Smart Sanctions: Confronting Security Threats with Economic Statecraft

Jose W. Fernandez
Assistant Secretary, Bureau of Economic and Business Affairs
San Francisco, CA
July 25, 2012


Good evening. Thank you for the introduction. I’m delighted to be in San Francisco and at the World Affairs Council.

I am here to talk about sanctions. Now, I didn’t come into the State Department to get involved in sanctions. I came to support development, promoting American values, and helping U.S. business to compete abroad and create jobs here. But if Clausewitz wrote that “war is diplomacy carried out by other means,” my time at that State Department has taught me that sanctions too are a form of diplomacy. And this is nothing new.

Throughout world history, effective diplomacy and statecraft more often than not, required a nation to use its commercial and economic leverage to achieve political and strategic goals. Within this narrow focus, the use of sanctions to exploit that leverage is virtually as old as diplomacy itself. Indeed one of the earliest recorded uses of economic sanctions was by ancient Athens. Pericles ordered all trade between Athens and Megra banned in retaliation for Megra’s support of Sparta. In more recent decades, sanctions were used against a number of countries, such as South Africa for apartheid and Serbia for its actions during the break-up of Yugoslavia. The fact of the matter is that, while there are many carrots that can be offered to countries – development assistance or increased access to markets – economic sanctions is one of the few sticks…short of war.

For the United States, the sticks we use today have evolved from the historic policies of the 20th century that shut out Castro’s Cuba from the global economy, and halted Iranian Oil in 1979 after the takeover of the American Embassy in Tehran. These days, our approach is more calibrated. Instead of imposing only wholesale embargos on all of a nation’s trade, our deeper understanding of the many complex relationships, transactions and interactions that make up a nation’s economy enables us to craft sanctions regimes that can focus on certain sectors and actors, which more effectively achieve our goal while avoiding collateral damage. Those targeted measures are what we call “smart sanctions,” and that’s what I would like to talk about: how smart sanctions can be an effective foreign policy tool, and how smart implementation of sanctions promotes American economic prosperity and national security.

We start with the reality that there are many foreign policy priorities that will compete with sanctions: negotiating new trade agreements with Korea and Colombia, managing relationships with strategic allies such as Pakistan and Russia, and supporting the transitions in North Africa. So where do sanctions fit within our priorities?

Smart Sanctions

When we discuss smart sanctions, the first question is: “What is our goal?” What are we trying to achieve? Sanctions are generally invoked for one of three purposes: 1) to change a government’s or private actor’s unacceptable behavior; 2) to constrain such behavior going forward; and/or 3) to expose behavior through censure. The goal is to raise the economic cost of unacceptable behavior and denying the resources that make it possible.

Given these goals, what are our available tools? Well, as we ratchet up pressure, sanctions increase and change. At the most basic level, we withhold U.S. government cooperation, such as by prohibiting development assistance. But, this only gets us so far, because most of the bad actors in this world don’t get a lot of assistance. As we move to a higher level, we look to freeze the assets of individuals and governments and restrict their access to the U.S. market or prevent them from receiving visas. Finally, we might also ban exports or imports from countries for certain activities, as in the case of Iran for refusing to address the international community’s concerns about its nuclear program.

An even more aggressive approach involves the use of “secondary sanctions.” These measures act against companies in third countries who do business with a U.S.-sanctioned target, thereby indirectly supporting the behavior of the bad actor. Ultimately, making that institution choose between doing business with a rogue country or operating in the United States.

But at the same time that we consider the optimum sanctions for a given objective, an important element for consideration is how to ensure that sanctions are structured to achieve the desired outcome, while minimizing collateral damage to U.S. and other interests.

This unwanted collateral damage includes investments, economic and trade relations that we want to maintain, and protecting innocent citizens in the targeted country. For example, in Iran, the door is still open for the sale of agriculture products and medicine. Approval was given for NGOs working to empower Iranian women, support heart surgery for children, for consultants on a telecom fiber optic ring, for a lawyer’s association providing legal training, and for a media company that filmed an Iranian election. So our smart sanctions are targeted.

