The Sanctions Age

Backfire: How Sanctions Reshape the World Against US Interests
By Agathe Demarais
Columbia University Press, 2022

Charles De Gaulle declared in 1961, “A great state which does not possess [nuclear weapons]… does not command its own destiny.” France became the world’s fourth nuclear power in 1960 following the Gerboise Bleue nuclear test. Yet the command of France’s destiny continued to elude French policymakers—the great power anxieties that gave rise to Gaullism persist in France today. After all, the proliferation of nuclear weapons did not diminish America’s superpower status, which found new military, economic, and cultural articulations. De Gaulle was worried about France being a junior partner to the United States in the bipolar order of the twentieth century. France entered the twenty-first century as a junior partner in a unipolar world. 

American power has continued to vex French leaders, and in recent years it has been America’s economic might that has caused the most consternation. In a 2019 speech, French finance minister Bruno Le Maire suggested that a bloc that does not control its currency cannot command its own destiny. The weakness of the euro had been exposed by the power of American sanctions. Le Maire was troubled by “the example of American sanctions against Iran,” which had been imposed by the Trump administration in the previous year following the unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA). 

Most studies of the power of US sanctions naturally focus on their effects in the targeted countries. Trump’s sanctions, imposed as part of a “maximum pressure” policy, cut Iran’s few links to the global financial system, making it difficult to conduct foreign trade, even in humanitarian goods. Of Iran’s major energy customers, only China proved willing to sustain crude oil imports in the face of the US measures. The Iranian rial weakened dramatically as the central bank lost access to its reserves at the same moment that export revenues plummeted, wreaking havoc in the foreign exchange market. The loss of oil revenues also created an acute fiscal crisis, to which the government responded with expansionary monetary policy, adding to the inflationary pressures. Just as it had in 2012, Iran suffered a sanctions-induced macroeconomic shock. The resulting high inflation has dramatically eroded the living standards of ordinary Iranians.

But Le Maire was not particularly concerned with the fate of the Iranian economy. He was worried about the way that sanctions—much like nuclear weapons—allowed the United States to treat France as a junior partner. In turn, he was angry about the collateral damage to European multinationals, which for decades had been thwarted in the large and lucrative Iranian market. The dollar’s dominance in global banking and trade allowed the United States to “exercise leverage on European companies” through its sanctions, Le Maire explained. Those companies were suffering because of “American decisions that [the French] don’t always share.”

One long suffering European company is the French energy giant Total. In 1996, the US congress passed the D’Amato-Kennedy bill—the Iran and Libya Sanctions Act—as part of a growing set of nuclear sanctions. The sanctions were extraterritorial in nature and sought to prevent investment by non-US firms in Iranian and Libyan energy sectors. Total had recently invested in the second and third phases of Iran’s massive South Pars gas field, swooping in after domestic politics prevented American oil giant Conoco-Philips—Iran’s preferred investor—from entering the project. European authorities balked at the idea that American legislation could command the destinies of European firms. After two years of intense lobbying and a threat to refer the issue to the WTO, the Clinton administration struck a compromise with Europe. Total ramped-up operations in Iran and remained an investor until 2010, when the company withdrew from the country in compliance with EU sanctions imposed over Iran’s nuclear program.

Six years later, following implementation of the JCPOA, Total was the first major oil company to sign an agreement to re-enter the Iranian market, reaching a $4.8 billion deal to continue development of the South Pars gas field. But the triumphant return was short-lived. Once again, political developments in Washington came to determine Total’s fate. 

The election of Donald Trump in 2016 put European businesses active in Iran on notice. Trump had vowed to tear-up the Iran nuclear deal. Total tried to change his mind. The company opened a lobbying office in Washington tasked with protecting their investment in Iran. The company’s CEO, Patrick Pouyanne, made a personal appeal to Trump at a dinner in Davos, asking Trump to consider giving the reformists in Iran more time to “help them to go towards more democracy.” Pouyanne’s argument was a sophisticated one, and evidently the wrong one given his audience. Trump was unswayed and pulled out of the JCPOA in May 2018 despite Iran’s full compliance with its commitments under the deal. Total exited Iran again in August of that year. In 2019, US sanctions would force the French company out of Venezuela. This year, sanctions have dogged Total’s operations in Russia.

