[Salon] A Note of Caution: How Sanctions Can Undermine U.S. Interests



https://warontherocks.com/2023/05/a-note-of-caution-how-sanctions-can-undermine-u-s-interests/

May 23, 2023

A Note of Caution: How Sanctions Can Undermine U.S. Interests

Janet Yellen

In the dead of night on January 29, 2018, the Department of the Treasury published a list of senior political figures and oligarchs in Russia on a U.S. government website. With just 11 minutes to spare before a congressional deadline, American financial regulators had satisfied one of the requirements of Congress’ Countering America’s Adversaries Through Sanctions Act. It was a slapdash effort; names on the list appeared to have been copy-and-pasted from the Forbes billionaires report and from public directories of Russian government staff. But the list nonetheless informed a Treasury sanctions package released three months later targeting prominent Russians for their linkages to Moscow’s “malign” activities. 

While the Kremlin mocked the so-called Forbes list, firms had to take it seriously. When it became clear that the sanctions would affect major international companies owned by several of the Russians on the list, a cascade of unintended consequencesfollowed that paralyzed global supply chains, roiled commodity markets, and threatened entire industries in the United States and Europe. Under serious pressure from the business community and the European Union, Washington was forced to change course, at the expense of its own credibility but not necessarily to the fortunes of the sanctions targets.

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This misadventure offers a cautionary tale about how a flawed approach to the application of U.S. sanctions — in particular, the failure to do a full accounting of their potential collateral effects — can undermine U.S. policy goals and interests.

Washington Sneezes, the World Catches a Cold 

In her important new book, Backfire: How Sanctions Reshape the World Against U.S. Interests, Agathe Demarais offers a host of such examples, including the case of Oleg Deripaska, one of the oligarchs that Treasury sanctioned in 2018. Deripaska, a Kremlin insider and billionaire, was sanctioned along with his holding company, EN+. Deripaska is mostly known in the United States for his alleged entanglements with former President Donald Trump’s campaign in 2016 and the subsequent scrutiny of his actions by U.S. investigators. But it was his far-flung business interests and close ties to the Kremlin that brought him and his businesses into focus for the U.S. Department of the Treasury. 

As Demarais recounts, Russia-based Rusal, the largest maker of aluminum outside of China, fell under the umbrella of EN+, Deripaska’s holding company. Responsible for 10 percent of the world’s aluminum, Rusal’s operations spanned multiple countries, but the sanctions — which included secondary sanctions that penalized non-U.S. actors for engaging with the firm — forced companies worldwide to sever ties with Rusal. The London Metals Exchange declared it wouldn’t trade aluminum unless it could be guaranteed Rusal hadn’t produced it. Manufacturers scrambled to adjust, raising prices and grappling with supply disruptions. Rusal’s stock value plummeted, and banks ceased processing its payments. As the aluminum market reeled, prices surged by 30 percent, sparking panic buying and sending a ripple effect throughout the industry. 

Demarais describes how Rusal’s European operations teetered on the brink, with the largest alumina refinery on the continent facing shutdown and electricity suppliers refusing to serve the company’s Swedish smelter. Other metals companies, shipping giants like Maersk and MSC, and even European car manufacturers felt the tremors, with 800,000 German jobs suddenly at stake. The unexpected side effects, notably on global metals markets and the myriad businesses that produce goods made from aluminum, implicated the jobs of tens of thousands of people in Russia and around the world, threatening their livelihoods. The United States’ European partners were furious: Washington had not consulted them before imposing the Rusal sanctions, despite the firm’s importance to the European economy.

As aluminum prices soared to record highs, consumers faced steeper prices while Chinese metal producers filled the void, profiting handsomely. Eventually, the United States issued a license that temporarily waived the sanctions on Rusal, and after lengthy negotiations Deripaska relinquished some of his holdings, allowing sanctions against Rusal to be lifted while penalties on Deripaska remained. The sanctioned Russian bank VTB acquired part of Rusal’s parent company, ultimately directing profits into Russian state coffers, perhaps to fund — as Demarais points out — the very activities that prompted the United States to impose sanctions on Rusal in the first place. Despite the tumult, the unintended beneficiaries of this high-stakes geopolitical drama likely ended up being the Kremlin and Vladimir Putin himself.

