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Nicholas Mulder is an assistant professor at Cornell University, where he studies twentieth century European and international history. In January, he published The Economic Weapon: The Rise of Sanctions as a Tool of Modern War, which traces the emergence of sanctions as a potent instrument during the interwar period. In this lightly edited Q&A, we discussed the use of sanctions in response to Russia’s invasion of Ukraine and what the future implications are for China.¹Mulder was interviewed last week by The New York Times. See here.

Q: What have we learned so far about sanctions as a tool of war from Ukraine?

A: We are witnessing a quite striking and important moment where we have learned that it is possible to impose sanctions of a magnitude much bigger than what people had previously held possible — both in western capitals, but also in Russia itself, and potentially in China, too. The speed and the scope, and skill and intensity of the sanctions has been surprising and striking, and the unity the coalition behind it has been impressive. [It is] not just a standard Western group of countries — a sort of NATO or North Atlantic coalition — but also one where, in certain kinds of sanctions, not all of them, they also have the cooperation of Japan, Singapore, South Korea, Taiwan. So that is quite impressive. It’s no longer just a North Atlantic sanctions regime. It’s not a global or international one either, it’s important to note that there are still very large parts of the world — big countries like Mexico, Brazil, South Africa, Turkey, most Middle Eastern countries, India, China, Indonesia, Pakistan — that are not involved with the sanctions against Russia, and that don’t seem to be particularly keen to actively join. But nonetheless, impressive and more widespread than we had thought. 

The other thing we’ve learned is that the sanctions against the Russian Central Bank were definitely the most far reaching, and in many ways, shocking sanctions that were imposed. And that, of course, shows that having this large war chest of reserves, something that Russia has, but of course China has as well and many times more (five times the size of the Russian reserves), is quite vulnerable to an asset freeze if it’s coordinated by Western countries. 

I do think the jury is still very much out on whether the sanctions are having a direct effect on the battlefield. I’m more skeptical than some others about the ability of sanctions of this kind to directly influence battlefield events. That’s ultimately going to come down to quite local factors, and sanctions just as a war stopping tool have a pretty poor record. When force and military confrontation has reached this level, sanctions are quite an indirect way of influencing the situation. It doesn’t mean that they’re irrelevant, but they’re not the war stopping tool that some people want them to be.

If sanctions are not a war-stopping tool, then why use them? 

I’ve written about this quite a lot the last few weeks — there’s just a lack of clarity about what exactly the goals of the sanctions are. And that feeds into this a little bit. There are different justifications. So, broadly speaking, it seems Biden and also the British government have said, “The point here is to impose costs.” So their justification seems to be, “We are simply raising the costs of continuing this course of action. We’re not actually directly expecting behavioral change. But we also want to degrade Russia’s capacity to do future harm.” That’s why economic war is not a misnomer. When you no longer expect the other person to change behavior, but you’re just putting force against force and trying to exhaust and weaken the enemy, that’s kind of what you do in war. That’s one rationale. 

We should work hard on turning the sanctions into an actual form of leverage — when you just keep piling them on without setting goals or outlining conditions that can get them lifted, that is just upping the stakes and increasing the amount of force being used against force. But if you add conditions for lifting, then you could actually use the sanctions as a form of leverage and say things like, “We’re going to lift the central bank sanctions on Russia if it pulls back to its late February positions.” “We’re going to lift the SWIFT sanctions if you also give certain guarantees about Ukraine’s political status.” You tie different tranches of sanctions lifting to very concrete actions by Russia — that is the most responsible and sage way forward.

I do worry, however, that there’s such a big public opinion push to just keep piling on the sanctions as very atrocious and awful things keep dragging on. We’re in danger of losing that negotiation window and that this is going to drag out into something really long. And that means it’s so much more damaging and much more unpredictable. So the best rationale I can see for the sanctions that we have is to try and turn them into some sort of negotiation tool, but we need to switch in the way that we’re talking about them as well to do that.

How might both sanctions, and countries’ response to them, change going forward? If China invades Taiwan six months from now, for example, would the sanctions playbook look the same and how would China prepare for that?

This is where it’s important to not draw conclusions that are too sweeping, because every single country that is targeted by sanctions is different. And particularly, the level of economic integration of China in the world economy is an order of magnitude larger than that of Russia. One way of thinking about this, from the point of view of efficacy, is that if you want sanctions to really work, you need to tailor each sanctions regime to each country. There’s no single instrument that works with equal efficacy in each case. And I think that that’s a problem, because in our political discourse about sanctions, we feel that the kinds of sanctions we pick should be tied to the severity of the sort of trespasses that we want to punish with them. But that’s not actually the way to design the policy optimally, because they’re just very different economic strengths and weaknesses involved. 

