The Sanctions Myth

The widespread belief that sophisticated sanctions provide policy makers with a silver bullet for addressing intractable national-security issues is wrong.

July-August 2015

SINCE 2005, American policy makers have increasingly turned to sophisticated types of economic sanctions as a foreign-policy tool of first resort. From the development of banking sanctions limiting Iran’s ability to secure financing from Western capital markets to new sanctions targeting Russia’s financial system and the development of its oil resources, U.S. policy makers are touting these innovative tools as extremely powerful while also being tailored and precise. The Obama administration’s 2015 National Security Strategy, for example, said that “targeted economic sanctions remain an effective tool for imposing costs on . . . irresponsible actors” and that “our sanctions will continue to be carefully designed and tailored to achieve clear aims while minimizing any unintended consequences for other economic actors, the global economy, and civilian populations.”

These sanctions are indeed powerful, and in many respects they represent a marked improvement over earlier generations of economic statecraft. But some of the problems that limited the effectiveness of previous sanctions also limit the effectiveness of these new tools. And the most important lesson from earlier efforts of economic coercion still applies: sanctions work best when they are a tactic incorporated into a well-considered strategy. They falter when they are employed as a substitute for such a strategy.

The new sanctions are better than the old ones in several ways. They are more precise than the “comprehensive” sanctions of the 1990s and are thus more likely to hurt legitimate targets and less likely to hurt innocent bystanders. They are also more effective than the “smart” sanctions (such as travel bans) of the early 2000s, and so less likely to feel like token symbols substituting for real pressure. Their greater effectiveness comes from the way they harness the United States’ position as the leader of the global financial system; through a number of mechanisms, the sanctions prevent rogue actors from accessing the U.S. financial system and force legitimate financial institutions to abandon any business with targeted countries and individuals.

But while these sanctions can have significant economic impacts, policy makers overestimate their ability to calibrate and control these tools of economic statecraft. As with earlier forms of economic coercion, it is still difficult to predict their economic or political effects. For example, Barack Obama and his European Union partners clearly intended to ratchet up pressure on Vladimir Putin’s Russia only gradually. They resisted more draconian proposals and imposed modest sanctions that, for a long time, seemed to impose little real pain on the targeted sectors—until the sanctions combined with the separate-and-unplanned-for drop in oil prices. Now, the effects of the sanctions in tandem with the oil-price drop have contributed to the near collapse of the ruble and effectively ended foreign direct investment into Russia. This is clearly more than the Obama administration intended or anticipated—though in light of Putin’s continued defiance, the White House has referenced this impact as evidence of its tough response.

Likewise, the new sanctions do not avoid one unintended effect that bedeviled earlier forms of economic coercion: the ability of targeted regimes to use the sanctions to amass more political power against their rivals, at least temporarily. In the case of Russia, for example, Putin has used the economic impact of the sanctions to diminish the influence of political and economic elites who oppose many of his policies. The result may be that Russia becomes more authoritarian—and less likely to act in ways that further Western interests.

The developing narrative that increasingly sophisticated sanctions provide policy makers with a silver bullet for addressing intractable national-security issues is wrong. These new sanctions can be powerful, but they often cannot be calibrated to the extent policy makers desire—or to the extent necessary to deliver strategic objectives. Indeed, in many ways their greatest asset is also their most significant liability; because they primarily utilize international financial markets (which is how they are able to create so much leverage), their reach and effects can often be very difficult to predict.

 

IN THE middle of the last decade, the United States began employing significantly more sophisticated types of economic sanctions. Using the importance of the dollar in the global financial system, private firms’ concern with their business reputations and the fact that the United States is the hub for many key technologies necessary for the development of industries in other countries, the United States found new ways to pressure rogue actors.

In the case of Iran, for example, the United States relied on its position as the financial capital of the world—and one of its largest markets—to force foreign companies to abandon their business with the Islamic Republic. The U.S. Treasury Department threatened those companies with a choice: either they could do business in U.S. financial markets (and have access to U.S. dollars for transactional purposes) or they could do business in Iran, but not both. As a result, a large number of foreign firms shuttered their business operations in Iran, increasing economic pressure on the country. This ability to impose what many countries argued were extraterritorial sanctions helped prevent Iran from easily finding alternative trade and financing partners, and was—at least in part—responsible for bringing the country to the negotiating table to discuss its nuclear program.

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