Do Sanctions Really Work? Russia's Oil Trade With India Exposes Limits Of Economic Punishment | The Reason Why

Just read the news that Russia and India are finding ways to continue the oil trade. A few days ago, the US passed a law that levies 500% duties on anyone dealing with Russia. However, there's a loophole.

According to a report in the Guardian, as long as Rosneft and Lukoil are not involved, Russia can export oil to India. Therefore, many small companies have opened up last month to make this happen.

That brings an important question: whether sanctions work?

If we look closely, research shows that strict sanctions work less than 10% of the time. Even with a broader definition, they're successful at best about a third of the time.

The idea that sanctions lead to the complete stoppage of trade is a myth, which even sanctioning countries know. For instance, people in Iran can get Western goods, often by going through Turkiye or the Gulf.

However, sanctions can damage economies: annual GDP losses of 1–3%, higher inflation, weaker currencies, and reduced investment. But Russia surprised us. In 2024, the IMF projected Russia’s economy would outpace some advanced countries, which was pretty embarrassing for the West.

However, according to an October New York Times report, Russia has reduced its military spending for the upcoming year, which could be a minor advantage for the West. Even President Putin admitted the sanctions are hurting the economy, though he claims they won’t change Russia’s stance. On the other hand, Trump thinks the real impact of sanctions will show up in the coming months.

But here’s the catch: just because a country’s economy is hurting doesn’t mean the government will cave, especially if it’s authoritarian. Using power to clamp down on dissent, such governments can do whatever they want and not change their behaviour.

When the primary sanctions don’t work as intended, the countries go for secondary sanctions — penalising third parties for trading with sanctioned entities.

The US, with its dominance over the dollar and the global financial system, basically decides who gets to play and who doesn’t. Big banks, insurers, and global companies stop doing business with any entity on the sanctions list. The idea is to squeeze industries so much that governments feel forced to change the behaviour that led to the sanctions in the first place.

But this power has a cost. As the Economist has argued, using secondary sanctions too aggressively damages trust in the global financial system. Even countries that don’t want to challenge the West start looking for ways to protect themselves — using other currencies, setting up alternative payment systems, or doing more trade directly with each other.

Then, there’s a political limit to it, too.

If the US sanctions major Chinese banks, global trade would slow, supply pressures would ignite inflation, and that would harm the US businesses and consumers. That’s why Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, says big Chinese banks have become effectively "unsanctionable".

Speaking of secondary sanctions, it is important to note that these sanctions are also not foolproof and cannot guarantee any success.

For instance, when the West sanctioned VTB Bank, a Russian bank, and cut it off from SWIFT in 2022, the aim was to isolate Russia’s financial activity. According to the New York Times, VTB adapted by enabling transfers through Chinese platforms like Alipay, bypassing restrictions and letting customers move funds internationally.

Similarly, Russia’s shadow fleet shows how sanctions disrupt formal networks but shift economic activity into less transparent channels. In a previous article, I wrote about how the shadow fleet works.

Western countries impose sanctions to express disapproval of other nations' actions, mainly as a message to their own citizens.

Economist Urjit Patel points out that sanctions aren’t just about changing how another country acts; they’re also a way to warn others, flex some muscle, and show off financial control. Freezing assets or kicking banks off SWIFT is often more about sending a message than actually expecting change.

Sanctions are not entirely useless, but their success depends on specific conditions. They are most effective with narrow, negotiable aims, strong coalitions, and strict enforcement.

Sanctions tend to limit capabilities. But they cannot force surrender or change behaviour. Expecting them to end wars or topple regimes is unrealistic and can undermine genuine diplomacy.

Having said that, sanctions impact civilians the most, not the leaders.