Lifting Sanctions Isn’t as Simple as It Sounds

Financial wars damage and disfigure economies as much as military ones. Countries ravaged by sanctions need reconstruction, too.

A picture taken on July 25, 2017 shows Sudanese patients waiting in a hallway at the Radiation and Isotopes Centre in  Khartoum.
In Sudan access to drugs and treatment was impaired by U.S. sanctions.
A picture taken on July 25, 2017 shows Sudanese patients waiting in a hallway at the Radiation and Isotopes Centre in Khartoum. In Sudan access to drugs and treatment was impaired by U.S. sanctions. (ASHRAF SHAZLY/AFP/Getty Images)

The sanctions just keep on coming. The reactions were swift when the Trump administration designated Iran’s Islamic Revolutionary Guard Corps as a foreign terrorist organization, in a move heralded by the White House as “the first time that the United States has ever named a part of another government as a FTO.” In Tehran, leaders from across Iran’s political spectrum condemned the designation, with nearly all members of parliament showing solidarity by attending the next day’s session in combat fatigues. In Washington, experts saw the designation as a risky political provocation that would do little to add meaningful pressure to Iran—a country already targeted by dozens of executive orders and pieces of legislation such as the 2010 Comprehensive Iran Sanctions, Accountability, and Divestment Act and the 2017 Countering America’s Adversaries Through Sanctions Act.

But these objections have largely overlooked the underlying logic of adding designations despite limited gains in economic pressure. A vast institutional, legal, and surveillance infrastructure now exists that is devoted to the maintenance of economic sanctions. Today, sanctions proponents are actively seeking to apply new restrictions in ways that make the eventual lifting of sanctions more difficult, in part to preserve the emergent sanctions-industrial complex—a network of government agencies, law firms, technology providers, and think tanks with a vested interest in the unceasing expansion of sanctions programs.

The think tank leader Mark Dubowitz, who was among the most vocal proponents of the foreign terrorist organization designation, has called for the Trump administration to impose sanctions on Iran in such a way as to make it politically toxic and legally cumbersome for a potential Democratic president to reenter the Iran nuclear deal in 2021. In this way, America’s financial wars now risk becoming the new forever wars. For those committed to the use of sanctions as a tool of coercive diplomacy, the important question is no longer how sanctions should be targeted. It is whether effective relief is possible when changing political circumstances require the lifting of sanctions.

The term “sanctions relief” is odd, because unlike relief from natural disasters, it aims to counteract the outcome of deliberately chosen policies. Sanctions relief also appears too feeble a response to sanctions programs increasingly conceived as a means to wage financial war.

When conflicts end and policies shift from coercion to cooperation, lifting sanctions in an effective way requires going beyond mere relief. As the effects of economic pressure accumulate, efforts toward reconstruction—and not merely relief—must follow the legal lifting of sanctions. Only by taking active measures to return the targeted economies to sustainable growth and well-being can the benefits of sanctions relief become more credible. This, in turn, would give diplomats increased leverage at the negotiating table. Unfortunately, European and U.S. policymakers currently lack adequate harm reduction tools, as recent events in Iran and Sudan demonstrate.

Iran’s trajectory in the last three years illustrates how even avid users of sanctions such as the U.S. government often lack the means to effectively lift them, a shortcoming that can have grave effects on international politics. On Jan. 16, 2016, the United States implemented broad sanctions relief in exchange for tighter controls over Iran’s nuclear program as part of the nuclear deal with Tehran. The text of the agreement noted that the deal was meant to “produce the comprehensive lifting of all UN Security Council sanctions as well as multilateral and national sanctions related to Iran’s nuclear programme, including steps on access in areas of trade, technology, finance, and energy.”

But while the Obama administration lifted sanctions as a legal fact, the benefits of relief to Iran largely failed to materialize. In the words of then-Treasury Secretary Jack Lew, the Obama administration relied on little more than “global outreach to help governments and businesses understand the sanctions relief provided.” U.S. officials had no experience in lifting such a broad sanctions program. They were blindsided by the discovery that a decade of strict sanctions enforcement had fundamentally altered the risk assessment of major companies and financial institutions expected to resume commercial activity in Iran. No one wanted to go near the country, regardless of what Washington said.

