvention through non-participating countries.

Humanitarian Concerns and Unintended Consequences

Comprehensive sanctions can cause significant humanitarian harm. The sanctions on Iraq from 1990 to 2003, combined with the Gulf War's destruction of infrastructure and the Iraqi government's misallocation of resources, contributed to deterioration of health, water, and food systems that killed hundreds of thousands of Iraqi civilians — the most cited example of sanctions-induced humanitarian catastrophe. This experience drove the shift toward "targeted" sanctions focused on elites rather than populations.

Even targeted sanctions have indirect humanitarian effects. Sanctions on financial systems can make it difficult for humanitarian organizations to transfer funds into sanctioned countries, even for clearly legitimate aid. The "de-risking" behavior of banks — refusing all transactions touching a sanctioned country to avoid regulatory risk — creates collateral damage that exceeds the intended scope of the sanctions. Sanctions on medical or food imports formally exempted from restriction often face practical barriers because of banking restrictions, creating civilian harm inconsistent with stated policy.

The Future of Sanctions

Sanctions have become so widely used that their effectiveness may be declining through overuse — "sanctions fatigue" among both senders (whose businesses and allies grow tired of the costs) and targets (who develop workarounds and alternative relationships). The development of alternative payment systems by Russia, China, and other countries is a direct response to dollar-based sanctions and will gradually reduce their leverage. The growing use of sanctions for political purposes beyond the most egregious violations (weapons of mass destruction, terrorism, systematic human rights abuse) risks normalizing what should be an exceptional tool and eroding the multilateral cooperation necessary for them to be effective.

The United States faces a structural challenge: its sanctions power depends on the centrality of the dollar and U.S. financial system to global commerce. To the degree that other countries develop alternative systems — SWIFT alternatives, yuan-denominated trade settlements, cryptocurrency-based transactions — the leverage that makes U.S. financial sanctions uniquely powerful will gradually diminish. Managing this structural challenge while using existing leverage wisely is one of the central challenges of American economic statecraft in the coming decades.