In Conversation with Agathe Demarais
3 April 2023
9DASHLINE recently had the pleasure of speaking with Agathe Demarais to discuss her timely and important book Backfire: How Sanctions Reshape the World Against U.S. Interests.
Drawing on interviews with experts, policymakers, and people living in sanctioned countries, the book reveals how sanctions are transforming geopolitics and the global economy, as well as diminishing US influence worldwide.
Given the adverse effects and historical record of using sanctions, as well as the Office of Foreign Assets Control’s staff shortages, why are sanctions still perceived as the ‘weapon’ of choice in US foreign policy?
AD: Sanctions are the ‘go-to tool’ for American diplomats to respond to crises and wars — as we’re seeing in the case of Ukraine today. Around 10,000 individuals, companies, and economic sectors are currently under some form of US sanctions, making the US the biggest sanctioning power in the world (far ahead of the UN or the European Union). The popularity of sanctions among American policymakers reflects three factors.
First, sanctions are often perceived to be a cheap tool — only a handful of civil servants are needed to draft them, and the cost of implementing them in practice is borne by banks and companies. This is a crucial point, as it points to some form of externalisation of US foreign policy, with private firms shouldering the costs and responsibility of implementing sanctions. Second, sanctions can be imposed quickly. After Russia invaded Ukraine in February 2022, the US and its allies were able to impose stringent sanctions on Moscow immediately. Third, sanctions fill the void in the diplomatic toolkit between (ineffective) diplomatic declarations and (deadly) military interventions. In other words, sanctions have side effects and are certainly an imperfect tool, but so far the US hasn’t found anything better to advance its foreign policy interests and confront the likes of Russia, Iran, or North Korea.
It seems that sanctions are one factor among many in achieving goals such as pressuring Iran to engage in dialogue in 2015 but here — as in other cases — sanctions are often hyped as the deciding factor for ultimately causing a change in behaviour. Is there a way to measure the effectiveness of sanctions beyond quantitative indicators?
AD: Your question is a key one in the debate regarding the effectiveness of sanctions: as historians say, we do not have access to a counterfactual. That is to say, we do not know what would have happened if sanctions had not been in place. Would Russia have invaded all of Ukraine in 2014 if Western countries had not imposed sanctions on Moscow back then? Would Iran have come to the negotiating table and signed a nuclear deal in 2015 if the Iranian economy had not been under stringent US sanctions? The honest answer is that we do not know. From my perspective, however, sanctions did play a huge role in convincing Iran to sign the nuclear deal: it was only after Rouhani was elected as president in 2013, with a clear mandate to get sanctions lifted, that international negotiations around a deal started to become productive. But the truth is that only Iranian leaders know how important sanctions were in their calculations.
A related issue is that measuring the effectiveness of sanctions requires having a clear idea about their objectives. This is a problem, given that these are sometimes unclear. Russia is an obvious example of this. There is a lot of confusion regarding the effectiveness of sanctions against Moscow nowadays, stemming from a lack of clarity surrounding their goals. These sanctions are not about regime change (history shows that this never works); they will not provoke a Russian economic collapse (Russia is the ninth largest economy in the world, with huge financial resources); and they will not change Putin’s calculations in Ukraine (he thinks he’s waging an existential war against Ukraine and Western countries). The objective of sanctions on Russia is to weigh on the Kremlin’s ability to wage war in Ukraine. Yet sanctions will not be a ‘magic bullet’ and will not produce immediate results; it will be a long-term endeavour.
In your book, you observe that the US government seems to specifically target non-US businesses when enforcing its sanctions and note that the average fine for American firms is about 70 per cent lower than their non-American counterparts. Can you help us understand why this is the case?
AD: This question would be one for American policymakers! Since 2009, the Office of Foreign Assets Control (OFAC) — which is the US Treasury Department’s agency in charge of sanctions — has imposed more than USD 4 billion in fines on foreign companies breaching sanctions. Over the same period, US firms had to pay less than USD 300 million in fines for evading sanctions. This could well mean that US companies are more virtuous than foreign ones. However, a closer look at the data shows that this is not the case. American companies breach sanctions just as much as foreign ones, but when they do, the fines that they receive are lower. In recent years, a foreign company caught evading sanctions could expect to receive a fine of USD 139 million. For American firms, the average fine was 70 times lower, at just USD 2 million.
This stark difference fuels a widespread perception among European firms that the US uses sanctions to advance American economic interests. This is nothing new, and a number of American faux pas have fuelled this perception: the fact that American energy firms are able to continue operating in Venezuela, for instance, is mind-boggling for European firms. In 2018, after the US exited the Iran nuclear deal, European firms were told that they had weeks to leave Tehran if they did not want to fall under US secondary sanctions. From my perspective, this perception that the US has double standards regarding sanctions only benefits countries under sanctions: cracks in the transatlantic alliance are exactly what Putin delights in, given that he’s betting that the Western sanctions front will not manage to remain united (and I think — or at least hope — that he’ll be proven wrong).
You write that a "fragmented — instead of U.S. dollar dominated — global currency landscape could emerge" (p. 141). This, understandably, would be bad news for US policymakers. However, it is less clear how it would also affect the broader international political and economic system as we know it, including potentially leading to a fairer (as in, less hegemonic) system. Could you walk us through this?
