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Existing scholarship on the link between economic sanctions and political violence examines whether and how this coercive instrument engenders anti-government mobilization short of armed conflict. In this article, I elucidate three plausibly exogenous pathways through which sanctions increase the likelihood of armed conflict: reduced opportunity costs, increased grievances, and impaired territorial control. I argue that although sanctions significantly harm a target’s economic well-being and increase the risk of political repression, potentially giving rise to violent conflict via the first two mechanisms, if a state’s capacity to crush a rebellion remains intact, violent mobilization will not materialize. Rather, sanctions’ detrimental impact on the ability of a state to exercise full territorial control is more likely to encourage insurgent mobilization and, subsequently, violent conflict. Using mediation analysis, I find that sanctions lead to armed conflict via their harmful impact on state capacity rather than their adverse effect on economic performance or human rights conditions in the target country. These results are robust to a number of methodological and variable specifications. I also validate the underlying mechanism in several illustrative cases.