IN 2016 JACK LEWThe then US Treasury Secretary wondered how over decades his country had “refined our ability to apply sanctions effectively”. But he also warned that excessive use “could undermine our leadership position in the global economy and the effectiveness of our sanctions themselves”.
If the message read “proceed with caution” it would be lost to Donald Trump, who soon became president. The screw was turned against China, Iran, Russia, Venezuela and other. The steady rise in sanctions “has been a” rare constant “on Trump’s watch, says Adam Smith of Gibson Dunn, a law firm. During Mr. Trump’s four-year tenure, the Foreign Wealth Control Office (OFAC), which oversees US sanctions programs, targeted roughly twice as many companies and individuals per year as it did during the two-year presidencies of George W. Bush and Barack Obama (see chart).
Those who thought Joe Biden was going to pull out were quickly made clear. His administration is talking to the Islamic Republic about easing his predecessor’s “maximum pressure” sanctions in the hope of resuscitating a nuclear deal with Iran that was struck by Obama but abandoned by Trump. However, there were also numerous new sanctions in his first few months in office.
On April 15, America announced comprehensive measures against Russia for mixed voting, cyber attacks and more. A month earlier, American and Western allies had placed asset freezes and travel bans on several Chinese officials for their role in human rights abuses in Xinjiang. Since Mr. Biden took office, America has also sanctioned officials believed to have undermined Hong Kong’s autonomy. Announced Restrictions on China’s Access to American Supercomputing Technology; and targeted corporations affiliated with the junta behind Myanmar’s coup.
Such measures show how sanctions have become a central foreign policy instrument. Governments are increasingly seeing it as a way to try to change the behavior of other states in situations where diplomacy alone is insufficient, but military intervention is seen as too risky or persistent.
With the use of sanctions, their diversity has also increased. What was once a few trade embargoes has developed into a global web of coercive instruments, some of which cover countries or entire economic sectors, others individual companies or individuals. One of Mr Trump’s targets was Huawei, a Chinese 5G-Network provider and TikTok, a video app; Mr Biden’s sanctions affect a Russian troll farm and a Pakistan-based company that allegedly creates counterfeit goods I WOULDs used by trolls.
Mr Biden is likely to use American Magnitsky law (named after a lawyer who died in a Russian prison) to crack down on foreign officials accused of corruption or serious human rights violations. Western countries – including the UK as it appears to be forging a post –EU Sanctions policy – increasingly adopting “thematic, value-based guidelines” targeting such offenders, says Emil Dall of the Royal United Services Institute (RUSI), a think tank.
This sophistication is partly a matter of necessity. In the past, targets were mainly small-breed economic brood such as Cuba and North Korea; Now that includes much larger fish like China and Russia. As targets grow, so does the potential for collateral damage. A blanket embargo against China, for example, imprisoning Uyghurs, could lead to an unbearable economic setback.
However, big goals also feel more encouraged to strike back. China responded to the Xinjiang sanctions with countermeasures against European politicians, diplomats and a think tank. Due to its growing economic clout, retaliation can result in injuries. In the long run, this can also have a caustic effect on sanctions: the more the big targets respond by trying to reduce their reliance on American finances and technology, the weaker America’s global economic leverage will be – and the less the sanctions will be effective out.
The first proven use of sanctions was in 432BCwhen the Athenian Empire banned Megara traders from their marketplaces, thereby strangling the rival city-state’s economy. “It was not until the 20th century that modern concepts of international sanctions – a collective denial of economic access to enforce the global order – became known,” writes historian Benjamin Coates in an essay published last year.
The League of Nations introduced multilateral sanctions at the beginning of the 20th century. The U.N. later he did the same against obnoxious regimes from white supremacist Rhodesia to Saddam Hussein’s Iraq. America, for its part, tightened its unilateral sanctions after World War II. OFAC was founded in 1950, a decade after a forerunner was set up to freeze that US Danish and Norwegian government assets to prevent the Nazis from seizing them. During the Cold War, Congress gave the President new powers to impose sanctions. Cuba was a popular destination.
