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America’s Dangerous Love Affair With Sanctions

Dinging other countries economically can be a good way of dealing with adversaries in the short-term. Over the long haul? Not so much.
July 26, 2019
America’s Dangerous Love Affair With Sanctions
Kim Jong-un (Photo by Brendan Smialowski/AFP/Getty Images)

For the past 15 years, the United States has increasingly relied on sanctions and other economic tools to coerce adversaries like Iran, North Korea, Russia, and others. Sanctions can be very effective but overusing them risks diminishing their efficiency in the long run.

Currently, the U.S. dollar is the largest reserve currency in the world. It accounts for 60% percent of global currency reserves and 40 percent of international transactions. People around the world use our financial institutions for investment more frequently than other countries’. Stability, transparency, rule of law, and low tariffs have made the United States an attractive market for foreign products, though the current administration is damaging that reputation. Another factor, however, is freedom of investment.

Primary sanctions are sanctions imposed on a country. Secondary sanctions threaten private entities with punitive action if they engage in financial transactions with the target country. And the United States has been relying on secondary sanctions for punitive action more often. This started with a heavy economic pressure campaign on Iran before the Joint Comprehensive Plan of Action agreement. The argument, at the time, was that Iran posed a unique and immediate threat. Yet, just a few years later, Venezuela, North Korea, and Russia are also targets of secondary sanctions, as well as Iran.

Sanctions are a great way to impose pressure on a country. They are both deterrent—preventing bad behavior—and coercive—the best example is bringing Iran to the table of negotiations. Additionally, they weaken countries financially, which inhibits their ability to suppress their own people while decreasing the level of its military adventurism and support for terrorism. But they are not and should not be the only tool, as they have been recently.

A new report by the Center for a New American Security (CNAS) warns that the United States’ over-reliance on economic coercion risks a long-term diminishment of this power—an emphasis on long-term. Experts have been warning about this long-term risk, but it is important to mention that, so far, the United States has not faced much backlash from its use of sanctions. 

Eric Edelman is a former undersecretary of defense for policy and one of the most respected foreign policy thinkers. He tells me that, “we do run the risk that eventually other countries will develop workarounds” in regard to our sanctions, but he adds that, “although it hasn’t really happened yet, despite frequent commentary suggesting that it is imminent.” The report by the CNAS confirms this.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the dominant system of international and interbank financial transactions that relies on the United States dollar.  SWIFT has cut access to all banks in Iran and North Korea, while there are still some banks in other sanctioned countries with access to SWIFT, but the trend has created a demand for an alternative system.

Other countries became more alert after the Obama administration sanctioned Iran’s Central Bank in an unprecedented move—it was the first time a country’s central bank was being sanctioned—ever since, Iran’s Central Bank has been relinked with SWIFT, following the JCPOA, and unlinked again, after the Trump administration imposed further sanctions on Iran. So far, Iran remains a unique case, but it has concerned other countries that their central banks could be targeted as well.

China and Russia have already created alternative systems, and the European Union has also developed a channel to allow payments to Iran. Russia’s system performed an average 15 million transactions a day in 2018, a little less than half of SWIFT’s transaction, which is astonishing given that the system had existed for only four years at the time.

Indeed, the successes of these channels in going around the United States’ financial order have been limited, nevertheless, the demand for them is unprecedented and should be concerning. China’s Belt and Road Initiative will likely empower its alternative to SWIFT. But the limits and small size of these alternative channels still do not prevent their success in isolated objectives. Iran, Venezuela, and North Korea are quickly learning how to take advantage of them to circumvent U.S. sanctions. Add to these channels the growth of cryptocurrencies, such as Bitcoin, which help, to a degree, with circumventing sanctions, since crypto-transactions’ footprints are very difficult to follow.

This is a problem that the United States will have to deal with in the long run. First of all, losing this power will be bad for our foreign policy, disarming us from imposing economic pressure when needed. Second of all, the current international financial system and share of the dollar as the world’s reserve currency are also good for our economic interest.

The growing size of our budget deficit is both concerning and outrageous. Nevertheless, it exists, for which we have to borrow money. This money comes at a relatively cheap interest and cost because of the influence of our financial institutions and the power of the dollar. Let’s put it this way: In an economic crisis, governments can issue bonds. The dollar’s strength means American bonds will be sold, while Venezuela and Iran don’t even bother because their currencies are incomparably weak. Or, in case of a necessity of deficit spending, as in 2008, the United States can still borrow money. It is the strength of our financial institutions and currency that has made our stock markets the most successful in the world.

There are other economic negativities as well. Chinese investments in the United States have dropped by 90 percent over the past couple of years. Russian investments have also taken a hit. Now, when it comes to secondary sanctions, choosing between the Iranian or Venezuelan market and the American market is one thing. Choosing between the American and Chinese markets does not have as easy of an answer, and producers could go either way.

As with anything, abuse of this tool could diminish its strength.

Strategists are familiar with the acronym DIME: Diplomacy, Intelligence, Military, and Economic. These are the four tools to impose pressure on another power. More and more, the United States’ foreign policy apparatus is relying less on diplomacy, intelligence, and military and more on economic pressure—we are DIMming out.

Sanctions are not the only tool at our disposal. A good strategy needs to employ all four elements to remain sustainable over the long haul. A few weeks ago, the Iranian regime shot down an expensive American aircraft in international airspace. The United States responded by imposing sanctions. Russia has been occupying Georgia for years and annexed Crimea. We responded with sanctions. China imposes a host of threats. We have responded with tariffs. North Korea is building a nuclear arsenal. Again, the response has been sanctions. 

Sanctions are a very low-cost response to adversarial aggression, but they are low-cost only in the short-run. Presidents understand that when the backlash happens, they will not be there to be held accountable. The same cannot be said about covert intelligence operations, military action, or diplomatic failures.

Barack Obama, Donald Trump, and the next president, whoever is elected, will not be in office 20 years from now when we lose our economic power as a coercive tool, but the threats will be there, and the American people will be left with less power to confront them.

Shay Khatiri

Shay Khatiri studied Strategic Studies at the Johns Hopkins University School of Advanced International Studies. He’s an immigrant from Iran and writes the Substack newsletter The Russia-Iran File.