ECONOMIC STATECRAFT: A TALE OF TWO OUTCOMES

Following the Russian invasion of Ukraine in 2022, the European Union and the Group of 7 (hereinafter: the EU and the G7) imposed targeted sanctions, sanctions against Russian financial institutions, and asset freezes. In 2015, the United States of America (hereinafter: the USA) imposed targeted sanctions on Venezuelan individuals and institutions, oil sanctions and asset freezes in response to the political repression, human rights violations and corruption committed by the government of Nicolás Maduro. Russia and Venezuela are two states that have been the recipient of sanctions. However, using economic statecraft against these two states yielded dramatically different results. Through these case studies, we will see that the effectiveness of sanctions as a means of economic statecraft depends primarily on three factors:

• The economic foundation of the target nation
• International relationships and alliances
• Institutional and technological capacity to adapt

Economic Foundations: The Base For Resistance

Russia’s Economic Fortress

After the annexation of Crimea in 2014 and prior to the invasion of Ukraine in 2022, Russia took measures to prepare for the imposition of sanctions by opposing nations. Among other measures, Russia set out to build its military budget, as well as its currency reserves. By 2022, Russia expanded its currency reserves to 630$ billion by redirecting its oil and gas profits. 79% of the accumulated reserves were made up of foreign currencies, and 21% were made up of gold. Russia is the world’s second-largest gold producer and is expected to increase production by 4% a year until 2026. In 2022, preparing for expected sanctions, Russia fixed the ruble to gold with ₽5000 to one ounce of gold. Another pre-sanction preparation action taken by Russia was to distance itself from the dollar and the euro; therefore, Russia announced that it would no longer be trading in dollars and euros. Russia has advocated for diversifying its currencies in response to sanctions, opting to use Chinese and non-European/Neo-European currencies.

Russia’s economy is heavily dependent on oil exports. It is rich in natural resources and, therefore, a lot of Russia’s capital and labour is dedicated to this. However, attempts were made to diversify the economy, and in 2014, Russia introduced the import substitution policy as a way to stimulate domestic production and reduce the dependency on imports. This policy focuses on key industries such as technology, services and products in certain sectors. It did not aim to entirely substitute all imports, merely some of them, and it would allow Russia to take part in the global supply chain. Other items such as meat, cheese, pork and vegetables were also part of the import substitution policy. Instead of importing these products, they were sourced domestically, which led to a growth in the agricultural sector. The import substitution policy also revived the Russian domestic automotive industry as the Russian government offered subsidies to local automotive producers and enticed foreign companies to set up factories in Russia.

Russia’s attempt to diversify its state beyond the oil and natural gas industry created a strong economic foundation that enabled it to withstand European and Neo-European sanctions.

Venezuela’s Economic Vulnerabilities

Venezuela was first sanctioned in 2005/2006 and was sanctioned periodically up until 2019 by the USA and the EU. The economic statecraft tools used in this case were targeted sanctions, which are precise and sophisticated tools that target specific individuals, entities, or organisations, as well as embargoes, asset freezes and prohibitions from accessing markets and transacting within sectors of the North American economy. Venezuela relies heavily on its oil exports and in 2024, it was estimated that oil exports were responsible for financing 58% of their government budget. Oil was first discovered in Venezuela in 1922, and it has remained the state’s main export. Oil accounted for 71% of exports in 1998 and rose to almost 98% in 2013. Venezuela’s oil exports increased by 10,5% in 2024. The Venezuelan economy lacks diversification due to its heavy reliance on petroleum products. In 2021, Agricultural goods made up 1,6% of exported goods in 2021 and manufactured goods made up 16%, whereas petroleum exports made up 75%. While oil makes up a large percentage of their exports, Venezuela has seen a decline in oil production due to corruption, underinvestment in the industry and sanctions. The oil production infrastructure lacks maintenance which has severely impacted their capacity to produce oil, despite Venezuela still having 200 trillion cubic feet of natural gas and reserves of 303 billion barrels.