This history makes Total “the textbook example of how secondary sanctions may derail the business plans of non-American companies,” according to former French treasury official Agathe Demarais in her new book, Backfire: How Sanctions Reshape the World Against US Interests. 

In Backfire, Demarais examines how the growing use of economic sanctions is dramatically reshaping the international order. In her view, “few if any foreign policy tools have as big an impact as sanctions,” which have “not only come to play a major role in the lives of millions of people and in companies around the world” but have also reshaped “relations between countries, and in turn global geopolitics.” 

Side effects

To be more precise, it is American sanctions that have had this impact. Demarais focuses on the incredible power that the United States has gained by developing its sanctions regime, leveraging the global dominance of the dollar over the past two decades to devise over seven sanctions programs targeting upwards of 9,000 entities. Through its sanctions, especially the financial ones, the United States wages economic war and commands the destinies of many states. In this sense, sanctions are a weapon. 

Demarais is no spectator. She first grappled with sanctions policy during a posting as a French treasury official in Moscow between 2010–2014, where she worked on Russia sanctions imposed after the annexation of Crimea, and in Beirut between 2014–2017, where her portfolio included the numerous sanctions programs targeting Middle Eastern countries. 

The book’s particular perspective can be distinguished from works by former US officials, such as Juan Zarate’s Treasury’s War and Richard Nephew’s The Art of Sanctions. American sanctions practitioners—while aware that sanctions do often backfire—tend to write about sanctions with a certain detachment. For one, they rarely have experience “in the field” and the unintended consequences are, if anything, an affirmation of the unique power of the economic weapon they helped develop.  For her part, Demarais, while assuring the reader she is “not for or against sanctions,” aims to provide a “clear picture” about their effects. She presents two main arguments for why overuse of sanctions by American policymakers is backfiring, hurting US interests.

First, Demarais describes how the unilateral and extraterritorial use of sanctions has strained transatlantic relations going back several decades. She recounts the Siberian pipeline “debacle” of the 1980s, the tussle over extraterritorial sanctions against Cuba, Iran, and Libya in the 1990s, the fight over the Nord Stream 2 pipeline in 2017, and the fallout from Trump’s withdrawal from the Iran nuclear deal in 2018, which she considers “the straw that broke the camel’s back” for European officials worried about the extraterritorial power of US sanctions. In June 2018, the foreign ministers and finance ministers of France, Germany, and the United Kingdom took the unusual step of writing a joint letter to their American counterparts, demanding measures that would ensure “the extraterritorial effects of US secondary sanctions will not be enforced on EU entities and individuals,” enabling European firms to maintain business with Iran. The Americans rejected the plea.

Second, Demarais explores how the US overuse of sanctions has contributed to efforts by targeted countries to not just find ways to circumvent sanctions, but also to find ways to permanently reduce the impact of US financial coercion. In January 2019, European governments established a state-owned trade intermediary called INSTEX that was intended to enable European and Iranian companies to trade without needing to make cross border transactions, nullifying at least part of the impact of US sanctions on Europe-Iran trade. While INSTEX never constituted a serious challenge to US financial primacy, Demarais suggests that China’s development of CIPS, a financial messaging and clearing system intended to compete with SWIFT, may lead to the formation of a “fragmented global financial system” in which “some channels are controlled by the United States, while others escape Washington’s scrutiny.” Around 1,200 financial institutions in one hundred countries are currently connected through CIPS, around one-tenth of the number connected through SWIFT. But the adoption of parallel financial channels is growing, as predicted by Demarais. Last month, Russia and Iran announced they were connecting their banking systems as the two countries seek to create a united front against Western sanctions. Russian and Iranian banks will be able to send payment instructions using Russia’s own SWIFT alternative, called SPFS. 

