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Even Smarter Sanctions

How to Fight in the Era of Economic Warfare

U.S. Ambassador to the UN Nikki Haley is seen voting in favor of new sanctions during the Security Council meeting. (Getty)

by Edward Fishman

Economic sanctions have been a fixture of U.S. foreign policy for decades, but never have they enjoyed so much popularity as they do today. On virtually every major foreign problem—North Korea’s belligerence, Iran’s nuclear aspirations, Russia’s aggression, ISIS’s brutality—the U.S. government has turned to some form of sanctions as an answer. Their value is one of the few things that former President Barack Obama and President Donald Trump agree on: Obama used them more than any other president in recent history, and Trump, in his first eight months in office, oversaw significant expansions of U.S. sanctions against North Korea, Venezuela, and, despite his misgivings, Russia.

Some U.S. sanctions aim to stigmatize foreign leaders and human rights abusers, such as those against North Korea’s Kim Jong Un, Zimbabwe’s Robert Mugabe, and the Russian officials responsible for killing the lawyer Sergei Magnitsky. Others are designed to deny terrorists, drug traffickers, nuclear proliferators, and other bad actors the money and tools they need to wreak havoc. It is a third category, however, that U.S. officials have come to rely on so heavily in recent years: coercive economic sanctions. Their purpose is to apply economic pressure to force a foreign government to do something it doesn’t want to do (or to refrain from doing something it does want to do). The prime example is the sanctions that pressured Iran to sign the 2015 Joint Comprehensive Plan of Action, under which it agreed to stringent limitations on its nuclear program.

For all the popularity of sanctions, however, the system for applying them remains underdeveloped. U.S. officials almost never design sanctions, much less negotiate them with allies, until crises are already under way, and so the measures tend to be either rushed and ill conceived or too slow to deter adversaries. These shortcomings make sanctions less effective in the present, and they will do even more harm in the future. As governments around the world race to hone their own economic warfare capabilities while finding clever ways to insulate themselves from the effects of U.S. sanctions, Washington risks falling behind in an area in which it has long enjoyed primacy. So it’s well past time for the U.S. government to modernize its favorite foreign policy tool. 

SMARTER AND SMARTER 

Sanctions have been Washington’s foreign policy tool of choice throughout the post–Cold War period. As the specter of great-power war receded, policymakers came to see sanctions as an efficient means of advancing U.S. interests without resorting to military force. But the explosion of sanctions programs during the Clinton administration led to a backlash among experts. In the late 1990s and early years of this century, their reputation hit rock bottom.
In particular, the UN Security Council’s strict embargo against commerce with Saddam Hussein’s regime in Iraq was seen as depriving ordinary civilians while doing little to pressure those in power. Waning international support for these sanctions inspired U.S. Secretary of State Colin Powell to propose a new approach. Dubbed “smart sanctions,” it aimed to move beyond embargoes by targeting leaders and influencers directly.

But beginning around 2006, as Washington shifted its focus to sanctions against Iran, it became clear that this approach was not up to the task of curbing the country’s nuclear program. It would take pressure on the Iranian economy, chiefly the financial and energy sectors, to do that. So sanctions experts in the State Department and the Treasury Department aimed higher, crafting measures that would damage Iran’s economy without placing undue burdens on its civilians or destabilizing global markets. The resulting sanctions severed Iran’s largest banks from the global financial system, denied its maritime shipping fleet access to insurance and repairs, and gradually reduced the regime’s oil revenues. The strategy worked: from 2012 to 2013, Iran’s GDP shrank by roughly nine percent and its oil sales fell from 2.5 million barrels per day to 1.1 million barrels per day. Meanwhile, broad exceptions to sanctions granted ordinary Iranians access to food, medicine, and cell phones from abroad.

Even though sanctions have gotten smarter, their precise impact remains extraordinarily difficult to forecast. That’s because it is banks and companies that perform the first line of sanctions implementation, and it is impossible to know exactly how they will manage this task. In some cases, they simply decide to cease doing business with entire countries for fear of violating sanctions, making the effect of the measures more draconian than intended. That is what has happened with Somalia, where remittances have been impeded after U.S. banks decided to end their relationships with companies transmitting money to the country. In other cases, sanctions end up being weaker than intended, as the private sector grows accustomed to complying right up to the boundary of legality and illicit actors find workarounds. 

