Are U.S. sanctions effective?

U.S. sanctions against Iran, Russia, Afghanistan, China and Venezuela have all made the news in recent months. That may seem like alot of countries that the U.S. is sanctioning, but they are just five of the roughly 23 countries that the U.S. is currently sanctioning around the world.

The Office of Foreign Assets Controls (OFAC) at the U.S. Treasury says sanctions use trade restrictions and the blocking of assets to accomplish foreign policy and national security goals. Sanctions have been around in some form or another since the days of ancient Greece. The French used them against the British during the Napoleonic wars, and they have been used by other countries many times since. But they have become particularly prevalent since the 1960s, when the U.S. first imposed sanctions on Cuba.

There are basically three phases of sanctions, from the crude tool of the embargo to the much more incisive weapon of the financial sanction, to the pinpoint focus of the individual sanction. The first phase, the trade embargo, has rarely, if ever, been met with success. President Eisenhower imposed a trade embargo on Cuba in 1960, in response to Fidel Castro’s decision to nationalize three American oil refineries. Retaliation for the seizure of the plants was not the objective: regime change in Havana was. More than sixty years later, the same regime remains in place.

The U.S. sanctions on North Korea, which initially began as an embargo, morphed into something more sophisticated after North Korea withdrew from an international treaty on nuclear proliferation in 2003. OFAC began looking for better ways to put pressure on the country, and identified a bank that was helping North Korea get around its trade restrictions. By targeting the bank, OFAC destroyed the sole conduit for all North Korea’s international banking transactions, a severe blow. And with that, the financial sanction was born.

The third phase of sanctions, the individual sanction, is a natural next step. Financial sanctions aim to shut down bank, country and company cash supply lines; individual sanctions are designed to isolate and alienate specific people in key sectors of a target country’s economy or political system.

Financial sanctions, then, whether aimed at corporations, countries or individuals, are a good deal more targeted than embargoes and blockades. But even they have had mixed results. Moreover, they often backfire or cause collateral damage, affecting innocent people in the targeted country.

The human cost of sanctions is often so high that it turns the people of the sanctioned country against the sanctioner. This happened in Iran in 2012, and in Venezuela, after U.S. sanctions in 2018 triggered a one million percent inflation hike. It has also happened in Russia more recently. Russian citizens angry in part at U.S. sanctions have been reportedly lining up to join the army.

The loss of hearts and minds in a target country is one thing, but sanctions can backfire in very specific ways that damage the U.S. The embargo on grain exports to the Soviet Union that the Carter administration put in place in 1980. The administration wanted to pressure the Soviet Union to get out of Afghanistan, and figured that because the U.S. supplied a third of Russia’s grain supply, this was a good pressure point.

But the Soviet Union simply switched to new suppliers, and U.S. farmers were left with a glut of grain. The market crashed. Land values plummeted. Farms went out of business. The embargo was lifted a year later, but the damage was done. American farmers’ share of the global markets in corn, soybeans and wheat all dropped.

Another reason sanctions have limited effects, is that they are often easily avoided. Since the beginning of the conflict in Ukraine, Russia has combated sanctions by sourcing new markets for its most important exports. India and China have bought its oil, and it has used other allies such as Turkey as conduits to export other goods.

The new school of sanctions dodgers uses inoculation. The first prong is currency protection. Russia vaccinated itself ahead of its invasion of Ukraine by keeping half of its reserves in non-western currencies, in rubles and rupees and renminbi, so that it could continue to trade. The second part is finding alternatives to Swift. China has taken the initiative in this area, having seen what happened to Iran when it was disconnected from Swift in 2012. It has begun developing an alternative, called the Cross-Border Interbank Payment System (CIPS). So it gives China a plan B in case it were to be cut off from Swift. And it actually gives China an offensive capability too, because one day China could say, to do business with Chinese firms, you need to use CIPS. And so that would give China the possibility to cut off entire countries or companies from its market.

Finally, countries aiming to inoculate themselves from the effects of sanctions are developing digital central bank currencies. Again, China has taken the lead here, creating a financial realm that is completely disconnected from the U.S. dollar and international currency markets, and thereby totally insulated from American influence.

After more than two years of the tightest embargoes in history, Moscow’s economy is doing far better than anticipated. By 2021, the U.S. had already imposed over 8,000 sanctions on individuals and companies globally, targeting regional sectors in a range of countries. Since then, this number has seen an astronomical increase.

In the days following the start of Russia’s conflict with Ukraine in late February 2022, Biden introduced a series of allies-coordinated sanction packages targeting Russia’s weapons industry, technology exports, foreign assets, banks, energy companies, and wealthy businessmen. Western states then went on to completely isolate Russia from the global financial market.

More than two years into the conflict, Biden’s introduction of new sanction packages every other month since February 2022 has not toppled the Russian regime or led it to agree to Western demands for a withdrawal from Ukraine. Russia’s increased allocation of national GDP to defense, which is predicted to reach an all-time high of 6%, stands as proof of this unpleasant truth.

There is no doubt that Russia’s economy is feeling the impact of sanctions. Its aviation and car manufacturing sectors were particularly affected with a decline of 80% due to inaccessible components. The collapse of Western direct investment, combined with capital flight and severe brain drain, foreshadows decades of economic struggle for Russia’s future generations.

Still, this is nowhere near the outcome hoped for by U.S. officials. Claims that the Russian economy is about to collapse seem to stem from a need to reassure voters who are suffering from collateral sanctions damage, be it rising energy prices or deteriorating living standards.

It is clear that Western planners greatly underestimated the worldwide willingness, including by Western partners like India, to reject sanctions and continue buying Russian energy. China has also played a key role as it has increased imports from Russia significantly and formed closer ties. One can also credit Russian economic planning for cushioning the blow of sanctions. At the very outset of the conflict, the government and the Central Bank promptly reacted with a combination of restrictions on the free flow of capital and a 20% increase in interest rates. In only two months after the conflict started, banks saw 90% of initially withdrawn funds returned to Russian accounts.

The Russian government has imposed new measures compelling Russian exporters in energy, metals, and agriculture to convert their foreign currency earnings into rubles and released new duties on non-oil exporters. Overall, anti-dollar strategies and currency swaps have pushed Russia closer to countries such as China, Iran, and Turkey, some of which share the aim of curbing American financial influence. This illustrates another danger in U.S. sanctions: Far from strengthening U.S. global power, they are in fact spurring other countries to reduce their economic dependence on the U.S.

The failure of sanctions against Russia echoes a long series of such failures, against Cuba, Iran, Iraq, North Korea, and elsewhere. What is more, sanction-setting betrays a pattern of stickiness: Once legislated by Congress, U.S. sanctions have historically tended to become permanent.

There is a significant boomerang effect of U.S. sanctions though. It is reducing the U.S. global marketplace, negatively impacting the U.S. economy as it reduces export revenues and opportunities. The U.S. sanctions against Russia has also created more geopolitical division and in effect created a growing anti-U.S. coalition of countries such as China, India, South Africa, Brazil, Russia, North Korea, Iran and the list can go on. These countries do not trust the U.S. any longer and are willing for form closer ties and work closer together. The world is essentially becoming increasingly divided into two blocs. This geopolitical shift is a direct result of U.S. sanctions and will weaken the U.S. globally over time. Overall, sanctions have not served the U.S. well and they are actually contributing to weakening the U.S. economy and weakening U.S. global power as the anti-U.S. alliance has grown much stronger and keeps growing stronger.

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