In addition to over-reliance on oil, Venezuela’s political environment was unstable. The decline can be traced to the corruption and mismanagement of funds under Hugo Chavez’s government. Hugo Chavez came into power in 1998 and was able to reduce the poverty rate by 15% by subsidising goods and services. However, under Chavez’s rule, the state-owned Petróleos de Venezuela, S. A. (hereinafter: the PDVSA), responsible for the exploration, production, refinement and exportation of oil (the main contributor to the Venezuelan economy), was corrupted and overtaken by military and political actors that did not employ experienced engineers. Under Chavez’s rule, oil dependence increased. Chavez’s policies of widespread nationalizations and price and currency controls discouraged foreign direct investment. Industries, other than oil, lacked investment, and the government did not make efforts to diversify the economy.

Poor economic policies continued under the Maduro government. The fall of oil prices in 2014 caused the Venezuelan economy to collapse as they were ill-equipped to deal with the crash, and the lack of oil revenue strained government finances. Maduro’s solution was to adopt an expansive monetary policy, leading to hyperinflation. The government also implemented price controls to control inflation, but this was largely unsuccessful. Another consequence of overdependence on oil is limited domestic production capacity. Venezuela is an example of a state afflicted by “Dutch disease”. This occurs when there is an influx of foreign investors looking to invest in the natural resources of a state. States will pour all of their time and money into that industry, leading to over-reliance. This can result in governments neglecting other sectors, such as agriculture and manufacturing. The Venezuelan government focused on oil production, neglecting other sectors.

The agricultural sector is one example of those neglected sectors, which resulted in the Chavez government imposing price controls to counterbalance the increased prices due to limited production. However, these price controls often mean that the producers and companies do not make a profit. As a result, farmers grow less, production decreases, and there is less stock available. Lack of investment means that agricultural infrastructure lacks maintenance, reducing production. The same can be said for the manufacturing sector, as the lack of investment meant that equipment could not be maintained or updated, and frequent blackouts disrupted production.

Oil dependence, pre-existing instability, and lack of domestic production all contribute to weak economic foundations. If an economy is unstable and weak, the effects of sanctions will be amplified.

International Relations: The Shield Against Isolation

Russia’s Strategic Partnerships

Despite the sanctions imposed on Russia by European and Neo-European states, Russian oil exports continue as China, India and Türkiye have replaced European states as Russia’s biggest oil consumers. They have both declined to impose sanctions or rebuke Russian actions against Ukraine. These states also provide alternative markets for Russia. Europe was once one of the biggest importers of Russian goods, however, sanctions have limited this relationship. Russia has been forced to seek new markets for their goods. China in particular has stepped in to replace European and Neo-European imports.

In addition to these new markets, the alliance between Brazil, Russia, India, China, and South Africa (hereinafter: BRICS), proved to be beneficial for Russia. The BRICS alliance is based on three tenets: culture and humanitarian links, finance, politics and security. BRICS ensures that Russia is not isolated from the rest of the world. It links several states to Russia, encouraging trade and cooperation. Another action taken by Russia is the development of parallel payment systems. One aspect of the sanctions against Russia targeted Russia’s banking system and its ability to transact internationally. To bypass this, Russia created the System for Transfer of Financial Messages (Systema Peredachi Finansovykh Soobshchenii, hereinafter: SPFS). SPFS allows Russia to conduct cross-border transactions without relying on European and Neo-European institutions like the Society for Worldwide Interbank Financial Telecommunication (hereinafter: SWIFT). They also created Mir, a card payment system that allows transfers electronically which was created by the Central Bank of Russia as an alternative to Mastercard and Visa.

Alternative markets, strategic alliances and new payment systems provide sanction buffers. The effects of sanctions are not fully felt when the target nation can circumvent them and continue trading. These international relationships and alternative systems allow states to pivot and find other states that are willing to do business with them.

Venezuela’s Diplomatic Isolation

Regional relations began to fray as many neighbouring states did not agree with the state actions and public unrest under the Maduro government, thus Venezuela received limited regional support amidst its sanctions. The USA, the leader of the sanctions, and Canada did not provide support to Venezuela. Mexico, another regional actor, did not get involved or provide support either. Other Latin American regional actors did little to offer their support as they were already dealing with mass migration from Venezuela, putting a strain on their resources and making it difficult to provide any other support to Venezuela. Brazil, a regional actor with sufficient influence, also had little involvement. Venezuela was also heavily dependent on the USA as the USA was Venezuela’s primary importer of oil. Sanctions on Venezuelan oil meant that the USA stopped purchasing its oil, which accounted for, at the time, 90% of the revenue from this industry. On top of depending on the USA to buy Venezuelan oil, Venezuela also relied on the USA for naphtha. Naphtha is a liquid hydrocarbon composition used to dilute crude. This dilution is necessary to transport crude. As a result of sanctions and lack of funding, oil production declined, contributing to economic collapse in Venezuela.