AD: The first thing I’d say here is that I am not sure that a multipolar world would be fairer. Such a fragmented economic landscape would illustrate the economic rise of China, which hardly shares Western democratic values, shows little respect for human rights principles, and applies unfair practices towards Western firms operating in the Chinese market.
The point that I make in Backfire is that the global geopolitical landscape is fragmenting, with the emergence of three blocs: one that is US-led (of which the EU is part); another one that is dominated by China (of which Russia is part); and a final one, made up of mostly emerging countries that have yet to pick a side. In the coming decades, currency blocs and financial tools will increasingly reflect this fragmentation. For currency blocs, the Chinese renminbi (assuming Chinese capital controls will eventually be relaxed) could play a bigger role in global trade as China’s economic rise continues: the Chinese economy will probably become the world’s largest economy by the 2040s. The willingness of countries under sanctions, such as Russia, to de-dollarise their economy further fuels this phenomenon.
In terms of financial tools, emerging countries are increasingly interested in getting rid of Western financial channels, such as Swift (a Belgian co-operative that acts as a rolodex of global banks to route financial transfers). China is developing an alternative to Swift, called CIPS. This system is far smaller than Swift, but I argue in Backfire that it may prove to become increasingly attractive for countries that wish to avoid Western financial channels, for instance, if they fear they could fall under sanctions. The rise of non-Western financial channels is a dangerous development. In my view, illicit groups involved in terror attacks or nuclear proliferation, for instance, would undoubtedly switch to non-Western financial tools to escape Western scrutiny.
In 2019, there were a lot of discussions internationally about China ‘launching its own cryptocurrency’. What was the truth behind this and why is it a big deal?
AD: There’s a lot of confusion around this crucial topic, which I try to clear up in my book. China’s digital renminbi (or the e-yuan) is not a cryptocurrency: it is a digital currency that is issued by the central bank of China and stored on the mobile phones of more than 300 million Chinese citizens (and counting). The digital renminbi simply represents a virtual version of China’s physical coins and notes. This is yet another tool for countries under sanctions to gradually ‘vaccinate’ their economies against Western penalties: China’s e-yuan is completely immune to Western sanctions, given that it does not use any Western financial channels.
And of course, the digital renminbi will come with added benefits for the Chinese leadership: everything is done online, but the Chinese central bank keeps ledgers of all transactions, making it easy for the Communist leadership to trace them back to specific individuals or companies. For Beijing, such surveillance capabilities are of paramount importance. If cash and payment cards become obsolete in China, everyone in the country will have to use a mobile phone to make payments, including foreigners. All transactions will be recorded and traceable. The troves of personal data that the digital renminbi generates will greatly enhance the capabilities of China’s security services. Instead of offering greater privacy, as some (but not all) cryptocurrencies may sometimes do, China’s virtual coin promises to help Beijing record the moves of everyone in China.
You mention that in some cases — such as sanctions against companies like Rusal in 2017 and COSCO in 2019 — there have been tremendous ripple effects across the global economy, leading to sharp price hikes, supply chain disruptions, and job losses. Have there been similar ripple effects after sanctions against Russian entities were imposed last year following the invasion of Ukraine?
AD: This is a really important question, given the rise in aggressive Russian propaganda campaigns claiming that Western sanctions on Moscow are fuelling food and energy insecurity around the world. The reality is that Western countries have been extremely careful in minimising the side effects of sanctions on Russia. The economic ripple effects that we’re seeing today, notably high commodities prices, are solely due to the war — and not due to sanctions. Energy prices were high and rising even before the start of the conflict, and it was Russia’s decision to invade Ukraine and turn off the ‘gas tap’ in Europe that has fuelled them even further, not sanctions. In terms of food supplies, it was Moscow’s decision to impose a blockade of Ukrainian ports that has fuelled fears of food insecurity in the emerging world (there are no sanctions on Russia’s food exports). Blaming sanctions is an inversion of the cause and the consequence that serves the Kremlin’s interests.
Second, so far, the US has not imposed secondary sanctions on Russia that would force all businesses around the world to make a choice between the American and Russian markets. This means that countries that have not imposed sanctions on Russia are still free to do business with Moscow. In fact, the G7/EU price cap on Russian oil exports may even have positive effects on emerging countries by giving them more bargaining power to negotiate discounts on Russian crude oil.
You explain in great detail that US decoupling from China would be arduous and not without disadvantages — especially in the microchip sector. Despite these downsides, what are your expectations with regard to US-China relations in the near future?
AD: I am not optimistic regarding the outlook of US-China relations. The idea that the two countries are competitors is firmly entrenched in both Washington and Beijing. This competition between an incumbent economic superpower (the US) and a rising one (China) will continue, taking place in the trade, financial, and increasingly in the technological spheres. The latest US measures that restrict China’s access to advanced semiconductor technology illustrate this phenomenon: American policymakers will try to use every possible tool to slow down China’s economic and technological advances. What will happen around Taiwan is obviously the biggest worry: if China were to invade the island, the US would probably be forced to respond, possibly sparking a global conflict.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Agathe Demarais is the global forecasting director of the Economist Intelligence Unit (EIU) and the author of Backfire, a book on the global ripple effects of US sanctions. Before joining the EIU, Agathe worked for the French Treasury in Moscow and the Middle East.