The United States possesses two principal assets to handle this inevitable uncertainty. The first is the sheer size and reach of its economy (and the global dominance of the U.S. dollar), which gives it a fairly wide margin for error. The second is the flexibility of U.S. legal authorities, which permit the Treasury Department to issue licenses, update sanctions lists, and pursue other course corrections with relative ease.

Both factors help explain the success of U.S. sanctions against Russia, the largest economic power the United States has ever sanctioned. But perhaps the most unique element of this particular sanctions program is that, from the start, it has been a collaborative project between the United States and Europe. (The sanctions program against Iran became a genuine multilateral endeavor only after years of pressure from Washington.) Given the many links between the Russian and European economies, getting the EU’s buy-in was essential. After all, if Russia could replace all its lost business with the United States by turning to Europe, the sanctions would be toothless, leaving U.S. companies as the only losers.

The sanctions on Russia are also distinct in their precision. Unlike ordinary sanctions, which shut their targets out of the U.S. economy altogether, these focus primarily on blocking Russia’s state-owned enterprises from raising capital in Western financial markets and on hindering its energy companies’ efforts to develop Arctic, deep-water, and shale oil projects. The United States and the EU designed the sanctions this way to put pressure on Russia while limiting the risk to markets posed by going after a major player in the global economy.

On paper, the sanctions against Russia are a fraction as harsh as those placed on Iran before the 2015 nuclear deal. But owing to the outsize roles played by Western banks and oil companies in global finance and energy, the sanctions have managed to squeeze Russia’s economy while causing little financial blowback in the United States or Europe. In the six months after the first round of sanctions on key sectors of Russia’s economy were enacted, in July 2014, the ruble lost more than half its value. The International Monetary Fund estimates that sanctions initially reduced Russian GDP by 1.0 to 1.5 percent and will cost the country up to nine percent of GDP over approximately five years. The drop in world oil prices that began in 2014 no doubt remains a crucial factor behind Russia’s economic fall, but sanctions have held back the country’s recovery, curbing investment, hampering access to credit, and stalling the development of energy projects. 

Sanctions have not forced Russia to pull out of Ukraine. But they have helped deter it from taking more drastic measures, such as conquering a wider swath of eastern Ukraine, using its military forces to secure a land bridge to Crimea, or overthrowing the democratically elected government in Kiev. It is impossible to prove a counterfactual, but it strains credulity that Moscow would have abstained from all these actions had it believed it could get away with them scot-free. The timeline of events also provides evidence of deterrence. Russia put the brakes on its two large-scale military offensives, in September 2014 and February 2015, as Washington and Brussels were preparing harsher sanctions. And in the spring of 2015, after several rounds of sanctions and clear signals from the West that tougher ones were in the offing, Moscow abandoned the so-called Novorossiya (New Russia) project, which envisioned Russia swallowing up nearly half of Ukraine’s territory. The Russia experience thus suggests an important lesson: the best use of sanctions may be not to counterpunch but to deter.

WHEN TO SANCTION

Despite these recent successes, sanctions are no panacea. In some cases, they are best suited to a supporting role—a means of constraining an adversary’s capacity for mischief, for instance, as opposed to a solution to an intractable problem. In others, they are the wrong tool altogether. The United States should be wary of using them capriciously, as doing so would allow adversaries to adapt to its tactics, decrease allies’ appetite for cooperation, and encourage foreign corporations to reduce their exposure to the U.S. economy. Before turning to sanctions to address a problem, policymakers should ask themselves four questions.