The Russia sanctions

After three years of research and writing, Demarais narrates, she was putting the “finishing touches” on her manuscript when Russia invaded Ukraine. Sanctions have been the cornerstone of the Western response to Russia’s invasion. US and European financial sanctions have frozen about half of Russia’s foreign exchange reserves and excluded Russian banks from networks like SWIFT. Export controls have strained Russia’s industrial supply chains, making it more difficult for Russia to import key technologies such as semiconductors. The oil price cap instituted towards the end of last year is beginning to take a bite out of Russia’s oil revenues, adding fiscal pressure on the government. Given the overall chilling effect of the Western sanctions, over 1,000 Western businesses have withdrawn from the Russian market. Notably, these measures have been carefully coordinated by American and European policymakers, relieving some of the transatlantic strains that had motivated Le Marie and others to call for greater European economic sovereignty during the Trump administration. The US has not applied secondary sanctions on Russia, counting instead on the EU’s own sanctions to curtail the activities of European companies. 

The swiftness with which Western governments isolated Russia’s economy has given a new impetus for the likes of China and Russia to find ways to reduce their vulnerability to Western economic weapons, leaving Demarais even more bearish about the future of unilateral sanctions. In a recent Foreign Affairs essay, she cites intensified Chinese and Russian efforts to cease conducting trade in dollars, including through the adoption of digital currencies. These efforts began years ago—by 2020 “China settled more than half of its trade with Russia in a currency other than the US dollar, making the majority of these commercial exchanges immune to US sanctions.” But the goal of creating sanctions-proof financial channels has gained greater importance following the Russian invasion of Ukraine. Considering the new geopolitical stakes, Demarais believes the trend is permanent, suggesting that “within a decade, US unilateral sanctions may have little bite.”

Whether Russia and China can develop a viable defense against the weaponized dollar remains unclear—there are plenty of reasons to doubt that the two countries can achieve the technologies and institutions necessary to operate a fully parallel financial and trade system. But the prospect of a more concerted challenge to US dollar hegemony is not the only geopolitical consequence of the Russian invasion of Ukraine. Europe’s push for greater economic sovereignty has fallen by the wayside. The unified Western response to Russia gives the impression that the US and Europe have moved past the disagreements that make-up a large part of Demarais’s book. But even as the transatlantic allies apply sanctions on Russia in concert, the inequities that underlie Europe’s economic subservience to the United States persist.

Last October, French President Emmanuel Macron accused the United States of “double standards” as American energy companies rake in huge profits by exporting LNG at record prices to an energy starved Europe. Macron’s comments point to an overlooked fact—Europe always bears a higher cost than the United States when it supports sanctions programs. A 2020 paper published by the Kiel Institute found that “European countries bear a much higher cost of sanctions than the US, relative to their respective GDP values.” For example, with losses equivalent to 0.2 percent of its GDP, sanctions were eighteen times more costly for Germany than for the US at the time of the report. While Europe may have smaller defense budgets than the United States, it is paying for Western security in other ways. Of course, these contributions count for little in Washington, which continues to treat Europe as a junior partner.

Moreover, Western sanctions can create acute economic pressures for countries in the global South, particularly by contributing to elevated commodities prices. Considering these pressures, broad sanctions programs can even backfire by deepening economic dependence on the countries being targeted by the West—in this case, Russia. Patrick Pouyanne of Total warned a French parliamentary committee that “the vision which we have of this conflict in the Western camp is by no means shared by the vast majority of the rest of the world.” Reflecting on conversations in the Middle East and South Asia, Pouyanne noted that his interlocutors were “very surprised by our attitude when we unilaterally imposed sanctions and only afterwards went to the United Nations to check if that was ok.” Pouyanne’s warning seems to be that if China and Russia are to spearhead an Eastern bloc, the West should not take it for granted that the horrible spectacle of Russia’s invasion will lead countries in the rest of the world to side with it. No doubt Pouyanne has been tracking the tremendous volume of Russian oil still being consumed by countries like India.

