U.S. Sanction Power May Be Reaching Its Limit
Six years ago, in the course of investigating London-based bank Standard Chartered Plc over suspicions it had flouted U.S. sanctions against Iran, the New York State Department of Financial Services published an email from a senior executive to one of his counterparts in New York. “You f***ing Americans,” the message read. “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”
It’s a sentiment that has echoed through halls of power in recent weeks following President Trump’s May 8 decision to pull out of the 2015 Iran nuclear deal and impose unilateral sanctions, despite all indications that the country was complying. In Year Two of the Trump administration, the number of financial penalties has hit a high after years of increasing use. “The current administration is kind of drunk on the sanctions power,” says Jarrett Blanc, a senior fellow at the Carnegie Endowment for International Peace who was a leading Department of State official in the Obama administration responsible for Iran nuclear issues. “They don’t understand that the tool is limited and fragile.”
Today’s global economy runs through the U.S. financial system, which constitutes a major source of the country’s influence. The dollar is the world’s currency, and Wall Street remains a key financial center, which helps U.S. leaders sway friends and coerce rivals. That status is “not ordained,” Blanc says. “At a certain point, it might be worthwhile for foreign governments and private-sector actors to work around New York.”
The U.S. began stepping up its use of sanctions after the Sept. 11 attacks, deploying them against terror suspects and their financial backers, says Brian O’Toole, a former senior adviser at the U.S. Department of the Treasury’s sanctions unit, now a senior fellow at the Atlantic Council. Over time, Washington increasingly used financial penalties as a tool of foreign policy, as in the U.S.-led multinational effort to pressure Iran to curtail its nuclear program, which culminated with the 2015 agreement.
When Trump was elected a year later, the strategy began to shift yet again. In January 2018 the Pentagon declared that terrorism was no longer the main threat to the U.S. It identified China and Russia as the chief rivals in a new era of great-power politics. “America First” meant that sanctions were more likely to be unilateral—and more likely to be deployed at the expense of other diplomatic strategies. “They’ve leaned heavily on Treasury,” O’Toole says. “They’ve basically gutted the State Department.”
The Treasury is still pursuing militants: On May 16 it imposed a raft of measures against the Iran-backed Shiite militia Hezbollah. But it’s the renewed attempt to target the economies of Russia and Iran that’s confounded investors and upset U.S. allies. Although the administration’s March announcement of tariffs against imported steel and aluminum got more press, mayhem ripped through global metals markets and supply chains after the Treasury slapped penalties on Russian aluminum producer United Co. Rusal Plc in response to the Kremlin’s interference in the 2016 presidential election. Trump’s Iran decision a month later sent oil prices soaring. Even though new curbs on Iran won’t kick in for months, they’ll be the “strongest sanctions in history by the time we are complete,” U.S. Secretary of State Mike Pompeo said on May 21.
The most important response to the onslaught of U.S. sanctions won’t come from the target countries. The key decisions—to comply or defy—will be made by the only actors on the same economic scale as the U.S.: China and Europe. “For absolutely core national security reasons, China will find ways around the hold of the U.S. banking sector,” says Jeffrey Sachs, an economics professor at Columbia University. In the past five years, China has set up its own lending institutions parallel to the Washington-based World Bank and International Monetary Fund and pushed the yuan as an international currency. The country is likely to strengthen its presence in Iran no matter what Trump does.
The calculations are more complex for Europe’s leaders, longtime allies of the U.S. who share many of its concerns, including those about Russian election meddling and Iran’s involvement in Middle East wars. In July 2017, Germany’s Kiel Institute for the World Economy published a study on the economic impact of multilateral sanctions imposed on Russia over its annexation of Crimea three years earlier. While Russia naturally took the biggest hit, a surprisingly large share of the losses—$44 billion—was borne by the sanctioners. Of that, almost 40 percent fell on Germany; only 0.6 percent hit the U.S.
Reacting to Trump’s Iran decision, French Economy Minister Bruno Le Maire fumed, “Do we want to be vassals who obey decisions taken by the United States while clinging to the hem of their trousers?” Meeting in Bulgaria less than a week later, European leaders agreed on a package of measures to defy American pressure. Special rules to shield European Union companies from U.S. sanctions will be activated for the first time in two decades. The European Investment Bank will be allowed to finance business in Iran, and EU countries were encouraged to explore transfers to Iran’s central bank.
Numerous battles loom in the coming months. The global Swift cross-border payment system—based in Brussels but dependent on U.S. cooperation—is one likely flashpoint. The planned Nord Stream 2 pipeline, which would bring Russian natural gas to Germany, is another. “We would be delighted if the project did not take place,” U.S. State Department energy expert Sandra Oudkirk told reporters in Berlin.
In the long term, Sachs says, there’s a bigger risk. While countries such as Venezuela, which is promoting its own state-backed cryptocurrency, Iran, and even Russia may chafe at the greenback’s dominance, they lack the clout to do much about it. Now that the bigger players have a motive to find ways around the dollar, he says, there’s no technical reason why they couldn’t succeed. “Europe and China have banks,” he says. “One of these days, the U.S. is going to talk the dollar right out of its international role.” —With Shelly Hagan and Marc Champion