Venezuela also had limited access to global financial markets. As part of their sanctions, Venezuela and the PDVSA were not allowed to issue new bonds and stocks. They were not allowed to receive financing from any USA investors or from the North American financial system. Additionally, CITGO, a subsidiary of PDVSA located in the US, was not allowed to allocate any profits to the Venezuelan government. International banks also ceased transactions with the Venezuelan government.

Adaptive Capacity: The Key To Survival

Russia’s Institutional Innovation

The international transmission of funds is made possible by SWIFT, which connects thousands of banks across the globe. SWIFT was established by American and European institutions to facilitate the international transmission and transaction of funds between banks. The main controller of SWIFT is the National Bank of Belgium. Facilitating safe cross-border transactions for its member institutions while being impartial in global disputes is SWIFT’s primary goal. Nevertheless, seven Russian banks were excluded from SWIFT at the beginning of 2022 in response to Russia’s invasion of Ukraine. In addition to Russia’s exclusion from SWIFT, the Central Bank of Russia’s assets were frozen, limiting its ability to stabilise the ruble and manage its reserves. However, Russia managed to circumvent these restrictions partially through the SPFS. SPFS processes transactions between Russian parties and other states. As of 2024, SPFS connects several states, and hundreds of organisations, including banks in Germany, Switzerland, Kyrgyzstan, Armenia, Belarus and Kazakhstan.

Sanctions against Russia meant that Russia’s usual trading partners, European and Neo-European states were no longer viable options. It needed to diversify its trade partners, hence Russia’s pivot to states like China, India and Türkiye. The states, as mentioned before, did not condemn Russia for their actions against Ukraine, nor did they impose sanctions against them. Russia found lucrative partnerships with these states. As Russia is limited in its trading with European states, it also needed to find alternative transportation routes that are time and cost-effective. Russia has developed a plan to link the transportation of goods between Iran, Russia, Asia and Europe. The International North-South Transport Corridor (hereinafter INSTC) is a network of rail, ship and road systems connecting Russia, Iran, Azerbaijan, India and more states. This new route is estimated to reduce transportation times by 30%-50%. Another way that Russia adapted to these circumstances is through import substitutions. Russia relied on European and Neo-European states for their technological materials to manufacture weapons but has since turned to China. In 2022 alone, China provided 500$ million of microelectronic materials to Russia. Hong Kong has contributed significantly to the Russian procurement of circuit components, with their exports numbering around 400$ million in 2022.

Russia’s strong adaptive capacity enables its sanction circumvention. It easily found alternatives to European and Neo-European options that greatly reduce the effectiveness of sanctions.

Venezuela’s Limited Response Options

Instability at various levels of the state made it very difficult for Venezuela to respond adequately to the rampant sanctions by the USA and the EU. Venezuela was unable to develop alternative systems in response to sanctions. Rather, it considered using alternative systems developed by Russia, such as SPFS. Due to the focus on oil exports, many industries were left lacking, particularly the technology industry. Not only was the domestic technology industry lacking, but Venezuela relied on technology imports from the USA. The sanctions restricted exports of microprocessors, technology and software for military use, as well as any US-produced technology and software to Venezuela.

Policies and actions under the Chavez and Maduro presidents exacerbated the pre-existing instability in Venezuela, leading to an institutional breakdown. After the death of Chavez, Nicolás Maduro became the Venezuelan president. Several actions and policies taken by the Maduro government led to the deterioration of political effectiveness in Venezuela. Maduro’s economic policies led to hyperinflation. Anti-government protests broke out across the nation, contributing to the instability. In 2015, a National Assembly made up of the opposition party was elected, creating a divide between Maduro and the legislative assembly. Despite the attempts made to oust Maduro, he retained power through the support of states including Türkiye, Russia, Cuba and China. The USA, however, did not recognise Maduro as the Venezuelan leader, choosing to back Maduro’s political opponent, Juan Guaidó of the Popular Will party. The USA involvement in South American politics dates back the rise of social movements in the 1950s – 1970s. During the Cold War era, the USA saw socialist movements in South America as a threat to the international order, adopting interventionist policies, such as the Monroe Doctrine, to prevent these movements from taking root. This interventionist attitude to prevent regime changes in Latin America continued with various USA presidential administrations. The most recent being the USA opposition against the socialist Maduro government. To pressure Maduro into resigning, the USA imposed increasing sanctions on Venezuela. Social unrest, in conjunction with sanctions, led to an institutional collapse in Venezuela. This instability meant that the government was unable to provide basic services, and many were unable to access food and medicine, which resulted in the dissemination of infectious diseases. This humanitarian crisis led to mass migration, with millions of Venezuelans fleeing the country and settling in neighbouring states.

