Remarks at the BAFT 24th Annual Conference on International Trade

Peter Harrell
Deputy Assistant Secretary for Counter Threat Finance and Sanctions, Bureau of Economic and Business Affairs
Chicago, IL
November 13, 2014

Thank you, Tod, for the gracious introduction and for inviting me to Chicago to speak today.

It’s a pleasure for me to be here with you. It’s especially nice to see so many friends and colleagues in the room.

I want to begin by thanking all of you for the work that you do. Without the work of America’s financial and trade professionals, sanctions would not be such a potent tool in our kit. The U.S. government and the American people owe you a big thank-you for your commitment and your diligence. Your work underpins the integrity of our financial system and the global trading system, and it directly contributes to our national security.

As Tod mentioned, I work for the Bureau of Economic and Business Affairs – the part of the State Department that is charged with promoting economic prosperity at home and abroad. Most of my colleagues work on trade agreements, investment pacts, and other measures that increase global economic prosperity. I worked on a number of these initiatives myself earlier in this Administration, including Secretary Clinton’s economic statecraft initiative, the Trans Pacific Partnership, and the Transatlantic Trade and Investment Partnership.

And between the energy and enterprise of the private sector and smart policies, we’ve seen global trade and investment flows rebound from the lows following the 2008-2009 global economic crisis. U.S. exports have grown strongly since the 2009 low and total U.S. trade—exports and imports—exceeded $5 trillion for the first time in 2013. American banks remain at the center of the global financial network that makes this international trade possible.

For the last two years, however, I’ve spent most of my time working on a different set of policies, but ones that also have real impacts on international trade--the sanctions programs that have put significant economic pressure on Russia, Iran, Syria, ISIL and other rogue actors around the world.

America’s growing use of sanctions is perhaps a logical outgrowth of globalization--the increased interconnectedness of global trade and financial markets. As international trade and financial ties grow, our ability to use economic tools pressure rogue actors dependent on having those international trade and financial ties increases as well.

And as policymakers seek alternatives to military action to address some of the toughest foreign policy challenges of the day, it is no surprise that we are turning with increasing frequency to the sanctions toolkit. As my colleagues in the military would put it, those of us who work on sanctions—including all of you in this room, who implement them in the private sector—are increasingly the sharp end of the spear when it comes to protecting the U.S. and our allies.

I want to use my remarks today to discuss recent trends in U.S. sanctions, focusing on Iran, Burma, and Russia. And then I want to discuss what we are doing to address the some of the unintended consequences of our sanctions and to ensure that our sanctions remain focused on their intended targets and not legitimate trade.

But first, a bit of history is in order. Although sanctions haven’t always dominated the news as they have in the past few years, their use dates back to the beginning of recorded history. In fact, the first known use of sanctions was in 432 B.C., when Athens imposed a complete embargo on the neighboring state of Megara. Athens’ goal was to inflict damage on Megara without inciting Sparta, which had pledged to defend Megara in the event of invasion. Sanctions, Athens hoped, were a means to punish Megara without instigating a fight with Sparta.

But, within a year, Athens and Sparta were at war. And when the Peloponnesian War ended 27 years later, the golden age of ancient Athens had come to an end.

But in the past couple of millennia – and particularly over the last decade or two – we’ve made substantial progress in targeting our sanctions programs to achieve desired outcomes.

Consider the differences between our sanctions on Saddam Hussein’s Iraq two decades ago and our Iran program today.

After Saddam’s army invaded Kuwait in August 1990, the UN imposed comprehensive sanctions on Iraq. These sanctions had major economic impact, decimating Iraq’s economy. But in the end they neither persuaded Saddam to retreat from Kuwait nor moderated his behavior after the Gulf War ended.

Fortunately, we learned a number of lessons from the Iraq sanctions – lessons that shape our sanctions programs today.

Let’s start with Iran. For nearly two decades, we’ve been working to curb Iran’s nuclear program through a dual-track strategy of engagement and diplomacy. And since the first “secondary” sanctions – on investments in Iran’s energy sector – came into force in 1996, the economic pressure on Iran has evolved substantially.

Today’s Iran sanctions target the main revenue streams of the Iranian government, such as its energy sales. They also target other major sectors of the Iranian economy, including the production of oil and gas in Iran, and Iran’s shipping, insurance, and automobile sectors. And they prohibit transactions with most Iranian banks, denying Iran access to the international financial system.