The use intensified in the 1990s, and America targeted Iran when it flirted with making atomic bombs. The most dramatic change in America’s approach, however, followed the terrorist attacks of September 11, 2001. The Patriot Act, passed soon after, targeted terrorist coffers. Thus began an era of more careful or “smarter” sanctions that sought to hinder terrorists, dictators, and others by restricting their access to American-owned or influenced financial installations (an example of the latter is the FAST Interbank network). That change “made the sanctions so much stronger than before,” says Coates.
Another turning point came around 2010 when America increased the use of “secondary sanctions” that not only target the perceived bad guys but also threaten anyone who does business with them with financial excommunication. Their power was most evident in Iran: European firms saw golden opportunities there after the 2015 nuclear deal, but withdrew in droves after Trump reinstated sanctions and added secondary ones in 2018.
American politics have seen two more changes in the past decade. The first, triggered by Russia’s annexation of Crimea in 2014, was the search for larger fish. America and other Western powers exposed sanctions against dozens of Russian agencies, corporations and members of the Putin Circle. In this way, they adopted an economy more than twice the size of any other previously subject to such extensive sanctions.
The second shift was Mr. Trump’s splattergun approach. His goals were so diverse and his manner diplomatic (he once threatened to wipe out Turkey’s economy) NATO Allies, during a spit on Syria) that Wonk’s sanctions were left behind, wondered if there was any method of madness. But its administration undeniably showed creativity. “Trump came across nuances to target big players like Russia and China, with sanctions that weren’t quite sanctions,” says a former OFAC officially. Its limitations on Chinese technology and telecommunications companies, for example, hampered their ability to design chips, source components, or operate effectively in many Western countries.
They have also significantly increased the burden on banks and corporations who have to comply with sanctions. Unlike traditional sanctions that freeze trade, “private actors turn private actors into enforcers,” says Coates. The cost of avoiding blacklisted individuals and organizations has risen inexorably, especially for banks. A global bank executive says that after she was caught and fined for violating American sanctions, she spent “a few billion” dollars hiring more compliance staff and installing better screening technology to Avoid repetitions.
A lot of effort to be sure, but to turn bad OFAC can cost even more. Up until about a decade ago, sanctions enforcement was a technocratic backlog. Fines can run into the billions today, with operating restrictions often being addressed to aggravate the pain. In 2014 BNP Paribas, a French bank, pleaded guilty to thousands of transactions with America blacklisted countries, fined $ 8.9 billion and had its dollar clearing operations in New York set for one year.
The costs would be easier to bear if the sanctions normally achieved their objectives. Measuring success is difficult; Even US government agencies involved in sanctions do not conduct their own assessments. But it is clear that many fail. The extreme pressure measures against Iran have neither ousted its theocratic regime nor halted its nuclear ambitions. The country has now enriched more uranium than it did when Mr Trump took office.
In addition, sanctions provoke countermeasures. It is most direct for the target country to impose counter-sanctions. An alternative is to use legal mechanisms to lift sanctions. “Lockdown laws” aim to protect domestic businesses by prohibiting them from complying with another country’s sanctions. The EUThe statute dates back to the 1990s and was strengthened after Mr Trump left the Iran deal. It has sparked legal disputes in the UK, Germany and the Netherlands and several cases are pending before the European Court of Justice (ECJ). In the UK, Metro Bank is being sued by a group of Iranian customers who argue that the bank’s closure of their accounts without warning – after Metro found it violated American sanctions – violated the lockdown law. The results will have a major impact on European companies that operate or wish to operate in Iran but are caught between competing sanctions regimes. China passed a lockdown law in January (based on the European one), but it has not yet specified the extraterritorial measures to which it applies.