First, is there money at stake? Sanctions will sway a country’s political leaders only if their economy relies substantially on foreign trade or access to international financial markets. This is why sanctions programs that remain stagnant for years tend to be the least effective: their targets have long since limited their exposure to the U.S. economy. Such is the case with sanctions against Cuba, which have been in place since 1960 to little effect. The same dynamic was also at work with the embargo against Iran initially imposed by the Reagan administration in 1987. With minimal commerce between the United States and Iran, sanctions were largely ineffective until 2010, when the Obama administration began a policy of threatening sanctions against firms in Asia, Europe, the Middle East, and elsewhere that conducted business with Iran—putting more stress on the Iranian economy than decades of an embargo ever did.

The second question concerns the need for a persuasive theory of success: Will economic pressure actually change the target country’s policies? All governments, even autocracies, care to some degree about their people’s livelihoods, as plunging living standards can spark political unrest. But in general, the more politically active a target’s population is, the more likely sanctions are to work.

For over a decade and a half, President Vladimir Putin has promised the Russian people political stability and rising living standards in exchange for acquiescence to his personal rule. But Western sanctions, mixed with the Kremlin’s own economic mismanagement, have made this social contract untenable, forcing Putin to seek a new one based on his supposed role as Russia’s protector from a predatory West. Putin’s popularity spiked after the 2014 annexation of Crimea, but as a full economic recovery remains far from sight, discontent is brewing and seems likely to grow.

The third question officials should ask themselves involves the disposition of the coalition imposing sanctions: Do the United States and its allies have the determination to maintain these measures over the long haul? If not, then a target country will likely try to wait them out, hoping that interest groups and opposition parties in the West will seize on the domestic costs of sanctions and force Washington or Brussels to throw in the towel. 

The experience with Russia shows how sanctions can turn into a race against time. For the last several years, Russia has sought to free itself from sanctions not by giving the West what it wants—the restoration of Ukraine’s international borders—but by trying to break the West’s resolve. By setting up a process in which member states must unanimously agree to extend sanctions against Russia every six months, the EU has made itself a frequent target, with Moscow currying favor with incumbent leaders, such as Hungary’s Viktor Orban, and boosting aspiring ones, such as France’s Marine Le Pen. The spectacular failure of Russia’s intervention in the recent French presidential election and the U.S. Congress’ overwhelming approval of a law that restricts Trump’s ability to lift sanctions against Russia have done much to clarify that the West is not prepared to fold. But still, EU sanctions would be far more effective if they didn’t require a semiannual vote of confidence.

The fourth question zeroes in on the political objective of sanctions: Does the target have a feasible off-ramp? Even the harshest sanctions are unlikely to result in total capitulation, and it is foolhardy to expect any leader to commit political suicide in order to get sanctions lifted. Hence the failure of sanctions against North Korea: Kim has made his nuclear program a centerpiece of his domestic legitimacy, and so the political costs of agreeing to denuclearize have outweighed the economic benefits of doing so. For sanctions to change a country’s behavior, they must allow leaders on the receiving end to save face while acceding to U.S. demands. 

IF YOU WANT PEACE, PREPARE FOR ECONOMIC WAR

In March 2016, the U.S. secretary of the treasury, Jacob Lew, struck a memorable note of caution in a speech on sanctions. “We must be conscious of the risk that overuse of sanctions could undermine our leadership position within the global economy and the effectiveness of our sanctions themselves,” he said. The more the United States relies on sanctions, Lew argued, the more other countries will wean themselves off dependency on the U.S. financial system—and reduce their vulnerability to U.S. sanctions.

However compelling its logic, Lew’s argument overlooked a key point: we are already living in an era of intensifying economic warfare. In just the last two years, China has threatened sanctions against U.S. companies involved in arms sales to Taiwan, Russia has responded to Turkey’s shooting down of a Russian attack aircraft with restrictions on tourism and food imports. At a time when states are trying to challenge the liberal world order without triggering great-power war, rising economic combat has become inevitable. And that’s to say nothing of the political impetus for more and more sanctions in Washington: supporting them is one of the easiest ways for politicians to burnish their national security credentials. Curtailing the use of sanctions would be akin to the error of those who protested the Industrial Revolution by smashing textile machines: the individual may opt out, but the tool will continue to spread.

