Julia Friedlander is CEO of Atlantik-Brücke in Berlin and former advisor for European affairs at the U.S. National Security Council and Department of the Treasury. Josh Lipsky is senior director of the Atlantic Council GeoEconomics Center and previously was an advisor at the IMF.
In director Christopher Nolan’s “Oppenheimer,” which chronicles the life of the father of the atomic bomb, the character of physicist Niels Bohr warns: “We have to make the politicians understand, this isn’t a new weapon, it’s a new world.” And for many economists watching the film, the moment may have rung eerily true.
Over the past few years, politicians have leaned heavily on the power of economics to shape foreign policy — what we call “economic statecraft.” From sanctions and export controls to the blocking of assets overseas, these tools appeal to policymakers who want to make an impact on a competitor or adversary, while avoiding direct military conflict.
Of course, sanctions are nothing like atomic weapons, but the gap between its practitioners — in this case economists and the private sector — and the expectations of those who implement these economic tools can be dangerous. And we have now crossed a point of no return in this hard-to-define area between finance and war.
These tools didn’t just appear overnight. Throughout history, nations have been no strangers to embargos or creative tariffs and taxation. But modern economic warfare based on the integration of financial markets is a relatively newer affair, dating back just 22 years, to the aftermath of the 9/11 attacks in the United States.
In the wake of this unprecedented terrorism on American soil, U.S. Congress granted federal agencies sweeping powers to choke off the financing of al-Qaeda and its affiliates, leveraging the U.S. financial system’s global reach. However, Washington also used these measures for purposes of international law enforcement to protect Americans from terrorism — complementing, but not replacing, the military targeting of al-Qaeda.
Fast forward a decade, and sanctions then begin to play a different role in foreign policy: Driving Iran to the negotiating table over its nuclear program through multilateral — and, on the U.S. side, increasingly unilateral — financial punishment. Here, sanctions were used as leverage, as the credible threat of direct force was still part of the equation, looming large over negotiations.
And just this month, the outbreak of the Israel-Hamas war and Iran’s continued support of terrorist organizations has renewed this pairing of sanctions and military deterrence as a first-move policy option for the West.
But so much has changed in the evolution of sanctions over the years. It now truly is, as “Niels Bohr” said, a new world.
Since Russia’s invasion of Ukraine, the G7 has unleashed the most sweeping sanctions regime ever to be placed on a major economy. It isn’t just the raw number of designations or the various banks cut off from SWIFT that make it so, but the sweeping export control measures covering everything from handbags to airbags, and blocking approximately $300 billion in Russian sovereign assets.
Also, unlike previous instances where tensions ebbed and flowed between the U.S. and its European partners over the severity and impact of sanctions, the allies are now aligned. And unlike before, the West is clear it won’t be confronting Russia with direct military engagement.
During the war’s initial stages, when consensus held that Ukraine would fall in weeks, economic statecraft attempted to inflict enough damage on Russia to cripple an invasion in real time. And though it may now sound naive, we maintain that this ambitious and daring tactic could have worked. With all the financial and economic unknowns unleashed by battering a global economy overnight, a chain of events could have caused a major financial crisis and bankrupted Russia.
However, we also aren’t surprised it didn’t.
If one were to ask an economist at the U.S. Treasury Department or the International Monetary Fund (IMF) about Russia withstanding such a severe barrage, they would have quickly pointed to the country’s history of weathering financial crises, and lessons learned from the decades-long Iranian sanctions regime — a regime that will now be put to the test again in the months to come.
Economists would also add that substitution effects mobilize quickly, and that the global economy is increasingly more multipolar — but this doesn’t mean sanctions have failed. Instead, they have forced Russia into newer, unreliable markets and severed access to credit, complicating Moscow’s war. And Russia’s long-term GDP growth will now be significantly lower than projected before the invasion, in part because of sanctions and the associated emigration of young professionals.
All this means, the results of the sanctions on Russia are mixed. But will Washington understand the implications for its policymaking going forward?
Some economists are now quietly worried about what they have helped unleash. Early last year, we had warned that the G7’s efforts against Russia were the ultimate test of economic warfare, and that the U.S. and its allies risked exhausting options without adequate return — as well as perhaps drawing the wrong lessons from the experience, namely that they had crafted a blueprint for future conflicts.
For Western countries targeting Russia, flexing nearly all their economic power proved a risk worth taking. It also proved an economically tenable risk for a bloc that could outbid others for alternatives to Russian energy and has a small business footprint in Russia since President Vladimir Putin’s aggression against Ukraine began in 2014.
However, the gamble between governments’ national security aims and the global economy’s macroeconomic realities would look much different with a stronger financial adversary. As research by the Atlantic Council and Rhodium Group showed, shape-shifting the same sweeping sanctions tools to address a Chinese escalation in the Taiwan Strait, for example, could cost Western economies trillions and potentially erode Western economic influence across the world.
Over the past two years, the global south has already been watching the rapid expansion of the tools of economic statecraft with growing alarm. And in private conversations with non-G7 central banks, we have heard a deep desire to reduce the dollar dependency of their nations. The recent expansion of the BRICS grouping is just the latest public manifestation of this.
Along these lines, in a recent publication, we showed that sanctions do risk alienating countries from their dollar holdings. And at last month’s IMF-World Bank Meetings in Marrakesh, India’s finance minister explained to the Atlantic Council why her country — and many others — were concerned about an overreliance on the dollar.
While these countries aren’t yet close to immediately detaching themselves from the currency, they are, as the minister said, searching for alternatives — and we shouldn’t ignore this sign. Countries that rely on the U.S. and European financial system have a right to understand the way the West thinks about these issues and have a voice in their implementation. This isn’t about being “nice,” it’s about guarding our own financial system and reducing the risk of damage.
So, how best to acknowledge these concerns? We propose setting out a new framework for the use of the tools of economic statecraft. Just as the Atomic Energy Commission was created to guide the future use of nuclear weapons, the U.S. and Europe should jointly propose guidelines for what kind of sanctions and other economic measures should be used and when.
Can a belligerent state’s foreign reserves held in dollars or euros be frozen? What is the threshold that must be crossed to seize those assets? If the U.S. bans the export of certain microchips to China, what happens when an ally or partner wants to ship a similar product? Without answering these questions, the world can only guess at what the West will do — and look for alternatives to its system.
The second step is to then remind the global south — and ourselves — of the positive dimensions of statecraft. The tools of trade and international aid are just as powerful, in fact more so, than anything coercive. But the U.S., at least, spends far too much time thinking about how to punish economies and far too little about how to bring more countries onside. However, recent efforts from both the U.S. and Europe on the joint Technology and Trade Council and the Indo-Pacific Economic Framework for Prosperity, as well as new capital for the World Bank, are small steps in the right direction.
Back in 1944, just as scientists began focusing on a test implosion in New Mexico for the atomic bomb, 44 nations met in Bretton Woods, creating the IMF and World Bank — the original tools of economic statecraft. They weren’t intended to be institutions to sanction or punish but rather massive lending organizations to rebuild from war and avoid future conflict. And the financial and trade network built around these institutions helped the U.S. and Europe, while also generating growth across many economies.
But now, in the face of such sweeping sanctions regimes and other punitive measures — and without serious effort at reform based on the changing shape of the global economy or the replenishment of these institutions’ resources — the IMF and World Bank will decline in relevance in the years to come. And in their absence, rival lending banks will exert more influence.
The tools of economic statecraft are powerful, and their use can come with lasting harm. We need to understand that the Russian experiment was a turning point after two decades of escalating economic power play. And now is the moment to think carefully, and strategically, about the next steps in the evolution of economic statecraft.
