America’s love of sanctions will be its downfall, stresses ‘Foreign Policy’. In the past two decades sanctions have become the go-to foreign-policy tool of Western governments, led by the United States. But objective processes and guardrails must be built to ensure that sanctions are considered rationally and that they don’t undermine national interests.
According to a database maintained by Columbia University, a total of six countries — Cuba, Iran, North Korea, Russia, Syria, and Venezuela — were under comprehensive U.S. sanctions, meaning that most commercial and financial transactions with entities and individuals in those countries are prohibited under U.S. law.
An additional 17 countries — including Afghanistan, Belarus, Democratic Republic of the Congo, Ethiopia, Iraq, Lebanon, Libya, Mali, Nicaragua, Sudan, and Yemen — are subject to targeted sanctions, which indicates that financial and commercial relations with specific companies, individuals, and, often, the government are forbidden under U.S. law.
By 2021, according to U.S. Treasury Department’s report, the United States had sanctions on more than 9,000 individuals, companies, and sectors of targeted country economies. In 2021, U.S. President Joe Biden’s first year in office, his administration added 765 new sanctions designations globally, including 173 related to human rights. All told, the countries subject to some form of U.S. sanctions collectively account for a little more than one-fifth of global GDP. China represents 80 percent of that group.
Now, a growing coalition of autocratic governments is seeking to rewrite the rules of the global financial system — largely in response to the ubiquity of U.S. sanctions. It’s time to reconsider how these punitive measures are eroding the very Western order they were meant to preserve.
Unlike many among these sanctioned nations, China has the economic weight, growing diplomatic clout, currency stability, and liquidity — at least for now — to push for the increasing international adoption of the renminbi and Chinese financial schemes, such as its Cross-Border Interbank Payment System.
But Chinese-led parallel financial arrangements bring significant systemic risks for the United States and its allies.
One is the rising number of non-sanctioned countries in the global south that are joining a parallel anti-sanctions world economy. Returning from his April trip to Beijing, Brazilian President Luiz Inácio Lula da Silva repeated his support for a trading currency among the BRICS countries (Brazil, Russia, India, China, and South Africa). In raising the initiative, Lula cited his concerns about a dollar-dominated global economy, where the United States leverages the dollar’s dominance for its punitive foreign policy.
Within the BRICS club — which at least a half-dozen other emerging economies are queueing to join — only two countries are under some form of sanctions: China and Russia. The other three, in particular India, are countries the United States has growing partnerships with and are thus unlikely to come under U.S. sanctions anytime soon. In other words: Even U.S. partners are hedging their bets against Washington’s extraterritorial sanctions policies.
Lula’s promise represents a genuine, growing desire among many members of the global south to break free of the dollar’s dominance and the U.S. financial system, even if some of those reasons stem from misplaced solidarity. It’s time for Washington to recognize that its love of sanctions may be undermining its own economic and diplomatic power worldwide.
Beyond the still incipient — but likely to endure — efforts to displace the dollar, there is a more immediate threat to Western influence: secondary sanctions on the purchase of distressed debt.
When countries default on their loans — or appear to be close to default — large institutional lenders will seek to offload that debt on secondary debt markets to other investors for a fraction of the price. When those countries are under U.S. sanctions, Western investors are reluctant to buy their distressed bonds—and shadier, often U.S.-antagonistic actors tend to step in.
According to one source at Mangart Capital — a hedge fund in Switzerland — 75 percent of Venezuela’s original debt from 2017 was held by U.S. interests; today, that amount is estimated to have declined to around 35 percent to 40 percent. A large share has moved to mysterious investors in unknown jurisdictions. This trend becomes a geopolitical threat when a firm or government opposed to U.S. and Western interests could gain control over energy supplies and infrastructure, as could be the case in Venezuela.
U.S. policymakers are unlikely to seriously reconsider their love affair with sanctions anytime soon. Their application is easy, cheap, and less dangerous than the threat of military action.
Sanctions have become the all-purpose tool of statecraft, meant to convey opposition to everything from military invasions to human rights abuses to nuclear proliferation to corruption, irrespective of whether they help or undermine long-term U.S. interests.
These should include a nonpartisan process to review and compare the effectiveness of sanctions to their stated goals.
As we have seen in Cuba, Iran, North Korea, and Venezuela, sanctions do not produce the quick intended result of regime change (sic!) but, over time, instead reinforce alliances among targeted regimes.