Transcript Security Scenarios And The Global Economy

NS3040
Fall Term 2014
Sanctions
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
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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
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Input-Output I
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Input-Output II
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Input-Output III
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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 7
monitored.
Sanctions III
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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:
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Sanctions: Empirical Findings
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Richard Haass: Sanctioning Madness I
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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
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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.
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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.
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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
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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.
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Richard Haass: Sanctioning Madness VI
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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
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Never use secondary sanctions
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
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Iran Sanctions I
Oxford Analytica, “Tighter Sanctions May Prove CounterProductive”, 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
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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
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Europe
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 economicallyinefficient nature of the apartheid system and the rising
effectiveness of the political opposition.
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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
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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
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Iranians
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
states
With regard to Iran:
• Intensification of sanctions on Iran represented a gamble by
international community that if unsuccessful could compromise the ongoing negations
• Sanctions seem to have brought Iran to the negotiating table
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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
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Extra Slides
• iIran Sanctions
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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
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Iran Crude Exports
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Change in Imports of Iranian Crude
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Iran Export Quantity (monthly)
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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
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protest
Iranian Export Revenue (monthly)
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Iran Sanctions 2012 III
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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 33
months
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
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Change in Iranian Imports 2012 (year on year)
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Change in Iranian Imports 2012 (half on half)
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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
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