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Economic Diplomacy Boom: Will It Last Long?Read more on: Sanctions, Russian Economy challenges, Russian finance

09:42 16/10/2014

BRATERSKY, Maxim

As the international crisis around Ukraine escalates,countries in the West, especially the United States, haveincreasingly used economic diplomacy against Russia, andthreaten to expand the scale and reach of sanctions. Sanctionshave also been a key mechanism by which America exertspressure on Iran and many other countries. Why are thesetools of economic coercion increasingly becoming a basis forpursuing the policy of containment and the main instrumentof Western countries pressure? Is it because economicdiplomacy is so effective compared to other instruments offoreign policy? Or is there a different reason for so frequentlyresorting to economic instruments of foreign policy?

Economic diplomacy (economic statecraft) is the use of thefull spectrum of economic tools a state has at its disposal toachieve its foreign policy goals. Instruments used in economicdiplomacy are divided into the negative (sanctions) and the positive (rewards), and can takemany forms. The most well-known being economic sanctions, on the one hand, and variousrewards for loyalty, including economic and military aid, access to markets, etc., on the other[1].

Economic diplomacys place in the foreign policy arsenal

States pursue foreign policy and protect their national interests through a variety of instruments.Foreign policy tools that the state has at its disposal can be divided into several groups as follows:information propaganda, timely and properly delivered facts; soft power attractiveness of itssocio-economic model, national culture; diplomatic negotiations, agreements and alliances;power threat of violence, violence; economic goods, services and investment; monetary access to markets.

It is necessary to draw a line between economic instruments of foreign policy and a states foreigneconomic policy. The fundamental difference between the two is that economic tools of foreignpolicy are used to achieve non-economic objectives, while foreign economic policy, in contrast,

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uses economic and non-economic instruments to achieve the economic goals of the state. Thefollowing example illustrates the difference between these two categories.

Imposing a trade embargo against a country to force it to abandon its WMD developmentprograms is categorized as economic diplomacy [2]. The use of political pressure to force acountry to reduce import restrictions is categorized as foreign economic policy. The Americanembargo against Cuba illustrates an unsuccessful attempt to use economic sanctions for politicalpurposes. The introduction of countervailing duties by the United States in response to Chinesesubsidizing exports of auto parts in 2012 illustrates the use of sanctions for commercial purposes.Of course, it is not always possible to distinguish between these two types of public policy, sincethe states often pursue both political and economic goals simultaneously.

Economization of foreign policy began not so long ago

Economic instruments of foreign policy occupied a prominent place in the foreign policy arsenalof economically developed countries after World War II, when the global trade in goods andservices started developing rapidly [3].

Many countries, particularly the United States, saw the growth of international trade as anexcellent opportunity to exert influence on foreign governments. In the 1990s, the United Statesand other economically powerful countries obtained operating control over an important foreignpolicy tool. Encouraging or limiting foreign countries participation in global economic processesmade it possible to attain major foreign policy goals without resorting to military force, whentraditional diplomatic methods had failed. The possibility of using economic measures isdetermined by the economic vulnerability of the state and the type of foreign-trade policy that itpursues. It is difficult to exert influence on a state such as North Korea, as its foreign trade isnegligible. On the other hand, it is easy to assert influence over a country that imports all vitalgoods and does not produce any of them itself.

Foreign economic instruments at states disposal today include international trade and economicsanctions, establishing regional trade blocs and regimes, managing international financial flowsand the use of external debt, the use of foreign direct investment, economic and humanitarianaid, as well as influencing the activities of international financial institutions. Financialinstruments of foreign policy are today becoming more important than those involving trade.Thus, forty years of trade sanctions could not force Iran to reconsider its position on the nuclearissue, while financial sanctions imposed by the West were quick to bring Iran to the conferencetable.

Improved efficiency of using financial instruments in the world economy is primarily due to thepeculiarities of the current stage of globalization. The volume of financial transactions heavilyexceeds the amount of financial services rendered in the international trade in goods andservices. In 2013, global exports of goods and services amounted to 17.8 trillion dollars [4], whilethe volume of the world equity market alone (excluding bonds, derivatives, currencies) amountedto $55 trillion [5]. The globalization of trade has diversified world markets, except for certainspecific goods (such as weapons, some high-tech products, and gas). Goods can be bought andsold in many markets, which makes manipulating the commodities markets for politicalpurposes increasingly difficult. In contrast, the global finance system becomes increasinglyvulnerable to targeted interference. The number of global reserve currencies used in internationaltransactions is decreasing, and corresponding accounts are settled in the three or four centersthat service an increasing share of the world economy. 90 per cent of FOREX transactions and80 per cent of trade finance world over was conducted in American dollars [6].

