Counting the Hidden Costs: A New Approach to Analyzing Sanctions Evasion

• In Event: Economic Instruments and Foreign Policy

Abstract

Within the literature on economic sanctions, the phenomena of sanctions evasion and circumvention have garnered considerable scholarly attention. Several studies have shed light on the motivations that lead firms and states to engage in sanctions busting (Early 2011; Preble 2023). Others have delved into the tactics employed to evade sanctions, such as smuggling, covert financial networks, and deceptive trade practices (Early 2015; Wronka 2022). Still more have sought to assess how sanctions evasion affects the overall success of the sanctioning effort (Allen 2005; Early 2015; Early 2021). The common argument, whether explicit or implicit, that runs through all these works is that a target country’s ability to evade sanctions is a sign that sanctions have not or will not work.

This paper takes a different tack. Extant studies, I argue, overlook a crucial dimension of sanctions evasion — the costs incurred by entities engaged in circumventing economic restrictions within the target country. Put another way, while firms and states can find ways to successfully circumvent sanctions, such activities come at a price. To the best of my knowledge, this hidden cost of sanctions evasion has yet to be explored by scholars.

Recognizing that evading and circumventing sanctions is not costless, this paper proposes a novel approach to evasion which seeks to understand not just the means companies use to circumvent sanctions but the costs they incur when doing so. I argue that the costs of evasion can be both direct and indirect. Direct costs entail, for example, paying higher prices for needed inputs (e.g. component parts, transportation). Indirect costs, while more difficult to measure, take into account that sanctions evasion diverts resources from other, more productive activities. For example, it has often been argued that Russia has successfully evaded the G-7 price cap because Russian crude continues to trade, and often at prices higher than those set by the cap. What this argument misses, however, is that the price cap has meaningfully increased Russia’s costs to drill and transport its crude. By some estimates, Russia now incurs an additional $36 in transaction costs per barrel of exported oil. Some of these costs are direct – in order to circumvent sanctions, Russia needed to add tankers to its shadow fleet at a cost of roughly $3.5 million a ship. Others, however, are indirect – Russia has been forced to expand and modify its port capacity in ways that were not envisioned before the imposition of sanctions.

To demonstrate the utility of the proposed approach, I conduct an in-depth analysis of three economic sectors in Russia: oil, electronics, and automotive repair. I first analyze the different, and diverse, tactics that have been developed to bypass sanctions and then show how these strategies have translated into costs. I argue that by assessing both direct and indirect costs of circumvention, we can arrive at a more nuanced understanding of the true impact of sanctions evasion. This, in turn, may require that we reconsider what it means for sanctions to “work.”

Author

• Masha Hedberg, Colgate University