Instead, the United States must prepare itself for the coming economic battles by overhauling its sanctions apparatus. Although sanctions have some record of success in persuading adversaries to reverse troublesome steps they’ve already taken—such as in the Iran nuclear negotiations—it remains far easier to prevent future actions. So the goal should be to establish sanctions as the United States’ most potent deterrent in the gray zone between war and peace, where so much of today’s international jostling takes place. 

The first step is to build a permanent sanctions contingency-planning process within the U.S. government. Just as the U.S. military draws up detailed plans for wars it might someday have to fight, U.S. officials in the State Department, the Treasury, and other agencies should create and constantly update off-the-shelf plans to impose sanctions rapidly if needed. To practice these plans and signal the government’s readiness to use them, they should routinely perform military-style exercises that simulate crises in which sanctions play a central role in the response.

The U.S. government should also bolster its defenses against other countries’ sanctions. That means prioritizing the collection of intelligence on adversaries’ blueprints for economic warfare in addition to their military plans. It also means identifying vulnerabilities in the U.S. economy and quietly working with private companies to rectify them. Some vital American-made products, including aircraft and pharmaceuticals, depend on components from countries that may one day sanction the United States, and so the federal government should team up with their manufacturers to identify potential alternative suppliers in advance. 

Indeed, effective offensive and defensive planning will require more regular consultation between sanctions policymakers and private-sector leaders. The United States has traditionally shunned the types of close ties between business and government that are so prevalent elsewhere, but it is worth making an exception for national security. In a similar vein, when building the teams that fashion sanctions, the State Department and the Treasury Department should draw on not just the usual diplomats and lawyers but also experienced professionals from the financial, energy, and technology sectors. Industry expertise is critical for the U.S. government to construct sanctions programs that are forceful yet don’t backfire on the United States or its allies. And it is especially important when deploying sanctions against larger economies, because the risk of financial contagion is higher in such cases. 

The final ingredient to sanctions-based deterrence is making economic warfare a regular subject of consultations between the United States and its allies. Despite the tantalizing prospect of widespread international support, the UN Security Council is not the right forum for these discussions, since the differences among its five permanent members tend to result in watered-down sanctions. In fact, a cardinal weakness of the U.S. campaign to pressure North Korea has been its reliance on the UN Security Council, a legacy of a program that has historically been geared more toward frustrating the country’s efforts to obtain nuclear missile components than economic coercion. By giving China and Russia a veto over sanctions decisions, and by entrusting them to police violations within their borders, the United States has left itself with fewer options on North Korea than it has had in the case of Iran or Russia. It has also exposed itself to the vexing possibility that Beijing and Moscow will claim the moral high ground for agreeing to Security Council resolutions while surreptitiously continuing to aid Pyongyang.

In most cases, U.S. interests are best served by negotiating coercive economic sanctions with like-minded allies in the EU and the G-7, while focusing efforts in the UN on less divisive sanctions, such as those that stigmatize bad actors and stem weapons proliferation and illicit finance. The U.S. government should also invite allies to participate in sanctions contingency planning and exercises, and it should work with them to use sanctions for collective defense. A reasonable strategy for deterring future Russian interference in foreign elections, for example, would entail a joint EU-NATO declaration affirming that such meddling will be treated as an attack against all and result in strong multilateral sanctions.

Economic warfare is a reality of the international environment, and perfecting the art of it will be essential for the United States to deter the incremental interventions favored by its adversaries. That doesn’t mean crises will go away; the United States will always find it difficult to check aggression and defend its interests in such hot spots as the South China Sea, the Persian Gulf, and Russia’s periphery. But if Washington strengthens its sanctions policy so that its capabilities are unquestioned and its intentions unmistakable, it will provide a critical service to the sustenance of great-power peace: averting crises before they spiral out of control.

EDWARD FISHMAN is a Fellow at the Atlantic Council. From 2015 to 2017, he served as an adviser on Europe and Eurasia and the lead sanctions expert on the Policy Planning Staff at the U.S. Department of State.

This article was originally published in Foreign Affairs

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