on the necessity of economic sanctions....

In the toolbox of diplomatic reactions, economic sanctions - either formal or informal - have always featured prominently. Of late, it has been the U.S. that has been threatening 'non-compliant' states with this option or actually implementing it, particularly in light of its already stretched military resources and the inability to throw funds at any more conflicts, given the ongoing war in Iraq and the strengthening couter-insurgency in Afghanistan. Over the past years, economic sanctions have been imposed on Saddam's Iraq, on Ahmadinejan's Iran, and a host of smaller states which were ideologically not alligned with the rest of the international community, or just some of this world's powerful...all with more or less, signigificant if not outright disastrous consequences.

Almost ten years later, the image of suffering Iraqi children is still fresh in our collective memory. The impact of economic sanctions is not only rhetorical and imagined, but has been also quantitatively substantiated. In a seminal 2005 study titled Economic Sanctions Reconsidered, the authors found that the average cost to a target country in a ‘success’ case was 2.4% of GNP and in a ‘failure’ case 1% of GNP. This and other research demonstrates that economic sanctions are no laughable matter, hence their effectiveness in twisting the arms of unwieldy politicians.

That being said, one can ask whether their effectiveness has been on the decline? Sanctions have been recently levied on Iran, and subsequently on Syria, without the same impact as earlier sanctions have had. This may be explained in terms of improved regional cooperation in the middle east, which implies ongoing strong economic relations with countries under sanctions. UAE and Iran, despite technically being in conflict over the islands which they dispute, and despite promoting different streams of Islam, are reported to have a strong and growing economic cooperation. Iran and Syria, while both under international economic sanctions, also have strong economic cooperation, with growing FDI and trade.

In the context of our new multipolar world, where there is always a careless lad on the block who does not really care about the moral wrongs of the 'sanctioned country' (i.e. China in Africa or UAE in Iran), what is the future of sanctions, and are there indeed any alternatives? Well, looking at the unravelling economic crisis in Russia, reported to be the worst since the 1998 banking crisis, I daresay there is. What's best about it, that the alternative is not even part of the 'nasty responses' in the toolbox of diplomatic reactions, it's a natural market reaction. Perhaps these Adam Smith inspired market equilibrium folks are onto something, maybe the markets do self-correct!

Let's have a quick look at the evidence only a few weeks after Russian invasion of Georgia. The Russian stock markets fell by over 50% since May. Capital flight led to two day closure of all Russian stock markets to halt the panic sale of equities. On September 11, the Russian central bank injected $10bn (£5.7bn) into the banking system to alleviate a chronic credit shortage. Further injections will be necessary and apparently budgeted for, as both direct and portfolio investors flee the country. The government announced a plan to boost liquidity by more than $100bn after the biggest market crash in a decade.

Likewise, foreign investors, uninspired by the latest news from the TN-KBP case are also reconsidering. RWE, the German utility, said it was pulling out of a deal to buy a stake in TGK-2, a Russian regional power generator, blaming the cost of the transaction and the turbulence in the country's financial markets. What's perhaps even more important, economic tensions, finally seem to result in a dialogue between the various factions in Kremlin, giving Putin less chance to shut off opposition forces (if they can be so qualified). Given that Putin's power rests ultimately on his promise to be able to deliver Russian out of Yeltsin's oblivion, this is not a threat to be taken lightly.

All this forces an interesting question: why go though the whole shabang of UN Economic Council unanimous decision making to levy sanctions, which have increasingly smaller impact when there seem to be easier and more effective opporunities? Perhaps in the future, certain political actions can have a natural market consequences, which force the regimes in question to change their political direction. Judging from the Russia case, this is certainly plausible. Of course, the caveat to the Russia case is that it is a regime that not only likes to tinker with neighbouring regimes and opponent political parties, but also with shareholder rights and rights of foreigners, all so very intricately related to the interest of foreign private investors into Russia. The good news for the international community, is that disrespect of agreed upon agreements (i.e. respect for Georgia's sovereignity) is often accompanied by disrespect of private ownership rights. A conclusion that then begs itself: goodbye sanctions, hello market democracy!