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Cybersecurity Research

V. Effectiveness of U.S. Unilateral Economic Sanctions

Despite the movement toward globalization, modern financial infrastructure is very American-Centric such that economic sanctions imposed by the U.S. have a universal effect.123 Although geography may matter less in finance today, U.S. currency is the world’s reserve currency and the most trusted investment during times of distress.124 In 2015, 81% of global trade financing is funded by the U.S. dollar.125 Because of its significance, U.S. public and private institutions such as the Federal Reserve, the Securities and Exchange Commission (SEC), stock exchanges, and major investment banks are at the forefront of international financial policies and practices. As such, when America takes financial measures against a country, it has global consequences.126 For example, the financial rules and regulations declared by the U.S. after the September 11 attacks had a universal effect because of the importance of U.S. currency to global financial system.127

Hence, because of the interconnectedness of modern finance and the central position of the U.S., banking prohibitions may make a restricted nation-state or entity disconnected from the global financial system. They would not be able to obtain financing due to the risks that legal institutions might face by associating with these organizations.128 In a financial system that revolves around the U.S., American financial policy can leverage the

121. Lin, supa note 36, at 1402.

122. Id. at 1402.

123. See Richard Barrett, Time to Reexamine Regulation Designed to Counter the Financing of Terrorism, 41 CASE W. RES. J. INT’L L. 7, 10 (2009) (discussing American-centric financial infrastructure).

124. Lin, supra note 36, at 1386-87.

125. Id. at 1387 (citing a report by Ian Bremmer & Cliff Kupcha, EURASIA GROUP, Top Risks 9 (2015)). A copy of the report is available at: https://eurasiagroup.bluematrix.com/sellside/AttachmentViewer.action?encrypt=bb489f5d-29ae-439a-9355-6f824999bf34&fileId=16645_fcb7dbe1-770f-4ad0-81de829815eae238&isPdf=false?link=instory (last visited Apr. 4, 2021).

126. Id. at 1387.

127. Barrett, supra note 123, at 10.

128. Zarate, supra note 14, at 2-5.

support of international financial institutions129 to push adversaries out of the international financial community.130

While there is no definitive proof that nation-wide economic sanctions are successful,131 the countries have long used such policies and they have become more widespread in recent years.132 Economic sanctions are intended to inflict financial harm and destruction to the enemy in a hot war or a cold war.133 Although the economic theory of sanctions is largely based on assumptions as to how trade can be affected by sanctions, such an assumption cannot take into account t all of the facts, such as human behavior and the responses of the country leaders who are under the sanctions regime.134 Scholars have argued that economic sanctions have only a limited capacity to achieve their intended objectives.135 “The effectiveness of sanctions is further reduced today due to a growing interdependency between markets and a shrinking world.”136

If the use of economic sanctions is strategically effective, it could be tempting for countries to misuse the policy.137 One reason why some countries have changed their conduct is because they need to defend themselves from the overuse of economic sanctions imposed by other countries.138 Moreover, a reasonable leader is likely to restrict his or her activities in order to limit the choices of political opposition within a country that he or she considers to be a threat to their political power. However, there are some leaders whose behavior appears to be unaffected by the use of economic sanctions.139

Although no weapon can completely avoid every attack by an enemy, thoughtfully targeted financial restrictions can provide the most protection from adversaries.140 On the other hand, economic sanctions tend to be the best choice for countries that are reluctant to fight and endanger the lives of

129. Id. at 349.

130. Id. at 24.

131. Smeets, supra note 2, at 3.

132. Lin, supra note 36, at 1401.

133. Lin, supra note 36, at 1401.

134, Smeets, supra note 2, at 4.

135. See, e.g., Lobsinger, supra note 21, at 121; Amichai Cohen, Economic Sanctions in IHL: Suggested Principles, 42 ISR. L. REV. 117, 135 (2009); Egle, supra note 28, at 47.

136. Smeets, supra note 2, at 5.

137. Amichai Cohen, Economic Sanctions in IHL: Suggested Principles, 42 ISR. L. REV. 117, 135 (2009).

138. Id.; see generally Anne-Marie Slaughter, A NEW WORLD ORDER (5th 2009).

139. Cohen, supra note 137, at 144 (“In dictatorships, for instance, ruling party officials continue to receive perks and the armed forces continue to receive supplies of food and other goods despite sanctions imposed on the State.”).

