Lessons from Iran: Rethinking U.S. economic sanctions policy

NEW YORK (Reuters) - - U.S. policymakers have made a habit of treating access to the U.S. market as a privilege, confident that when presented with a choice between doing business in the United States and virtually anywhere else, companies and banks will tilt to America. Such a mindset has enabled the United States to weaponize its economy to a dramatic extent, including most recently in the cases of Iran and Russia. Sanctions imposed against Iran in 2010-2013 may be the single greatest factor in creating sufficient leverage for the United States to persuade it to constrain its nuclear program. Sanctions against Russia may not have convinced Putin to withdraw from Crimea, but Russia’s covert advance into Ukraine may have been slowed in response and the Russian economy has certainly felt the desired pinch.

Global partners have been an essential element of both of these sanctions efforts. However, this partnership has, to some extent, been an exercise in coerced multilateralism: foreign governments and companies went along with the sanctions largely in response to U.S. threats to curtail their access to United States if they engage in a wide range of now illicit activities in Iran and Russia. The United States has even made good on these threats without discrimination as to the national origin of the business: German, French, Spanish, Italian, British, Emirati, Indian, Chinese, and even Israeli companies have, at one time or another, been subject to U.S. sanctions during the Iranian sanctions campaign.

Extreme care in enforcement efforts helped to moderate some of the most negative implications of U.S. unilateral sanctions actions. But, one of the overlooked lessons of the renewed U.S. sanctions efforts from the past decade is that it is possible to apply pressure on the companies and banks of friendly and allied governments while retaining good overall trade ties and only modest diplomatic consequences.

The real question is how long this strategy can last, remain effective, and not create negative consequences on the United States itself. There is a very real risk that the overuse of sanctions authorities by the United States could result in backlash against them. In a new paper being released today by the Center on Global Energy Policy at Columbia University, I suggest that, due to a combination of global economic trends, frustration with the expansion of U.S. sway over foreign governments and markets, and resentment over U.S. muscling in various international economic fora, the United States may find that the ability to exercise its will through economic statecraft undermined.

In addition, the efficacy of the U.S. sanctions effort and its focus on individual companies and banks could encourage other countries to consider similar pressure tactics against U.S. companies and banks in the future. U.S. international business remains a central part of our overall current account balance. As such, a threat to our activities abroad could have an effect on the U.S. economy as a whole and, perhaps more fundamentally, could present real quandaries to our businesses operating globally.

These considerations do not mean that the United States should stop engaging in economic statecraft or applying sanctions. Sanctions are a legitimate tool with real diplomatic value. But it is reasonable to consider whether sanctions are the best tool in all circumstances. The United States must look for ways to make the use of sanctions more transparent and intelligible to foreign partners and businesses. This, in turn, will improve the overall effectiveness of U.S. sanctions efforts.

Reforming the U.S.’ use of sanctions will require several steps and considerations. It should start with recognition that our economic power is finite and that our actions across a range of policy issues – from trade to sanctions – can erode our position over time. Moreover, the United States should conduct the necessary economic analysis of short- and long-term implications of individual sanctions, as well as the net effect of all U.S. sanctions programs. Reform must also take other governments into account: we must ensure sanctions operate in a transparent manner so that international actors understand and can follow sanctions. The United States should also work to combat perceptions of favoritism by creating regularity in the process and conform international practice to U.S. efforts. It would also be wise to consider international approaches to sanctions regulation akin to international arms control efforts. And, U.S. companies with international operations should work now to identify their current vulnerabilities to future sanctions risks and consider ways to protect themselves.

By adapting its sanctions policies now, the United States may be able to change the trajectory of an otherwise prejudicial future international operating environment. While sanctions have yielded impressive geopolitical results, restraint and reform is critical to preserving our ability to continue using sanctions as a foreign policy tool and improving their effectiveness.

(Richard Nephew is the Program Director for Economic Statecraft, Sanctions and Energy Markets at the Center on Global Energy Policy. Prior to joining the Center in February 2015, Nephew served as Principal Deputy Coordinator for Sanctions Policy at the U.S. Department of State, a position he assumed in February 2013.)

Editing by Jonathan Leff and Alden Bentley