The Sword and the Shield: The Economics of Targeted Sanctions

42 Pages Posted: 5 Jan 2018

See all articles by Daniel P. Ahn

Daniel P. Ahn

Georgetown University School of Foreign Service; Government of the United States of America - Department of State

Rodney D. Ludema

Georgetown University - Department of Economics

Date Written: December 1, 2017

Abstract

While broad economic sanctions have long been used as instruments of foreign policy, targeted sanctions focusing on specific individuals, entities, and transactions are relatively new and less understood. We present a model of firm performance under sanctions where the target government may be incentivized to “shield” some firms from the full brunt of sanctions. Then, using detailed firm and individual-level data, this paper empirically estimates the impact of targeted sanctions, focusing on sanctions deployed by the United States and the European Union against primarily Russian targets after the crisis in Ukraine in 2014 as a natural experiment. We find, on average, a sanctioned or associated company loses about one-quarter of its operating revenue, over one-half of its asset value, and about one-third of its employees relative to their non-sanctioned peers, suggesting targeted sanctions are quite “smart” in the sense of hitting the intended targets with relatively minimal collateral damage. We also find some evidence of spillover impact onto technically non-sanctioned targets. Finally, we find that “strategic” firms selling high-priority goods to the regime systemically outperform non-strategic firms under sanctions, consistent with our shielding hypothesis and demonstrating the policy tradeoff between the tactical and the strategic impact of targeted sanctions.

Keywords: sanctions, state subsidies, targeted sanctions, national security, economics of conflict, economic warfare, Russia

JEL Classification: F51, H56, F14, H77, H81, N44

Suggested Citation

Ahn, Daniel P. and Ludema, Rodney D., The Sword and the Shield: The Economics of Targeted Sanctions (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=3095325 or http://dx.doi.org/10.2139/ssrn.3095325

Daniel P. Ahn (Contact Author)

Georgetown University School of Foreign Service ( email )

Washington, DC 20057
United States

Government of the United States of America - Department of State ( email )

United States

Rodney D. Ludema

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1429 (Phone)
202-687-6102 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
178
rank
152,008
Abstract Views
842
PlumX Metrics