[I]t seems Biden and also the British government have said, the point [of sanctions] is to impose costs. So their justification seems to be, we are simply raising the costs of continuing this course of action. We’re not actually directly expecting behavioral change. 

So against China, there are two things that I’ve been thinking about. I don’t want to make any predictions, because it’s such a big question. But two things that I’m really looking at now with regards to China: one is clearly they have vulnerabilities in terms of their reserves, and also the activities of their banks. I think it’s quite possible that many Chinese banks are going to be faced with secondary sanctions from the U.S. and the West in the next few weeks if they continue to allow certain trade with Russia to keep going on. That doesn’t mean that they’re going to stop that trade, it means that they might be moving it off books or finding third party intermediaries, but it’s definitely going to raise the stakes. And it’s clear that the international part of the Chinese banking sector doesn’t really want to fall afoul of Western sanctions. They have been showing quite a degree of compliance. That’s one thing. 

And then on top of that, there’s also the reserve vulnerability. China has at least a third — so 1.1 trillion out of its 3.2 trillion in foreign reserves — in dollar-denominated Treasury securities. Those are largely located in the U.S., but also in other countries of the world — Belgium and various offshore jurisdictions. Those are going to be vulnerable to an asset freeze. And in that sense, this will give Chinese policymakers pause. That being said, the other side of the coin is that I do think that there are really big differences between the Chinese and the Russian situation. One of them is that the Chinese are aware of, and rightly so, that they do have much more leverage against the West than Russia has, and Russia doesn’t lack leverage totally. It has some as well, but China has much more still. 

The U.S. Chamber of Commerce had an important study in its China bureau that showed the cost of a U.S.-China decoupling, and it’s the best study I’ve found in terms of actual detailed numerical estimates of what the damage or fallout from a U.S.-China full economic decoupling. They have two scenarios: One is a sort of hard decoupling, which is basically about 50 percent of trade and investment between the U.S. and China, and the other one is a full 100 percent decoupling. They only calculate the hard decoupling, if China, say, hypothetically were to invade Taiwan. One of these things that has been used against Russia is a full ban on any U.S. entity investing in Russia, not just U.S. companies, but any entity that has U.S. jurisdiction, they can not send any capital for investment portfolio or foreign direct investment anywhere into the Russian economy or a Russian firm. If they were to do that with China, that’s a full decoupling scenario and the cost of that is astronomical. Just the hard one, the Chamber of Commerce calculated, would be at least $500 billion of U.S. GDP lost, which is equal to about a 2.5 percent drop in the American economy. It doesn’t sound like that much. But just for comparison, that’s how much the U.S. economy shrank at the peak of the global financial crisis in 2009. So that’s the softer decoupling from China scenario. The full one, if you extrapolate it roughly, would probably have some sort of multiplier effects: conservatively, let’s say that causes U.S. GDP to collapse by 5 percent. A trillion dollars of GDP wiped away. I mean, that’s a bigger shock than COVID in 2020. And the Chamber of Commerce does a really good job of showing all these industries chemicals, medical devices, technology, aviation. It would just be really tremendous. So if there are going to be any sanctions on China, I think the U.S. is well aware that it’s a much more tricky and complicated landscape.

Also the ability of China to get other countries to side, at least partially, with it, or to want to remain neutral and keep open trade with China in such a case would be much stronger than with Russia. And again, with Russia, we can see that at least 50 percent or so of the U.N. member states are not willing to join sanctions against Russia, probably more even in numerical terms. So if you can imagine those maps, where you have a world map comparing the world in 1990 and 2020, and then showing which country is the biggest trading partner of each state of the world: In 1990, the U.S. and Europe were still dominant, but now it’s like 60 or even 70 percent of the world has China as their largest trade partner. Those countries going along with U.S. sanctions on China for the invasion of Taiwan — it would [cause] an absolutely momentous, gigantic global recession. The Russia sanctions, if things go wrong, could already cause a recession this year, because of the shocks in the commodity markets. But the China one would be an absolute guaranteed global recession of pretty unpredictable size. So China is more vulnerable than we thought, but also the costs for the West are much bigger than we thought of that potential scenario.

Would the EU stay aligned with the U.S. on sanctions against China as it has with sanctions on Russia? 

The question very much is whether Europe is going to go along with tougher U.S. sanctions [on Russia]. Probably the sanctions that are going to be announced now are maybe closing loopholes rather than adding new ones and doing things like a full energy embargo. That’s still quite a difficult thing for European countries to agree on because of their economic interdependence with Russia. But for China, it is many times more significant. The EU, really, in a sense, has pursued the wrong economic policy in the last decade if it wants to use sanctions at this scale. Almost all EU countries, particularly the Eurozone, have developed economies that are much more reliant on trade than they were 20 or 30 years ago. So the losses to them of decoupling from China would just be much bigger than they were before. The U.S. is kind of unique in that regard because it has this big domestic demand driven economy. And it’s not all that dependent on foreign demand to drive its own growth. So Europe could move in that direction, but it would require a fast restructuring of their entire political economy and economic structure.