The layered design of these sanctions has given the United States and our allies multiple points to disrupt a prohibited trade--making evasion much, much harder. Take Iran’s energy sales. Our sanctions can directly target a purchaser of Iranian oil, such as a refiner. They can target a company shipping Iranian oil, and a company providing insurance to a shipment of Iranian oil. And of course they target any banks involved in payments or other transactions related to a shipment of Iranian oil. We have seen how the interplay of these measures over the past several years—the combined pressure on buyers, insurers, shippers, and on banks that might be involved in oil-related transactions—plus good, old-fashioned skillful diplomacy with our allies and partners--reduced Iran’s oil sales by more than 1 million barrels per day.

But to stop Iran’s nuclear program, diplomacy—what we call “the engagement track”--has been equally essential. Sanctions are not a strategy in and of themselves. They almost always need to be integrated with smart diplomacy, economic incentives and military options to be effective. That's why even as we ramped up pressure, we kept the door open to a relaxation of sanctions if Tehran took steps to ensure that its nuclear program is entirely peaceful.

By 2013, sanctions had taken a significant toll on Iran’s economy, but just as important, the sanctions highlighted for the Iranian people their country’s isolation from the international community. The Iranian people chose a new path and elected Hassan Rouhani as their president, who vowed to reverse Iran’s economic fortunes.

As you know well, within a few months of Rouhani’s election, the P5+1 and Iran agreed to the Joint Plan of Action, which has imposed limits on Iran’s nuclear program for the first time in over a decade.

We have been very clear about the choice that Iran is facing, and that now is the time for Iran to seize this historic opportunity to prove the peaceful nature of its nuclear program. The jury is still out on whether a comprehensive solution is possible in the next several weeks. But if we do reach a comprehensive solution, it will be a landmark achievement – owing to diplomacy and the use of sanctions.

Meanwhile, in Burma, sanctions have already helped produce change.

For decades, the United States imposed comprehensive sanctions on Burma, which was being run by an oppressive military junta. International sanctions rendered Burma a pariah state entirely isolated from the rest of the world.

But in 2011, we began to see change in Burma. Political prisoners were released. Media controls were alleviated. The military started loosening its grip on politics.

We recognized these positive developments – and encouraged more of them – by easing most of our sanctions. Broadly speaking, Americans can now invest in Burma, import Burmese goods, and engage in financial transactions with Burmese nationals.

We’re also actively helping to re-integrate Burma into the global economy, including through financing from the Ex-Im Bank and OPIC. In June, Penny Pritzker became the first-ever Commerce Secretary to visit Burma. Meanwhile, to give banks and companies confidence to re-enter the market, we’ve emphasized repeatedly and publicly that cross-border transactions with Burma are now allowed.

Of course, Burma is a country that remains in transition and the United States continues to have deep concerns about ethnic violence and the potential for backsliding. That is why we have kept in place certain key sanctions, such as prohibitions on dealing with the military, and why we will continue to target for sanctions people in Burma who seek to undermine the reform process.

I was in Burma myself last year and the progress was obvious: I could use a credit card to pay for my hotel, which would not have been possible just a few months before. I met with dozens of U.S. businesses that are active on the ground exploring market opportunities, and a group of civil society leaders in Burma told to me about how excited they are about the potential impact U.S. investment can have in transforming their country. And the capital, Rangoon is well on its way to having the all-day traffic jams that are a part of the economic boom across Asia.

The history of our Burma sanctions demonstrates the United States’ willingness to ease sanctions when we see positive developments. Our efforts to responsibly roll back elements of the Burma program provides an example to countries like Iran of the benefits of changing behavior for the better.

Over much of this year, however, another country has consumed the majority of my time: Russia.

Since Russia began its aggressive activities in Ukraine in March, we have gradually increased sanctions. We started by targeting Putin’s inner circle and those directly involved in the destabilization of Ukraine, but we’ve progressed to Russia’s banking, energy, and defense sectors.

The purpose of our Russia sanctions is three-fold.

First, sanctions aim to impose costs on Putin’s regime for its illegal annexation of Crimea and its destabilization of eastern Ukraine. Sanctions demonstrate that America and our partners will not stand idly by when one country threatens the territorial integrity and stability of another.