140. Lin, supra note 36, at 1405.

their soldiers.141 Economic sanctions are therefore seen by policymakers as a good replacement for the more dangerous policy of using military forces; a resolution that entails no risks and only benefits.142 However, economic sanctions do not always produce the desired goal of the imposing country, often because the sanctions are used when they are not needed and inflict needless suffering on civilians.143

Scholars use the example of economic sanctions against Cuba to argue that economic sanctions are not successful and place unreasonable economic pressure on Cuba’s internal political issues.144 Many of critics argue that such unilateral economic sanctions without the authorization of the Security Council should be considered as a violation of non-intervention rule from an international law point of view.145 The U.S. has been attempting to place a full embargo on Cuba for more than half a century.146 Most of the sanctions have not accomplished their objectives and most of them are now coming to an end.147 On December 17, 2014, President Obama proposed a new path in the 50-year U.S. sanctions strategy against Cuba.148 The announced changes were intended to normalize diplomatic relations between Cuba and the U.S., to allow travel, some trade relations, and the flow of information to and from Cuba.149 OFAC and BIS implemented new rules amending the Cuban Assets Control Regulations and the Export Administration Regulations in accordance with new policies announced by the President.150 In other words, the President’s announcement that “50 years have shown that isolation has not worked,” and the subsequent steps of the Administration to decrease the use of sanctions against Cuba show how the sanctions policy against Cuba failed.151 U.S. economic sanctions against North Korea are also

141. Cohen, supra note 137, at 123.

142. Id. at 135.

143. Id. at 136.

144. Id.

145. See e.g., Doraev, George N. Barrie, International Law and Economic Coercion - A Legal Assessment, 11 S. AFR. Y.B. INT’L L. 40, 53 (1985-1986); Derek W. Bowett, International Law and Economic Coercion, 16 VA. J. INT’L L. 245, 246-254 (1976).

146. Smeets, supra note 2, at 4.

147. Id.

148. Press Release, THE WHITE HOUSE, Statement by President Barack Obama, Statement by the President on Cuba Policy Changes (Dec. 17, 2014), http://www.whitehouse.gov/thepress-office/2014/12/17/statement-president-cuba-policy-changes.

149. Id.

150. Id.; see also Press Release, DEP’T OF TREASURY, Fact Sheet: Treasury and Commerce Announce Regulatory Amendments to the Cuba Sanctions (Jan. 15, 2015), http://www.treasury.gov/press-center/press-releases/Pages/jl9740.aspx.

151. Doraev, supra note 1, at 386 (internal quotation omitted).

far-reaching and continue to be expanded. 152 Some have argued that economic sanctions are not effective as North Korea continues to have business interactions with certain trading partners to bypass U.S. economic sanctions.153

Although imposing sanctions is based on the theory that they decrease the income and the welfare of the target country because the target country suffers depreciation in its economy and eventually complies, given the rising interdependence of global markets, there are alternate ways for the target country to enter markets.154 Sanctions are often frequently circumvented by trading with third parties who refuse to comply with the sanctions.155 Today, the world is more interdependent, thus increasingly complicating trading relations between all countries. These new realities are the result of the rapid growth of international commerce, globalization, liberalization, and the rise of multinational companies with complex interrelations in trade and investment with foreign subsidiaries.156 One cannot conclude that by depressing the economy of a target country, its leaders will have no choice but to comply with the objectives of the imposing country. Pressure from economic sanctions may have the reverse effect. Leaders may use the sanctions to justify the lower levels of economic growth and welfare to prevent even more sanctions.157 The economic sanctions against Iraq are a good example. Saddam Hussain’s resistance to outside pressure caused by the sanctions ultimately led to the military intervention.158 Furthermore, research studies have shown that economic sanctions lose much of the impact after their first and second years, followed by a sharp decline over time.159

In another report, researchers found that “[the effects [or economic sanctions] are only significant in the first two years and turn negative after six to seven years, reflecting that even short-term sanction costs will wane

152. See generally Office of Foreign Assets Control (OFAC), U.S. DEP’T OF TREASURY, North Korea Sanctions, available at https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information/north-korea-sanctions.

153. See e.g., Kaitlan Collins et. al., Trump Announces New North Korea Sanctions, CNN, (Feb. 24, 2018), https://www.cnn.com/2018/02/23/politics/donald-trump-north-korea-sanctions/index.html; Katrina Manson,* US Sanctions 27 Shipping Companies over North Korea Ties,* FINANCIAL TIMES (Feb. 23, 2018), https://www.ft.com/content/666e7710-18ab-11e8- 9376-4a6390addb44.

154. Smeets, supra note 2, at 6.

155. Id.

156. Peter Muchlinski, The Changing Face of Transnational Business Governance: Private Corporate Law Liability and Accountability of Transnational Groups in A Post-Financial Crisis World, 18 IND. J GLOB. LEG. STUD. 665, 666 (2011).

