NS3040 Summer Term 2014 Sanctions

1. NS3040 Summer Term 2014Sanctions

2. Sanctions: Overview Types and objectives of sanctions • Change target country’s policies in a modest way • human rights and nuclear nonproliferation possible types • Undermine a target government • U.S. campaign against Castro • Soviet campaign against Tito • Disrupt a military adventure • U.K sanctions against Argentina during Falklands conflict • Impair military potential of a target country • WWI, WWII, COCOM sanctions against USSR • Change target country’s policies in a major way • U.N. campaign against South Africa over apartheid and control of Namibia

3. Sanctions I • Sanctions can be of two types • Trade – cutting off supplies or blocking exports • Financial – restricting credit or investment • For trade sanctions the theory is straight-forward • The input-output matrix of the receiving country reveals import dependence • Calculations are made of the impact of partial or total boycott of selected imports • A search is made for those imports yielding maximum effect with minimum boycott • The ideal case would be that of a system in which total boycott of one product alone would be sufficient

4. Sanctions II Ideal set of conditions for trade sanctions: • Imports are critical for important sectors of target’s economy • There is no internal substitute for these imports • A large percentage of the imported imports comes from the sending nation(s) • There are no external substitutes for these imports so that receiving nation cannot threaten to change trade patterns • These imports make up a very small part of the exports of the sending nation(s) and there are no easily available substitute for them. • Exports from the receiving nation can easily be obtained elsewhere • The trade relations of the receiving nation can easily be monitored.

5. Sanctions III • Several limitations of sanctions • The means used may not be adequate for the task • The sanctions themselves may create an antidote • Allies of the target country may support its cause or • There may be a backlash abroad and at home to the limitation or suspension of sanctions • Empirical research on sanctions suggests some general factors leading to success and failure:

6. Sanctions: Empirical Findings

7. Richard Haass: Sanctioning Madness I • Written in 1977 but still very relevant • Haass a Presidential advisor during Desert Storm • Concerned over the increased use of sanctions • 35 countries targeted by new American sanctions boom 1993-1996 alone • Haass concerned that sanctions were increasingly at the core of U.S. foreign policy • The U.S. uses them more than any other country • Argues that sanctions frequently contribute little to American foreign policy goals while being costly and even counterproductive • In 1995 alone sanctions cost U.S. companies between $15 and $19 billion and affected some 200,000 workers • Secondary sanctions contributed little but were jeopardizing U.S. trade relations

8. Richard Haass: Sanctioning Madness II • Sanctions Boom • Sanctions popular because appears to offer a proportional response to challenges in which interests at stake are less than vital • An expression of displeasure – satisfy domestic need to do something • More frequent because of single issue constituencies in Congress – human rights, environmentalism, ethnic, religious or racially oriented causes • CNN effect – people watch problems and expect U.S. to act • End of Cold War and demise of the USSR also contributed to sanctions – no longer opposition from Soviet Union – veto in U.N.

9. Richard Haass: Sanctioning Madness III • Do sanctions work? • Standard study of more than 100 cases suggests sanctions have worked to one extent or another about one third of the time • Success on a scale of 0 to 16, so always fuzzy. • Goals of sanctions not always clear • Usually work best against your friends, not enemies. • Successes: • Sanctions against Iraq after Desert Storm increased Iraq’s compliance in UN’s call for elimination of weapons of mass destruction • Sanctions one reason Serbs’ decision to accept Dayton agreement ending fighting in Bosnia • Unclear if they were responsible for Libya turning over the PanAm 103 terrorists.

10. Richard Haass: Sanctioning Madness IV • Limitations of Sanctions • Often more harm than good • Unlikely to achieve results if the aims are large and time is short – Saddam after invading Kuwait • Sanctions against Iran have not altered nuclear position • Castro brothers still running an authoritarian state • North Korea still testing atomic bombs • Unilateral sanctions particularly ineffective – often costly to target country, but ineffective in meeting goals • Generating international support for sanctions extremely difficult • Most governments do not like to use sanctions – too costly • Resort to secondary sanctions has threatened WTO and good will of countries working with U.S. in other areas

11. Richard Haass Sanctioning Madness V • Missing the target • Sanctions often produce unintended or undesirable consequences • Haitian sanctions caused economic distress and massive exodus to U.S. • Bosnia sanctions weakened the Muslims and shifted the balance of power to Serbs – led to attacks • Sanctions often only affect general population and not decision makers • Sanctions often strengthen target country leadership – control food (Iraq), or make profits smuggling (Iran) • Sanctions often discredit pro-US groupes (Iran) • Used by leaders as an excuse for poor economic performance (Cuba), (Iran), rather than their mismanagement.

