Strategic sanctions are costly foreign policy tools

Analysis

Over the last few decades, the nature of sanctions has changed substantially.

Smart sanctions

In many cases, sanctions use has moved from broad trade embargoes that were blunt tools with significant unintended consequences to 'smart' sanctions that are more focused on individuals, entities or sectors.

In particular, targeted financial sanctions seek to deter financial intermediaries from processing illicit financial transactions and to isolate rogue actors through threats of fines or lost market access.

United States

The United States is the most dominant user of such sanctions. Recent and ongoing targets range from states including Russia, Iran, North Korea and Venezuela to non-state actors such as the Islamic State group. Sanctions, especially 'secondary sanctions', are integral to the national security strategies developed under both former President Barack Obama and his successor Donald Trump.

Rather than targeting persons under US jurisdiction, secondary sanctions target third party actors by threatening to lock them out of US financial markets, which dominate the global market, together with the dollar. The dollar accounts for about 60% of global sovereign reserves, 40% of cross-border payments and likely over half of total global debt (see RUSSIA: US sanctions pressure will not let up - March 13, 2019).

EU

In the EU, sanctions -- or 'restrictive measures' in EU parlance -- are integral to the bloc's Common Foreign and Security Policy and, coupled with diplomacy, aim to promote peaceful change. Implemented through unanimous decisions by the European Council, EU sanctions are in place in a number of areas, notably:

• on Islamic State, al-Qaida and similar terrorist outfits;
• Iranian intelligence services after attempted assassinations in Europe;
• Russian entities and individuals for actions in Ukraine from 2014;
• entities and individuals in Russia and Syria for using chemical weapons; and
• Venezuela, Iran, Belarus and Burundi for human rights violations.

The EU agreed on new sanctions power on cyber issues in May this year but has to yet to target them.

China and Russia

China and Russia are also using targeted trade sanctions to punish countries for harming their interests:

• Beijing is believed to have restricted exports of rare earths to Japan in 2010 (though it denies this) and salmon imports from Norway. More recently it has curbed tourism to South Korea and forced South Korean retailers in China to close.
• Russia has imposed 'counter-sanctions' on European agricultural exports in retaliation for EU sanctions over Crimea.

Tool of first resort

The second major shift in sanctions use in recent decades has been an increasing reliance on economic coercive power as a tool of first resort. This trend is partially informed by the success of sanctions and partially by the perceived low cost of employing these tools.

Success of sanctions

A 2016 study by the Center for a New American Security found US financial sanctions imposed since September 2001 to be effective in nine of 22 cases, or nearly 41% of the time. This finding is reinforced by recent high-profile cases where targeted sanctions are credited with achieving Western foreign policy objectives substantially:

• Notably, economic and financial sanctions imposed over Iran's nuclear programme brought its government to negotiations.
• Sanctions against military-linked entities in Myanmar supported democratisation.

Cost of sanctions

The cost of sanctions differs case to case, depending on interdependencies and exposure. However, the cost can be non-trivial. The European Commission estimated that in 2014 and 2015, EU sanctions on Russia lowered EU GDP growth by 0.3 percentage point.

Unilateral turn

Another growing trend is a turn to unilateral sanctions, particularly by the United States, without a clear strategic objective and an accompanying diplomatic process.

The multilateral nuclear sanctions imposed on Iran prior to 2015 had a clear purpose: to ensure Tehran would not develop or otherwise acquire nuclear weapons. Similarly, the transatlantic sanctions on Russia since 2014 have a stated goal: to compel full Russian implementation of the Minsk agreements.

However, more recent cases are less clear:

• Renewed US sanctions on Iran have been surrounded by overlapping and competing messages making their ultimate goal hard to discern.
• New US sanctions on Russia in late 2018 cited as their reason the Kremlin's "malign activities around the world".

Decoupled from diplomacy

Sanctions need not necessarily be coupled with a diplomatic process; they may be used as a tool of denial. This is often the case with non-state actors, such as terrorist groups, where the aim is to starve them of financing and other resources. Sanctions against al Qaida and Islamic State have helped starve them of funding, but their wider effectiveness is questionable given the continuing activities of these outfits.

Detrimental effects

Frequent use of sanctions, especially when not multilaterally coordinated or implemented with clearly defined goals risks long-term detrimental consequences.

Private sector 'de-risking'

An emerging trend in the financial community is overcompliance with sanctions. Since the potential cost of transgression is high, and since sanctions legislation, supply chains and ownership structures in target economies are often difficult to unpack, institutions often scale back their operations more than necessary.

These institutions also show great hesitance to re-engage with post-sanctions jurisdictions, increasing the negative impact of sanctions on the ordinary population and fuelling diplomatic rivalries. For instance, renewed US sanctions on Iran have led to shortages of critical goods such as food and medicine, and further increased inflation.

Such de-risking by private institutions can also compel local actors to use more opaque financial channels and networks, impeding efforts to curb money laundering and terrorism financing.

Evasive manoeuvres

A long as there have been sanctions, affected entities have devised structures and arrangements to circumvent them.

For example, actors such as China and Russia have pursued initiatives intended to decrease their dependency on US financial structures. In 2015 China launched a renminbi-denominated international payments system, and several joint investment initiatives with Russia that were intended to be financed through currency swaps without dollar clearances. China's support for North Korea has also undercut US sanctions against Pyongyang's nuclear programme for decades (see NORTH KOREA: Sanctions hurt, but Kim’s grip is strong - May 1, 2019).

Besides rivals, US allies have also resorted to similar strategies recently. Following US withdrawal from the Iran deal, Germany, France and the United Kingdom have established a special purpose vehicle (SPV) in 2018 to conduct trade with Iran without exposing themselves to US sanctions (see EU/IRAN: Payment scheme to focus on humanitarian trade - January 8, 2019). The SPV is not operational as yet.

Outlook

Near term, the continued global dominance of US financial structures and the dollar will militate against a major policy re-think in Washington, especially under the current administration (see RUSSIA/IRAN: US sanctions prompt Russia disengagement - April 16, 2019).

However, longer term, as former US Treasury Secretary Jack Lew has warned, 'overuse' of sanctions could degrade US economic coercive power over time as other actors develop alternative financial structures as a pre-emptive hedge.