The love of sanctions is dragging America into ruin

Imagine this: a global summit of all governments, public officials and private individuals under US sanctions. A group photo from that gathering would feature a diverse group of leaders from Africa, Asia, Latin America, and the Middle East — and would not be much different from photos from the G-7 summit or any gathering globally. At the center would be China, proudly presenting itself as a moral and diplomatic - not to mention trade and financial - ally of the club of governments that the US names and scolds.

In the past two decades, sanctions have become the first foreign policy instrument of Western governments, led by the United States. Recent packages of economic and individual sanctions imposed on Russia over its invasion of Ukraine, as well as on Chinese companies for national security reasons, mean that the two powers have joined a growing club of those the US has characterized as villains such as Myanmar, Cuba, Iran, North Korea, Syria and Venezuela.

According to data from Columbia University, a total of six countries, Cuba, Iran, North Korea, Russia, Syria and Venezuela, are under extensive US sanctions, meaning that most trade and financial transactions with entities and individuals in those countries are prohibited by US law.

An additional 17 countries, including Afghanistan, Belarus, the Democratic Republic of the Congo, Ethiopia, Iraq, Lebanon, Libya, Mali, Nicaragua, Sudan and Yemen, are targeted by targeted sanctions, meaning that financial and trade relations with certain companies, individuals and often prohibited by governments.

According to Princeton University, an additional seven countries including China, Eritrea, Haiti and Sri Lanka are under some export controls. This already long list does not even include targeted sanctions imposed on territories such as Hong Kong, the Balkans, Ukrainian Crimea, and the Donetsk and Luhansk regions.

By 2021, according to the US Treasury Department, the United States has imposed sanctions on 9000 individuals, companies and sectors. In 2021, the first year of the mandate, the administration of US President Joe Biden introduced another 765 new sanctions at the global level, including 173 that related to human rights.

In total, the countries targeted by some form of US sanctions together represent a little more than a fifth of the world's GDP. China represents 80 percent of that group.

Now, a growing coalition of autocratic governments is seeking to change the rules of the global financial system, largely in response to the spread of US sanctions. It is time to reconsider how these punitive measures are undermining the very Western order they were supposed to preserve.

The disproportionate weight of Beijing on the list of countries under US sanctions is a problem. This is because the Chinese Communist Party presents itself as an economic, diplomatic and moral ally of the Global South.

Political scientist Daniel W. Drezner and economist Agathi Demarais, who write regularly for "Forin Polisi," have recently published argumentative views on how US-sanctioned governments use loopholes in the US sanctions regime to ease the pain that sanctions are meant to cause and often build. illegal means to replace reliance on the dollar and the Western financial system.

In total, the countries that are the target of some kind of US sanctions together represent a little more than a fifth of the world's GDP, China's share in that group is 80 percent

Unlike many sanctioned states, China has the economic clout, growing diplomatic influence, stable currency and liquidity, at least for now, that it needs to push the growing international adoption of the renminbi and Chinese financial systems, such as the Cross-Border Interbank Payment System.

China also provides a sizeable and lucrative market for the export trade of sanctioned countries; such as Venezuelan, Russian or Iranian oil and gas. Although many diverted commercial markets are expensive and inefficient, they are sufficient for sanctioned governments to survive.

These parallel financial arrangements translated by China pose a significant systemic risk to the United States and its allies.

One is the growth in the number of non-sanctioned states in the global south that are joining the parallel anti-sanctions world economy. In April, after returning from a visit to Beijing, Brazilian President Luis Ignacio Lula da Silva reiterated his support for currency trade between the BRICS countries (Brazil, Russia, India, China and South Africa). In launching the initiative, Lula cited fears about a global economy dominated by the dollar and in which the US is using the dominance of the dollar for its punitive foreign policy.

Within the BRICS club - in which at least six other emerging economies are waiting to join - only two countries are the target of some kind of sanctions: China and Russia. The other three, especially India, are countries with which the US has a growing partnership and which, as a result, will hardly be the target of US sanctions in the near future. In other words: even US partners are betting against Washington's international sanctions policy.

Lula's pledge represents a genuine, growing desire among many members of the Global South to break free from the dominance of the dollar and the US financial system, although some of the reasons stem from misguided solidarity. It is time for Washington to admit that its love of sanctions can undermine its economic and diplomatic power around the world.

In addition to the still-incipient but likely lasting effort to replace the dollar, there is a more pressing threat to Western influence: secondary sanctions on defaulted debt purchases.

When countries default on their debt obligations, or appear to be close to bankruptcy, large institutional creditors will try to sell that debt on the secondary bond markets to other investors at a significantly lower price. When these countries are under US sanctions, Western investors are reluctant to buy their indebted bonds, and dubious, often anti-American actors usually enter the scene.