The combined use of trade and financial pressure mechanisms appears a particularly effectivepolitical tool to promote a states foreign policy interests.

Not all players enjoy the opportunity of using economic instruments (financial and commercial)in foreign policy to protect their interests in the modern world. Minor economies are helpless in aworld scarred by political struggle, just as militarily weak countries cannot use military power toadvance their political interests.

The successful application of economic instruments requires at least partial control over thecommanding heights of the world economy, such as the world reserve currency, a majorfinancial and payments center, strong positions in international economic organizations thatprovide an opportunity to use not only ones own financial resources, but those of other countriestoo (that are managed by international financial institutions) to its political ends. Most of thesanctions that proved politically successful were imposed by the United States, although therewere instances of successful sanctions imposed by other countries (the UK against Rhodesia in1966). In contrast, the Russian sanctions against Georgia and Moldova in the mid-2000s failed toachieve their political goals, although they were relatively economically successful.

Sanctions as the main tool of economic diplomacy

After World War II, the practice of imposing economic sanctions gained momentum. In 1950,there were 15 cases of the imposition of sanctions, in the 1960s 20 cases, in the 1970s 37, inthe 1980s 23, and more than 50 cases in the 1990s. Most were imposed unilaterally by theUnited States, and in recent years countries in Western Europe began to apply sanctions moreactively, although such sanction coalitions have usually been formed by the United States [7].


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The attitude of governments and international public opinion towards the issue of when sanctionsare justified and appropriate has changed over the last decade. From the beginning of the FirstWorld War to the end of World War II, sanctions were imposed to prevent military intervention,and as a part of the governments broader war effort. In subsequent decades, the spectrum ofends to be achieved by imposing sanctions widened and included putting an end to regionalconflicts, promoting the spread of democracy and political freedoms, enforcing human rights,preventing the proliferation of nuclear weapons, winning the release of hostages and theliberation of occupied territories.

The efficiency of trade and economic sanctions as a political tool has long been seriouslydiscussed. More and more experts [8] tend to believe that sanctions are not effective in principle.Nonetheless, sanctions remain a favored tool of politicians and the frequency with whichsanctions are imposed around the world does not decline.

The reason for this decline in the efficiency of economic sanctions should be sought in the natureof the modern globalized economy. The world is becoming, and in many ways has become, asingle market, and the relative dominance of the American economy and the economies of itspolitical allies in the world is weakening. The United States and the West as a whole have lost asignificant part of their control over and influence on the world economy and trade in goods andservices. Since, historically, most economic sanctions were imposed by them, the effect of theirimposition has consequently also lessened. Great Britains share of global merchandise exportsfell from 18.5 per cent to 2.6 per cent (2012), the share of Germany from 18 per cent to 7.7 percent [9], and that of the United States decreased from 12.56 per cent in 2000 to 8.21 per cent in2012 [10].

Globalization has had a twofold impact on the use of sanctions in world politics. On the one hand,globalization diversifies export and import markets, making the effective imposition of sanctionsmore difficult, since any state can find alternative tracks for exports and imports. On the otherhand, the financial and information components of globalization make it easier to trackinternational payments and financial flows, providing developed countries with world reservecurrencies better opportunities to meddle in world trade finances and block trade operations.This is why, in recent years, the emphasis on the imposition of economic sanctions has shiftedfrom trade sanctions to financial sanctions. In terms of financial sanctions, limited access to thecapital markets has come to the fore.

Thus, the relative decline in the efficiency of trade and economic sanctions is largely due to theglobal nature of the world economy, which offers little if any opportunity for the introduction andmaintenance of truly severe restrictions on the flow of goods and services, except for specificgroups of goods, such as weapons, dual-use technology, etc. Another reason for sanctions limitedeffectiveness is that they impact the population of the target country rather than its politicaldecision-making elite. In a democratic society the political elite, aware of public discontentsparked by a drop in living standards, is likely to react by taking the required decision. The elite inauthoritarian political systems, against which sanctions are most often imposed, remainsunaffected by sanctions and can afford to ignore them. The imposition of sanctions against Iraqunder Saddam Hussein serves as an apposite illustration of this point.

Reasons for economic diplomacy

Why has economic diplomacy come to the fore in world politics in the last 20-30 years, becominga staple instrument of Western foreign policy?

This change was brought about by political, military, social and economic factors.