Is China learning anything from the sanctions against Russia?

It strikes me that China has actually taken a quite ambiguous attitude towards this conflict. I don’t think some of the Western discourse that they are fully on the side of Russia is entirely right. It’s clear if you look at the sanctions, compliance with their banks, and also some of their media, they are quite critical of the Russian invasion of Ukraine — they don’t openly endorse it. And the Chinese private sector is steering clear of violating some of these sanctions. So the picture to me is still pretty mixed. What they certainly are concerned about, and that’s what drives this, is that if there’s going to be a commodity price-induced recession for the world economy this year, China’s going to suffer massively because they are the world’s largest oil importer, for example. So an embargo of the West against Russian oil is going to also drive up the price of imports for China and just be a big drag on growth for China. So in that sense, China doesn’t want the sanctions on Russia to start including oil, but therefore, probably also doesn’t want Russia to do things that could trigger such an embargo. So that’s kind of where I think actually, the knife cuts on both sides, so to speak. At least if I was in China right now, I’d be very concerned about the commodity prices given the way that China has a highly open economy where high commodity prices feed into the cost of everything. In the U.S., people are concerned about gas prices, because people love driving cars here. But in China, actually, at the general level, there’s much more vulnerability to some of those price increases. 

The other thing to watch is obviously the use of currency and trade. There are various loopholes for Chinese banks to continue to do business, particularly using third countries, with Russia and also to help Russia manage its gold supplies, and its yuan reserves. Clearly, the Chinese want to expand the digital yuan, but it’s going to be difficult to do that quickly. But these bits of news that China is seriously starting to explore the possibility of buying oil from Saudi Arabia in yuan: that’s still not at all any real threat to the dollar. It does, however, mean that it’s going to be much more difficult for the U.S. in the future to interdict something like that. So definitely, for China’s concern with its own energy imports, that’s going to be something where they’re going to now want to take even more defensive measures than they already have been taking. And I also think, for example, some of the things that China has been doing in the last few years, like keeping a large backup of coal power plants, is because of its energy security dilemma. They’re very worried that the United States Navy, in case of a conflict, is going to cut off their oil imports through the Malacca Straits. That’s also a reason to want renewables, but if you can’t get renewable energy up quickly in China, coal is the fallback option, so coal is kind of the substitute for oil because of the blockade threats.

Would the U.S. consider sanctioning Chinese ‘oligarchs’ in addition to the Chinese state, as it has done with Russian oligarchs? 

There are quite a lot of questions around the oligarch sanctions. How are we selecting who is on that list? For example, the EU put 680 individuals and 53 entities, last time I checked, on that list. But there are some questions to be asked about when do you count as an oligarch? And how do we also assess whether these are people that actually have any links to Putin? There’s, of course, the argument that anyone who’s rich in Russia has a link to Putin. Sure, but we should still ask something about why we’re doing this. If we think it’s right to seize their assets because they acquired them through corrupt or illicit ways, that money really belongs to the Russian people. It’s interesting to debate whether it should be given to Ukraine for reconstruction? There’s an argument for that. But there’s also an argument, of course, that we [should] actually return it to the people that this money was stolen from, which is the Russian population who have been victims of Putin’s dictatorship and the oligarchs for 30 years. So there’s all sorts of justice and equality questions that come in. 

This is also a game that two can play. There are many Western businesses that have significant operations in Russia and China and in emerging markets. Russia is already passing laws to nationalize business assets of Western businesses that have left. The Chinese government in Hong Kong could all of a sudden take over and have the Hong Kong authorities freeze a lot of Western assets there, which would also not be an insignificant amount of money. So there’s also the question of what’s the principle being used here? Are we targeting the oligarchs because we think they are part of the war machine? That seems to be questionable because I think most Russia experts will acknowledge that the oligarchs have no real sway over foreign policy. Are we targeting them simply because they’re rich or because they’re corrupt? I have no problems with some of those justifications. But then why should only Russian rich people be targeted? There’s other corrupt and tax evading rich people all around the world. So, to me, this points actually towards the much more global enforcement of tax evasion, which I think would be an interesting international cooperative venture. I think being discriminatory in national terms is going to actually lead towards further instability. If you want to defend this policy, you should do it in an appropriately internationalist coordinated way, involve the United Nations, and involve the OECD and global agreements for tax justice and tax equity and make sure that this is done against people everywhere who have ill gotten gains and kleptocrats. 

