How Economic Sanctions Work: A Strategic Guide
Economic sanctions have become the foreign policy tool of choice for major powers, yet their mechanics remain poorly understood even by many professionals who must navigate them. Whether you're a business leader, policy analyst, or risk manager, understanding how do economic sanctions work in international relations is essential for strategic decision-making in an increasingly fragmented global economy.
What You'll Learn
You'll understand the core mechanisms that make sanctions effective, the legal and financial infrastructure that enforces them, and why even well-designed sanctions often fail to achieve their stated objectives. You'll walk away with a practical framework for assessing sanctions risk and navigating compliance requirements in real-world business contexts.
The Architecture of Economic Sanctions
Defining the Tool
Economic sanctions are coercive measures imposed by governments or multilateral bodies to constrain the activities of foreign nations, entities, or individuals . They range from travel restrictions to comprehensive trade embargoes, and from targeted measures against specific individuals to sweeping restrictions affecting entire economies. At their core, sanctions are designed to advance foreign policy goals—conflict resolution, nonproliferation, counterterrorism, human rights—without resorting to military force .
Sanctions can be unilateral (imposed by a single country) or multilateral (coordinated through bodies like the UN Security Council). The United States is the world's most active sanctions user, currently maintaining 37 distinct sanctions regimes . This dominance stems from the dollar's role as the global reserve currency—restricting access to the U.S. financial system effectively cuts off sanctioned entities from the international economy .
Primary vs. Secondary Sanctions: The Extraterritorial Reach
Understanding the distinction between primary and secondary sanctions is fundamental to answering how do economic sanctions work in international relations.
Primary sanctions apply to "U.S. persons"—citizens, permanent residents, U.S. corporations, and anyone physically within the United States. They prohibit transactions involving designated individuals, entities, or countries . For some regimes, foreign subsidiaries of U.S. companies also count as U.S. persons.
Secondary sanctions are where the U.S. system becomes truly extraterritorial. These measures target non-U.S. persons and companies that conduct significant transactions with sanctioned countries or entities—even without any U.S. nexus . A foreign financial institution that transacts with an Iranian petroleum company may itself be sanctioned under the U.S. Iran sanctions program . The mere threat of secondary sanctions deters many companies globally from doing business with sanctioned nations .
The Legal Framework: IEEPA and the National Emergency
Most U.S. sanctions derive from the International Emergency Economic Powers Act (IEEPA) of 1977, which authorizes the president to impose sanctions after declaring a national emergency regarding an "unusual and extraordinary threat" to U.S. national security, foreign policy, or economy .
Between 1977 and 2025, presidents invoked IEEPA in 77 national emergency declarations. These emergencies last an average of more than nine years, and none declared under the National Emergencies Act has been terminated without presidential assent . This effectively gives the executive branch enduring sanctions authority with minimal congressional oversight.
Key enforcement agencies include:
- Office of Foreign Assets Control (OFAC) — administers and enforces most U.S. sanctions, issues licenses for exempted activities, and levies civil penalties
- State Department — oversees visa restrictions, arms sales, and aid-related sanctions; can designate terrorist organizations
- Commerce Department — manages export controls on dual-use goods and technology
- Department of Justice — handles criminal violations, asset forfeiture, and sanctions evasion prosecutions
Types of Sanctions and Their Mechanisms
Financial Sanctions
Financial sanctions target the lifeblood of international commerce—money. They include:
- Asset freezes — blocking access to bank accounts, property, and investments held in sanctioned jurisdictions
- Capital market restrictions — prohibiting investment in sanctioned countries or entities
- SWIFT exclusion — removing sanctioned banks from the global messaging system for financial transactions
In response to Russia's 2022 invasion of Ukraine, the U.S. and allies blocked almost $330 billion of Russian Central Bank reserves—an unprecedented escalation .
Trade Restrictions
Trade sanctions range from targeted bans on specific goods to comprehensive embargoes:
- Arms embargoes — prohibiting weapons sales or transfers
- Export controls — restricting advanced technology, semiconductors, AI chips, and dual-use goods
- Import bans — blocking purchases of strategic materials like oil, gas, and rare earth minerals
Sectoral Sanctions
Rather than targeting whole countries, sectoral sanctions focus on specific industries—energy, defense, technology, or finance. The U.S. employs this approach against Russia's energy sector and Iran's petrochemical industry . These measures can be nearly as disruptive as comprehensive sanctions while maintaining a veneer of precision.
Individual Sanctions
Targeted measures against specific individuals include asset freezes and travel bans. The U.S. maintains thousands of designated individuals on the Specially Designated Nationals and Blocked Persons List (SDN List) . While framed as "smart sanctions," these measures often have far-reaching effects, as designating individuals can freeze assets held through complex corporate structures affecting employees, partners, and stakeholders .
The Compliance Burden: Understanding Sanctions-by-Extension
One of the most challenging aspects of sanctions compliance is the concept of ownership and control. Under U.S. rules, entities owned 50% or more in aggregate by sanctioned persons are themselves considered sanctioned—a cascade effect that vastly expands sanctions exposure .
The scale is striking. In the EU, entities sanctioned-by-extension outnumber direct designations by approximately 3:1. In the U.S., the ratio is about 3:2, while it exceeds 4:1 in the UK . This means a single designation can create hundreds or thousands of de facto sanctioned entities.
The compliance landscape has grown exponentially. In 2023 alone, OFAC levied $1.54 billion in fines against non-compliant organizations . In 2024, European regulators significantly increased enforcement, resulting in higher fines and more convictions for sanctions violations than U.S. authorities . Sanctions compliance extends beyond knowing your immediate customers and suppliers—it requires understanding the entirety of your supply chains, with ongoing monitoring, verification, and due diligence capabilities .
