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The Sanctions Myth

June 15, 2015 Topic: Security Tags: SanctionsNational SecurityAmerica

The Sanctions Myth

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

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.

 

Similarly, the United States has imposed sophisticated new sanctions on Russia that move well beyond simple prohibitions on transacting with certain of Vladimir Putin’s cronies. These new tools—which target Russia’s ability to refinance its massive external debt, as well as prevent the country from developing key energy resources over the medium to long term—leverage advantages enjoyed by the United States: technological superiority and attractive capital markets. A significant component of these sanctions prevents U.S. energy companies from providing cutting-edge technologies to Russian firms that would help those firms develop difficult-to-reach oil resources (such as shale, offshore and Arctic resources). And like the sanctions aimed at isolating Iran from Western financial markets, U.S. and EU sanctions on Russia prohibit Western financial firms from dealing in new debt or equity with more than a thirty-day maturity period, making it exceedingly difficult for Russian companies to secure the necessary financing to service the country’s massive debt.

These new forms of economic statecraft have proven powerful. For example, as a partial result of the sanctions, economists are predicting that the Russian economy will shrink by 3.5–4 percent in 2015 and continue contracting in the medium term. Likewise, the Iranian economy is suffering from significant inflation, and according to the Treasury Department, sanctions on the Iranian petroleum industry cost the country $40 billion in revenue in 2014.

 

Policy makers, seeing the sophisticated nature and powerful impact of these sanctions, have concluded that these new tools of coercion are different from—and a marked improvement on—prior forms of economic punishment. For example, in a December 2014 speech, David S. Cohen, then the under secretary of the treasury for terrorism and financial intelligence, noted that

we have been able to move away from clunky and heavy-handed instruments of economic power. . . . All of us in this room remember how sanctions used to consist primarily of trade restrictions or wholesale bans on commercial activity. . . . These embargoes rarely created meaningful pressure. Sanctions that focus on bad actors within the financial sector are far more precise and far more effective than traditional trade sanctions.

This perspective is echoed in the 2015 National Security Strategy, which makes clear that these targeted economic sanctions are an effective tool for dealing with threats to the United States and its allies and friends.

As Cohen went on to say in his speech, “Financial power has become an essential component of our country’s national-security toolkit. That fact may mean that we are called on to use it more frequently and in more complex ways than we have in previous decades.”

 

BUT WHILE these sophisticated sanctions have imposed substantial economic costs on Iran and Russia, policy makers’ optimism about their usefulness may be excessive. Indeed, it is more difficult than policy makers think to narrowly tailor these tools to achieve particular strategic objectives for at least two reasons.

First, the economic effects of these sanctions are unpredictable. In the case of Russia, the macroeconomic impact of U.S. and EU sanctions—combined with the drop in international oil prices and actions taken by Russian regulators—has undercut the country’s economy to a far greater extent than was expected or desired. For example, by March 2015, inflation in Russia had risen to 16.9 percent. This followed on the footsteps of a near run on the country’s currency, which was supposedly triggered by the Central Bank of Russia promising to effectively print money to prop up certain companies owned by Putin’s confederates and hurt by Western sanctions. By the spring of 2015, Russia had spent approximately $130 billion of its precious currency reserves in an attempt to defend the value of the ruble and prevent it from sliding even further. In addition, by raising interest rates to 17 percent in an attempt to stabilize the ruble, the central bank has likely stymied consumer spending in the near term.

While these economic impacts have been profound, U.S. policy makers did not anticipate them. Nor did they intend to create them. It is fair to say that the collapse of Russia’s economy would cause many more problems in the region than it would solve, and if the Obama administration wanted to seriously undermine the Russian economy, it could have easily done so by designating a number of Russian banks and directly freezing them out of the U.S. and European financial sectors. This action would have been a far simpler and more direct way to cause Russia economic pain and bring it to the negotiating table over the Ukraine issue. These new, sophisticated sanctions were instead designed to hurt a specific subset of Russian companies, namely those that are owned or controlled by Putin’s inner circle or directly run by the Russian government. Yet, despite the fact that these sanctions are narrowly tailored, they could end up causing economic damage to the Russian economy that would be similar to what would result from a wholesale ban on transacting with certain industries, such as the financial sector.

Second, the political effects of these sophisticated sanctions are also difficult to predict. In the Russian case, U.S. policy makers developed the sanctions in order to target Vladimir Putin’s inner circle. If his henchmen were hurt, it was believed, they would pressure the Russian president to adopt a different course in Crimea and eastern Ukraine. And while the sanctions have damaged the economic interests of these individuals, the result has been the opposite of what policy makers intended. Instead of pulling out of Crimea and ceasing Russian support for the rebel forces in Ukraine, Putin requisitioned property of more liberal oligarchs and consolidated the position of hard-liners within the political, military and economic sectors. For example, in late 2014, Russian authorities seized Russian businessman Vladimir Yevtushenkov’s oil company, Bashneft, and effectively nationalized the company in what was seen as an attempt to secure resources for the Russian government and to reallocate the company to Putin’s allies.

