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The Cheap, Seductive Lure Of Sanctions

by Paddy Hirsch

US sanctions against Iran, Russia, Afghanistan, China and Venezuela have all made the news in recent weeks. That may seem like a lot of countries that the US is sanctioning. But they’re just five of the roughly 23 countries that the US is currently sanctioning around the world.

The Office of Foreign Assets Controls (OFAC) at the US Treasury says sanctions use trade restrictions and the blocking of assets to accomplish foreign policy and national security goals. Some of these sanctions date back to 1996. So how successful have they been?

Not very, says Agathe Demarais, in her new book Backfire: How Sanctions Reshape the World Against US Interests.

Demarais works at the Economist Intelligence Unit, as its global forecasting director. Previously, she worked on sanctions for the French government, as a senior policy advisor to the Treasury. She says a review of all US sanctions since 1970 shows that targeted countries altered their behavior in a way that the US hoped they would just 13 percent of the time.

“The reality is that sanctions are sometimes effective, but most often not, and it is hard to accurately predict when they will work,” she says.

Chris McGrath/Getty Images

From the Cudgel to the Laser

Sanctions have been around in some form or another since the days of Ancient Greece. The French used them (unsuccessfully) against the British during the Napoleonic wars, and they have been used by other countries many times since. But they have become particularly prevalent since the 1960s, when the US first imposed sanctions on Cuba.

Demarais identifies the development of sanctions into three phases, from the crude tool of the embargo, to the much more incisive weapon of the financial sanction, to the pinpoint focus of the individual sanction.

The first phase, the trade embargo, has rarely, if ever, been met with success, she says. President Eisenhower imposed a trade embargo on Cuba in 1960, in response to Fidel Castro’s decision to nationalize three American oil refineries. But, Demarais says, retaliation for the seizure of the plants was not the objective: regime change in Havana was. More than sixty years later, the same regime remains in place.

The US sanctions on North Korea, which initially began as an embargo, morphed into something more sophisticated after North Korea withdrew from an international treaty on nuclear proliferation in 2003. OFAC began looking for better ways to put pressure on the country, and identified a bank that was helping North Korea get around its trade restrictions. By targeting the bank, OFAC destroyed the sole conduit for all North Korea’s international banking transactions, a severe blow. And with that, the financial sanction was born.

“The idea behind financial sanctions is beautifully simple,” Demarais says. They make it “difficult to raise funds, conduct international business, or launder the proceeds from illicit activities” by making it harder to use banks. Cash, she says, is still king when it comes to global transactions. But when nations or people have to transfer large amounts of money, they need to use wire transfers and therefore banks.

The third phase of sanctions, the individual sanction, is a natural next step. Financial sanctions aim to shut down bank, country and company cash supply lines; individual sanctions are designed to isolate and alienate specific people in key sectors of a target country’s economy or political system. Demarais tells the story of the sanction, in 2018, of seven Russian businessmen. One of the principal sources of intelligence used by OFAC to choose these targets: the Forbes top 100 list of richest Russians, cross referenced with the Kremlin public telephone directory.

Financial sanctions, then, whether aimed at corporations, countries or individuals, are a good deal more targeted than embargoes and blockades. But even they have had mixed results, Demarais says. Moreover, they often backfire or cause collateral damage, affecting innocent people in the targeted country and even the interests of the United States itself.

Backfire

That is kind of the point. Financial sanctions are designed to inflict pain on the people of a targeted country, with the hope that they will get fed up and advocate for political change. But it’s a delicate balance.

The pressure can work: Demarais points to the example of Iran in 2012, when the Obama administration convinced the Swift financial transaction system to cease doing business with Tehran. Unable to do any international business, the Iranian economy crashed. A year later, Iranians elected a new, moderate president, Hassan Rouhani. Two years after that, Iran signed a deal to accept limitations on its nuclear program.