Second, sanctions aim to deter Russia from further aggression in Ukraine and other neighboring states. When Russian aggression has escalated, we have steadily increased sanctions. We’ve shown clearly and irrefutably that we’re determined to impose harsher sanctions if Russia continues its aggressive actions in Ukraine, and, along with Europe, we continue today to be prepared to increase costs if Russia escalates it aggression.

Third, sanctions aim to persuade the Russian regime to change its behavior. As we have said to Russia, if Russia de-escalates and implements the ceasefire it agreed to in September, then our European allies and we will roll back certain sanctions. But until we reach that point, we will maintain pressure on Russia.

From a practical standpoint, deploying effective sanctions on Russia presents a number of challenges. Russia is the eighth-largest economy in the world – larger than the combined GDPs of all of the other countries where we have significant sanctions programs – and a major energy exporter that is deeply enmeshed in the global economy.

Consequently, in sensitive sectors such as energy, we’ve tailored our sanctions to constrain future production, not current supplies.

We’ve also taken pains to minimize the second-order effects of sanctions. In addition to the traditional blocking penalty – under which entities are added to OFAC’s SDN List – we’ve enacted capital-markets restrictions, creating a new Sectoral Sanctions Identification, or SSI, List.

It is no secret to us in government that the SSI List has created complex compliance challenges for many of your banks. But it has proven a powerful tool that lets us choke off Russia’s ability to get access to the capital it needs to promote domestic economic growth without prohibiting the financial transactions related to ordinary trade that we want to continue to allow.

Meanwhile, we’ve engaged in diplomacy and outreach across the world to multilateralize our sanctions and ensure that U.S. companies are not simply backfilled by firms from other jurisdictions. The EU has been a particularly important partner in this regard. As you have seen, we have moved in parallel with the EU in ramping up sanctions on Russia. That reflects our knowledge that sanctions are most effective when they are multilateral, particularly given the EU’s much greater trade and economic ties to Russia. We’ve also reached out to countries around the world, including Australia, Canada, Japan, Norway, and Switzerland, all of which have joined in imposing sanctions and restrictive measures on Russia.

And the results of our sanctions are already palpable.

According to official statistics, $85 billion of capital has fled Russia during the first three quarters of this year. But some analysts estimate that the number could reach $110 billion by year-end, nearly double the volume of capital flight for all of 2013. Over the past month, the Russian Central Bank has spent more than $30 billion trying to stabilize the ruble, which has nonetheless fallen to record lows, and Russia is now moving to a free float of the ruble.

Liquidity is drying up, forcing Russian companies to ask for financing from the government. Rosneft, Russia’s largest oil producer, has requested approximately $49 billion from the Kremlin in the wake of U.S. and EU capital-markets restrictions. And with Russian corporates scheduled to roll over well over $100 billion before then end of next year, we expect the impact of our financing prohibition to grow over time.

The future of Russia’s oil sector has also been cast into doubt.

With U.S. and European companies barred from providing technology and services to Arctic, deepwater, and shale oil projects in Russia, the Kremlin’s most lucrative sector will find it difficult to grow in the years ahead.

And unless Moscow changes course – with actions, not words – the economic costs will only grow steeper.

Regardless of what happens in Ukraine, the Russia sanctions offer a hint at where sanctions policy may be headed. I anticipate that we will continue to impose more complex sanctions to maximize costs for the target regime while minimizing the risks for the global economy.

Innovations such as the capital-markets restrictions of the SSI List – while challenging from a compliance perspective – are likely to continue to be used in appropriate circumstances. Just as our military constantly adds more weapons to its arsenal, we are prepared to expand the range of economic levers we can deploy to achieve discrete policy outcomes.

On the whole, this will be a positive development. We are learning to use our sanctions more effectively, and they offer us a way to protect our national security without necessarily turning to military force.

But this also brings me to the second major issue that I would like to discuss with you today: our efforts to address the potential unintended consequences of our growing use of the sanctions toolkit.

Our growing use of sanctions presents new compliance challenges for all of you. It is also beginning to pose new policy challenges.

As you all know, it is normal for banks to stay well-clear of prohibited activity, and I know that everyone in this room gives that advice to your companies. That’s usually a smart approach to take. But we are also aware of the fact that our growing use of sanctions and AML tools is beginning to have unintended consequences. Some large banks are deciding – for entirely understandable and legitimate business reasons – to cease most or all business with certain markets.