Likewise, Putin has reportedly sidelined even those conservative oligarchs who have supported him thus far during the crisis in favor of relying on the advice of a small group of military and security officials. These officials have further encouraged Russian support of separatists in eastern Ukraine and a generally confrontational approach to the United States and the European Union. In effect, the sanctions may have made it more difficult for the United States to achieve its goals in the conflict; by isolating Putin and damaging the Russian economy, the sanctions have caused Putin to consolidate his power and limit his inner circle to those advisers who advocate policies at odds with U.S. interests.

 

WHILE THE use of economic statecraft has become more sophisticated in the last decade, tailoring these tools to achieve the desired political effects remains exceedingly difficult, and U.S. policy makers should not be lulled into believing that these new forms of coercion can be perfectly calibrated to address every foreign-policy challenge. And though they may be more effective than the “comprehensive” sanctions of the 1990s or the “smart” sanctions of the early 2000s, these new levers present a new set of complications for policy makers, such as being significantly more powerful and difficult to control than anticipated.

To overcome these obstacles and ensure that these new sanctions are more likely to achieve U.S. strategic objectives, the Obama administration can take a number of steps. First, it should be wary of relying on these new sanctions as tools of first resort. These levers are attractive in large part because they can be imposed unilaterally (or with minimal allied support) and quickly, and are seemingly risk-free in comparison to other forms of coercion such as using military force. In the case of Russia, for instance, the administration was quick to target Vladimir Putin’s clique using sanctions because many of the alternatives were unpalatable. Yet this rush to react also created a number of unanticipated consequences, such as Western businesses that had assets with Russian companies that were indirectly and opaquely owned by some of Putin’s collaborators finding their economic interests unexpectedly harmed. Likewise, as the recent debates in Congress over the Iranian nuclear deal have shown, unwinding sanctions can often be more difficult than imposing them, and turning to sanctions as a knee-jerk reaction can often cause significant complications down the road. To be sure, economic sanctions may still often end up being the best alternative to doing nothing or to escalating to military force, but policy makers need to realize that many of the arguments against those other two options may also apply in some measure against sanctions.

Second, and relatedly, U.S. policy makers should study the likely impacts of these sophisticated sanctions more carefully prior to imposing them. In targeting a number of Russia’s financial institutions, for example, the administration believed that it had found a way to threaten Russian companies’ ability to service their massive debt, as well as the health of the Russian economy in the medium and long term. While such damage seems probable, U.S. policy makers did not anticipate that the sanctions would nearly cause the Russian currency to collapse or lead Vladimir Putin to consolidate his authoritarian rule, making the achievement of U.S. objectives more difficult. The Obama administration would be well served to create an interagency working group that closely examines the likely economic and political impact of these new sanctions before imposing them. Yet we must not kid ourselves about our ability to predict effects with great confidence. These sanctions are more powerful than earlier generations of “smart” sanctions precisely because they have a multiplier effect beyond the direct control, and thus beyond the confident predictions, of policy makers.

Third, and most importantly, policy makers should not rely on these tools in place of a strategy, but rather should incorporate them into a broader strategy for safeguarding U.S. interests. In the case of Russia, for example, the Obama administration has seemingly relied on sanctions to impose economic pain on the country in the hopes of convincing it to pull out of Crimea and to cease its support of rebels in eastern Ukraine. But sanctions—even sophisticated ones—are rarely effective alone, and must be used in conjunction with other tools of diplomacy to have much chance of success. Rather than imposing sanctions on target countries and rogue actors and hoping that they can cause enough pain, policy makers should carefully consider how to use sanctions, threats of force, negotiations and other forms of diplomacy in a coordinated way to achieve U.S. objectives.

In the end, sanctions will contribute the most in those cases when any tool of statecraft will be most effective: when the leaders know where they want to go, have a good idea of how to get there and are committed to expending the resources—financial, military, moral and political—to get there. Sanctions will not be sufficient substitutes if the leaders lack such strategic insight and resolve.

 

Peter D. Feaver is a professor of political science and public policy at Duke University. He is director of the Triangle Institute for Security Studies and director of the Duke Program in American Grand Strategy. Eric B. Lorber is an attorney in the Washington, DC, office of Gibson, Dunn & Crutcher. 

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