In an infamous London meeting in May 2016, then-U.S. Secretary of State John Kerry met with bank compliance officers to clarify the status of U.S. sanctions against Tehran and encourage their financial institutions to resume Iran-related transactions. But almost a decade of sanctions enforced with billion-dollar fines had made many banks steer completely clear of Iran. Bank compliance officers quickly determined that the marginal revenue potential presented by Iran was not worth the increased scrutiny from regulators and shareholders, especially given the precarious political commitment that underpinned the lifting of sanctions. HSBC’s chief legal officer, Stuart Levey, formerly an undersecretary of the treasury for terrorism and financial intelligence from 2004 to 2011, ridiculed Kerry in an op-ed, noting that “no assurances” were provided “as to how [doing business in Iran] would subsequently be viewed by U.S. regulatory and law-enforcement authorities” in the event of a change of administration—exactly the situation that transpired when President Donald Trump took office less than a year later.

Even while former President Barack Obama remained in office, the reluctance of banks and lingering sanctions stigma throttled Iran’s ability to attract much-needed foreign investment. In a December 2017 to January 2018 survey conducted by Bourse & Bazaar and commissioned by International Crisis Group, 83 percent of senior managers at multinational companies active in Iran indicated that their companies were “moving slower than they could” to the Iranian market, attributing the slowdown to concerns regarding U.S. sanctions and the related difficulty in securing banking services. By the time the Trump administration was preparing to withdraw from the nuclear deal in early 2018, some opponents of the agreement were even arguing that Trump should stay in it and avoid a political spat with European allies on the grounds that Iran was receiving little economic benefit from the deal.

Trump finally withdrew in May 2018 and has initiated a new so-called maximum pressure campaign against Tehran. This move forced the European signatories to the nuclear deal to scramble to preserve some economic benefit for Iran. France, Germany, and the United Kingdom established INSTEX, a state-owned trade intermediary. The mechanism aims to coordinate payments so European exporters can get paid for their sales to Iranian importers from money already in Europe, balanced with the payments owed by European importers for purchases made from Iranian exporters. The INSTEX project is an example of how Europe is now grappling with a new challenge of sanctions relief: how to ensure economic benefits can be delivered to deserving countries in the face of secondary sanctions from a third-party country.

Meanwhile, Iranian President Hassan Rouhani has been weakened, with domestic rivals pointing to the deteriorating economic situation as evidence of both his mismanagement and the error of engaging in diplomatic negotiations with the West. Iran’s embittering experience with sanctions relief may have poisoned the well for future diplomatic negotiations over the country’s nuclear program.

Iran is not the only country where failure to improve sanctions relief has contributed to political crisis. In Sudan, too, the heedless way in which sanctions ended has destabilized domestic politics. After most of the economic sanctions imposed against Khartoum in the late 1990s were lifted in October 2017, there have been few material gains for Sudanese society. As Nesrine Malik wrote in Foreign Policy last year, two decades of U.S. sanctions transformed the structure of the Sudanese economy: The country’s isolation spawned an unofficial banking sector disconnected from global finance.

Ending sanctions amounted to a shock form of globalization for Sudan. After the reopening of trade, a major economic crisis gripped the dollar-dependent country as inflation rose to 64 percent, imports and government revenues fell, and the Sudanese pound lost 86 percent of its value in 10 months. As in Iran, the failure of Western policymakers to reframe discourse about Sudan meant that foreign companies did not return to the country, drying up foreign investments. Without a reorientation of diplomatic efforts, the reputational effects of sanctions persisted. As Malik wrote, for Sudan the “sanctions ‘tail,’ the aggregate result of years of economic pressure, is proving to be an insurmountable challenge.”

The Sudan specialist Alden Young has pointed out that over time, sanctions made Sudan more dependent on U.S. dollars, as access to this hard currency became one of the only ways of accessing world markets. After they were lifted, Khartoum faced a lack of dollar reserves, foreign direct investment inflows, and export markets. The government’s decision to cut food and fuel subsidies in early 2018 massively increased existing discontent with President Omar al-Bashir’s dictatorship and produced mass protests in December. The government embarked on a campaign of repression and deflection, imprisoning and abusing thousands of protesters while edging closer to direct military rule. Ultimately, it failed to quash the protests. Bashir’s ousting by the military last week is to be welcomed, even if it is unclear what a power transition overseen by the military will mean for the country.

Lifting the U.S. sanctions on Sudan was, of course, the right thing to do: They had not worked for two decades, and observers agree that they merely strengthened the Sudanese regime. But hardly anyone anticipated the consequences of lifting them so rapidly, and the way in which the measures were removed harmed Sudan’s economy and society. Despite Bashir’s departure, the material legacy of economic sanctions will require attention if Sudan is to overcome his 30-year reign.

