What U.S. sanctions, Russia and Iran have in common

For the past several decades, sanctions have generally been seen as a tool of last resort. Yet when the country at issue lacks sophisticated sanctions capabilities, sanctions look less like a last resort and…

What U.S. sanctions, Russia and Iran have in common

For the past several decades, sanctions have generally been seen as a tool of last resort. Yet when the country at issue lacks sophisticated sanctions capabilities, sanctions look less like a last resort and more like a blunt instrument of national power.

In the middle 1980s, there was an upsurge in U.S. sanctions against foreign entities and individuals with strong connections to Iran. The move was a strategic response to Iran’s massive oil sales to Iraq and the Iranian regime’s policy of supporting Palestinian terrorism.

First, the government tightened rules on financial transactions with Iran, particularly involving any country doing business with the U.S. In short, though both Iraq and Libya actively blocked what could be blocked by other governments, it was easier for the U.S. to take the lead.

Following a number of debacles with respect to its financial transactions, Iran reacted to the tightened sanctions by freezing all U.S. dollars and moving all transactions from the Persian Gulf to the U.S. rather than the other way around.

While the loosening of sanctions following the signing of the Iran deal was supposed to help ease tensions with regard to the nuclear program, in Iran sanctions have been the main event. In November 2017, Iran set a deadline for the removal of U.S. sanctions, and it remains on track to meet it.

Finally, like the U.S., Russia is lagging in developing effective sanctions against its adversaries. U.S. sanctions are, of course, far more sophisticated. Russia has much of the same economic interests as the U.S. but is less likely to make them the centerpiece of its foreign policy.

In terms of their economic impact, the key distinguishing features of U.S. sanctions are not only their scale, but also their effects on the U.S. economy. One prominent example of this is the Iranian deal, which provides many monetary benefits to Iran, as well as some concessions on nuclear physics.

But the U.S. also provided American businesses the opportunity to carry out some serious investing in Iran and other sanctioned countries by allowing them to pay for their imports and energy purchases with U.S. dollars — even if they were in euros. This gave U.S. businesses a decisive advantage in providing desperately needed private capital to the sanctioned states.

The multi-billion dollar investments made by the U.S. in Iran are now mostly being carried out by banks in Switzerland and in China.

These were investments whose benefits the U.S. had the greatest possibility of recouping through tougher sanctions, which thus can have a different, less-desirable economic impact on the target country.

The upshot of all this is that it is possible to overestimate the economic costs of an embargo on a country like Iran, and to overestimate its effect on foreign investors.

This is particularly the case where an immediate and well-coordinated policy — particularly the U.S. government’s policy — can offer investors an advantage and ultimately lead to better, less costly investments for the target country.

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