Breaking Bad: Sanctions and Illicit Economic Activity

Sanctions are a common tool in international diplomacy used to pressure governments into compliance. Sanctioning countries hope, by restricting access to international financial markets and limiting the capacity to trade vital goods and services, to force a target government to yield to policy demands or face a popular uprising that leads to its downfall. Complementing a long list of contributions analyzing the political economy of sanctions, I develop a political economy model of sanctions, illicit finance, and selectorate size. Building on these theoretical arguments, I hypothesize that sanctions result in an increase in illicit economic activity. This argument starts from the idea that autocratic regimes, faced with the constraining effects of sanctions, seek illicit channels to import the goods and capital necessary to support their regimes. To test this hypothesis, I draw on three carefully selected present-day cases and augment them with a large-N analysis. In this analysis, I establish a causal link between the onset of sanctions and increases in capital flight to offshore financial centers. From a policy perspective, these findings underscore the urgent importance of reassessing sanctions policy in response to foreign policy crises such as Russia’s 2022 invasion of Ukraine.