Vladimir Konstantinov / Courtesy Reuters A representation of Vladimir Putin, October 21, 2010.

Penalty Box

How Sanctions Trap Policymakers

In recent months, U.S. President Barack Obama has imposed multiple rounds of economic sanctions on Russia. Their purpose, according to the president, is threefold: to punish Moscow for its intrusion in Ukraine, to deter it from further destabilizing the region, and, ultimately, to persuade it to reverse course and pull out of Ukraine entirely.

Obama has often relied on sanctions to address difficult foreign policy challenges. His aides have described them as the prudent middle path between intervening militarily and standing idly by. Over the past few years, he has put them to use against Iran, Libya, Russia, Sudan, Syria, Myanmar (or Burma), and North Korea. But this is not merely an Obama phenomenon: President George W. Bush sanctioned many of the same countries, and President Bill Clinton did too. Nor is it purely an executive branch trend. Where Obama has been reluctant to impose sanctions -- for instance, on Iran during his first term, when he was still holding out hope that a more conciliatory approach could work -- Congress has forced his hand.

Washington’s reliance on sanctions has increased as it has developed more effective types of penalties and ways of implementing them. For example, policymakers have become particularly skilled at leveling sanctions on the financial institutions through which target countries access the global financial system. These penalties are designed to choke off foreign governments and companies from the global economy -- the benefits of which are getting larger as the world grows more interconnected. Many new sanctions go beyond merely restricting a target country’s access to U.S. companies; they use legal designations to scare off foreign companies from doing business in that country as well.

Yet the same attributes that make sanctions effective can also make them difficult to unwind. And although U.S. policymakers have learned much about imposing sanctions, they have given far less thought to lifting them. As seen in the last few years, an inability to ease sanctions can seriously complicate Washington’s diplomacy. Coercion, after all, is ultimately about following through on promises. When sanctions are used as a way of bringing about certain policy outcomes, they contain an explicit threat and an implicit guarantee: If a state continues the unwanted policy, it will continue to suffer sanctions; if the state changes course, the punishment will end. But if the United States proves incapable of ending sanctions after its demands are met, the targeted state will have little incentive to favorably adjust its activities.

Over the past decade, Washington has faced three main obstacles to easing sanctions in exchange for good behavior: domestic politics, coordination problems with international organizations, and the private sector’s reluctance to engage with formerly sanctioned countries and companies. As recent history makes clear, such challenges can significantly imperil U.S. objectives. It’s high time, then, that policymakers worked to address them.

HOUSE DIVIDED

Although the president technically leads the formulation of U.S. foreign policy, Congress has played a leading role in sanctioning foreign states. In the case of Iran, for example, Congress has passed three key pieces of legislation: the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010; the National Defense Authorization Act of 2012; and the Iran Threat Reduction and Syria Human Rights and Threat Reduction Act of 2012.

The effectiveness of these laws, in combination with executive orders from the president and designations by the Treasury Department, arguably brought Iran to the negotiating table. Yet if Tehran does end up making concessions, unwinding the web of regulations will be that much more difficult. Although Obama can rescind executive orders and remove foreign nationals from the Treasury Department’s Specially Designated Nationals and Blocked Persons list, he cannot unilaterally terminate congressional sanctions. Congress would need to do that job itself -- a step that, given the current political climate, Capitol Hill is unlikely to take. Although sanctions legislation permits the president to waive enforcement when he can demonstrate that the waiver is vital to U.S. national security, he can only do so for a limited time. The president must also report such waivers -- and provide the justification for them -- to the appropriate congressional committee. Given the broad support for sanctions against Iran on Capitol Hill, even a temporary suspension of them would likely face stiff opposition.

Furthermore, if Obama acted unilaterally to unwind sanctions, Congress could do two things to undermine him. First, it could pass further sanctions on Iran, as it nearly did in the lead-up to the signing of the Joint Plan of Action last November, almost torpedoing the interim nuclear accord with Iran. Second, Congress could pass legislation limiting the president’s ability to waive the provisions of its sanctions legislation. Such a move would effectively make Congress the only arbiter of when -- and whether -- many U.S. sanctions on Iran could be lifted.

REGIME PROBLEMS

Coordinating action with different countries and international organizations can also complicate the process of unwinding sanctions. Consider how United Nations regulations imperiled funds that Libya’s fledging transitional government desperately needed after the 2011 overthrow of Muammar al-Qaddafi’s government in Tripoli. Those funds -- which once belonged to the Qaddafi regime -- had been frozen pursuant to UN, EU, and U.S. sanctions. Although Washington and Brussels could have quickly permitted the release of many of the frozen assets, transferring them would still have violated UN prohibitions. In the end, it took months for the U.N. to fully remove those regulations. Meanwhile, Libya’s transitional government struggled to provide basic services, damaging its credibility and threatening the country’s stability.

Grounding sanctions in international legal regimes has exacerbated such challenges. For instance, Washington's central grievance against North Korea revolves around its nuclear weapons program. However, Pyongyang is also a major counterfeiter and proliferator of illegal arms. As part of the campaign to pressure North Korea to give up its nuclear weapons, the Treasury Department ordered U.S. financial institutions to close all accounts belonging to Banco Delta Asia of Macau, a bank that facilitated North Korea’s money laundering and proliferation activities.

This policy subsequently prompted Macau to freeze $24 million in funds owned by North Korea -- which, along with the threat of further sanctions, helped pressure North Korea to return to the six-party talks. When the Bush administration wanted to ease the pressure to encourage Pyongyang to continue negotiating over its nuclear program, however, it had trouble lifting the sanctions, as Pyongyang had not ceased the money laundering activities that Washington had used to justify the asset freeze. This inability to reduce pressure on North Korea in exchange for its participation in the talks almost scuttled the negotiations.

