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A large literature seeks to understand the causes and effects of economic sanctions. However, we argue that this body of work often miscategorizes the goals of sanctions in the important set of cases in which terrorist groups operate. We argue that sanctions are part of an overall strategy that depends on whether the potential sanctioner is friendly with the target state's regime and whether it is threatened by terrorism in that state. We develop a typology that characterizes and predicts the potential sanctioner's response. We theorize that in cases where the target is unfriendly and where terrorism is a threat, a potential sanctioner uses a balancing approach. It applies enough pressure to keep the target regime weak, but not so much that the regime collapses and terrorists assume control. Focusing on cases in which the Islamic State maintained an active presence, we use an in-depth case study approach to demonstrate that these concerns shaped U.S. foreign policy in the post-9/11 era.