On Wars, Sanctions and Sovereign Default

This paper explores the role of restrictions on the use of international reserves as economic sanctions. We develop a simple model of the strategic game between a sanctioning (creditor) country and a sanctioned (debtor) country. We characterize how the sanctioning country should impose restrictions optimally, internalizing the geopolitical benefits and the potential losses of a default by the sanctioned country. A calibrated version of the model can account for the sequence of events leading to the Russian default. Moreover, it suggests that for every dollar of economic damage inflicted to Russia, the US is willing to give up 0.50 dollars of its own consumption.