Use it and lose it

The limits of sanctions

When backpacking in cold weather I developed a theory about layering for warmth. The essence of the theory was that the most important layer is the one that stays in the bottom of the backpack. I might be shivering, but I know that if I get really cold there’s one more layer I can put on. I take comfort, if not actual warmth, from that. But if I ever actually put on the last layer and still shiver, then hypothermia is a genuine risk.

There are tools that are most effective when never used. Nuclear weapons fall into this category. Such positive effect as they have lies in deterrence. Should deterrence fail, nuclear weapons become a disaster.

Economic sanctions are a marginal case. Employed judiciously, they can influence the behavior of those against whom they are applied. The peril of losing access to American wheat discouraged Britain from recognizing the Confederacy during the Civil War. American sanctions against the apartheid regime of South Africa seem to have had an important effect in ending that regime in the early 1990s.

Economic sanctions are a tempting tool of diplomacy. Presidents can deploy them without consulting Congress. They put no troops in harm's way. Their use does not preclude escalation to military force if necessary. Because of the global reach of the U.S. dollar, there are few countries or regimes beyond American sanctions.

But their durability is inversely proportional to their effectiveness. As soon as they start to bite against a foreign regime, that regime has an incentive to find ways to lessen its dependence on the dollar. Pundits and American leaders these days sometimes describe an axis of authoritarianism, led by China and Russia and including Iran and North Korea. Each country does indeed have an authoritarian form of government. But what's driven them together is actual or potential pressure from American economic sanctions. American sanctions have encouraged the four countries to create a dollar-free trade zone beyond the reach of the sanctions. 

The consequence is the weakening of the grip of the dollar on the world economy. Two decades ago, the dollar appeared about to become the world's currency. It was ubiquitous, and dollar transfers and holdings were freer from restrictions than transfers and holdings in any other currency. Most countries were content for America to become the world's banker, because the banker stuck to business.

The U.S. government's growing reliance on sanctions changed the dynamic. Iranian, North Korean and Russian assets were frozen. The governments of those countries reduced their exposure to the dollar. Russian oligarchs stopped parking their money on Park Avenue. The Chinese government and Chinese investors took similar steps.

After the start of the Ukraine war, sanctions on oil sales from Russia were supposed to crimp the Kremlin’s ability to pay for the war. Instead, China began buying large quantities of Russian oil, ensuring that Russia wouldn't have to quit the war from lack of financial resources. In the bargain, China made itself less vulnerable to American sanctions, such as those that might apply to oil purchases from suppliers in the dollar zone.

Russia and China aren't impervious to American sanctions. But they're less susceptible than American leaders hoped. The longer the sanctions remain in place, the broader and deeper the dollar-free economy will become. Iran is a big player, North Korea a bit player. Other countries occasionally take part, and still others are tempted to join.

The designers of economic sanctions aren't unaware of this effect. But policy makers think in terms of months and a few years, while the effects of the erosion of the dollar’s strength might take decades to become manifest. Joe Biden hopes he can end the war in Ukraine before he destroys the hegemony of the dollar.

In this area, time is on the side of the authoritarians. One advantage dictators often have over democrats is the ability to play a long game. America once was able to play a long game, specifically during the half century of the Cold War. No single president felt obliged to bring the Cold War to a decision. Patient pressure was the essence of the policy of containment. Over time it worked. With good reason, other countries today doubt America's ability to apply pressure for long periods.

Meanwhile the very countries Washington is worried about are applying patient pressure against the United States. Vladimir Putin assumes Americans won't be willing to defend Ukraine as long as they tried to defend their client regime in Afghanistan. Putin's not going anywhere, but the Americans might take their money and go home. Xi Jinping doesn't have to reassert China's authority over Taiwan during this American presidency, or the next one or the one after that. Taiwan will always be 100 miles from the Chinese mainland, and the United States 7000 miles from Taiwan.

American presidents will be tempted to pile on more economic sanctions. But finally they'll reach the last sweater in the backpack. When that doesn't stop the shivering–well, as John Kennedy said to Nikita Khrushchev after an acrimonious meeting in Vienna, “It will be a cold winter.” The Cuban missile crisis followed.