Episode 49: Sanctions

From full trade embargoes to targeted sanctions and frozen assets, sanctions are an increasingly commonplace tool used in U.S. foreign policy.  Today, a primer on the purpose and design of economic sanctions, from one of the people who helped develop Obama-era sanctions against Russia: Sean Kane, Counsel at Hughes Hubbard and Reed's International Trade Practice. 

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TRANSCRIPT

[Virginia Prescott] What are sanctions to begin with?

[Sean Kane] So, broadly defined, sanctions are first a tool of foreign policy, so, critical to keep that aspect in mind, and that distinguishes them from export controls or other sort of trade barriers that might be put in place. But they are tools that are intended to incentivize a change in behavior via the imposition of really any sort of limitation or restriction on a foreign country entity or person and their ability to transact or interact principally with the United States.

[VP] So what are some examples of sanctions, you know, the levels of sanctions from the least to the most serious?

[SK] When people say sanctions, people typically conceive of economic and trade sanctions. So for instance, the U.S. embargo against Cuba or the U.S. sanctions against Iran.

There are other things that sort of fall under that broad umbrella however, arms embargoes for instance which are typically instituted at the United Nations level are a form of sanction.

And then you can maybe go along the spectrum in terms of targeted sanctions that the U.S. could impose against specific individuals or entities. So in other words, the Department of Treasury, where I formerly worked, maintains a list of people that United States persons and businesses are prohibited from transacting with.

And then the farthest end of the spectrum I suppose would be the sort of comprehensive trade embargo and that would essentially prohibit U.S. businesses or persons from engaging in any sorts of trade or transactions with most typically with a country.

[VP] So an embargo is basically a boycott?

[SK] That would be another word for it sure.

[VP] What role do sanctions play in U.S. foreign policy?

[SK] An increasingly prominent role I would say. In the last 10 to 15 years, the United States government has come up with very clever ways to impose sanctions and to impose them in a more targeted fashion. When you're talking about, you know, embargoes like we maintained against Cuba for upwards of 50 years, that's not the most typical way to implement sanctions any longer. The United States has become a little bit more adept at what they call smart sanctions. You know using that tool a bit more as a scalpel rather than as sort of hammer.

[VP] What would be an example of that?

[SK] So one example of that would be the targeted sanctions that I just mentioned. So rather than, let's say, imposing a full scale trade embargo on Iran--although such a thing exists--you could prohibit U.S. persons from transacting with specific individuals in Iran.

[VP] So they are punitive, right? The idea is to make a country suffer.

[SK] So no. And I think anyone who has worked in--certainly in this field--in the government would blanch at that description, although I understand why that's where people might go. But sanctions are intended to change behavior. They are not punitive. And that distinction is important because when behavior changes, the idea behind sanctions is to be able to use them as a negotiating tool, to provide leverage. So when the behavior you are trying to change, does in fact change--as we hope it does--you have to have the flexibility to remove or at least relax sanctions. If it were a strictly punitive measure, you know, we would just sentence you to 10 years of not trading with the United States and the book is closed.

[VP] But has that really worked? I mean as you mentioned the embargo against Cuba has been in effect for more than 50 years.

[SK] So the question of do sanctions work is…it's a loaded question to be quite honest. And maybe I would submit it's the wrong question. I think maybe the better question to ask is: Do sanctions exert meaningful pressure on the targets? And I think the answer to that question is clearly yes. And that's in part because the United States especially, is in a privileged position. Most transactions come through U.S. dollars at some point so we have a lot of leverage.

Do sanctions always work in terms of achieving our foreign policy goals? Sanctions are part of a broader strategic policy. So you can't look at them in isolation. And whether they are decisive in any one instance depends on a lot of factors including what specific sanctions are imposed, whether they're multilateral. Optimally we would have, you know, United Nations sanctions which would compel all countries to play ball. And what other diplomatic pressure is brought to bear. So all of those things sort of factor into whether you know sanctions ultimately tipped the scale.

[VP] So what are some cases of successes of sanctions?

[SK] We can certainly, you know, look to the Iran deal which I know is very controversial in many parts. But the sanctions--

[VP]—but the sanctions helped get them to the negotiating table, is that the point?

