The article addresses political economy aspects of the policy of economic sanctions. Given the fact that decisions taken both in sender and target countries depend on the interaction of numerous groups of political and economic agents, sanction research can be productive only if their behavior is explicitly modelled given their objective functions and institutional context they face. It is shown that political economy approach can help resolve a number of paradoxes common in sanction research, i.e., paradoxes related to inefficiency of sanctions, pro-conflict reaction on sanctions by target countries, escalation of inefficient sanctions by sender countries, and retaliatory measures. Analysis shows that escalation of economic sanctions against the Russian Federation can not shift country’s foreign policy in the direction preferred by sender countries. On the contrary, higher sanction costs for the Russian economy fuel domestic political support for current foreign policy decisions. Consequently, conflict resolution should rely upon multilateral political dialogue rather than economic sanctions.