Financial War

Subject to Sanction

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When diplomacy failed, war used to be inevitable, the continuation of politics by other means. Today, when persuasion doesn’t work, big powers turn to economic combat as their first resort. Sanctions occupy a messy zone between condemnations and air strikes. Hard to organize and uncertain in impact, they can hurt innocent citizens and legitimate businesses. Russia’s seizure of Crimea and support for separatists in eastern Ukraine are putting the effectiveness of sanctions to their latest test.

The Situation

The use of financial warfare as an alternative to military force has grown dramatically in the new century. Since 2000, the U.S., European Union, Australia, Canada, Japan, Israel, Russia, South Korea and international organizations have imposed sanctions in at least 20 cases on nations including Myanmar, Sudan and Syria. No modern nation has wielded economic weapons more than the U.S., which restricted imports, exports, investments and other financial transactions more than 110 times in the 20th century to try to change policies, end weapons programs or topple a government. The U.S. Treasury Department became a prominent national security player after the terrorist attacks of Sept. 11, 2001. Its self-described “guerrillas in gray suits” manage 37 sanctions programs that target governments, individuals, terrorist groups or criminal organizations in about 20 countries. The department’s methods range from asset freezes on Mexican drug lords and Russian oligarchs to bans on business with Iran and North Korea. U.S. and EU sanctions on Iran since 2010, honored by every nation that had been importing Iranian oil, squeezed its economic lifeline, tanked its currency, spiked inflation, and helped Hassan Rouhani win election as Iran’s president in 2013 on a pledge to get them eased. Within months, Iran returned to nuclear talks and made limited but historic concessions.

Source: Peterson Institute for International Economics
Source: Peterson Institute for International Economics

The Background

The first documented use of economic pressure for political ends dates to ancient Greece (the city-state of Megara banned trade with Athens in 432 B.C.). The U.S. Treasury first employed sanctions before the 1812 War against Britain. Woodrow Wilson was the first modern leader to promote financial pressure as an alternative to combat. The most effective sanctions are crippling ones imposed by multiple countries; the global boycott of South Africa over its apartheid policy in the 1980s led to elections that ushered the black majority to power. The worst case of unintended consequences may be the U.S. oil embargo on Japan that unleashed a chain of events leading to the bombing of Pearl Harbor. Sanctions on Saddam Hussein’s Iraq were criticized as toothless, indiscriminate and corrupt; in retrospect, they were proven to have cut off funding for his weapons of mass destruction.

Source: Columbia International Affairs Online (CIAO)
Source: Columbia International Affairs Online (CIAO)

The Argument

Debate over what kind of sanctions might discourage Russian intervention in Ukraine shows how tricky they are to apply successfully. EU trade ties, including reliance on Russian gas, have caused squeamishness about broad trade embargoes that could harm U.S. and European companies. At first, penalties were mostly tailored to target individuals, industries or institutions — with exemptions for food and humanitarian goods. In July 2014, the U.S. and EU twice upped the ante with sanctions limiting the access of Russian companies to markets, credit and technology. In September, new penalties tightened restrictions on key financial, energy and defense companies, and forbid U.S. and EU concerns from cooperating with Russia on Arctic drilling. In November, when NATO reported that Russia had sent tanks and troops to eastern Ukraine, EU ministers agreed to impose more asset freezes and travel bans on individuals but stopped short of deeper sanctions. In December, a combination of sanctions and falling oil prices caused the Russian ruble to collapse. The question is whether that’s enough to make President Vladimir Putin sweat. Democratic or quasi-democratic states that care about international opinion and rely on global trade and finance are likeliest to respond to sanctions, while isolated authoritarian regimes often don’t. A U.S. embargo against North Korea in place since 1950 has done little to change the regime or policies. In December 2014, the U.S. changed tactics on Cuba, which had been the target of U.S. economic sanctions since 1960. In announcing the steps to normalize diplomatic and trade relations, President Barack Obama said it will end an “outdated approach that has failed to advance our interests.”

The Reference Shelf

  • history of sanctions published by Columbia International Affairs Online.
  • Foreign Policy magazine explains how “a blunt diplomatic tool” morphed into a “precision-guided” weapon.
  • Three economists assessed the effectiveness of sanctions in a 2009 book, “Economic Sanctions Reconsidered.” A table looks at cases since 1914; another covers post-2000 episodes.
  • Juan Zarate, a former Treasury official, describes how the U.S. used post-9/11 financial weapons against terrorists, criminals and rogue regimes in his book, “Treasury’s War.”

First Published April 22, 2014

To contact the writer of this QuickTake:

Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net

To contact the editors responsible for this QuickTake:

Jonathan I. Landman at jlandman4@bloomberg.net

Lisa Beyer at lbeyer3@bloomberg.net