Venezuela’s inability to develop alternative systems, its limited technological capacity and the deterioration of political effectiveness, leading to an institutional breakdown, all contributed to its weak adaptive capacity, and thus economic collapse.

Tools Of Economic Statecraft In Action

Financial Sanctions

Russia and Venezuela were both recipients of financial sanctions, however, the outcomes of the application of these economic tools were very different. Much of the financial sanctions imposed on Russia were circumvented through the creation of SPFS and the Mir payment system, which greatly reduced the impact of sanctions. Banking restrictions placed on Venezuela led to a system collapse. We can see that the same financial tools can have varying effects depending on the capacity of the target nation to adapt and withstand them.

Trade Restrictions

Trade restrictions were another tool of economic statecraft used in both cases. Russia and Venezuela were not able to trade with the USA and EU, prompting the need to find new avenues. Russia was able to diversify its trade partners and establish alternative routes to transport its goods. Critical imports were disrupted in Venezuela, and restrictions on imports and exports led to a collapse in production. Here, it is evident that adaptability heavily influences the impact of sanctions. The ability of states to explore alternatives and replace what they no longer have access to is critical to ensure economic stability.

Energy Sector Targeting

Russian and Venezuelan energy sectors were targeted by sanctions, leading to a loss of the USA and EU buyers. Despite this, Russia still managed to maintain its exports through new partnerships. Venezuela’s energy sector did not fare as well. With the loss of the USA as a major importer and a source of necessary materials, Venezuela’s oil production declined. Here, we can establish that international relationships can shape the outcomes of sanctions.

Comparative Analysis: Why The Difference?

Economic Resilience

The strength of the target nation’s economy determines its ability to cope with sanctions. Pre-existing conditions, resource allocation and market diversity make up the foundation of the economy. Russia had implemented policies in preparation for sanctions. Building currency reserves, diversifying the economy and ensuring that the state would still have alternatives when they were cut off from European and Neo-European resources all provided cushioning for the economy, therefore establishing the capacity to resist the effects of sanctions. Venezuela’s overreliance on oil exports, limited ability to diversify its economy and political instability all contributed to an economic collapse after sanctions. However, the diversification of domestic economic development fundaments is limited to factors like territory and population. Adopting the devletist approach, each nation can maximise its economic output by emphasising the development of genuine knowledge production at the individual and aggregate levels. By doing so, small nations, too, can maximise their crisis resilience and economic development potential. These case studies demonstrate how the economic foundations of the target nation determine how effective sanctions will be but also underline the necessity to adopt a devletist economic model to reduce the effectiveness of sanctions.

International Support Networks

The alliances and support that a target nation has access to also determine the effectiveness of sanctions. If a target nation has stable and well-established relations with regional and international actors that could act as alternative trading partners, the effects of sanctions could be limited. This is demonstrated in the case studies. Russia was able to secure alternative trading partners, namely China, India and Türkiye, that were willing to purchase their resources when European and Neo-European states reduced or ceased their buying of Russian oil. Russia was able to circumvent sanctions via these relationships. Venezuela on the other hand had limited alternative trading partners when the USA imposed sanctions on Venezuela and its oil. Venezuela also had little regional support as many states surrounding Venezuela were reluctant to get involved, were dealing with the influx of Venezuelan migrants, or did not support the Maduro government. The effectiveness of sanctions depends on the relationships that target nations have. If they are supported by other nations during sanctions, the impact of sanctions will be lessened.