At a policy level, this is not our desired outcome. The United States has a strong interest in U.S. banks playing a leading role around the world and for the United to be at the center of the global financial system. We want legitimate, authorized trade--for example, sales of food and medicine to the people of Iran--to continue. Russia is an important global economic actor and we do not intend for our sanctions to inadvertently prohibit broad swaths of transactions.

From the perspective of the U.S. government, we have and are taking steps to address unintended consequences as they arise.

First, we are working to provide an unprecedented level of transparency and interpretive clarity about our sanctions programs. OFAC regularly published new FAQs on its website, and there are now more than 400 public FAQs providing guidance across all U.S. sanctions programs.

The U.S. government has also published detailed guidance on specific issues of concern. Last year, for example, OFAC published guidance for non-US banks on processing transactions related to humanitarian trade with Iran, and, for U.S. companies, there are 11 general licenses that enable the export of food, medicine, communications technologies, and other civilian goods to Iran. Just last month, OFAC published guidance for non-governmental organizations on the provision of humanitarian assistance globally, consistent with the U.S. government’s commitment to ensuring that humanitarian relief is available wherever there is need.

When we have launched major new sanctions developments, like the Joint Plan of Action between the P5+1 and Iran, or recent Russia sanctions, we have consistently issued detailed fact sheets and explanatory documents to explain both the regulations and the policy goals behind them. With the JPOA, for example, this included a plain-English document intended for the business community in addition to the formal regulations and waiver notices.

Second, we have increased our dialogue with the corporate sector to explain U.S. policy and regulations and to discuss implementation challenges. Just last week, for example, a colleague from OFAC and I hosted a teleconference for representatives of more than a three hundred companies to provide an update and to answer technical implementation questions on several sanctions and export control programs. OFAC has had dialogues with major banks about the Russia SSI list and numerous other sanctions implementation issues. Across the U.S. government, we meet with thousands of companies a year to explain our sanctions and address challenges as they arise.

We incorporate feedback from this dialogue into our policy and regulatory processes. For example, the guidance document OFAC issued for NGOs on humanitarian relief was the product of discussions with NGOs about the challenges of delivering assistance to Syria, Somalia and other countries under sanction.

Without detailed input from the U.S. corporate sector about U.S. corporate operations in Russia, we would not have been able to develop targeted sanctions that maximize the pain on Russia while minimizing collateral costs for us and our allies.

And we are prepared to make adjustments when unexpected consequences arise. Earlier this year, we published a major update to Iran General License-D, a general license that authorizes the sale of smartphones, tablets, and other personal communications to Iran. That update was the direct result of detailed conversations with the corporate sector about changes needed to make it practical to sell the kind of technology that will empower the people of Iran to communicate.

Just last month, we started hearing concerns that our Russia sanctions were having an unintended impact on a major Turkish bank owned by a Russian company. It is our intent to pressure Russia, but, as we have said, we don’t want unintended collateral costs for us and our allies. And so after ensuring that the Turkish bank was not engaging in prohibited transactions with its Russian parent, Treasury was able to provide a general license allowing the Turkish bank to continue ordinary operations.

This dialogue will continue as compliance challenges arise. But I also have to be candid. From my perspective at the State Department, I hope that those of you in the private sector are also thinking about collaborative, creative ways to address some of the challenges that our growing use of sanctions has caused on legitimate trade.

I regularly hear from companies that they can’t find banks willing to process transactions related to certain kinds of legitimate trade, such as humanitarian trade with Iran. From a government perspective, we have endeavored and we will continue to endeavor, through licenses, public documents, and private engagement, to make clear that this trade is allowed. And I have also know that some companies are able to make financial channels work.

The question I put to you today is--even as we work in government to provide greater clarity, what kinds of systems can the private sector develop that will help facilitate some of this trade? How can you take advantage of the clarity that we have provided? What lessons can be learned from the companies that are able, within existing regulations, to make these kinds of transactions work? How can the private sector come together to come up with private sector solutions that enable this trade in a secure, reliable manner?

I don't know what these solutions will look like. But I do know that it will take work on the part of both government and the private sector to address the challenge.

So in closing, I want to say that I expect that in the years ahead, sanctions will continue assuming a preeminent role in U.S. foreign policy. They’ll become a stronger and more precise tool of statecraft.

This is a good thing of our national security.

And as always, your work will be the critical piece of the puzzle. For we all share a common mission to protect national security and promote economic growth.

Thank you.