The Swift sanction was a success. But the long-term fallout for the people of Iran — who were still living under other sanctions — was devastating. Consumer prices rose by 30 percent. Living standards plummeted. When Covid hit, a few years later, sanctions affected Iran’s ability to get medicine and other supplies. The virus tore through the country, and hundreds of thousands of people died.

Demarais notes that the human cost of sanctions is often so high that it turns the people of the sanctioned country against the sanctioner. This happened in Iran in 2012, and in Venezuela, after US sanctions in 2018 triggered a one million percent inflation hike. It has also happened in Russia more recently. Russian citizens angry in part at US sanctions have been reportedly queueing up to join the army, even after a year of war and economic isolation.

The loss of hearts and minds in a target country is one thing, but sanctions can backfire in very specific ways that damage the US, Demarais says. She points to the embargo on grain exports to the USSR that the Carter administration put in place in 1980. The administration wanted to pressure the USSR to get out of Afghanistan, and figured that because the US supplied a third of Russia’s grain supply, this was a good pressure point.

But the USSR simply switched to new suppliers, and US farmers were left with a glut of grain. The market crashed. Land values plummeted. Farms went out of business. The embargo was lifted a year later, but the damage was done. Russia didn’t trust the US, and neither did anyone else. American farmers’ share of the global markets in corn, soybeans and wheat all dropped.

The Artful Dodgers

Another reason sanctions have limited effects, Demarais says, is that they are often easily avoided. Since the beginning of the war in Ukraine, Russia has combated sanctions by sourcing new markets for its most important exports. India and China have bought its oil, and it has used other allies as conduits to smuggle other goods.

“We're seeing a lot of trade between Turkey and Russia these days, for instance,” Demarais says. “So it appears that some smuggling could be taking place via Turkey, which doesn't impose sanctions, even though it is a NATO member.”

But circumvention is the old way of doing things, Demarais says. It’s logistically challenging, time consuming and expensive, as you generally have to sell your goods cheaper. The new school of sanctions dodgers uses inoculation.

“It's about a preemptive approach to vaccinate their economies, insulate their economies from the impact of sanctions, and these innovations take place in the financial sphere,” Demarais says.

She says this inoculation takes a three pronged approach. The first prong is currency protection. She notes that Russia vaccinated itself ahead of its invasion of Ukraine by keeping half of its reserves in non-western currencies, in rubles and rupees and renminbi, so that it could continue to trade.

“The second part is [finding] alternatives to Swift, the global Rolodex connecting all banks around the world,” she says.

China has taken the initiative in this area, having seen what happened to Iran when it was disconnected from Swift in 2012. It has begun developing an alternative, called the Cross-Border Interbank Payment System (CIPS).

“It is much smaller than Swift,” Demarais says, “But it just exists. So it gives China a plan B in case it were to be cut off from Swift. And it actually gives China an offensive capability too, because one day China could say, to do business with Chinese firms, you need to use CIPS. And so that would give China the possibility to cut off entire countries or companies from its market.”

Finally, Demarais says, countries aiming to inoculate themselves from the effects of sanctions are developing digital central bank currencies. Again, China has taken the lead here, creating a financial realm that is completely disconnected from the US dollar and international currency markets, and thereby totally insulated from American influence.

“These are not crypto,” she says. “These are digital currencies that are stored on the mobile phones of more than 300 million Chinese people. Sanctions from western countries have zero bite on such digital currencies, which are completely managed by the central bank in China.”

The Cheap Lure of Sanctions

So if sanctions don’t work most of the time, backfire often, and are increasingly easy to evade, why does the US keep using them?

Demarais says it’s because they’re easy to implement, they cost very little, and they are comparatively risk free.

“Sanctions are a very popular tool because they fill in the gap between empty diplomatic declarations,” she says. If a country does something the US doesn’t like, the administration doesn’t have many options. On one end of the response spectrum, it could make a strongly worded statement, which might feel like too little. On the other end…

“On the other end of the diplomatic spectrum, you have military interventions, deadly, costly, and unpopular. Sanctions fill the void in between these two extreme options.”