And then, there’s of course the question of efficacy. It’s not having an effect on the Russian war machine. Because the oligarchs have their money offshore, but the companies that they own, the metal and oil and gas companies that they own in Russia, still have their assets there. So it doesn’t actually impede the working of the Russian economy. It simply takes away the accumulated profits, but the profit-generating enterprises are still there in Russia. 

In China, it might be a bit more complicated, because a lot of these enterprises that rich Chinese people own have a lot of foreign operations as well. But still the Chinese domestic market is big. I don’t know enough about the CCP to predict how that would play out internally. But it seems to me that Xi Jinping last year certainly has been more than happy to bring down the hammer against rich Chinese people for entirely his own reasons. So it’s not clear to me that the West doing that is going to be in any way something that would weaken the Chinese leadership.

If China sides more overtly with Russia (say, by giving it military aid), then what options does the U.S. have? What categories or levels of sanctions would the U.S. consider using? 

Well, the thing they could use right now is simply secondary sanctions — so cut any Chinese bank that has any links with a prohibited Russian entity out of access to dollars, which is a very big thing because the Hong Kong-based part of the Chinese banking system is almost entirely a Euro-dollar or dominantly Euro-dollar system. But it would also include, for example, Japanese banks and their important role in trade finance in Asia. So Japanese banks would no longer be giving trade credit to Chinese firms if they were found to have links with Russia. It would have all sorts of effects. And that really would make the financial situation for the Chinese government quite difficult. So that is something that the U.S. could do. 

I find it so difficult to predict the consequences and the Chinese reaction to something like that, because we’ve been steadily reducing interactions in a variety of ways and passing much stronger foreign investment laws, having the sanctions on tech companies, human rights sanctions, trade wars tariffs. So at some point, some sort of economic coercion is going to be used and it is going to tip the scale to a much more rapid decoupling, and no one really knows where that point is. But everyone should hope that it doesn’t actually occur anytime soon, because the sort of escalation spiral that you then get into is quite scary. So far, the best thing that could probably happen is just that there is some sort of tacit understanding that China will not overtly or directly support Russia, and it will continue to have some degree of financial independence. 

The other thing is, what would that actually do for dollar usage in Asia. Clearly, large parts of the Asian financial system are using dollars, because it’s the most liquid and easy-to-use currency. But their actual profit model is very much tied to China. So there’s a question of, are you going to care about the business? Or about the medium in which you do business? Are they going to switch to invoicing and extending trade credit in other currencies? That poses questions to the U.S., if they all switch to using yuan and yen, is the U.S. going to impose secondary sanctions on every Japanese and Korean bank? Is it going to expect those countries to enforce that in the same way? The alliance management issues very quickly multiply to a very complex area.

The U.S. and EU sanctions against Russia have been a remarkable effort. Given America’s ability to weaponize global networks, does the U.S. face any risk of backlash? Is there a point at which U.S. sanctions will no longer be as effective? 

Well, there’s a good argument to be made that this sort of asset freeze of central banks is a weapon. That’s something that the U.S. and Europe are only going to be able to really use once against the country of this size with these sorts of effects — like inducing a currency crisis and pushing Russia into recession. I just don’t think that’s something that you could keep doing. And it’s clear that there are real concerns. I don’t know about a backlash. But definitely, there’s real concern and a real move away in parts of the world from relying on dollars for essential transactions. So, Russia and India are doing this rupee-ruble exchange for oil. Part of that is, this is not the first time that India is caught in the dragnet because they were also called out in the U.S. sanctions against Iran. So they imported oil from Iran, and then the Trump administration really tried to bring down the hammer on Indians buying Iranian oil. At that point, people in the Reserve Bank of India had already begun discussions about, how are we going to move towards a system where there’s not this external control by Western countries. One need not have any sympathy for autocrats and illiberal governments to see that this is something that you cannot keep doing indefinitely, and it requires some kind of compensatory policy. So they could probably do it [again] if they make it really clear that there are very specific conditions that result in these sorts of actions. If they keep using it in a kind of freewheeling way, I do think that the disintegrating effects, or the backlash, will be much bigger. The other thing that I’ve been reading in Bloomberg and the Wall Street Journal, [is that] places like Thailand and Indonesia are pretty concerned about this and are worried that they’re going to be hit by secondary sanctions. They prefer to remain neutral, they want to be able to not to have to pick sides of this conflict. But what will be the Indonesian position in the West-Russia conflict? The sanctions could force them to make a decision, but they’re not happy to do so. At some point, there is a point where tolerance ceases. These countries are involved in a major set of trade agreements with China and other Asian powers. You can’t keep doing it indefinitely.

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