The use of courts to challenge sanctions goes beyond blocking laws. Maya Lester, a London-based attorney, has worked on several cases about the impact of sanctions on commercial contracts and many more cases involving individuals and organizations – including Iranian banks – for the sake of blacklisting. Several have made it. There are legal challenges in America too. Last year, a court stopped Mr Trump’s attempt to blacklist TikTok. In March, a federal judge suspended a similar ban on smartphone manufacturer Xiaomi.
The greatest long-term threat to the effectiveness of sanctions is efforts by targets to circumvent them. A time-honored way to do this is by trading in sanction busters: black marketeers using Shell companies, fake trading records, and other dark arts. Turkey and Dubai – especially their trading houses and free trade zones – were weak links in enforcing Western sanctions against Iran.
More importantly, sanctioned countries and those who wish to trade with them are looking for ways to decouple economically from those who impose them, especially America. China has responded to American technology bans and expanded its plans to invest in domestic chips. It is also trying to reduce its dependence on the dollar and American banks, for example by making the yuan more attractive in international finance.
Digitization could help. China’s central bank is a world leader in developing a digital currency that will be tested in multiple cities. “It could fundamentally change the way Chinese companies do business by 2022 or 2023,” says the head of a global bank. If this is successful, it can be introduced in other parts of Asia and later further afield. China also wants to ease America’s hold on the cross-border payments infrastructure. It has its own version of FAST, named CIPSwhich simplifies cross-border payments in yuan.
Europe is also trying to strengthen the role of its single currency in global trade. The euro is now used to handle some international oil shipments, for example by commodity companies buying from Russia. (Oil trades are traditionally in US dollars.) Russia’s capital markets have been much less reliant on foreign investors since the Crimea-related sanctions were imposed seven years ago – one reason its markets have shaken America’s recent restrictions.
It would be easy to exaggerate this trend. The EUThe attempt to create an exchange mechanism that helps his companies to evade American sanctions has failed. China’s financial system is opaque and largely closed. The yuan only accounts for 2.4% of global payments while the dollar accounts for 38%. CIPS is tiny. Nevertheless, the direction of travel is clear.
For now, the world of sanctions compliance remains fixated on Washington politics. There are few signs of any significant easing of pressure from the Trump administration, except perhaps under severe conditions on Iran. Even so, Mr Biden will likely work harder than his predecessor to “combine sanctions with diplomacy,” he says RUSIMr. Dall.
However, the changes in China’s approach to sanctions could be more dramatic. It shows signs of assertiveness, including through faster retaliation. It has growing leverage as a huge market for overseas firms selling everything from consumer goods to commodities and as a financier of American national debt. It can also develop a taste for preventive sanctions. A report by the Center for a New American Security, a think tank, counted ten such cases between 2010 and 18, three times as many as between 1978 and 2000. In 2019, China announced sanctions against American arms manufacturers supplying Taiwan. More recently, Australian coal has been unofficially banned because of Canberra’s “offensive” anti-China rhetoric.
China will continue to try to use Western sanctions to its advantage. They have helped her advance her interests abroad, for example by filling the economic void left by American sanctions against Iran and Venezuela. China reportedly signed a 25-year $ 400 billion deal in March to invest in Iran’s energy sector and improve its transportation and manufacturing infrastructure.
This increased muscle tension underscores that the sanctions world is becoming less unipolar. China’s reach may be limited by its small role in international finance relative to trade. But its share is growing, and looking for ways to reduce dependence on the greenback is not alone. A China that no longer relies on America or other outsiders for financial installations or critical technology is likely to feel more encouraged to attack Taiwan, for example.
And this raises the specter of irreversible shift that Mr. Lew warned about: an instrument designed as one of the most powerful expressions of American power is instead fatally undermining its economic hegemony. The stake could hardly be higher. ■
A version of this article was published online on April 21, 2021.
This article appeared in the Finance & Economics section of the print edition under the heading “Handle with care”.