The economic chaos in Sudan could have been averted if sanctions relief had involved more than just national security and foreign-policy elites. It was entirely foreseeable that without external support, structural adjustment policies would impose further costs on the Sudanese population. Strong external financial support was needed immediately in the form of hard currency loans and swap arrangements between central banks. More broadly, development specialists have to be involved in assisting with reentry into global markets, while humanitarian organizations are needed to ensure a stable food supply. Similar efforts would have also helped address domestic political and economic pressures in Iran after the nuclear deal.

The cases of Iran and Sudan clearly demonstrate that more proactive and comprehensive approaches to so-called sanctions relief must be devised. Such approaches must anticipate the international and domestic political effects of lifting restrictions. Addressing this problem is an acute challenge as the Trump administration threatens a more expansive program of sanctions on Russia and Venezuela and is expanding the targeting of specific companies worldwide.

Even sanctions advocates should reflect on the positive effects of lifting many of the restrictions currently in place, for a simple reason: The overgrowth of sanctions weighs on the world economy so heavily that it destroys any incentive structure for U.S. adversaries to comply. Under the current conditions, new economic sanctions serve to antagonize allies and rivals alike. Reimposing sanctions on Iran has strained trans-Atlantic relations. Overuse of sanctions accelerates the collapse of U.S. international authority. It also spurs national efforts to escape U.S.-controlled networks of globalization. To prevent such outcomes, a new reconstruction approach to sanctions relief must be developed, with interventions for the short, medium, and long term.

The immediate short-term benefits of sanctions relief would be stronger with the provision of emergency finance, in the form of multilateral loans, ideally provided by a dedicated international financial institution. Special loans would also help investors price risk in the new market and reduce the stigma of reestablishing transactions with target countries. Lending has the inherent advantage of serving to commit the providing countries to the long-term implementation of sanctions relief lest they forfeit the debt.

An even quicker support mechanism could come from swap lines between central banks, such as those established by the U.S. Federal Reserve during the 2008 global financial crisis. Swap lines allow central banks to trade national currencies that they control against prevailing exchange rates. Through swap arrangements, the United States could dole out much-needed foreign exchange reserves to offset a post-sanctions run on the local currency, as happened in Sudan. The local currency pledged to the Fed in exchange would then serve as a form of payment for imports from the United States.

The creation of international trade intermediaries, such as INSTEX, can help bilateral trade recover more quickly even as banking channels between new trading partners remain limited. Such measures would help deliver the tangible economic benefits necessary to foster political support in the targeted country for the continued implementation of diplomatic agreements—Rouhani has seen his popularity fall dramatically as Iranians came to realize that the economic recovery he had promised would not materialize.

Medium-term sanctions relief must include the provision of development expertise to help strengthen institutions and increase economic well-being. Economic sanctions degrade government institutions and the business environment, and they exacerbate mismanagement, corruption, and income and wealth inequality. Technology transfers and technical assistance could counteract these problems and remedy sanctions-related achievement gaps. Development economists and nongovernmental organizations are better equipped than national security elites to analyze the harmful path dependencies caused by sanctions and propose effective remedies.

Finally, alleviating the long-term negative impact of sanctions should include commitments to help remediate environmental damage. A growing body of research has made clear that the environmental costs incurred by economies under sanctions can be debilitating for generations. With the exhaustion of groundwater supplies and the depletion of biomass and soil erosion, economic isolation has encouraged very harmful forms of land and energy use. Leaving such biosphere destruction unaddressed is irresponsible in a world increasingly gripped by catastrophic climate change.

Together these interventions over the short, medium, and long term can be melded into a single, cohesive program of “sanctions reconstruction.” The need for expansive relief efforts in the aftermath of military conflict is widely recognized; similar efforts should likewise become routine after a financial and economic war. By presenting such a package, Western governments will gain at the negotiating table: Better relief makes the promise of lifting sanctions more credible and more valuable, increasing the potential to obtain concessions and establish durable agreements.

The current trend toward the ossification and retrenchment of sanctions regimes is inflicting enormous damage on both the countries targeted and on the international community. When sanctions end, so must their harms. There is no better way to do this than to counterbalance the damage of deprivation with the power of provision.

Esfandyar Batmanghelidj is the founder of the economic think tank Bourse & Bazaar. Twitter: @yarbatman

Nicholas Mulder is a political and economic historian and a postdoctoral associate at Cornell University. He is finishing a book about the interwar origins of economic sanctions. Twitter: @njtmulder