Technological And Institutional Capacity

The long-term impact of sanctions depends on whether target nations can adapt to their circumstances. The sophistication of financial systems, access to technology and institutional capabilities influence the capacity of the target nations to withstand sanctions over time. Russia has demonstrated its ability to adapt and innovate when faced with exclusion. The development of SPFS and the Mir payment system speaks to their adaptive capacity and financial sophistication. Its access to technology has been unperturbed by sanctions as they import technology from alternative trading partners or produce it domestically as seen by the import substitution policy. Venezuela has had more difficulty in its adaptive capabilities. In light of sanctions, Venezuela was not able to find alternatives to oil exports. In addition to sanctions, hyperinflation, limited domestic production and corruption contributed to the economic collapse. Venezuela found itself unable to adapt to its circumstances, which caused long-term instability in the nation. Again, through these case studies, it has been determined that the capacity of the target nation to adapt will influence the long-term outcomes of sanctions.

Future Implications

For Target Nations

From these case studies, we can determine three crucial aspects for target nations to help them prepare for sanctions. Economic diversification is one key area that will help withstand the effects of sanctions. Over-reliance on one sector will leave the target nation vulnerable to extreme consequences. It is important that states have various sectors that are equally as funded and developed. Having a diversified economy ensures that a state will have various sources of income or different avenues to explore if one sector is sanctioned.

Secondly, strategic partnerships go a long way in helping to alleviate the effects of sanctions. Good international relations provide support from other actors, and access to other markets should a state be sanctioned from transacting in another market. Alliances and diplomatic relations with other states ensure that the target nation will not be isolated. They also open up the opportunity for alternative markets, new opportunities for collaboration, and access to new materials and resources.

Thirdly, technological sovereignty is crucial to withstanding the effects of sanctions. Technology is advancing rapidly, and states must ensure that they can keep up. Sanctions can deny states access to key technology, leaving them unable to keep up with the moving times. This can lead to isolation and stagnation in the economy. Ensuring that target nations are able to access technology either domestically or through other avenues is key in ensuring that they can remain relevant and able to partake in the global economy. Ensuring this participation will also alleviate the effects of sanctions.

For Sanctioning Nations

Understanding a nation’s capabilities is key to ensuring the effectiveness of sanctions. It may help sanctioning states to predict the outcomes of sanctions. Analysing a nation’s capabilities will highlight the means a target nation may have to adapt and reduce the effects of sanctions.

Firstly, sanctioning nations must consider the target nations’ economic foundation. Economic foundations determine how well a target nation is able to cope with sanctions. It determines if they have enough reserves to withstand sanctions long-term, whether their economy is diverse enough to explore other avenues to keep the economy stable, and if the nation can sustain itself if they are excluded from key markets and industries. This can be seen in the case study of Venezuela. Venezuela’s economy was heavily reliant on its oil exports. The USA-led sanctions targeted these exports, effectively destroying Venezuela’s ability to withstand sanctions long-term.

Secondly, comprehensive coalition-building is key to ensuring the effectiveness of sanctions. The lack of cooperation and coordination by states leads to weak enforcement. If states are not all in agreement with the sanctions, they will not be enforced adequately, thus leading to limited effects. Weak enforcement leads to the deterioration of sanctions, therefore careful planning and execution are necessary for economic statecraft success. Specific objectives, robust enforcement and international cooperation are essential components. This is seen in the case study of Russia, which was able to circumvent the effects of sanctions due to states like China, India and Türkiye who continued to trade with Russia. Understanding and strong coalition building are key in ensuring that sanctions are effective.

Lastly, sanctioning states must recognise the adaptation possibilities of the target nation. If a nation can pivot, adapt, and find new ways to conduct its affairs, sanctions will not be as effective. States will not be isolated, and the aim of the sanction, to influence state behaviour, will not be achieved. Therefore, sanctioning states must have a full understanding of the adaptation capabilities of target states. Through the case study on Russia, we can see this demonstrated. Russia’s exclusion from SWIFT prompted them to innovate a new system that allowed them to circumvent the impact of sanctions, rendering the sanctions ineffective.

The key takeaways from these case studies are:

• Economic foundations determine whether target nations will be able to absorb the initial shockwaves of economic statecraft.
• International relationships and strategic alliances enable sanction circumvention.
• The adaptive capacity of a state will determine their long-term resilience.
• For sanctions to be effective, all three of these areas must be targeted.