Effective diplomatic leadership is also crucial to effective sanctions. Sanctions are more likely to have an impact when many countries participate. The more global leaders are on board in imposing sanctions, the more powerful the message that certain behavior is unacceptable in today’s world.

So, let’s look at a few recent cases – Iran, Syria, Burma, and Libya – and review our sanctions policy.

1) Iran

Iran’s destabilizing actions speak for themselves: refusal to address international concerns about its nuclear program; defiance of UN Security Council resolutions; support for terrorism, and efforts to stir regional unrest, all present a grave threat to international peace and security. Iran remains one of our top foreign policy and international security priorities.

Smart sanctions have played a prominent role in the success of the Administration’s dual-track policy of pressure and engagement to compel Tehran to address the concerns of the international community over its nuclear program. In fact, senior Iranian officials, including President Ahmadinejad have acknowledged the negative impact of sanctions. The macroeconomic indicators tell the story: the Iranian rial has lost nearly half of its value in nine months, oil exports and revenues are down significantly, and inflation is rampant throughout the economy.

The Administration’s recent actions on sanctions include:

  • An Executive Order targeting development of Iran’s upstream oil and gas industry and petrochemical sector. This order expands existing sanctions by authorizing asset freezes on persons who knowingly support Iran’s ability to develop its petroleum and petrochemical sector, which is one of Iran’s primary sources of funding for public projects like uranium enrichment.
  • President Obama also enacted legislation targeting the Central Bank and Iran’s oil revenues. Section 1245 of the 2012 National Defense Authorization Act (NDAA) places sanctions on foreign financial institutions for significant transactions related to the Central Bank of Iran (CBI) and designated Iranian financial institutions. As a measure of the successful implementation of the legislation, some 20 countries have qualified for banking exceptions under the NDAA because they significantly reduced their purchase of Iranian crude oil.

In addition, the 27-member European Union implemented a full embargo on Iranian crude oil effective July 1.

The possibility of sanctions has persuaded many firms to discontinue their business with Iran - Total, Shell, Statoil (Norway), Edison International (Italy), and many, many others. In fact, an Iranian official recently admitted that sanctions have led, according to their estimates, to a 20-30 percent reduction in sales of Iranian crude oil. This translates into almost $8 billion in lost revenue every quarter.

Our efforts aren’t limited to oil: as a result of U.S. and multilateral sanctions, major shipping lines have ceased servicing Iranian ports. The Islamic Republic of Iran Shipping Lines (IRISL), Iran’s major shipping line, and the National Iranian Tanker Company, Iran’s tanker fleet, have had increasing difficulty in receiving flagging, insurance, and other shipping services from reputable providers. This further decreases Iran’s ability to gain revenue.

As we continue to seek progress on the negotiating front, we will maintain unrelenting pressure on Tehran. We know the pressure we are bringing to bear has been vital to getting Iran to the negotiating table. We all have a stake in resolving the international community’s concerns about Iran’s nuclear program through diplomacy if we can, and so we will continue our work with countries around the world to keep pressure on Tehran.

2) Syria

Although Iran sanctions continue to produce results, Syria requires a different approach. Indeed, as the death toll rises above 17,000, the Syria crisis becomes graver every minute. There are food shortages. There is a lack of safe access to adequate medical services. Syrian families are fleeing the country and registering in refugee camps in neighboring countries. It is a rapidly deteriorating humanitarian crisis.

Our goal in Syria is to support a democratic transition that reflects the legitimate aspirations of the Syrian people. The United States looks to its sanctions toolbox to isolate Asad and deprive him of financial resources that allow him to continue attacking the Syrian people.