Venezuela is such an example. In 2017, Caracas defaulted on 60 billion in foreign debt after failing to pay installments of 200 million to creditors. Since then, due to interest, Venezuela's debt has grown.

It is time for Washington to admit that its love of sanctions can undermine its economic and diplomatic power around the world

Years of fiscal negligence in the oil-rich country threatened the independence of the central bank and PDVSA, the leading energy company, bankrupting the government, preventing the energy company from attracting investment and triggering an economic collapse. From 2014 to 2021, Venezuela's economy shrank by three quarters; inflation at one point reached an estimated annual rate of over 1 million percent.

Three months before the bankruptcy, Donald Trump's administration imposed a new round of sanctions on Venezuela that prevented the regime of President Nicolas Maduro from returning to US capital markets and raising new money for debt restructuring. It was part of the White House's nonsensical "maximum pressure" policy to remove Maduro from power.

What followed should give pause to sanctions advocates as well as American lawmakers.

Namely, as the situation in Venezuela became unsustainable, with the financial crisis continuing, many of the original US institutional holders of Venezuelan bonds, including pension funds and trusts, decided to get rid of risky debt at low prices.

However, due to the threat of US sanctions and fines, both US and non-US investors, because the US sanctions are extraterritorial, institutional and private investors from the West were either prohibited or did not dare to take the risk of buying Venezuelan debt.

As a result, much of that debt was transferred to dubious owners through the United Arab Emirates, Turkey and others. It is difficult to identify who the buyers are, but several market analysts and investors believe that the new lenders are actually a front for buyers from China, Iran, Russia and other US rivals. According to one source at Mangart Capital, a hedge fund in Switzerland, the US owned 75 percent of Venezuela's original debt in 2017 (today, that figure is estimated to have fallen to around 35 to 40 percent). Much of it was transferred to mysterious investors in unknown jurisdictions.

This trend will bring non-market economies a seat at the table when renegotiating the terms of Venezuela's exit from debt and the return of the government and PDVSA to the financial markets.

New holders of government bonds could prevent a democratic, pro-Western government from coming to power and cut Caracas off from global capital exchanges. In other words: US sanctions allow malicious players to gain a stake in Venezuela's future.

But there's more: Many of Caracas' bonds are backed by funds from the country's rich oil and gas reserves. By purchasing these funds, new investors have a stake not only in the bankruptcy and recovery of Venezuela, but also in its energy resources, and as a consequence, in global energy security.

There are recent examples of investors seizing the assets of a debtor state to collect or force payment of overdue debt, such as after Argentina's bankruptcy in 2001, when US hedge fund Elliott Capital seized an Argentine warship in Ghana with more than 250 crew members on board. . It is bad enough that an aggressive US investor is willing to damage relations with its neighbor for profit; but if a firm or government that is against the interests of the US and the West could take control of energy resources and infrastructure, as could be the case in Venezuela, then it is a geopolitical threat.

Sanctions have become an all-purpose tool of statehood aimed at curbing everything from military invasions to human rights abuses, nuclear proliferation and corruption, regardless of whether they help or undermine long-term American interests.

Maduro's government also took advantage of a large outflow of bonds at low prices to implement debt-for-asset swaps. Under the scheme, bonds sold by regulated US institutional investors are bought from unregulated entities of unknown origin outside the US and then exchanged at inflated prices with Caracas or PDVSA for the assets. A swap does not mean a debt write-off, but simply a promise to pay the owners in the form of goods, services, or settlement of current claims. Collateralized, those bonds can be resold in the market for cash, allowing non-US entities to buy with the promise of lucrative assets in Venezuela's energy industry - giving them control over key global energy supplies.

Unfortunately, it is unlikely that US lawmakers will seriously reconsider their favor of sanctions anytime soon. Their application is easy, cheap and less dangerous than the threat of military action.

Sanctions have become an all-purpose tool of statehood aimed at curbing everything from military invasions to human rights abuses, nuclear proliferation and corruption, regardless of whether they help or undermine long-term American interests. They allow politicians to show that they are doing something when they are faced with a certain topic.

However, objective processes and mechanisms must be put in place to ensure that sanctions are considered rationally and do not undermine national and international interests. They should include a nonpartisan process to review and compare the effectiveness of sanctions against their proclaimed goals.

American policymakers should be clear and honest about what the desired goals are. Any honest review process must also include determining whether and how sanctions have strengthened the political and economic weight of governments and their economic allies in sanctioned countries and illicit actors in both the short and long term.

We have seen in the examples of Cuba, Iran, North Korea and Venezuela that sanctions do not produce the quick desired result of regime change but, over time, instead strengthen alliances between regimes that are the target of punitive measures.

This will largely require a sober willingness of politicians in both parties to consider a basic fact: sometimes sanctions don't work. And in many cases they actually undermine American interests.

The text is taken from the magazine "Forin Polisi"

Translation: N. Bogetić