Can America Escape Its Addiction to Sanctioning?

Can America Escape Its Addiction to Sanctioning?

A recent book examines the United States’ usage of sanctions, the unintended consequences of such, and how these measures aren’t going away any time soon.

Agathe Demarais, Backfire: How Sanctions Reshape the World Against U.S. Interests (New York City: Columbia University Press). 304 pp., $30.00.

According to the Financial Times, back in October 2022, 70 percent of Europe’s fertilizer and 50 percent of aluminum production capacity was offline due to energy shortages. The EU’s energy sanctions on Russia, imposed in response to the latter’s invasion of Ukraine, had the consequence of crippling the continent’s industrial capacity at the time. Firms ranging from BASF to ArcelorMittal made plans to relocate to China or the United States to escape high energy costs. While European countries were able to wean off Russian gas, the replacement of this with other sources led to developing countries, like Pakistan, to suffer from power outages.

While Europe resolved its energy crisis for now, the gas sanctions on Russia had unintentional consequences not only for European countries but also for countries not directly involved in the Russian-Ukrainian war. But why are sanctions so prone to producing unintended consequences? Agathe Demarais’ Backfire: How Sanctions Reshape the World Against U.S. Interests, which came out in the middle of 2022, answers this question. She delves specifically into the rich post-World War Two history of the United States sanctioning other countries.

Past Failures

It has been a common critique of sanctions that they do not work, and Demarais does an excellent job of proving this to be true. From unintended humanitarian consequences to sanctions derailing global commodities markets, Demarais provides detailed sanctions of well-intended policies having unintended consequences.

For example, there is how non-American businesses deal with U.S. sanctions. Before the mid-1990s, non-American companies did not have to comply with the specially designated nationals list, to the complaint of U.S. businesses that said it was unfair. Yet with the passing of the 1996 Helms-Burton Act, the United States decreed that international firms could not trade with Cuba. Yet rather than effectively isolating Havana and affecting regime change, the U.S. sanctions regime has only driven it into the arms of America’s foreign adversaries, including China.

There are other consequences of businesses being concerned about violating sanctions by accident. An entire cottage industry has sprung up to handle the complexity of America’s sanctions regime, with hundreds of thousands of people employed in financial compliance.

Demarais goes into examples of when sanctions strengthen an entity U.S. policy intended to weaken. For example, French oil giant Total’s South Pars project in Iran in the early 2010s was originally not subject to sanctions—as part of the 2015 Joint Comprehensive Plan of Action (i.e., the nuclear deal), European companies could finally operate in the country without fear of American sanctions. When Donald Trump won the presidency in 2016, however, a component of his foreign policy was to be tougher on Iran, including using secondary sanctions on Total to make sure a European company would not do business in Iran As a result of this pivot, the country’s Islamic Revolutionary Guard Corps ended up taking control of the project. The group the United States intended the sanctions to hurt in the first place was instead rewarded with ownership of a natural gas project.

Demarais goes into the recent history of Russia sanctions for yet another example. In 2017, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Oleg Deripaska, a Russian billionaire with ties to the Kremlin, along with Rusal, the Russian aluminum giant that Deripaska owned a third of. Rusal is no small company; it is the second-largest producer of aluminum in the world. As such, these U.S. sanctions soon derailed the global aluminum markets. Only a deal with Deripaska that lifted some of the sanctions restored market stability.

The “How” of Sanctions and Attempts to Get Around Them

It is telling that very little of the book is devoted to exactly how the U.S. government enacts sanctions. The Government Accountability Office, for one, notes that “federal agencies do not conduct comprehensive assessments that measure how effective sanctions are in meeting U.S. foreign policy goals.” Estimates on the specific impact of sanctions are extremely limited, given the amount of sanctioning Washington does. The Rusal example is a demonstration of this, given that OFAC staff noted that the Rusal sanctions would have unintended consequences, but policymakers still went ahead with these.