Restrictions on the use of military force are an important obstacle to conducting foreign policy viatraditional coercive methods. The use of military force is not only restrained by international lawand institutions (the UN Charter, the UN Security Council), but, more importantly, by thesubstantial conventional military power and nuclear weapons that many countries hold in theirarsenals. Only weak countries can be attacked largely painlessly, while major global and regionalpowers are almost immune to the use of military force from outside.

The second factor that makes economic diplomacy so popular is that politicians, executives andlegislators like such methods. They are in every way less expensive than military action, do notantagonize people who do not want to take up arms and go to the front, and they seem relativelyhumane: there is no bloodshed on TV, no reports of mass casualties. Of course, some nationalmanufacturers may suffer losses as a result, especially if they are exporters, but imposition ofsanctions is not regulated by international law, so the authors of the sanctions do not have toenter into a conflict with international law. In short, economic diplomacy seems a much morecomfortable and politically acceptable method than war.

The third reason why economic diplomacy is so widely used today is ideological in nature. TheWest, in the broad sense, stands for a liberal worldview that highlights the interests of theindividual. One of the basic interests of the individual appears to be the benefits and maximumpossible consumption provided by free trade. The imposition of economic sanctions reducesconsumption, makes the consumer market more expensive and sparse. However, the politicaleffectiveness of this economic pressure depends not only on the worsening economic situation,but also on the society in questions commitment to the ideals of private gain and consumption,quite apart from the political regimes readiness to consult private interests of its citizens. In this


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regard, society in different countries differs greatly, and a prime example of this is Cuba andIran, which for decades lived under sanctions.

The same is true for stimulating economic instruments of foreign policy. There are many statesthat are ready to make political concessions in exchange for economic benefits, while there arefew examples to the contrary. Ukraine, which refused a giant package of economic assistanceoffered by Russia for political reasons, is one of them.

The status quo is becoming less acceptable to emerging powers, and they (the BRICS, forexample) are beginning to build an alternative global financial architecture and to form their ownrules for international trade and investment. It seems that these efforts are starting to yield theirfirst results. For example, the decision was taken to set up the New Development Bank (NDB)[11]. This means that economic diplomacy in its current form will face new restrictions. It isbecoming increasingly difficult to implement economic diplomacy in a world of alternativefinance, trade and investment using the traditional economic stick and carrot policy, and regionaleconomic integration projects are coming to the fore today as tools of global political andeconomic competition.

In my view, the sanctions will remain in the arsenal of world politics, although their politicaleffectiveness is increasingly contested. The U.S. President argues that Russia's policy toward theUkrainian crisis has changed as a direct result of the sanctions. There might be an element oftruth in his words, but it is also true that the situation in South-Eastern Ukraine today is muchmore in line with Russia's interests than it was a month ago.

There will be attempts to dispute the sanctions and the counter-sanctions in international courtsand the WTO.

It will be interesting to watch as events develop, but drawing up internationally recognized ruleson the issue of sanctions seems unlikely.

Maxim Bratersky is Doctor of Political Science, Professor, Head of the World PoliticsDepartment of the Higher School of Economics.

This article was originally published on www.russiancouncil.ru

1. See: M. Braterskij. Nevoennye rychagi vneshnej politiki Rossii. Regional'nye i global'nye mehanizmy. Moscow, 2012, p. 78.

2. B. Steil and R.E. Litan, Financial Statecraft. Yale, 2006

3. Growth in world trade became particularly intense in the late 20th century. In 1986-2000, the volume of world trade in goods and services

nearly tripled.

4. http://stats.oecd.org/index.aspx?queryid=167

5. http://www.world-exchanges.org/files/2013_WFE_Market_Highlights.pdf

6. http://www.bloomberg.com/news/2014-07-15/dollar-dominance-intact-as-u-s-fines-on-banks-raise-ire.html

7. See: Gary Clyde Hufbauer , Jeffrey J. Schott , Kimberly Ann Elliott and Barbara Oegg . Economic Sanctions Reconsidered. N.Y., 2008

8. See: K.A. Elliot, G.C. Hufbauer, B. Oegg, Sanctions, http://www.econlib.org/library/Enc/Sanctions.html, pp. 1-15; V. Dimitrijevic, Sanctions,

Regime and People, Review of International Affairs, 1993 pp. 11-12.

9. See: Address by Deputy Minister of Economic Development A.E. Likhachev to the Federation Council on September 9, 2013

10. See: http://wits.worldbank.org/

11. Joint Statement of the Fifth BRICS Summit in Durban, March 2013 http://www.cfr.org/emerging-markets/joint-statement-fifth-brics-

summit-durban-march-2013/p30341

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