Sanctions on Russia Since the Ukraine War 

As the world marked the anniversary of Russia’s invasion of Ukraine recently, another milestone came to pass: Washington’s massive sanctions package targeting Moscow had been in effect for a year. The economic front has not received as much attention as the battlefields, but in reality, the largely Western effort to address Russia’s illegal war in Ukraine has focused as much on banks and commodities as on the trenches. With sanctions becoming such a dominant feature of U.S. foreign policy, it is more pressing than ever to understand their effects.

That is what makes Backfire so important. In brisk and readable prose, Demarais — a former French Treasury official who served in Lebanon and Russia and current global forecasting director at the Economist Intelligence Unit — reviews the sharp upward trajectory of U.S. sanctions since September 2001. While sanctions began to emerge as a pressure tool toward the end of the Cold War, they really took off after the attacks on Sept. 11, with the mushrooming of measures designed to deny resources to al-Qaeda affiliates and other terrorist groups. U.S. sanctions have now exploded into a set of economic measures against more than 10,000 people and entities in more than 150 states. Washington maintains sanctions programs in more than 30 countries, with some affecting entire economies, such as in Iran, North Korea, and Syria. As sanctions have multiplied, so have concerns in Washington’s policymaking circles (and among scholars and other expert communities) that the United States is overusing them. But when confronted with a crisis, policymakers still reflexively reach for this tool, tending to see it as a relatively low-cost, low-risk way to signal U.S. engagement and deter undesirable conduct. 

Demarais persuasively outlines the pitfalls of this approach in her book. Backed by a string of recent and deeply researched examples — such as the Rusal story recounted here —she points out the ways Washington’s sanctions sometimes jeopardize its own priorities, including those that the sanctions were meant to address. Her book gives readers a crash course in modern U.S. sanctions policy. It also serves as a warning to the United States that sanctions, implemented without rigorous analysis of and preparation for their consequences, can come at a significant cost.  

Reforms in Washington, but Only to an Extent   

The Rusal affair occurred during Donald Trump’s presidency. He made “maximum pressure” a cornerstone of his foreign policy and slapped sanctions on adversaries with little apparent thought to their potential harms. Demarais’ book was published in November 2022, less than a year into Joe Biden’s presidency, and so it does not capture the most recent efforts by the U.S. government to reform sanctions policy. President Biden came into office with a view to undoing some of the sanctions-related damage caused by his predecessor. As a start, in his first months in office, he removed Yemen’s Houthi rebels from the Foreign Terrorist Organization list, a listing that aid groups warned would spark a famine. In December 2022, his administration championed an effort in the United Nations Security Council to prevent sanctions from hindering humanitarian aid and released an unprecedented series of Treasury licenses that did the same. 

When it came to ramping up sanctions on Russia in response to Putin’s all-out invasion of Ukraine in February 2022, the Biden administration was cognizant of the potential for global ripple effects. It had observed the fallout from the Rusal case described above and others like it, and coalesced around the idea — long espoused by sanctions experts like Demarais — that unilateral sanctions are less likely to be effective and more likely to prompt the ire of allies. Senior officials had started to echo a refrain, rarely voiced publicly before, that U.S. sanctions had the potential to have unintended economic, political, and humanitarian impacts. And so Washington avoided sanctioning commodities that sustain livelihoods in the global south such as food and fertilizer, and those that played a major role in the global economy, including that of Europe (and, to a lesser extent, the United States), notably oil and gas. Washington issued sanctions in lockstep with European and other allies following months of joint planning.

This is not to say that the sanctions did not have collateral ramifications, however. Russia, through its invasion and actions in Ukraine, bears primary responsibility for the war’s consequences. Yet sanctions were widely seen as having played a role in a cascade of global shocks — notably spikes in food and fuel prices— that followed the invasion. Putin also instrumentalized the sanctions to serve his propaganda campaigns by blaming them for global food shortages. As Western sanctions expanded, going far beyond what most planners imagined to be conceivable in February 2022 (such as banning some Russian banks from the SWIFT international payment system), U.S. policymakers scrambled to control the outcomes of their sweeping economic measures. It took time for the Biden administration to put mechanisms in place to mitigate the harms that had become apparent and to confront Russia’s unhelpful propaganda. Even carefully considered sanctions can prompt unintended consequences. 

