Financial War

Subject to Sanction

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When diplomacy failed, war used to be the next option, the continuation of politics by other means. Today, when persuasion doesn’t work, big powers often turn to economic combat as their first resort. Sanctions occupy a messy zone between condemnations and military 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 put 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 members of Russian President Vladimir Putin’s inner circle to bans on business with Iran and North Korea. U.S. and international sanctions on Iran squeezed its economy 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 that produced a historic agreement to limit Iran’s nuclear program and lift sanctions. The U.S. and EU adopted increasingly stiff embargoes in response to Russia’s actions in Ukraine. They kept the pressure on hoping to enforce the compliance of Russian-backed separatists with a ceasefire negotiated in February. Russia, in return, banned the import of many food products from the EU.

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 surrounding sanctions against Russia for its behavior in Ukraine shows how tricky they are to apply successfully. While the sanctions have little effect on the U.S., which has limited trade with Russia, within the EU some exporters are hurting. A few EU members, including Greece and Slovenia, have criticized the sanctions. The IMF expects the measures, in combination with lower oil prices, to produce a 3.4 percent contraction of the Russian economy in 2015. The question is whether that’s enough to make 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 its policies. In December 2014, the U.S. changed tactics on Cuba, with which it had severed ties in 1961. In announcing the steps to normalize diplomatic relations and ease a trade embargo, President Barack Obama said it would 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