157. Smeets, supra note 2, at 5.

158. Id. at 6.

159. See Hufbauer et al., supra note 69.

due to economic adjustment.”160 In this manner, the target country is more likely to become immune to economic spirals caused by sanctions rather than more vulnerable over time. During the sanctions period, the target country can strengthen its diplomatic ties in order to build alliances with other countries, expand its import industry, and establish new trade relationships.161 Hence, the speedy application of sanctions to prevent the target country from coordinating a resistance to the sanctions is essential to the effectiveness of sanctions.162 The role of third countries and their participation in the sanction period is vital for fostering ties with the target country.163 For example, Russia and China developed approximately forty finance and technology agreements in October 2014, and China is turning to Brazil and Latin American countries to compensate its losses due to restrictions on importing agricultural goods from other countries. 164

Another example of sanctions diminishing effectiveness in the longterm are the U.S. sanctions against Russia. U.S. economic sanctions against Russia are a combination of economic and political sanctions.165 The U.S. imposed sanctions on Russia mainly in response to Russia’s 2014 invasion and occupation of Ukraine’s Crimea region and parts of eastern Ukraine.166 The sanctions include the freezing of assets of individuals and companies, restrictions on financial transactions with Russian businesses, restrictions on oil-related goods, and dual-use exports.167 The sanctions also targeted several Russian officials and politicians, banning them from entering the U.S. and freezing their assets and properties abroad.168

Russia experienced a significant depreciation of its currency due to the sanctions, with a fall of almost 50% in its value in 2014.169 Sanctions exacerbated the investment climate in Russia and had a major effect on the Russian Central Bank’s ability to borrow money.170 Shortly after the implementation of sanctions against Russia, the international oil market crashed— presumably strengthening the power of the sanctions and the chances of their

160 Sajjad Faraji Dizaji & Peter A.G. van Bergeijk, P., Potential Early Phase Success and Ultimate Failure of Economic Sanctions: A VAR Approach with an Application to Iran, 50(6) J. of Peace Res. 721, 734 (2013).

161. Smeets, supra note 2, at 8.

162. Id.

163. Id.

164. Id.

165. Smeets, supra note 2, at 10.

166. Corry Welt et al., CONG. RES. SERV., R45415, U.S. Sanctions on Russia 1 (2020), available at https://crsreports.congress.gov/product/pdf/R/R45415.

167. Smeets, supra note 2, at 10.

168. Id.

169. Id.

170. Id.

success.171 On the basis of several press reports, the Russian Central Bank had to dig deep into its reserve to support the Ruble, but it continued to depreciate.172 Hence, purchasing power diminished and many goods became unavailable.173

Nevertheless, the structural dimension and trade patterns of Russia have remained largely unchanged since 1990s.174 Because the Russian economy is not significantly diversified, it is potentially less susceptible to the economic impacts of sanctions.175 The economy is highly dependent on the import of goods and supplies for the use, production, and export of raw materials and essential items. Russian exports are mainly made up of mineral imports, including chemicals, food, and agricultural machinery.176

From a political viewpoint, Russian leadership has succeeded in managing the difficult economic situation caused by the sanctions.177 The real purpose of sanctions was to damage the Russian economy and minimize political support for President Putin and force Russia to de-annex Crimea.178 Despite a relatively low GDP growth rate, Russia’s current economy is stronger than it was in 2014, when sanctions were imposed.179 The sanctions did not have a major effect on Russian imports and Russia’s net exports and GDP continued to rise.180 Sanctions have also failed to minimize President Putin’s political popularity, as seen by the 2018 elections when President Putin raised his vote percentage from 65% to 76%.181

Russia is also diversifying its trade by building closer relations with other countries in order to have access to technology and finances to trade in agricultural goods; and to export its oil.182 This means that Russia’s reliance on foreign goods and services for internal use and its supply of goods and services to foreign markets will change.183 Because some countries, including South Korea, have not joined to enforce sanctions against Russia, the

171. Id.

172. Id. at 11.

173. Id.

174. See Sergei F. Sutyrin et al., Integrating into the Multilateral Trading System and Global Value Chains: The Case of Russia, IN CONNECTING TO GLOBAL MARKETS, Challenges and Opportunities: Case Studies Presented by WTO Chair-holders (Marion Jansen et al. eds, 2014) at 106-107.

175. Smeets, supra note 2, at 11.

176. Id. at 11.

177. Id. at 12.

178. Id.

179. L. Jan Reid, The Effect of American and European Sanctions on Russia, 1, 4-6 COAST ECON. CONSULTING (2019).

180. Id.

181. Id.

182. Smeets, supra note 2, at 12

183. Id.

effect of sanctions is diminished. Moreover, the inevitable market opportunities presented by Russia make other countries hesitant to renew their sanctions against Russia.184

However, growing evidence proves that there is an inverse relationship between the length of sanctions and their efficiency. The effectiveness of the sanctions decreased the longer the sanctions were imposed, showing how sanctions that have been in play for years lose the power to coerce the target country into complying with the objectives of the imposing country.185 This debunks the presumption that sanctions against a country in the long term will work.186 Therefore, sanction imposing countries need to be more strategic with respect to the length and extension of the sanctions.

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