It is too early to judge whether the economic means employed against Russia have been well matched to their desired ends. The United States had a strong rationale for sanctioning Russia as it did — namely, to clip Russia’s capacity to wage war and to make good on a threat made to deter the invasion in the first place. But while sanctions on Russia are biting, Putin shows no indication of slowing his war effort, and the Russian economy has proven strikingly resilient. Only a full accounting of sanctions’ effectiveness and costs can start to answer these questions, and that will likely have to wait at least until the war is over. Still, Washington shows no sign of pulling its finger from the sanctions trigger, and it remains — as a 2021 Treasury review of sanctions policy called it — “a tool of first resort.” 

More Sanctions, More Evasion

A central argument of Backfire is that Washington’s ability to inflict pain through sanctions — particularly if imposed unilaterally, which current sanctions on Russia are not — is drawing to a close because America’s adversaries have learned to insulate themselves against such measures. Demarais has compared the phenomenon to antibiotic resistance: the more Washington uses sanctions, the more immune its targets become to their harms. She details examples of sanctions evasion that are remarkable in their scope. They include laundering sanctioned assets through the U.S. art market; the extensive use of front companies; reorienting exports from the West to China and other countries; expanded trade ties between previously unconnected sanctioned countries such as Venezuela and Iran; direct currency trades settled in currencies other than the U.S. dollar; and the expanded use of digital currencies. Collectively, she says, such innovations have given countries alternative mechanisms for transactions that are effectively “sanctions-proof.” 

An associated effect, she warns (as others long have), will be the decline of the dollar as a reserve currency. She says that over time, this may diminish the United States’ place at the center of the global financial system. Other commentators dispute this point, noting that the dollar is still preeminent. But even if other countries have not come close to matching Washington’s financial dominance (China’s attempts to build a competing system to SWIFT or to promote the renminbi as an international currency have fallen short), the trend toward circumventing America’s coercive measures is on the upswing.  

Despite these warnings, however, Demarais is not making a case against sanctions in her book. She recognizes their “many selling points,” noting cases where they have prompted behavior change and demonstrated Washington’s resolve. She acknowledges that sanctions have the benefit of not inflicting the same immediate human or political costs as military intervention. Rather, the overarching case she is making is that if the United States wants its sanctions to be effective, it has to better understand their undesired effects and how those impact America’s allies and enemies alike. 

A New Era

The outlook for global sanctions policy is different today than when Demarais was writing her book. The Biden administration has shown more willingness than its predecessor to consider sanctions’ associated harms. As Demarais has writtenrecently, Washington’s partners are more enthusiastic about joint sanctions campaigns than they were a few years ago. Europeans, who were once fed up with Washington’s sanctions approach, are now protagonists in the economic war against Russia in the context of the Ukraine invasion. 

But Demarais’ compelling book is still relevant and will continue to be. As the United States and its allies ramp up their sanctions use, it is clear that sanctions are powerful measures that can bear consequences. They may be an appropriate tool in a range of circumstances, as they were in response to Russia’s flagrant violation of international norms in its invasion of Ukraine, but policymakers should use them carefully, keeping a close eye on their adverse effects and remaining nimble in addressing them. The Biden administration has supported some important reforms to this end, but considering the number of sanctions imposed in his presidency so far— including on Russia — sanctions are more ingrained than ever as a tool of U.S. statecraft. Against this backdrop, attention to their downsides has never been more important. The United States would be wise to heed the warnings in Demarais’ book so that its sanctions policies do not backfire. 

Delaney Simon is a senior analyst with the U.S. program at the International Crisis Group. Before joining Crisis Group, Delaney worked for the United Nations in Afghanistan, Lebanon, and Yemen. 


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