Sanctions waste neither blood nor treasure — or, at least, usually not American blood or treasure, which is what’s important to American politicians. And they are simple to implement.

“You can spend one night drafting sanctions and then implement them very quickly afterwards,” says Demarais, noting she has personal experience with this, from her time working with the Treasury of France. “And they appear to be cheap because they are implemented in practice by the private sector. There’s no sanctions police. So it is a form of externalization of US foreign policy.”

The American government does nothing more than dream up and impose these sanctions by fiat. The actual work of sanctioning is done by civilian institutions like banks and organizations like Swift, which check financial transactions for compliance with sanctions.

Given the ease with which sanctions can be imposed, and the lack of cost associated with them, it’s not surprising that they’re used so enthusiastically and so often by US administrations. Demarais says she doesn’t expect that to change. But, she says, because countries have gotten wise to sanctions, and figured out how to pre-empt them, the West would be wise to look back at what has and hasn’t worked when it comes to sanctions, and devise a playbook accordingly.

When Sanctions Work

Sanctions don’t fail all the time, Demarais says, and on studying the universe of sanctions, she has observed a few rules of thumb.

First, speed is everything.

“Sanctions tend to work fast or never,” she says. “They provoke a shock within the targeted economy. So if you're a small economy, essentially you settle your dispute with the US very quickly, or you decide that sanctions are the new normal and you will adjust.”

Sometimes countries do succumb to sanctions: Turkey did in 2018, when it was persuaded by sanctions to release an American pastor named Andrew Brunson. But after several years, sanctions become baked into the economy. States increase domestic production, find ways to circumvent restrictions, and reduce their reliance on imports.

Second rule of thumb: sanctions with a limited objective are more likely to be successful.

“Targeted states need to have a very clear picture of what they need to do to get sanctions lifted,” Demarais says, noting that this is exactly what happened with Iran in the run up to the nuclear deal in 2015. “Iran knew exactly what it needed to accept: curbs on its nuclear ambitions. And in return for that, it would get the lifting of sanctions.”

Third, multilateral support is crucial for sanctions to be effective.

Napoleon’s blockade of the English was a failure, even though he controlled most of Europe. He did not, however, control the rest of the world, and Britain used its navy to develop new markets. America’s sanctions against North Korea have also failed to achieve their objective of regime change, because they do not involve China, with which North Korea does 90 percent of its trade, and Russia, which takes care of the rest.

Demarais says the US appears to have learned this lesson with regard to its sanctions of Russia over the war in Ukraine.

“There's been a very high level of collaboration between the US and the EU and other Western countries,” she says. “This has been very positive because it means that sanctions are much stronger. And that there are no disputes regarding the scope and the impact of US sanctions.”

Finally, Demarais says, successful sanctions tend to target countries with which the US has close economic ties.

“Sanctions must target economic partners because otherwise there will be no economic ties to cut, she says. She points again to Turkey, which is a trading partner of the US and also a member of NATO. The sanctions worked in that case because there was a great deal at stake: their trading relationship.

“If you target an economy that you have zero ties to, sanctions will have very little bite because if you have zero trade, zero economic relations, zero diplomatic, or military relations with the country, you can cut them off very easily. They won't feel anything, and won't have any incentive to restore these ties.”

Partners have much to lose, she says. Adversaries do not.

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Kremlin public telephone directory three American oil refineries company cash supply lines national security goals natural next step seven Russian businessmen global forecasting director senior policy advisor Economist Intelligence Unit international banking transactions Paddy HirschUS sanctions Foreign Assets Controls The US sanctions

Why sanctions don’t work — but could if done right

The Cheap, Seductive Lure Of Sanctions

From the Cudgel to the Laser

Backfire

The Artful Dodgers

The Cheap Lure of Sanctions

When Sanctions Work

On Our Podcasts

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