Picture this: a global summit of all the governments and public and private officials who have been sanctioned by the United States. The family photo would feature a diverse group of leaders from across Africa, Asia, Latin America, and the Middle East—and look not unlike the G-7 or any other semiregular gathering on the global calendar. At the center would be China, proudly presenting itself as a moral and diplomatic—not to mention commercial and financial—ally to the club of governments that have been named and shamed by the United States.
In the past two decades sanctions have become the go-to foreign-policy tool of Western governments, led by the United States. Recent economic and personal sanctions packages applied to Russia for its invasion of Ukraine as well as to Chinese companies for national security reasons mean the two powers have joined a growing club of U.S.-designated bad boys such as Myanmar, Cuba, Iran, North Korea, Syria, and Venezuela.
According to a database maintained by Columbia University, a total of six countries—Cuba, Iran, North Korea, Russia, Syria, and Venezuela—were under comprehensive U.S. sanctions, meaning that most commercial and financial transactions with entities and individuals in those countries are prohibited under U.S. law. An additional 17 countries—including Afghanistan, Belarus, Democratic Republic of the Congo, Ethiopia, Iraq, Lebanon, Libya, Mali, Nicaragua, Sudan, and Yemen—are subject to targeted sanctions, which indicates that financial and commercial relations with specific companies, individuals, and, often, the government are forbidden under U.S. law.
According to a Princeton University database, another seven countries, including China, Eritrea, Haiti, and Sri Lanka, were under specific export controls. This already lengthy list does not even include targeted sanctions placed on individuals and businesses in countries such as El Salvador, Guatemala, or Paraguay, or sanctions placed on territories such as Hong Kong, the Balkans, or Ukraine’s Crimea, Donetsk, or Luhansk regions.
By 2021, according to U.S. Treasury Department’s report, the United States had sanctions on more than 9,000 individuals, companies, and sectors of targeted country economies. In 2021, U.S. President Joe Biden’s first year in office, his administration added 765 new sanctions designations globally, including 173 related to human rights. All told, the countries subject to some form of U.S. sanctions collectively account for a little more than one-fifth of global GDP. China represents 80 percent of that group.
Now, a growing coalition of autocratic governments is seeking to rewrite the rules of the global financial system—largely in response to the ubiquity of U.S. sanctions. It’s time to reconsider how these punitive measures are eroding the very Western order they were meant to preserve.
Beijing’s disproportionate weight in the list of U.S.-sanctioned countries is a problem. That’s because the Chinese Communist Party has fashioned itself an economic, diplomatic, and moral ally of the global south.
Regular Foreign Policy contributor Daniel W. Drezner and columnist Agathe Demarais—a political scientist and economist, respectively—have both recently published detailed arguments about how U.S.-sanctioned governments have exploited loopholes in the U.S. sanctions regime to undermine these measures’ intended pain and have built often-illicit means to replace their reliance on the dollar and Western financial system.
Unlike many among these sanctioned nations, China has the economic weight, growing diplomatic clout, currency stability, and liquidity—at least for now—to push for the increasing international adoption of the renminbi and Chinese financial schemes, such as its Cross-Border Interbank Payment System.
China also provides a sizable and lucrative market for commerce for sanctioned countries’ exports—such as Venezuelan, Russian, or Iranian oil and gas. Though many of the re-routed commercial markets are expensive and inefficient, they provide enough rent to sustain targeted governments.
One is the rising number of non-sanctioned countries in the global south that are joining a parallel anti-sanctions world economy. Returning from his April trip to Beijing, Brazilian President Luiz Inácio Lula da Silva repeated his support for a trading currency among the BRICS countries (Brazil, Russia, India, China, and South Africa). In raising the initiative, Lula cited his concerns about a dollar-dominated global economy, where the United States leverages the dollar’s dominance for its punitive foreign policy.
Within the BRICS club—which at least a half-dozen other emerging economies are queueing to join—only two countries are under some form of sanctions: China and Russia. The other three, in particular India, are countries the United States has growing partnerships with and are thus unlikely to come under U.S. sanctions anytime soon. In other words: Even U.S. partners are hedging their bets against Washington’s extraterritorial sanctions policies.
Lula’s promise represents a genuine, growing desire among many members of the global south to break free of the dollar’s dominance and the U.S. financial system, even if some of those reasons stem from misplaced solidarity. It’s time for Washington to recognize that its love of sanctions may be undermining its own economic and diplomatic power worldwide.
Beyond the still incipient—but likely to endure—efforts to displace the dollar, there is a more immediate threat to Western influence: secondary sanctions on the purchase of distressed debt.
When countries default on their loans—or appear to be close to default—large institutional lenders will seek to offload that debt on secondary debt markets to other investors for a fraction of the price. When those countries are under U.S. sanctions, Western investors are reluctant to buy their distressed bonds—and shadier, often U.S.-antagonistic actors tend to step in.