A new multilateralism?

In 2018, the European Commission published a strategy document titled “Towards a Stronger International Role of the Euro.” At the time, one of the intentions behind creating a stronger euro was to defend European companies exposed to “currency risks and political risks, such as international sanctions that directly affect dollar denominated transactions.” But as Russia continues to wage war in Ukraine, as Iran continues its nuclear intransigence, and as rhetoric from China turns more bellicose, Europe has been forced to weaponize interdependence. Europe is leveraging the prominence of the euro in global trade, the importance of the European banking sector, and the significance of foreign direct investment by European multinational companies to create its own tools of economic coercion.

European Union High Representative Josep Borrell recently asserted that Europe is facing “the consequences of a process that has been lasting for years” in which Europeans “decoupled the sources of [their] prosperity from the sources of [their] security.” Speaking to his ambassadors, Borrell bluntly insisted that Europeans “need to shoulder more responsibilities” to address “mounting security challenges.” He called on Europe to end its dependence on trade with Russia and China, two countries that have underwritten European prosperity, as well as its reliance on the United States, which has guaranteed European security.

Implicit in Borrell’s diagnosis is the idea that while European power was once advanced by deepening trade and investment ties, to back control over its security, a credible European sanctions power is needed. Two decades of mutual economic gains were not enough to stop Putin from starting a war in Europe. But Borrell believes that the economic war Europe has launched in response will deter other states from such rash action in the future. To put it another way, Borrell is ready to unify European economic and security policy even if doing so requires decoupling fully from Russia and partially from China.

The coordinated effort to impose sanctions on Russia demonstrates a “reinvention of US diplomacy” rather than something that reflects European agency. Demarais writes that the current moment “highlights that after decades of going it alone, America needs allies to implement sanctions too.” But her prediction of a restored “multilateralism” may be misplaced. Today, the European effort to assert economic sovereignty is in service of a sanctions alliance with the US. It does not establish an independent pole of influence. 

At the dawn of the nuclear age, De Gaulle worried that “two super-states would alone have the weapons capable of annihilating every other country.” He wondered how “under these conditions… could Europe unite, Latin America emerge, Africa follow its own path, China find its place, and the United Nations become an effective reality?” His question remains startlingly relevant as European far right parties use the inflationary costs of the Russia sanctions to sow discord, as countries in Latin America and Africa worry about the end of the brief multipolar dream, as China prepares for long-term confrontation with the United States, and as the United Nations is paralyzed. 

De Gaulle’s attempted solution was a simple one. To maintain influence in the atomic age, France needed to become a nuclear power. Failing would mean remaining dependent on the United States for security. This in turn would curtail French sovereignty. As Maurice Vaisse has argued, for De Gaulle, acquiring a nuclear capability “was more a question of protecting oneself from one’s allies than of arming oneself against one’s enemies.” 

Six decades on from the first French nuclear tests, it is sanctions—not nuclear weapons—that are reordering the world. European officials are taking a similar approach at the advent of the sanctions age as they did at the dawn of the nuclear age. Ardent defenders of sanctions claim that the weaponization of the euro will advance European diplomacy and economic sovereignty. But by seeking to establish their own sanctions powers, European officials are consenting to the proliferation of economic weapons and participating in an arms race in which the US has an unassailable lead. Meanwhile, countries like China, Russia, and Iran are hoping to neutralize the threat posed by the West’s economic weapons by establishing parallel financial systems. But so long as the dollar remains a weapon in the global economy, those efforts are likely to fail. With allies subservient and adversaries strangled, to the extent that sanctions are reordering the world, it is according to American interests and in the service of American power, even if the efforts at times appear to backfire.