Even before the current outbreak of violence in February 2011, the United States had several sanctions programs against Syria as a result of Syrian support for terrorism. More recently, we applied U.S. sanctions through a series of Executive Orders, issued by President Obama, targeting individuals who use information technology to commit human rights abuses, senior officials of the Syrian government, and supporters of the regime such as some Syrian businessmen.

The United States joined with likeminded countries in a multilateral group known as the “Friends of the Syrian People.” Through this group, we work with other countries to harmonize implementation of national sanctions regimes and coordinate efforts for implementing a multi-lateral sanctions regime. The work of this group is especially important given some countries have effectively blocked a UN Security Council resolution calling for international sanctions.

In the group, we synchronize the individuals and entities targeted by the sanctions, and discuss ways to strengthen sanctions by identifying measures that will impact the Assad regime while permitting legitimate trade to continue to flow.

So far, U.S. and international sanctions have had a significant effect on Assad’s reserves, and are making it difficult for the regime to finance its brutality.

But what happens when sanctions are successful? How quickly do you unwind?

3) Burma

Recent positive developments in Burma, that were unimaginable just last year, led the Administration to implement an innovative approach that eases certain sanctions and incentivizes further political and economic reform. Within the past year, over 500 political prisoners have been released, and the government and several armed ethnic groups (some of whom have been fighting against the government since 1948) have reached preliminary ceasefire agreements. Pro-democracy icon Aung San Suu Kyi re-registered her party and stood for office in recent parliamentary by-elections. She, along with 42 other candidates from her party, was elected to Parliament in early April.

The Burmese parliament has also taken several steps towards reform, including passing new legislation to protect the freedom of assembly and the right of workers to form labor unions. The government is also taking steps to bring increased transparency to the national budget.

Burma became subject to U.S. sanctions in the 1990s. Those sanctions were not universally emulated by many of our traditional allies. But, our sanctions are credited with helping to persuade Burma’s leadership to reconsider its long-term interests and move toward democratic reform. And now the country is becoming a case study in how difficult it is to be “smart” about easing sanctions. Our sanctions were initially developed before we gave serious consideration to the structure of sanctions and they were not built with an exit strategy in mind. That’s made it more difficult to address the developments of the last year, and it’s been a valuable lesson for crafting future sanctions regimes.

With regard to Burma, even though many of our international partners moved to fully suspend their sanctions, we opted for a different route: We are easing our sanctions, but in a calibrated manner. Even after our most recent easing, we remain vigilant about the protection of human rights, corruption, and the role of the military in the Burmese economy. Our approach aims to support democratic reform while aiding in the development of an economic and business environment that provides benefits to all of Burma’s people.

In forming our easing policy, we were also mindful of the desire for American companies to contribute to improved human rights, worker rights, environmental protection, and transparency in Burma, including the need to improve the transparency of the Myanma Oil and Gas Enterprise (MOGE), Burma’s state-owned oil company. We sought to do so while working for a broad easing across sectors. And we did something that hadn’t been done before in a license context: we integrated novel reporting requirements into the new investment license. These requirements, which will have a public transparency component, cover issues such as due diligence in protecting human rights and worker rights, and transparency in land acquisition and payments to the Burmese government, including state-owned enterprises. In addition, companies working with MOGE must report their investment within 60 days. The purpose of the public reporting is to promote greater transparency and encourage civil society to partner with our companies toward responsible investment. We want American companies to take advantage of the new opportunities. We think that by allowing them to invest in Burma provides an opportunity to share American values, transparency, and model corporate governance in the country.

Another key element of this policy can be found in the general license. While permitting new investment and financial services, we do not authorize new investment with the Burmese Ministry of Defense, state or non-state armed groups (which includes the military), or entities owned by them. U.S. persons are also still prohibited from dealing with blocked persons, including listed Specially Designated Nationals (SDNs), as well as any entities 50 percent or more owned by an SDN. It’s also important to keep in mind that the core authorities underlying our sanctions remain in place. They weren’t terminated, just suspended. This means that back sliding by the Burmese government, or other potential spoilers, on democracy, human rights, etc., can be countered with the appropriate measures.