Venezuela is a case in point. In 2017, Caracas defaulted on $60 billion in foreign debt after missing $200 million in payments to creditors. Since then, as interest has compounded, Venezuela’s debt has grown. Years of fiscal profligacy that broke the independence of the oil-rich country’s central bank and PDVSA, its flagship energy company, bankrupted the government, starving the energy company of investment and leading to an economic free fall. From 2014 to 2021, Venezuela’s economy contracted by three-quarters; inflation soared at one point to an estimated annualized rate of more than 1 million percent.
Three months before the default, the Donald Trump administration imposed a new round of sanctions on Venezuela that prevented President Nicolás Maduro’s cash-strapped regime from returning to U.S. capital markets to raise new money to roll over its debt. Although it was part of the White House’s rudderless “maximum pressure” strategy to remove Maduro from power, the move had a particular logic: Allowing U.S. investors to enable Venezuela to roll over poorly performing debt was a bad bet.
What has happened since should give pause to sanctions advocates and U.S. policymakers alike. As Venezuela’s default and the economic crisis dragged on, many of the original U.S. institutional holders of Venezuelan bonds—including pension funds and trusts—moved to offload the risky debt at low, distorted prices. But under the threat of U.S. sanctions and fines—for both U.S. and non-U.S. investors, because U.S. secondary sanctions are extraterritorial—Western-based institutional and individual investors were either prohibited from or did not dare take the chance of purchasing Venezuela’s debt.
As a result, a growing share of that defaulted debt has migrated to shadowy holders via the United Arab Emirates, Turkey, and others. It is difficult to identify who the buyers are, but several market analysts and investors suspect these new creditors are fronts for buyers from China, Iran, Russia, and other U.S. adversaries. According to one source at Mangart Capital—a hedge fund in Switzerland—75 percent of Venezuela’s original debt from 2017 was held by U.S. interests; today, that amount is estimated to have declined to around 35 percent to 40 percent. A large share has moved to mysterious investors in unknown jurisdictions.
This trend will give fundamentally non-market-based economies a growing seat at the table when it comes time to renegotiate the conditions of Venezuela’s debt exit and return the government and PDVSA to financial markets. The country’s new bondholders could prevent a democratic, pro-Western government from coming to power and lock Caracas out of global capital exchanges. In other words: U.S. sanctions are handing bad actors a stake in Venezuela’s future—though for now, talks appear to be a long way off.
But there’s more: Many of Caracas’s bonds were securitized with assets in the country’s rich oil and gas reserves. In buying those funds, new investors hold a stake not just in Venezuela’s bankruptcy and recovery but also in its energy assets—and, as a result, global energy security. There are recent examples of investors seizing or attaching assets of the debtor nation to pursue or extort a payment of defaulted debt, such as after Argentina’s 2001 default, when U.S. hedge fund Elliott Capital seized an Argentine Navy ship in Ghana with more than 250 crew members on board. It’s bad enough when an aggressive U.S.-based holdout is willing to trash relations with a neighbor in the name of profit; it becomes a geopolitical threat when a firm or government opposed to U.S. and Western interests could gain control over energy supplies and infrastructure, as could be the case in Venezuela.
The Maduro government has also taken advantage of the large outflow of bonds at bargain prices to engineer debt-for-asset swaps. Under this scheme, bonds sold by regulated U.S. institutional investors are purchased by unregulated entities of unknown provenance outside of the United States and then swapped at inflated prices with Caracas or PDVSA for assets. The switch does not cancel the debt but simply promises payment to holders via goods, services, or the closing of pending claims. Backed by assets, those bonds can be sold again on the market for cash, allowing them to be purchased by non-U.S.-regulated entities with the promise of lucrative assets in Venezuela’s energy industry—giving them control over critical global energy supplies.
Unfortunately, U.S. policymakers are unlikely to seriously reconsider their love affair with sanctions anytime soon. Their application is easy, cheap, and less dangerous than the threat of military action. Sanctions have become the all-purpose tool of statecraft, meant to convey opposition to everything from military invasions to human rights abuses to nuclear proliferation to corruption, irrespective of whether they help or undermine long-term U.S. interests. They are a means of virtue signaling that allow politicians to show that they are doing something when faced with a given issue.
But objective processes and guardrails must be built to ensure that sanctions are considered rationally and that they don’t undermine national and international interests. These should include a nonpartisan process to review and compare the effectiveness of sanctions to their stated goals.
U.S. policymakers need to be clear and honest about what these intended goals are. Any honest review process must also be willing to examine whether and how sanctions may have strengthened the political and economic weight of the governments and their economic allies in sanctioned countries and illicit actors in both the short and long term. As we have seen in Cuba, Iran, North Korea, and Venezuela, sanctions do not produce the quick intended result of regime change but, over time, instead reinforce alliances among targeted regimes.
Much of this will require a sober willingness by policymakers in both parties to consider a basic fact: Sometimes sanctions don’t work. And in many cases, they are actively undermining U.S. interests.