Financial War
Subject to Sanction
By Indira A.R. Lakshmanan | Updated July 17, 2014
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 innocents and legitimate businesses. Russia’s
seizure of Crimea and threats to 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 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. They 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 Hasan Rouhani win election last June on a pledge to get them eased. Within months, Iran returned to nuclear talks and made limited but historic concessions.
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.
The Argument
Debate
over what kind of sanctions might keep Russia out of 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, the U.S. and E.U. upped the ante with sanctions limiting the access of Russian companies to markets and credit. The hardest cases may be Cuba
and North Korea, where broad U.S. embargoes in place for more than half
a century failed to change regimes or policies. Democratic or
quasi-democratic states that care about international opinion and rely
on global trade and finance are likeliest to respond, while isolated
authoritarian regimes often don’t. With Russia, sanctions brought down Russian stock prices, weakened the ruble and brought warnings of recession; the question is whether that’s enough to make President Vladimir Putin sweat.
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