12. Richard Haass: Sanctioning Madness VI • Smart sanctions • Penalize leaders while sparing general population • Only partial solution • Some successes – Haitian generals left • Scope of use is rare – lack of information • Recommendations • Before imposing sanctions should show that anticipated costs less than probable benefits • Comparisons should be made with other alternatives – diplomacy covert action, military intervention • Broad sanctions should not be used as a means of expression • Multilateral support should be prerequisite for U.S. to use them • Never use secondary sanctions

13. Richard Haass: Sanctioning Madness VII • Recommendations (contd.) • Sanctions should not hold major bilateral relationships hostage to one or two issues • Especially important with country like China • Human rights important, but U.S. needs cooperation with China in a number of strategic areas • Humanitarian exceptions should be part of any comprehensive sanction regime • Any imposition of sanctions should be swift • Otherwise, preparations, stockpiling etc. can take place • Before sanctions imposed President should provide policy statement similar to War Powers Act • Sanctions should be subject to an annual impact statement • Should try to work sanctions – carrots -- into broader diplomatic efforts

14. Iran Sanctions I Oxford Analytica, “Tighter Sanctions May Prove Counter-Productive”, July 5, 2013 Main argument • Economic sanctions on Iran have been strengthened to an unparalleled degree by a range of international actors in recent years • Measures have been broadened to such an extent that they can be considered “comprehensive” sanctions • This is a departure from more targeted strategies favored by most governments in recent decades • An embargo on Iran’s energy and financial sectors in contributing to acute economic problems in the country • President elect Hassan Rouhani has pledged to address the issue by attempting to roll back sanctions

15. Iran Sanctions II • A range of countries and groups of countries have imposed and intensified economic sanctions on Iran in recent years, both in the UN framework and individually: • UN sanctions included a targeted arms embargo, travel and financial restrictions, and banning exports linked to uranium enrichment • US sanctions impose restrictions on international financial institutions dealing with Iran’s Central Bank, curtail Iran’s ability to sell oil and gas to the global market and place mandatory penalties on foreign entities investing substantial funds in the country • EU sanctions are particularly significant given the level of shared trade, formally accounting for around a third of Iran’s exports. They include an oil embargo, strict measures against Iran’s Central Bank, trade bans on metals and natural gas and restrictions that frustrate commercial dealings between Iran and Europe

16. Iran Sanctions III Sanctions Lessons • Sanctions appear to be slowing developments in Iran’s nuclear program, • However highly unlikely to help sanctioning powers achieve their policy aims • Stricter sanctions do not typically equate to more effective results, particularly in the case of authoritarian regimes where leaders may hold their fortunes in multiple bank accounts • Some of the toughest sanctions regimes including those on Cuba and North Korea have nor forces a change in behavior or prevented engagement in international trade • In the case of “successful” broad based sanctions against apartheid South Africa, more important factors were the economically-inefficient nature of the apartheid system and the rising effectiveness of the political opposition.

17. Iranian Sanctions IV Stricter sanctions can be counterproductive • They can serve as a unifying function providing the targeted regime with political capital against sanctioning powers as in the case of Cuba • They can benefit regime leaders through the sale of scarce commodities at elevated prices, as in Saddam Hussein’s Iraq • By severely damaging Iran’s economy and infrastructure and further isolating it politically, chances for productive talks are reduced • This was observed in Haiti, whose bureaucratic infrastructure was decimated under US and UN sanctions

18. Iran Sanctions V Backlash Risks • Severe trade bans and oil embargoes on Iran are now so broad that they can be considered comprehensive sanctions, widely associated in the past with negative humanitarian consequences: • Comprehensive sanctions against countries including Iraq, Cuba, Haiti, El Salvador, Nicaragua and the former Yugoslavia have all shown clear impacts on health • Effects are felt even when food and medicine are exempt from sanctions legislation • They mostly affect vulnerable sectors of society including children, women, the elderly and those suffering from chronic health problems • The UN Secretary General has expressed concern about the impacts of international sanctions on ordinary Iranians

