Last month, the Treasury Department weighed in on one of the most important but least prominent ongoing debates in American foreign policy: Are we addicted to sanctions? According to an October Treasury report, since 9/11, the United States government has been increasingly relying on sanctions as a tool of foreign policy, and the number of designated entities has increased almost tenfold. This overreliance on sanctions, the report warns, could lead to serious unintended consequences. But the report raises the question, which the White House needs to have an answer: What can be done instead?
The report correctly points out that sanctions have succeeded in seriously damaging the purchasing power of certain entities, most notably the regime in Iran, while having also failed to force the target government to change their policies almost everywhere, including in Iran.
In commenting about the report, former U.S. ambassador and sanctions coordinator during the Obama administration, Dan Fried, said that sanctions too often result from an impulse to “do something” in response to undesired actions by foreign actors. Put less diplomatically, too often, sanctions are a signal to a domestic audience about an administration’s toughness, not serious strategies in pursuit of a policy objective.
Another problem with sanctions is that many foreign actors, including allies and partners, are looking into avenues to circumvent them. Digital currencies, most famously Bitcoin but also other such currencies, are among the possibilities. The government of Iran, for example, has been aggressively mining Bitcoin, which requires energy-guzzling supercomputers. The effort has been so excessive that Iranians have been experiencing frequent electricity outages. If the rumors are true, a major energy source for this enterprise has been mazut, a dirty, low-quality fuel oil, which explains the sudden increase in air pollution.
The Europeans, for their investigations into circumventing American sanctions, have looked into special-purpose vehicles (SPVs), by which they could transfer money to sanctioned entities and governments excluded from the international Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, including the regime in Iran.
For decades, observers have been warning that the excessive use of sanctions will backfire, and eventually adversaries as well as allies and partners will find ways to circumvent them. The result wouldn’t just be that American sanctions would lose their potency, but that the dollar’s primacy in international finance would be upended. A primary reason that foreign actors abide by U.S. sanctions is that they block people and organizations from using American financial institutions and the dollar—the standard medium of international finance. For now, America’s rule of law system, enormous GDP, and transparent financial system—much more than most other liberal democracies—have maintained the attractiveness of its financial institutions and the primacy of dollar, but taking this primacy for granted is a good way of losing it. The report quotes the Trump-administration Treasury Secretary Steve Mnuchin: “I do seriously think we have a responsibility to use sanctions for important national security issues. But we need to think about the long-term impact on the global currency,” by which he means maintaining the dollar as the world’s primary reserve currency.
The critical point in the sanctions’ impact on the global currency came in 2012, when the United States enacted a law that sanctioned Iran’s Central Bank, the first time in history that a country’s central bank had been sanctioned by the United States. Yet, the global currency survived. In April, the Biden administration announced the first-ever sanctions on a country’s (Russia’s) sovereign debt—although they sanctioned only the primary market, not the secondary market, so Russian financial institutions are free to resell the debt. And while there are signs that foreign entities are looking into alternatives to go around U.S. sanctions, U.S. sanctions are still abided by globally.
The sanctions cliff is a lot like the debt cliff—it may one day come, and if/when it does, it will be terrible, but no one knows when that might be, and, so far, the alarms have proven to be false. The question is, is this a risk worth taking, and do the immediate benefits outweigh the potential costs?
The problem with sanctions against governments is that they are almost always targeted at autocracies, and autocracies are not accountable to their populations. (The sanctions on Germany in connection with Nord Stream 2 were the exceptions that proved the rule, and they were ultimately withdrawn.) So while they could (and sometimes do) seriously injure a regime’s economy and budget, starving the target government of resources with which to finance malign behavior, they don’t have the right coercive influence to make those regimes want to change their behavior because those who suffer from the consequences the most, the average citizens, have no say in the political process. The closest they came to a coercive influence was bringing Iran to the negotiating table in the 2010s, but though they slowed Iran’s nuclear weapons program, they didn’t stop it, as at least one former Obama administration official has admitted off the record.
Sanctions against individuals, on the other hand, are almost always related to the violation of human rights, corruption, or arms control. They occasionally curb the power of those individuals, but they have no serious effect on the regime they serve because no single individual is larger than the regime. (Ali Khamenei, Kim Jong-Un, Aleksandr Lukashenko, and Nicolas Maduro are all sanctioned, not that it’s having much effect.) Leaders atop autocratic regimes have no problem amassing wealth from within their countries, even if sanctions prevent them from spending it overseas. Elites at lower levels, who might be annoyed that they can’t go on vacation in Majorca are still better off rich (almost always corruptly) in their own countries than poor abroad. This is especially the case because no sanctions so far have confiscated wealth from anyone.
The Treasury report is not surprising—the institution fulfilling its mandate. In this case, the Treasury’s primary interest is not foreign policy but the U.S. dollar—although national security does rely on a powerful and stable U.S. dollar. But the problems the report raises are worth taking seriously, as is its recommendation that sanctions should be a part of a broader policy framework that transcends the Treasury Department to include other agencies. The foreign policy community has an acronym, DIME, for diplomacy, intelligence, military, and economics—the four pillars of power. In theory, they’re all supposed to work together. In practice, one can attain objectives if they do work together, which has not been the case too often.
Following the recommendations of the report, if the government is to rely less on sanctions, it will need to rely more on the other three pillars of power. Calls for investing more in diplomacy are constant and often convincing, but, as George Kennan said, “You have no idea how much it contributes to the general politeness and pleasantness of diplomacy when you have a little quiet armed force in the background.” The obvious candidates for increased spending are military power and clandestine operations.
Even if the sanctions cliff never comes, the Treasury report and others have raised difficult questions about the cost and effectiveness of our sanctions regimes. At the very least, they should be a tool chosen strategically, instead of a habit we can’t seem to kick.