Do Sanctions Actually Work?
The Case for Effectiveness
Sanctions have achieved notable successes. The international campaign against apartheid South Africa, including U.S. Congressional action in 1986 despite presidential opposition, pressured the government to dismantle the racist system. Nelson Mandela later acknowledged that sanctions were critical for bringing South Africa "to the point where the transition to democracy" was possible .
⚠️ Important note on humanitarian costs: A 2025 landmark study published in The Lancet Global Health found that unilateral economic sanctions lead to about 564,000 excess deaths annually worldwide—more than the annual number of battle-related casualties . Sanctions have also been shown to stunt economic growth, hinder access to essential goods, and disproportionately harm women and marginalized communities .
The Limits of Sanctions
Despite these successes, sanctions frequently fail to achieve their stated objectives. U.S. sanctions against Cuba have persisted for over six decades without removing the communist government . Similarly, sanctions against China, Iran, North Korea, Russia, and Venezuela have failed to effect meaningful political change .
The reasons for failure include:
Circumvention. Targeted countries adapt. Russia redirected energy exports to China and India, developed alternative payment systems to SWIFT, and expanded its "shadow fleet" of tankers to evade oil sanctions . Despite unprecedented Western sanctions, Russia's economy grew 3.6% in 2023—surpassing both U.S. and EU growth .
Diminishing effectiveness over time. Sanctions lose impact as targeted states become more adept at circumvention. Countries reduce reliance on the U.S. dollar and develop domestic alternatives to sanctioned goods .
Economic interdependence. Broad sanctions against major economies are often untenable. The U.S. refrains from sweeping sanctions on China despite numerous policy disagreements because such measures would hurt American companies and consumers .
Strengthening authoritarian regimes. Paradoxically, sanctions can help authoritarian governments by giving them more control over the economy and distribution of goods, and by providing a rallying point for nationalism .
Practical Implications for Businesses
Contractual Risk Allocation
Sanctions increasingly affect commercial relationships—not just for sanctioned parties but for any entity with commercial dealings with them . Parties entering international contracts should:
- Conduct due diligence on counterparties, directors, and ultimate beneficial owners
- Sanctions-screen goods and services, including final destination and likely users
- Include express contractual provisions addressing sanctions risk—termination rights, suspension options, alternative performance methods
- Consider dispute resolution carefully—whether to submit to courts or arbitration, and the governing law
The 50% Rule. Under U.S. OFAC rules, property of entities directly or indirectly owned 50% or more in aggregate by sanctioned persons is considered sanctioned itself . This dramatically expands the scope of sanctions and requires sophisticated ownership mapping. (Note that EU and UK rules can differ, factoring in both ownership and control.)
Force Majeure and Frustration
Sanctions can trigger force majeure or frustration doctrines—but with important caveats:
- Force majeure is only available if explicitly included in the contract, and courts typically require that the event be unavoidable, unforeseeable, and insurmountable
- Frustration arises when performance becomes impossible or radically different from what was contemplated—but applies only if the contract didn't already allocate sanctions risk
- In both cases, parties must try all available alternative methods of lawful performance to claim protection
The UK Supreme Court recently held (RTI v Mur Shipping [2024] UKSC 18) that a party is not required to accept payment in a different currency to satisfy a "reasonable endeavours" obligation unless the contract expressly provides otherwise .
Compliance Best Practices
Organizations should adopt a risk-based approach to sanctions compliance:
- Screen customers and transactions with reliable, up-to-date data
- Conduct enhanced due diligence where heightened risk is identified
- Monitor transactions continuously—new risks can emerge at any time
- Maintain comprehensive documentation to demonstrate compliance efforts
- Develop sanctions expertise through regular training and industry engagement
The reputational and operational damage from sanctions violations can be severe. In many cases, failure to comply can result in criminal charges and imprisonment .
Frequently Asked Questions
How do economic sanctions work in international relations without declaring war?
Sanctions operate through financial and trade restrictions rather than military force. By leveraging dominance in the global financial system—particularly the U.S. dollar and SWIFT payment network—sanctions coerce targeted states economically without armed conflict . They are positioned as a lower-cost, lower-risk alternative between diplomacy and military intervention.
What is the difference between primary and secondary sanctions?
Primary sanctions apply to a country's own citizens and companies, while secondary sanctions target third parties—foreign individuals and companies—who do business with sanctioned entities . Secondary sanctions give U.S. sanctions global reach by penalizing anyone engaging with sanctioned targets, regardless of nationality or location.
Can countries completely evade economic sanctions?
No country can completely evade sanctions, but major powers like Russia, Iran, and China have developed effective circumvention strategies. These include redirecting trade to non-sanctioning countries, developing alternative payment systems, using shadow fleets for shipping, and increasing domestic production of sanctioned goods . While these strategies reduce impact, they impose significant costs and inefficiencies.
How do sanctions affect ordinary civilians?
Sanctions often cause severe humanitarian harm, disproportionately affecting civilian populations rather than political elites. They stunt economic growth, create shortages of food and medicine, obstruct humanitarian assistance, and can cause hundreds of thousands of excess deaths annually . Women and marginalized communities typically bear the heaviest burden .
What happens if a company violates economic sanctions?
Penalties range from substantial fines (OFAC levied $1.54 billion in 2023 alone) to operational disruptions, reputational damage, criminal charges, and imprisonment for willful violations . Civil penalties can reach $368,136 per violation or twice the transaction amount, while criminal violations carry fines up to $1 million and 20 years' imprisonment .
— Editorial Team