19. Iranian Sanctions VI • Outlook • The reversal of most UN and EU sanctions would be relatively straightforward • However easing of U.S. measures could be cumbersome. • Many are Executive Orders which can be revered by the president, but some can only be lifted if approved by Congress • Sanctions likely to become increasingly vital instruments over time for Western powers, particularly for the EU and its member statesWith regard to Iran: • Intensification of sanctions on Iran represented a gamble by international community that if unsuccessful could compromise the on-going negations • Sanctions seem to have brought Iran to the negotiating table

20. Iranian Sanctions VII • Assessment • Sanctions no doubt slowed Iranian access to materials required for the nuclear program • Adverse humanitarian consequences for ordinary Iranians had the potential of posing reputational and other political problems for the sanctioning powers. • Stricter sanctions imposed now could undermine tentative six month agreements reached in Geneva, January 2014

23. Extra Slides • iIran Sanctions

24. Iranian Sanctions 2012 I • New Year’s Eve 2011 President Obama signed National Defense Authorization Act (NDAA) • Called for imposition of U.S. financial sanctions on anyone settling oil trades with the Central Bank of Iran • NDAA included exemptions for countries that “significantly reduced” the amount of Iranian crude they consumed • Early 2012 EU announced a ban on crude oil imports also scheduled to take effect during the summer • Combined impact of these two actions on Iranian crude exports has been significant • Average Iranian Sales fell by 36% in 2012 from 2.4 million bbl/d to 1.5 million bbl/day

25. Iran Crude Exports

26. Change in Imports of Iranian Crude

27. Iran Export Quantity (monthly)

28. Iran Sanctions 2012 II • Not clear exactly how much Iran was able to sell oil for in 2012 • Western sanctions have raised cost of doing business with Iran and increased negotiating leverage of Iran’s customers • Assuming Iran was able to sell every barrel at the Official Selling Price posted by Iranian company NIOC, export earnings down $33 billion in 2012 • While a 35% decline from 2011 levels, high oil prices meant 2012 was still Iran’s best year in recent history despite nearly 1 million bbl/d decline in export quantity • But payments delays and discounts coupled with rising production costs and government revenue needs ment up to $65 billion invoiced was not fully paid and still was not enough to keep B/P in check • By end of the third quarter the market value of the Iranian Rial had fallen by 2/3 – merchants took to the street in protest

29. Iranian Export Revenue (monthly)

30. Iran Sanctions 2012 III • Iranian exports hit lowest point over summer • During fall, Iranian exports began to recover • EU export ban continued to keep Iranian out Europe • However Japan and Korea started buying again with each country importing just under 200,000 bbl/day by end of the year • Indian imports recovered slightly and Chinese imorts ended the year just under 600,000 bbl/d same as December 2011 • Oil prices firmed up a bit increasing export revenue from $3 billion in July to $5 billion in December • Rebound in Iranian exports in recent months does not mean they are in the clear • While all major Iranian crude customers have secured an exemption from the US, these exemptions expire after 6 months

31. Iranian Sanctions 2012 IV • Countries must demonstrate an additional “significant reduction” to win extension • So far “significant reduction” not specified • Iran’s trade praters will likely need to show at least a 15% reduction during the first half of 2013 to win another exemption • Assuming EU imports stay at zero: • would bring Iranian exports back down to 1.4 million bbl/d if calculated on a year on year basis and • just under 1 million if calculated half-on-half

32. Change in Iranian Imports 2012 (year on year)

33. Change in Iranian Imports 2012 (half on half)

34. Iranian Sanctions 2012 V • More important is Iran’s ability to get paid for what it sells • New sanctions took effect in early 2013 that prevent countries that import Iranian crude from paying for the oil using hard currency. • Instead money must be kept in an escrow account inside the consuming country which Iranian importers can tap to buy goods and services • Will significantly increase the macroeconomic stress imposed by sanctions • Will leave Iran short of a wide range of goods and services Iranian’s expect • Raises the odds of a balance of payments crisis later this year