[SK] That's exactly right. So the sanctions that we imposed on Iran were ratcheted up in conjunction with our European allies and partners in the United Nations. And over time that is what brought Iran to the negotiating table. That was not the only thing that brought Iran to the negotiating table and of course we had to have something to deliver when they got to the negotiating table. And so some meaningful sanctions relief was provided as part of that Iran nuclear deal.

There are other programs that have achieved some notable successes. Burma for instance, that was a country against which we had imposed pretty heavy sanctions for several years until there was essentially a democratic transition there. And at which point the U.S. sanctions on Burma were terminated.

[VP] What are some of the risks of imposing sanctions on other countries?

[SK] There is an element of sanctions fatigue, I think, particularly with foreign partners. Many of them are a little sensitive to the United States, to their perception of the United States, flinging around its weight with sanctions. The other sort of near-term concern that we see is called over compliance. So as a result of some of the pretty hefty enforcement actions and fines that have been levied in recent years against both U.S. and overseas companies for violating U.S. sanctions, what we've seen is a lot of companies and businesses just back out of markets indiscriminately.

The longer term risks I think... well maybe let's start with the most obvious one. First there's always unintended consequences with sanctions. You know we have a number of tools, the U.S. government has a number of tools in place to mitigate some of the impacts of sanctions, but sanctions are always going to have an impact, an unintended impact, at some level, on some people, or on some sorts of transactions that you might want to see—

[VP] You mean residents, residents of a place—

[SK] —Could be civilians, could be humanitarian operations, could be a whole host of things. And there are mechanisms in place to mitigate those impacts but we can't turn a blind eye to them, they're real. The second sort of longer term risk I would say is that people sort of turn away from the U.S. financial system especially, which is ultimately self-defeating because that is the source of our greatest leverage at least in the sanctions space. So in other words, China or Russia setting up alternative payment mechanisms or alternative trade banks essentially for transactions to flow through them without ever coming into the United States.

[VP] Tell me if you could about the process of creating sanctions. Is this something that's done within Congress? Initiated within an administration? How does that work?

[SK] There is no process. I mean it's different every time. But the most typical way that sanctions are imposed is via an executive order. So the president having been granted this authority by Congress, will issue an executive order saying: "Pursuant to the national emergency declared with respect to Russia's intervention in Ukraine," let's say, "I hereby prohibit U.S. persons from engaging in the following transactions."

Congress of course can also pass sanctions legislation and we've seen that very recently—

[VP] just recently

[SK] Yes. Right. With respect to Russia. So Congress can also write its own sanctions legislation.

[VP] People who've been listening to the news recently know that there's a new set of international sanctions against North Korea and here in the U.S. new sanctions against Russia. You talked about smart sanctions. What do you think of these?

[SK] So North Korea actually is a great example of something that I didn't mention which is the United Nations and the U.N. Security Council can pass a sanctions resolution that obligates U.N. member states to implement those measures. So that is the sort of gold standard, right, for sanctions.

With respect to the North Korea U.N. sanctions resolution, you know, I would say North Korea is a particularly knotty problem, so I've referred a number of times here to the U.S. and our particularly privileged space at the center of the world's financial system. North Korea obviously doesn't use the U.S. financial system for much, at least not directly. So I think the U.N. component to this is particularly important.

Now, whether it will actually result in exerting meaningful pressure will depend on whether it is faithfully implemented, particularly by China and Russia which are the two countries that North Korea really relies upon to access either international capital or basically to get money. So that's a very big question mark.

There's another way of course that the U.S. could exert similar pressure and that is by... the U.S. has the flexibility to target, let's say, Chinese companies for transacting with North Korea. That's a model—that's sometimes called secondary sanctions—that's a model that was used very aggressively and Iran. The Russia sanctions bill is a bit of a different animal. It did a few things, one of which is, it codified—and when I say codified, I mean it wrote into law—the previous sanctions that had been put in place by the Obama administration. So what that does is it limits the president's flexibility to revoke or relax those sanctions. It also provided a number of new authorities that the president will be authorized to use to target additional actors in additional activity with respect to Russia to sort of tighten the screws as it were. How aggressively, again, that this administration chooses to implement that act and those authorities I think remains a question mark.

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