A New and Improved Sanction? Or the Same Old Story?

Gary Clyde Hufbauer’s article, “Sanctions Sometimes Succeed:  But No All-Purpose Cure,” is a nuanced and instructive assessment of the effectiveness of economic sanctions. Relying on Hufbauer et. al’s seminal compilation of sanctions data from the 20th and 21st centuries, Hufbauer argues that while states’ use of sanctions as a tool of coercive diplomacy has increased in recent memory, sanctions are still only likely to be successful (based on Hufbauer’s definition) approximately one-third of the time. His analysis should provide policymakers eager to use economic sanctions with an appropriate degree of skepticism.

While Hufbauer is correct that sanctions can be difficult to employ effectively, what his broad stroke analysis does not cover in sufficient detail—and what is particularly interesting to contemporary U.S. policymakers—is whether the sanctions developed and employed since 2005 are substantively different from, and more effective than, prior types of economic punishment. Since 2005, the U.S. Department of the Treasury has employed a series of innovative sanctions—primarily against Russia and Iran—that seek to use the United States’ position as a financial and technological hub to bring pressure to bear on target states. These sanctions do offer policymakers a greater ability to pressure countries such as Iran and Russia, but they also suffer from significant limitations, and policymakers should be cognizant of these limits before rushing to employ them.

A New Sanctions Toolkit for the 21st Century

While Hufbauer usefully divides the historical record of sanctions employment into a period from 1914-1969 and a period from 1970-2014, this differentiation does not fully capture what contemporary policymakers are most concerned about:  Whether new types of economic sanctions—employed against rogue actors since 2005—are more effective than previous methods of economic coercion.

In 2005, the United States began employing significantly more sophisticated types of economic sanctions. Using the importance of the dollar in the world 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 and to avoid problems that have historically prevented sanctions from achieving their goals.

In the case of Iran, for example, the United States used its position as the financial capital of the world—and one of its largest markets—to essentially force European and Asian companies to stop doing business with Iran. The United States Department of the Treasury 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. Unsurprisingly, many firms shuttered their business operations in Iran, thus increasing the economic pressure on the country. This ability to impose what many European and Asian countries argued were extraterritorial sanctions helped prevent Iran from easily finding alternative trade and financing partners, and thus from avoiding increased economic pain.

Likewise, in the case of Russia, the United States has imposed sophisticated new sanctions that target Russia’s ability to refinance its massive external debt, as well as prevent Russia from developing key energy resources over the medium to long term. These new sanctions move significantly beyond simple prohibitions on transactions with rogue actors and trade embargoes. Rather, policymakers at the Treasury Department actively tried to develop sanctions that would directly impact Russian President Vladimir Putin’s inner circle, notably by sanctioning those companies owned by Putin’s confidantes. These new sanctions also leverage a key advantage enjoyed by the United States:  Technological superiority. A significant component of these sanctions prevents U.S. energy companies from providing cutting-edge technologies (either through export or partnership) to Russian firms that would help those firms develop difficult-to-reach oil resources (such as shale, offshore, and Artic resources). Like the sanctions imposed on Iran, these new sanctions attempt to avoid many of the pitfalls associated with prior uses of coercive diplomacy. For example, they are more targeted at decision-making elites in Russia and they leverage key U.S. economic advantages.

These new forms of economic statecraft have proven powerful, at Hufbauer notes. For example, as a partial result of the sanctions, officials at the International Monetary Fund are predicting that the Russian economy will stagnate this year, and then enter into a recession in the medium term. Likewise, the Iranian economy is suffering from significant inflation, and the sanctions—particularly those imposed on the Iranian oil industry in 2012 and afterwards—have arguably helped bring the Iranians to the negotiating table with the P5+1 – that is, the five permanent members of the UN Security Council, plus Germany.

New Sanctions—Same Problems?

Given that these sanctions can cause their targets significant economic pain and arguably avoid some of the pitfalls of employing prior types of coercive diplomacy, do they represent a new and significantly more effective form of coercive diplomacy?  Put another way, should we consider Hufbauer’s findings historically interesting, but of limited practical consequence moving forward?  The short answer is no. These new sanctions, while powerful in some ways, also suffer from drawbacks that plague traditional forms of economic coercion, as well as additional limitations.

