We think of sanctions as an alternative to war. They are also a projection of power. States, corporations, and recently, individual citizens, are punished economically. The aim is to stop or curtail actions which are inimical to the interests or values of the sanctioning State or contrary to international law, or to both. In the long term the economic impact of sanctions may erode a belligerent State’s will or ability to wage war. So far so theoretical.
But after reading Agathe Demarais’ recent Backfire: How Sanctions Reshape the World Against US Interests, Columbia University Press, 2022, you might be surprised how little practice fits theory. Demarais recounts how sanctions have evolved since the 1950s including the variety of things that can go wrong and backfire on those who have imposed them.
President Eisenhower, with the creation in 1950 of the US Treasury’s Office of Foreign Assets Control (OFAC), instituted the use of trade sanctions as a way of achieving foreign policy goals. The first target was North Korea, a legacy of the Korean war. North Korea’s economic links with the USA were tenuous. The approach had to be multilateral: a UN embargo on oil imports and coal exports.
After the revolution in 1959, Cuba was always a particularly American concern. 73% of Cuba’s exports went to the USA and 70% of its imports came from the USA. Yet Eisenhower’s embargo imposed in 1960 failed to achieve its goals. Despite an estimated loss over $130 billion in income, Castro died with his regime intact and was succeeded by his brother Raul. The Kim dynasty in North Korea survives. There are always ways of getting round trade embargoes.
Fast forward thirty years to Saddam Hussein’s invasion of Kuwait, the lessons of Cuba and North Korea hadn’t been learned or were just ignored. Only a few days after Operation Desert Shield destroyed Saddam Hussein’s retreating army, comprehensive international sanctions were imposed on Iraq. They lasted from 1990 to1995 cutting off medical supplies and food imports. Estimates of Iraqi children dying of preventable diseases and malnutrition vary from tens to hundreds of thousands. An ‘oil for goods’ provision in 1995 permitted some humanitarian aid to enter the country. But Saddam Hussein was hanged in December 2006 as consequence of military defeat.
Inflation is the most immediate result of even partial enforced economic isolation. It powerfully affects the poorest. According to Demarais writing in Backfire, American OFAC sanctions on Venezuela in 2018 caused the price of a roll of toilet paper to jump “to nearly 3 million bolivars, requiring a three-kilogram stack of 1,000 bank notes to pay for it”. Mass emigration followed. The regime survived.
American companies shared a lot of the resultant pain from US sanctions while non-American companies were able to profit by filling the gaps created. Congress dealt with growing complaints from US business by legislation subjecting foreign companies to the same penalties for trading with Cuba. In a second 1996 Act, sanctions on Iran’s - and Libya’s - energy sectors were extended to include and enforce compliance by all international companies. This was the beginning of highly contentious ‘extraterritorial’ ‘secondary’ sanctions. The European Union, coerced by the Americans, had enough clout to stand up to them. It warned that they would initiate a dispute procedure in the WTO (World Trade Organisation) which most believed the EU would win. Clinton backed down.
By the turn of the century, OFAC, without abandoning the blunt weapon of embargoes, was moving on to sectoral sanctions, focusing on technology and finance, applied now to Iran. The US was playing to its strengths, in particular the dominant role of the dollar in global financial services. Companies and individuals in pariah countries were put on a Specially Designated Nationals (SDN) list barring them from doing business - in dollars - with the USA. Information on banks’ customers and networks became critical. In 2012, under strong US pressure, SWIFT (Society for Worldwide Interbank Financial Telecommunications), the over 11,000 strong cooperative network for international payments with its – today's - $5 trillion worth of transactions daily, 40% conducted in dollars, cut off Iranian banks.
But come the Russian invasion of eastern Ukraine in 2014 and China’s increasingly autocratic behaviour both nationally and internationally, the USA - and European Union – squared up to two significantly more formidable targets. A second phase in the sanctions saga opened up. The Peoples’ Bank of China immediately began developing its own financial service, CIPS (Cross-Border Interbank Payment System), for international payments in renminbi. After its launch in 2015, CIPS attracted not only HSBC and Standard Chartered but also Deutsche Bank, Citi and BNP Paribas, the French investment banking group. In January 2023 Russia and Iran joined up to create their own payments network after SWIFT excluded some important Russian banks. The sanctioned targets were hitting back.
Agathe Demarais indicates in Backfire that the growth of cryptocurrencies is providing sanctions-proof banking. China issued its own state-backed cryptocurrency in 2019, the digital renminbi. Today some 300 million Chinese citizens use mobile phones for such accounts, thus creating another doorway to comprehensive government surveillance. The Communist Party leadership now appear to be aiming at total control of the country’s financial system by displacing its two big tech firms, Alibaba and WePay, in the field of digital payments.
So the not-so hidden logic of sanctions is the ‘decoupling’ of the world’s major economies, the fracturing of the global economy into competing economic blocs. China’s Belt and Road Initiative, its extensive investment in trade and infrastructure in Africa, its role in the global South’s association of big economies, BRICS, leaves little doubt which bloc will eventually incorporate the most States. One brake on such ‘decoupling’ is the crucial role of semiconductors and microchips in all economies and in military-industrial complexes. Put crudely ‘it’s the supply-chain stupid’.
A key feature of decoupling is a policy of beggar - your- economic- neighbour (and rival) in microchip production. China controls 80% of the production/refining of the world’s vital rare earths used in semi-conductors present in a vast array of modern appliances. A F-35 fighter requires 417 kilos of these metals. But the USA predominates in the equipment, software and design of semi-conductors. A handful of such high-tech firms are collectively worth over $1 trillion. The bulk of mass microchip manufacture takes place in Taiwan and South Korea. In 2020 Chinese legislation restricted the export of 17 rare earths and Trump banned all microchip sales to Huawei and other Chinese companies. Skirmishes in a future economic war?
Geopolitics are changing. A multipolar world is emerging. Sanctions have helped shape the present contours of international economic relations. Yet on the whole sanctions don’t achieve their goals, often harming those they are not aimed at and bringing about unintended consequences. States with a powerful coercive apparatus and a cohesive military show considerable durability. Even weak States like Cuba and Venezuela resist successfully. The most that can be said is that war, the alternative to sanctions, is far worse.
Backfire is a fascinating must-read for those who contribute to making foreign policy, for those who suffer from it, and for us baffled onlookers who fear for our grandchildren’s future.
See TheArticle 18/04/2023