RISKY BUSINESS

Even after sanctions are lifted, the private sector is often understandably unwilling to engage with a target state, denying it many of the economic benefits of complying with U.S. demands. Although some reports have suggested that U.S. and EU businesses are stumbling over each other to reenter certain restricted markets, such as Iran’s, those firms will more likely be highly reluctant to make such moves.

For one, the U.S. government has made a concerted effort to stress the dangers of doing business in these markets. In the case of Iran, the Treasury Department has waged a concerted campaign to warn the heads of foreign companies of the potential consequences of operating or investing in the Islamic Republic. One of their core arguments is reputational: Dealing -- even accidentally -- with a company that supports terrorism or nuclear proliferation could seriously damage a firm’s image. That risk will still exist even after sanctions are lifted. No firm wants to be seen doing business with a company that recently supported terrorism, or be caught accidentally working with a company that still does. Although certain economic activities are now permitted with Iran under the Joint Plan of Action, many U.S. firms have simply concluded that conducting business there, even if authorized, remains too risky. 

In addition, companies are concerned that doing business in former target countries might expose them to punishment for violating sanctions regulations. As in the case of Iran, many sanctions programs include several layers of executive orders, congressional legislation, and EU and U.N. regulations. Lifting some of these will still leave behind a patchwork of sanctions that remain difficult to navigate. Companies conducting legal business in Iran would be operating in a market where some activities are legal and others not. Given that violating U.S. sanctions has routinely cost U.S. and EU companies hundreds of millions of dollars in fines, many firms have simply concluded that the risk of unwittingly conducting banned transactions is not worth the potential benefits.

This fear was on full display during the aforementioned U.S. negotiations with North Korea in 2005. When Pyongyang indicated its willingness to participate in a sixth round of the six-party talks, its officials set as a condition the return of the funds that had been seized when the United States closed accounts in the Banco Delta Asia. As Juan Zarate, a sanctions expert who served in the George W. Bush administration, has noted, when Washington decided to return the money, every foreign institution that it approached refused to cooperate. Ultimately, Washington had to get the Federal Reserve Bank of New York to route the funds through Russian banks. In this case, the private sector’s risk aversion nearly prevented the six-party talks from proceeding.

TARGET PRACTICE

Such complicating factors underscore how difficult it is to lift sanctions or ease their effects, preventing Washington from fulfilling its side of a bargain with a target state. In order to negotiate credibly, U.S. policymakers need to do three things. First, they should think more clearly about how to design sanctions that can be lifted if the target state changes its behavior. For example, removing a foreign national from the Treasury Department’s Specially Designated Nationals and Blocked Persons list is relatively easy, and U.S. businesses can conduct business with someone as soon as he is delisted. Conversely, the designation of a business or jurisdiction under Section 311 of the Patriot Act as a “primary money laundering concern” is more difficult to undo.

Second, policymakers should anticipate how businesses are going to react if sanctions are lifted. For example, if the West and Iran strike a comprehensive agreement over Tehran’s nuclear program, private firms will not necessarily rush to do business in Iran, especially if sanctions related to Iran’s continued support for international terrorism remain in place.

Third, policymakers need to clearly communicate the difficulties of lifting sanctions to the states they negotiate with. For example, U.S. diplomats dealing with Iran should be clear that even if the Obama administration lifts and suspends some sanctions, Congress could level new ones. (U.S. negotiators reportedly dealt with this issue during the negotiation of the Joint Plan of Action; they should continue to address it directly.) Further, negotiators should also communicate that companies may be reluctant to resume business in the country, but that such reluctance is not the result of the United States being unwilling or unable to fulfill its side of the bargain. Informing the target state of these limitations up front will help hedge against the possibility that, if Congress passes additional sanctions or U.S. businesses remain cautious, the target state will interpret these actions as bad faith on the part of the United States. 

Washington should heed these lessons as it continues to pressure Russia and negotiate with Iran. At this point, U.S. sanctions on Russia could be lifted fairly easily; since Obama imposed them through executive order, unwinding them would not require congressional approval. Were those sanctions to be dropped in exchange for Russian concessions, however, U.S. businesses would probably still be hesitant to reinvest in Russia. If Congress passes legislation requiring additional sanctions -- or if Washington designates Russia as a money-laundering jurisdiction -- successfully unwinding sanctions on Russia would become significantly more difficult.

In contrast, the current sanctions on Iran will be far more difficult to relax. First, lifting many of the sanctions requires congressional action. If Congress is dissatisfied with the final terms of the deal on Iran’s nuclear program, it may be unwilling to back the administration’s promises. Second, the terms of any deal are likely to relax some -- but not all -- of the myriad sanctions imposed on Tehran. U.S. and foreign businesses will most likely respond to this uncertainty by refraining from doing business with Iran altogether. In this case, Iran would still feel the sanctions’ effects, even after they have been lifted.

Sanctions can thus have unintended consequences, forwarding political objectives at first but later standing in their way. In this respect, sanctions suffer from drawbacks that also plague alternative policies. Doing nothing carries plenty of consequences, as Syria’s painful descent into chaos has made all too apparent. And military action brings with it a host of unexpected effects, as the invasion of Iraq in 2003 so clearly demonstrated. Even when sanctions are the best option among an array of tough choices, then, Washington must be strategic about using them. And well before sanctions actually start to work, policymakers ought to be confident that they will be able to roll them back.

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