Part of the reason why Washington can enact sanctions with such impunity and little foresight is the global dominance of the U.S. dollar; the threat of being cut off from the world’s reserve currency is one of the ways the United States gets other countries in line with U.S. sanctions. Attempts to circumvent this yield little fruit. One response, for instance, to this is to avoid using dollars by engaging in bilateral currency swaps to buy goods. While that certainly gets around dollar-based sanctions, de-dollarization is not helpful if one cannot buy goods invoiced in that currency. On a more technical level, fully replacing the usage of the dollar with another currency—the Chinese yuan, for example—is unlikely to happen given Beijing’s limited desire to have an external deficit and/or liberalize its capital flows.

Demarais notes across her work the other variety of ways countries have been trying to bypass American sanctions, with mixed results. Among the failures is Instex, a special vehicle intended to facilitate transactions with Iran. Far from being a blow against American sanctions, Instex ended up being severely restricted only due to concerns of violating sanctions. Other examples of sanction bypass methods, like the CIPS payment system China is building, are not as mighty as they seem. Far from being a replacement for SWIFT—the Western-dominated messaging network used to facilitate financial transactions and payments between banks worldwide—CIPS actually uses SWIFT for messaging between banks. It only functions as a replacement for SWIFT if one does transactions purely in renminbi.

Another example of this phenomenon can be seen with the Mir payment system, which the Russians built to get around U.S. sanctions. Russia has been struggling to find the chips to create the banking cards due to supply chain issues. Additionally, countries like Egypt, Turkey, and Uzbekistan have suspended the acceptance of the Mir card for fear of getting sanctioned by the United States and getting cut off from the U.S. dollar. Concerns over the usage of Mir cards even stretch to being unable to track if an individual user is sanctioned or not.

Attempts to circumvent U.S. sanctions via more recent digital innovations have also failed. OFAC has put great effort into quashing the usage of cryptocurrency to get around sanctions, for instance. Back in August 2022, OFAC sanctioned Tornado Cash, a “mixer” that lets one obscure cryptocurrency transactions, thereby making it hard to trace where money is both coming from and going. While the code repository for the mixer is back up, thereby allowing the service to be cloned and continued, traffic has fallen dramatically.

Something that Demarais failed to address in her work is the new non-digital means being used by nations to get around U.S. sanctions. These include using radar spoofing to disguise the locations of ships or ship-to-ship transfers of goods. While not nearly as flashy as using cryptocurrency, these more analog methods may be more sustainable methods than the usage of digital currencies whose prices are notoriously fickle.

The China Challenge

Demarais devotes the final chapter of her book to predicting how the current spate in the U.S.-China competition could hurt America. In decoupling, there is a concern that, instead of reducing America’s dependence on China, Beijing instead gains technical independence, which would allow it to act more autonomously.

We have seen this play out over the past several months. On October 7, 2022, the U.S. Bureau of Industry and Security (BIS) implemented new export controls on semiconductors. This move is a continuation of multiple years of escalating policy by the United States to restrict the supply of American technology to Chinese firms. Yet Beijing continues to pour billions of dollars into development, at a greater pace than U.S. firms, and has recently indicated it will restrict exporting critical minerals used to make chips. It is thus an open question if U.S. measures will actually successfully kneecap the Chinese semiconductor industry, rather than motivate it to successfully become independent of American pressures.

These continue today. At the start of 2023, the United States convinced Japan and the Netherlands to restrict the export of critical chip manufacturing equipment to China. These measures were a follow-up to the sanctions that BIS enacted for American firms at the end of 2022. In response to these measures, in the middle of May 2023, the Chinese government restricted the usage of Micron chips in Chinese infrastructure due to claims that the product had “serious network security risks.”

A New Era of Sanctions?

The United States is at a strange point when it comes to sanctions and sanctions-like policy. While Demarais claims that we have reached “peak sanction” and that its power may decline, one could argue that the reverse is happening. While export controls are not exactly the same as sanctions, the United States is deeply interested in restricting the flow of technology from any American ally to China.