How US sanctions backfire, erode the Western order imposing them: FP
6 Min Read
By 2021, according to US Treasury Department’s report, the United States had sanctions on more than 9,000 individuals, companies, and sectors of targeted economies.
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Iranian President Ebrahim Raisi shakes hands with Venezuelan President Nicolas Maduro in Caracas, Venezuela, on Monday, June 12, 2023. (AP)
According to a Foreign Policy article, sanctions have become a go-to-foreign policy tool of the West, particularly the US.
Numerous nations, including Russia, China, Cuba, Iran, and Venezuela, all for a plethora of reasons are stacked together in what the authors call a "family photo" of those "named and shamed" by the US.
Databases by Colombia University and Princeton University indicate that the US has more than 20 countries sanctioned, implying that financial and commercial interactions with certain firms, persons, and, in many cases, the governments, are prohibited by US law.
By 2021, according to U.S. Treasury Department’s report, the United States had sanctions on more than 9,000 individuals, companies, and sectors of targeted country economies. In Joe Biden's first year in office, the administration sanctioned 765 new designations globally, including 173 related to alleged human rights. The countries subject to some form of US sanctions collectively account for a little more than one-fifth of global GDP. China represents 80 percent of that group.
According to the article, a rising alliance of nations is attempting to change the rules of the global financial system, owing primarily to the pervasiveness of US sanctions, citing that it's past time to evaluate how these punitive measures are undermining the very Western system they're supposed to protect.
China, in particular, has the economic weight, growing diplomatic power, currency stability, and liquidity to press for further worldwide adoption of the renminbi and Chinese financial systems, such as the Cross-Border Interbank Payment System.
Political scientist Daniel W. Drezner and columnist Agathe Demarais recently published arguments in the Foreign Policy regarding how governments sanctioned by the US have utilized loopholes to undermine measures, such as de-dollarization.
China also offers a substantial and profitable market for sanctioned nations' exports, such as Venezuelan, Russian, or Iranian oil and gas. Despite the fact that many of the rerouted business marketplaces are costly and inefficient, they offer enough rent to maintain the targeted governments.
The authors argue that these financial arrangements driven by China pose enormous systemic threats to the United States and its allies.
One example is the growing number of non-sanctioned nations in the Global South adopting a parallel anti-sanction international economy. Brazilian President Luiz Inacio Lula da Silva reiterated his support for a BRICS trade currency (Brazil, Russia, India, China, and South Africa), emphasizing how a dollar-dominated global economy means that the US uses its supremacy to pursue punishing foreign policy.
Only two nations are sanctioned inside the BRICS group, which at least a half-dozen other growing economies are vying to join: China and Russia.
At the third annual forum, Strong Ideas For A New Time, organized by the Russian Agency for Strategic Initiatives (ASI), Russian President Vladimir Putin underscored that the exit of foreign companies from Russia due to sanctions has not only failed to weaken the nation but on the contrary it strengthened it.
The other three, in particular India, are countries the United States has growing partnerships with and are thus unlikely to come under US sanctions anytime soon. In other words, even US partners are hedging their bets against Washington’s extraterritorial sanctions policies.
Lula’s intentions signify an increasing desire in the Global South to break free from the US dollar, and according to the authors, the time has come for Washington to "recognize that its love of sanctions may be undermining its own economic and diplomatic power worldwide."
When governments default on their debts or appear to be on the verge of default, significant institutional lenders will seek to transfer that debt to other investors in secondary debt markets for a fraction of the price.
A foolish gamble
Venezuela's example is a clear one. Caracas defaulted on $60 billion in foreign debt in 2017 after failing to make $200 million in payments to creditors. Venezuela's debt has escalated since then as interest has accumulated. Venezuela's GDP fell by three-quarters between 2014 and 2021, with inflation reaching an estimated annualized rate of more than one million percent at one stage.
Three months before the default, President Donald Trump placed fresh sanctions on Venezuela, preventing President Nicolas Maduro's return to US capital markets to obtain new funds to roll over its debt.
As Venezuela's default and the economic crisis carried on, many of the initial institutional holders of Venezuelan bonds in the United States—including pension funds and trusts—moved to dump the dangerous debt at low, distorted prices, the article argues.
According to one source at Mangart Capital, a Swiss hedge fund, 75 percent of Venezuela's original debt in 2017 was owned by US interests; that figure is now thought to be about 35 percent to 40 percent.
Due to US investors being unable to purchase the debt, it defaulted to other buyers from China, Iran, and Russia.
Therefore, the US can bid farewell to any hopes of removing the Venezuelan government and installing a pro-Western one with the new bondholders.
Many of Caracas' debts have been securitized using assets from the country's vast oil and gas reserves. By purchasing such funds, new investors are investing not just in Venezuela's bankruptcy and recovery, but also in its energy assets, and hence in global energy security.
The authors note that all this taken into consideration, US officials still may not reconsider their position toward sanctions.
Sanctions have become a vital instrument of the US, regardless of whether they benefit or harm long-term US interests. They are a form of virtue signaling that allows politicians to demonstrate that they are doing something when confronted with a particular issue.
Worryingly for the US, previous sanctions have simply resulted in a strengthened coalition among targeted governments, as seen in Cuba, Iran, and Venezuela.
Much of this will need a sober willingness on the part of officials from both parties to accept a simple fact: Sanctions do not always work. In many situations, they intentionally undermine US interests.