We took the suspension route because while we are encouraged by the positive steps that President Thein Sein and his government have taken toward a more civilian led and democratic government, concerns still remain. These concerns include the continued detention of hundreds of political prisoners, ongoing conflict in ethnic areas, and Burma’s military relationship with North Korea. Going forward, we hope our calibrated approach results in increased democratic values and economic opportunities, and diminish human rights abuses. But, again, we have also maintained flexibility to further ease, or re-impose, restrictions as necessary. So stay tuned on Burma. We are.

So, let’s look at one of our recent successes?

4) Libya

After suffering from more than four decades of erratic and abusive rule by Muammar Qadhafi, the people of Libya rose up on early 2011. As the Libyan grassroots opposition grew in strength, Qadhafi recognized that his grip on power was threatened. He responded by unleashing the Libyan military on his own citizens.

Working closely with our allies around the world, the United States moved rapidly to support the Libyan people. Our efforts included launching a major economic sanctions program specifically geared to target Qadhafi and his cronies. The program sought to deprive Qadhafi of the resources necessary to sustain his assault, to preserve Libya’s wealth for its people, and to signal to Qadhafi and his allies that they were isolated and their days were numbered. These efforts were on both domestic and multilateral fronts.

Domestically, the U.S. government reached out to U.S. financial institutions to identify assets controlled by the Libyan government, Qadhafi, his family, and their cronies, in anticipation of a new sanctions program, and here we have a pleasant surprise: freezing Libyan assets had a far greater impact than first expected. For example, just one financial institution held assets of over $29 billion; another held almost $500 million in a single portfolio. Freezing these assets substantially constrained Qadhafi’s campaign.

But we do not act alone: just as the United States reacted with unprecedented speed, so too did the international community. The day after President Obama signed the Executive Order to freeze over $30 billion in Libyan assets, the UN Security Council imposed sanctions targeting the individuals most responsible for the violence. As the conflict intensified, the Security Council expanded its approach, imposing further sanctions on key financial and economic institutions, such as the Libyan Central Bank, the National Oil Corporation, and a number of Libyan sovereign wealth funds.

Unilateral and multilateral sanctions, reinforced with intense diplomatic and military efforts, hastened the demise of the Qadhafi regime. Targeted sanctions appeared to motivate Libyan leaders to defect, like the Foreign Minister Moussa Koussa. Broad private sector support in implementing sanctions removed the resources Qadhafi needed to supply his military and pay his mercenaries, and safeguarded the wealth of the Libyan people from Qadhafi and his cronies. Ultimately, this allowed Libya’s people to courageously liberate themselves and begin a new, democratic era. Our goal then became to lead a rapid transition to ease sanctions and help Libya re-open for business.

Last April, I traveled with representatives from twenty U. S. companies to Tripoli. We followed up on U.S. commitments to deepen economic and commercial relations with Libya in the aftermath of Qadhafi. While there, I was met with overwhelming goodwill for the U.S. and appreciation for U.S. leadership in the international operation to protect Libyan civilians against Qadhafi’s regime, and in following through with ensuring the new Libya was on a path to rebound.


Iran, Syria, Burma, and Libya remind us there is no one-size-fits-all sanctions strategy. Sanctions tools have to be flexible enough to adapt to rapidly changing conditions. From each application of sanctions, we learn a new lesson. What we learned from unwinding the Libya sanctions, we applied to Burma, and will help us as events unfold in Syria.

We’ve seen success in Libya, changes in Burma, and acknowledgement of an impact in Iran. While the results may take months or years to be apparent, we know economic sanctions work. They can be a powerful tool in diplomacy – a stick whose use we are constantly evaluating and working to improve, and to keep smart.

Thank you.