First, as Hufbauer notes, while these new forms of sanctions may have additional economic effects, those do not necessarily translate into political effects. For example, in the case of Russia, U.S. and EU sanctions have negatively impacted the Russian economy and dimmed the country’s growth outlook for the next few years, but Russia has been unwilling to accede to U.S. and EU demands to cease its support of Ukrainian separatists or relinquish control of Crimea. In the case of the recent sanctions on Iran, however, evidence suggests that a multifaceted strategy, including sanctions, was sufficient to bring Iran to the negotiating table to discuss its nuclear program. By inflicting significant economic pain on the Iranians, while at the same time slowing the development of their nuclear program through sabotage and offensive cyber operations, the United States was able to bring Iran to the negotiating table. However, it remains to be seen whether economic pain caused by these sanctions will help the P5+1 and Iran strike a deal. In this way, these new sanctions suffer from the same limits as older ones:  While they can cause economic pain, often this pain is not sufficient when the goals of the sender state are expansive.

Second, like comprehensive economic sanctions, the use of which was widely criticized in the 1990s for punishing innocent Iraqi civilians, these new and more targeted forms of economic statecraft also cause more widespread damage than the sender intends. For example, in the case of Russia, while the new sanctions are targeting specific Russian energy and finance companies, the damage to the Russian economy overall has extended far beyond these companies. According to experts at the World Bank, the uncertainty created by the sanctions as to whether more economic sanctions are coming, or what the Russian response, including expropriation of Western assets, will be, has significantly chilled the foreign direct investment climate in the country. Without FDI, and with sanctions targeting the medium and long term growth of the Russian economy, these sanctions are going to have a significantly greater impact than simply hurting a few large Russian corporations and Putin’s cronies.

Third, these sanctions can also have unintended consequences. For example, while the sanctions on Russia were aimed at punishing Putin and his inner circle, in fact they may have expedited a process of authoritarian centralization in the country. In an attempt to offset any pain felt by his close associates, Putin has requisitioned property of more liberal oligarchs and effectively consolidated the position of hardliners within the political and economic sectors. In effect, the sanctions have made it less likely that Putin will acquiesce to the demands of the United States and the European Union, as the sanctions have allowed Putin to strengthen his grip over important parts of the country.

These last two considerations illustrate a fundamental drawback to employing these sanctions:  Like with more traditional sanctions, the effects can be very difficult to predict. Even as policymakers rely on more and more targeted sanctions, it still is extremely difficult to a) fully understand and predict the effects of such sanctions, and b) utilize them for policy impact.

Conclusions

These new forms of sanctions can cause significant economic pain to target states. Yet in many ways the lessons Hufbauer derives from previous sanctions episodes also apply to them. While potentially effective in achieving a sender’s goals, policy makers should be well aware that these new tools are no panacea, and that they too can cause unintended consequences and the frustration of policy objectives.

Also from This Issue

Lead Essay

  • Sanctions Sometimes Succeed: But No All-Purpose Cure by Gary Clyde Hufbauer

    Gary Clyde Hufbauer reviews some of the factors that can lead to a successful sanctions policy - or that can prevent sanctions from succeeding. Sanctions seldom achieve major objectives without the threat of force, but they often achieve minor ones. They work better against friends and worse against autocracies. Sanctions strategy is important too - it’s better to impose a severe regime immediately, rather than slowly ramping up. Coalitions are not terribly helpful. Even despite their weaknesses, sanctions aren’t going to disappear anytime soon: They’re just too useful, as they fill a void between talk and armed conflict.

Response Essays

  • Some Nuanced Responses on Economic Sanctions by Daniel W. Drezner

    Daniel W. Drezner reviews the pros and cons of economic sanctions, with a focus on their hidden effects, including corruption. Although Drezner agrees that the simple alternative - “they work!” versus “they don’t work!” - is inadequate, he suggests that the present debate could benefit from still more nuance than is offered in Hufbauer’s lead essay. Drezner subdivides autocratic regimes into those that face a significant civilian constituency, and those that do not; he subdivides coalition-based sanctions into those that are under the aegis of an international organization, and those that are not; and he stresses the deadweight loss that comes with failing to reach a bargain in any case. He ends on a fairly damning note, observing that trade sanctions encourage black markets and organized crime. This suggests that perhaps the reputation of sanctions as a foreign policy tool has been too high in recent years.

  • Why Sanctions Busting Leads to Broken Sanctions Policies by Bryan Early

    Bryan Early discusses sanctions busters: Countries that profit from flouting international trade sanctions. His research shows that these countries commonly manage to frustrate American sanctions. States including Cuba and Iran have been the beneficiaries of sanctions busters. Sanctions busters make it significantly less likely that a sanctions policy will succeed and significantly more likely that it will be called off entirely.

The Conversation