ARE ECONOMIC SANCTIONS USEFUL?

Sanctions have become the central tool of foreign policy for many governments.  The goal of sanctions is to promote changes in a foreign government’s economic behavior when diplomacy has not worked, and military action is unwarranted.  Sanctions can range from trade embargoes to specific actions against individuals, companies, countries, or entire economic sectors.  In the U.S. they typically are legislated by Congress and enforced by the Administration, but can be in consortium with foreign governments.  In the four months that Biden has been president, we’ve seen sweeping measures against Russia for election meddling and cyber-attacks; measures against companies linked to the junta in Myanmar; asset freezes and travel bans against Chinese officials for human rights abuses in Xinjiang, and undermining Hong Kong’s autonomy; Limits to American supercomputer technology, et al.

The Beginning of Sanctions:  Sanctions date back to 432 BC in Greece when the Athenians banned traders from Megara, a city in the Peloponnesian region, from using their marketplaces.  This led to chaos for the Megarian economy, and probably came about as Athens was on the verge of a second Peloponnesian war with Sparta and questioned Megara’s allegiance.  Sanctions became more popular during the 20^th century as the calamity of World War I steered thinking away from taking immediate military action.  The post war League of Nations used sanctions as its major tool to foment political changes in the 1920’s and 1930’s.  Since 1945 the United Nations has picked up where the League of Nations left off. 

The Cold War Impact:  Since the beginning of the Cold War, sanctions targets were typically smaller and extremely radical countries such as Cuba and North Korea.  During the Cold War, Congress granted the President additional powers to impose sanctions.  These were expanded by the Patriot Act in 2001 to include terrorist organizations as targets.  It was at this point that the trend shifted toward customizing sanctions to block individuals and companies as well as governments from using U.S. financial services and systems. 

Recent Shifts:  Sanctioning by the U.S. Government reached a new level around 2010 when sanctions not only targeted certain individuals or organizations, but also any other entities who continued to do business with the offenders.  This became most conspicuous when European businesses saw opportunities to do business with Iran after the signing of the 2015 nuclear deal, but backed away when the Trump administration ended the deal and re-established sanctions.  Further there has been a noticeable shift in sanctioning during recent times towards high level targets after Russia’s annexation of Crimea in 2014.  Those sanctions involved Russian government agencies, companies, and individuals who were allegedly a part of President Vladimir Putin’s inner circle.

Enforcement:  Sanctions in the U.S. were enforced in 1940 by a government agency that was established to freeze the U.S. assets of the Danish and Norwegian governments to keep them out of Nazi control.  Since 1950 the Office of Foreign Assets Control in the Treasury Department has been primarily responsible for sanctions enforcement. When Trump became president, he instituted the widespread use of sanctioning in lieu of diplomacy.  Some of his sanctioning was so surgically oriented that it required enforcement by banks and other companies that worked in and around the supply chains of targeted entities.  Several large banks have run amok of some of these sanctions and have been forced to pay huge, billion-dollar fines.  Others have had to spend similar amounts of money to ramp up their operations to enforce government issued sanctions.

Negative Impacts:  Sanctions don’t always achieve their goals.  Further, in many of the more surgically dominated sanctions it is very hard to measure if any progress has been made at all.  In the case of Iran, the overall process of re-sanctioning by the Trump Administration has clearly failed in all respects.  The Mullahs and Ayatollah’s are still in charge, and the country is now much closer to developing nuclear weapons than before Trump took office.  Sanctioning can also bring about counter measures from the targeted entities.  One such counter measure is a law called a “blocking statute” that countries use to shield their domestic companies by prohibiting their compliance with sanctioning.  Such statutes exist in the European Union and China.  There have been a number of lawsuits connected with “blocking statues” creating a legal quagmire for those companies involved.  The larger the target, the larger the chance of some sort of retaliation—the larger the retaliation, the greater the hit is to the issuing economy.

Averting Economic Sanctions:  The best method to avoid sanctions could be to circumvent them.  By working in the black market, using shell companies, creating fake trading documents, money laundering, and other dark arts, individuals and companies can get around enforcement of sanctions.

Decoupling is another method of dealing with sanctions.  If an economy is subject to sanctions, it could end up taking its affected business elsewhere and avoiding doing business with the sanctioning economy altogether.  China is foremost in developing the usage of digital currencies to facilitate cross-border payments in opposition to SWIFT, the current standard for cross-border payments.  Russian financial markets have largely decoupled since the Crimea annexation therefore enabling them to largely shrug off the most recent round of sanctioning.  China has further been able to benefit by filling the economic void created by sanctions in places like Iran and Venezuela. 

Conclusions:  In 2016 Jack Lew, U.S. Secretary of the Treasury, said that the U.S. has “refined our capacity to apply sanctions effectively.”  At the same time, he said that the overuse of sanctioning “could undermine our leadership position with the global economy, and the effectiveness of our sanctions themselves.”  This leads me to conclude that sanctions, when carefully architected, are a better choice than military action in the event of failed diplomacy.  However, I further believe that the government should carefully utilize diplomacy, rather than immediately invoke sanctions just as fast as gunfighters would pull out their pistols in the Old West. 

Sources:  Economic Sanctions:  Handle With Care, The Economist, April 24th, 2021.