I am indeed.
Thank you very much for the opportunity to testify. I'll give a little bit of background about myself. I'm a professor of international politics at the Fletcher School of Law and Diplomacy outside of Boston. My area of expertise is not legal, but rather in international relations. I've written a book and several articles about the utility of economic statecraft in international affairs. Much of what I will say today is based on a report that I co-authored for the Center for a New American Security in Washington which just came out about recent changes in the way the United States employs economic sanctions, which I will talk about now and which might hopefully be relevant to your Parliament.
In some ways, the interesting evolution in the American approach to economic sanctions has been that, when I started work on this in my dissertation 20 years ago, it was widely thought among policy circles that sanctions did nothing. Economic sanctions were usually thought to be a useless symbolic tool and a demonstration of states doing something without necessarily accomplishing anything. Twenty years later, what is striking is the degree to which the policy consensus in Washington has done a 180° turn. There is an increased amount of enthusiasm for the utility of economic statecraft, the tool in terms of advancing American interest in foreign policy, as well as advancing things like the cause of human rights.
The question is, what happened in those 20 years? Was it just the policy-makers were wrong both times or has there actually been changes in the way in which the United States has employed sanctions? The answer is a little bit of both. I would argue that policy-makers were excessively pessimistic when they were assessing the utility of sanctions back in the late 1990s and they are now excessively optimistic about the utility of economic sanctions for a variety of reasons.
That said, there were changes in the way that sanctions were employed. You can argue that the history of sanctions in the United States basically boils down to three phases. The first was up until about 1990. Then the Iraq sanctions which were placed immediately after the Gulf War were a notion of so-called comprehensive sanctions. That is the idea that any economic sanctions that are employed should be employed against an entire country, should usually be trade-based, and should be designed to maximize the economic punishment that a country faces unless they comply with whatever is asked with respect to sanctions.
It quickly became clear that this process did not work terribly well in terms of its success rate, and more importantly, demonstrated massive negative externalities as the Iraq case demonstrates in the form of humanitarian catastrophes, an increase in corruption, and so forth. Essentially, any employment of economic sanctions is an effort to outlaw what would otherwise be considered ordinary, perfectly fine commercial activity. It therefore creates an incentive for actors to find ways to work around sanctions rules as a way to earn above-average profits and it is therefore a breeding ground for corruption.
It is no coincidence that if you look at the list of countries in terms of corruption according to, let's say, Transparency International's or the World Bank's governance indicators, the countries at the bottom, the most corrupt countries are countries that have usually been under sanctions in one form or another, because once sanctions are imposed, the corruption is often longer lasting.
In response to that, the United States began to embrace the idea of smart sanctions. The idea of smart sanctions was to focus on somewhat more targeted aspects of the country rather than trying to hurt the population writ large. The idea was that certain kinds of sectoral sanctions would be used, things like sanctioning luxury goods, imposing travel bans, imposing arms embargos, various financial sanctions. These sanctions would presumably hurt the elite of the target's population rather than the broad-based populace and therefore would cause pain to presumably the most politically influential members of the target country.
Furthermore, the other idea was to essentially start imposing sanctions on individuals rather than countries writ large, with the idea of making individual policy-makers or wealthy people who were considered close to policy-makers potentially liable for the implications of policy transgressions.
The problem was that most of these smart sanctions also didn't work very well. Indeed, the track record of the UN smart sanctions cases that were imposed in the 1990s and the 2000s show that they actually have a success rate of perhaps 11%, which is much lower than the success rate of ordinary comprehensive sanctions. While it did alleviate some humanitarian suffering, they didn't seem to accomplish that much.
The one exception appeared to be cases in which targeted financial sanctions were employed against the targeted country. In part, this is because when financial sanctions are imposed, the effect on the private sector in some ways actually enhances the effect of the sanctions, as opposed to the case of trade.
Generally, when you impose trade sanctions, you're incentivizing black market activity and corruption. However, as a general rule, when you're imposing financial sanctions, because the U.S. capital market is so central to the international financial system, generally speaking, for banks that have to deal with these kinds of sanctions, access to U.S. capital markets matter much more than any small profits they could gain from sanctions busting. Furthermore, private capital would engage in prudential risk calculation in terms of anticipating the effect of any kind of financial sanctions on a targeted economy. This is often referred to as de-risking.
The degree to which U.S. regulatory officials have fined various banks, such as HSBC, Commerzbank or BNP Paribas, for violating other kinds of sanctions, and these fines have run into the billions of dollars, have caused much of the western financial community to comply very quickly with sanctions edicts that come from the United States. Indeed, by 2015, the use of targeted sanctions was a relatively important component of President Obama's national security strategy.
Generally speaking, the question is, do these actually still work? The evidence suggests that the targeted financial sanctions do, in fact, have a better success rate than previous comprehensive sanctions as well as smart sanctions. Generally speaking, the success rate is along the lines of 40%, which might not sound that great, but again you're dealing with difficult cases. The fact that they work at all is relatively impressive.
Sanctions tend to work much better if they have a well-defined demand—which is a banal point but nonetheless important—if they hurt target elites, and most important, if there are lower expectations of future conflict between the country imposing the sanctions and the country on the receiving end of sanctions, or to put it another way, sanctioning allies, oddly enough, tends to work much better than sanctioning adversaries. Of course, countries are obviously more reluctant to sanction allies, which is why it doesn't happen all that much.
That said, there are still negative externalities that come from sanctions. Sanctions undeniably cause investment to dry up in the targeted economy. You do see massive increases in the assessment of economic and political risk by the private sector when any kind of targeted sanctions are imposed. There is not that much evidence of a “rally around the flag” effect, which is to say the sanctions don't necessarily lead to members of the targeted population deciding to support their leaders that much more.
The logic seems to be with targeted financial sanctions that the imposition of sanctions leads to an elevated perception of political risk among private sector actors, which then causes private sector investment in the targeted economy to expire. The question is whether or not we have reached peak sanctions, for lack of a better way of putting it. One of the reasons you can argue that some of these cases of sanctions have worked, for example, the sanctions that were imposed against Iran prior to the nuclear deal, is that in some ways people did not anticipate that they would actually have the potency that they did. Therefore, the actual imposition of sanctions was a genuine policy surprise not just to the target economy, but I would argue to U.S. policy-makers as well. The interesting question is whether or not going forward you're going to see an increasing amount of countries anticipating the fact that this can actually happen, and therefore, as result, hedging or finding alternative ways to guard against U.S. financial power. Indeed, you're even seeing in some cases countries such as Russia trying to find alternatives to the SWIFT payment system and to excessive reliance on the U.S. dollar as a form of international trade.
The question is whether or not the U.S. government appreciates this. Indeed, there are indications from a speech that Secretary of the Treasury Jacob Lew gave back in the spring that, in fact, U.S. officials are aware of this, and that in some ways while they will have to engage in continued financial intelligence in order to be able to continue to impose successfully targeted sanctions, there is a concern that essentially if the United States continues to become sanctions happy, there will be too much blowback, and that, in turn, could affect the dominance of the U.S. financial system.
I think I will leave my remarks there.