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The writer is a non-resident senior fellow at the Peterson Institute for International Economics. She is a director of the International Affairs Program and vice-president for foreign policy at the Kyiv School of Economics
In recent decades, the US has increasingly wielded financial sanctions as a foreign policy tool, leveraging its position at the heart of the global financial system to ensure compliance, all at a fraction of the cost of military action. With Russia’s war in Ukraine and the more competitive relationship with China, America is experimenting with new economic policy weapons, such as a price cap on Russian oil sales and controls on technology exports to Russia and China. But so far, these measures have yielded mixed results. As it confronts a daunting set of geopolitical challenges, the US needs a comprehensive framework for economic statecraft to alter the private sector’s risk calculus.
America functions as the central node in the global financial architecture, granting it the power to threaten to disconnect uncooperative actors from access to the US dollar and international payment systems. For example, when the US unilaterally pulled out of the Iran nuclear deal in 2018, the threat of American sanctions shattered all European efforts to stay engaged with Iran.
However, the success of US financial sanctions did not come overnight. It required investments in domestic institutional infrastructure, the alignment of objectives (including anti-money laundering and counter-terrorist financing efforts), and the imposition of multibillion-dollar fines to clean up the international banking system after 9/11. It took years, if not decades, for the US to establish its credibility.
Today’s challenges extend beyond finance to markets where the US lacks an absolute competitive advantage, such as global commodities and technology. The oil price cap has not been an indisputable success, with evidence of Russia selling above the cap using G7 shipping and insurance services. Even when Russia appears to be selling oil below the cap, for instance, to India, inflated transport costs allow Russian-affiliated companies, including oil traders, to capture some of the market arbitrage. Moreover, Russia is reducing its reliance on G7 companies. Shifting most of its exports to a shadow fleet will put them beyond the reach of the US and its allies.
Despite being under severe US, EU and UK export restrictions, Russia continues to import critical components for its war on Ukraine. China, among others, aids in producing dual-use goods for the Russian military. A few hundred government officials responsible for export controls in the US Department of Commerce cannot police the entire world. The burden of proof required to demonstrate that a company knowingly sent a component to Russia is excessively high. Consequently, only intermediaries end up on the sanctions list, bound to re-emerge under a new name at the same address shortly after. Despite the undisputed global reach of the US dollar, there is no infrastructure to “follow the money” and utilise financial sector data to pursue those violating export controls and the oil price cap.
The steps taken by the US right now are being closely observed by other nations, particularly China. This situation could either serve as a prelude to future confrontation or as a positive demonstration of US power. By expanding beyond financial sanctions, the US risks spreading itself too thin and losing credibility. America needs a doctrine of economic statecraft supported by a revamped and strengthened institutional infrastructure and private sector co-operation. Budget spending on the US public sector responsible for economic statecraft must be compared to the costs of inaction or military intervention.
The private sector, although reluctant to be the sharp end of US foreign policy, also plays a crucial role in implementing and enforcing sanctions. Changing corporate risk calculations to ensure compliance with sanctions is crucial, in much the same way as banks tightened their scrutiny of financial transactions to avoid large penalties. While corporations may argue that tracing their shipments is challenging and reporting requirements are burdensome, they can, like banks in the past, develop sophisticated compliance systems. Enhanced sanctions implementation and enforcement in the private sector would discourage bad actors and level the playing field. In the worst-case scenario, hefty fines can be a powerful deterrent, much as with banks.
In the absence of stepped-up enforcement and improved private sector compliance efforts, the effectiveness of sanctions will inevitably be eroded — and with it the credibility of US economic statecraft.
