The Unintended Consequences of Sanctions

In response to Russian interference in the 2016 American election, the Obama administration slapped additional sanctions on Russia.  Fearing that a Trump administration would backpedal on these sanctions, Congress passed a bipartisan veto-proof law called the Countering America’s Adversaries Through Sanctions Act (CAATSA).  The purpose was to codify and even stiffen some sanctions, then require Congressional approval to lift sanctions should the Trump administration decide to move unilaterally.

While largely sympathetic to the US response which European powers viewed as proportional, they also worried about possible conflicts that may have evolved given European company contracts with Russian firms, many on the sanctions list.  It has been a source of contention here and elsewhere that the Trump administration is deliberately ignoring the law at worst, or foot-dragging at best.  Neither is completely correct and the subject not of this article.

The purpose, however, is to illustrate how sometimes knee-jerk reactions could have unintended consequences.  But first, one needs to ask whether sanctions have any effect.  For this, we can use three recent examples: Russia, Iran and North Korea.  First, any sanctions regime will have loopholes that will be exploited by the sanctioned country.  As concerns Russia, the efficacy of sanctions- this and previous rounds of sanctions for their dalliance in Ukraine- have had an effect.  However, they illustrate that in the case of Russia, the sanctions hit at a fortuitous time in economic history.  Since the sanctions have taken effect, the poverty rate in Russia has doubled, inflation increased, the value of pensions decreased, and trade has collapsed.  Their newspapers ran stories about there not be a shortage of medicines proving there was a shortage of medicines.

However, the sanctions came at a time when there was cheap energy on the market and for a country whose economy is so dependent on the energy sector like Russia, the sanctions created a double whammy.  Some assert that Putin is immune to the sanctions.  If so, then why his desire to have them lifted?  And although they will not ultimately bring down his regime, at some point he has to answer to someone.  As a result, his direct interference in the Ukraine has been halted and he has been forced to slash the Russian defense budget.

With Iran, years of sanctions forced the robed mullahs to the bargaining table.  At this point, it becomes obvious that sanctions were working on Iran.  They were unable to modernize their military, airlines, and most industries.  Trade and banking structures were hindered.  That is what forced them to the table.  Unfortunately, they proved better negotiators than John Kerry and the Obama administration who were looking for some diplomatic legacy at any cost.  That cost came in the form of an Iranian regime running amok throughout the Middle East and exporting terrorism.

As for North Korea, we are dealing with a whole other animal here.  In Russia, on some nationalist level, Putin cares about his people and his heritage.  In Iran, on some religious level, the mullahs care about their people to some degree.  Provided his military is fed, housed and paid, Kim Jong-un cares nothing about his people.  As long as he has China as a backdoor and China has North Korea’s back, there will be the means to circumvent sanctions enough so that he and his military is taken care of despite the plight of his people.

So what to do?  In North Korea, sanctions are not going to stop their nuclear ambitions, but as punishment they should remain.  Forget about Iran; that is a lost cause.  Obama and company traded away all leverage as the grand bargain allowed all sorts of business deals to happen.  Where American companies failed in Iran, the mullahs found more than enough willing Asian and European partners.  As for Russia, perhaps a deep discontent is growing but there is an old maxim as concerns Russia: Russians unite in their suffering.  Where the US should exploit this is showing how Putin and his oligarch cronies live and operate in opulence while the common Russian suffers.

Where the unintended consequences enter the picture as concerns the Russian sanctions has nothing to do with US-Russian relations, but in another country- India.  As a legacy of the Cold War, about 60% of India’s military inventory is Russian-made.  As soon as this week, India and Russia may conclude a deal whereupon India will purchase a S-400 air defense system, 200 helicopters and four stealth frigates from Russia.  India feels the purchase is necessary for very real reasons.

India shares a border with two nuclear powers- China and Pakistan.  India has fought wars against both these countries.  Although it may not make the nightly news, the Indian-Pakistan border remains tense.  Thus, the Indian need for an advanced air defense system.

Unfortunately, CAATSA sanctions any country or entity that does business with Russia’s defense or intelligence sectors.  That puts India on a collision course with the United States.  The US is India’s second largest defense supplier- mainly aircraft and artillery- but has been unwilling to provide them with what the Russians have and are offering.  If forced to choose between what India believes is necessary to protect itself against Pakistani or Chinese aggression, their goodwill with the United States will likely take a backseat.

Like sanctions against India in the past (in the 1990’s after nuclear tests), US action would likely sour relations and foreclose existing US arms deals with India.  The only redeeming part of this story is that there is bipartisan support in Congress for good relations with India and for good geopolitical reason.  Hence, it may be wise to grant India a waiver from sanctions.  And in the interim, the US may want to reconsider what military hardware it is willing to sell to India.  They will act in their own self-interest, even if that means purchasing from Russia, American goodwill be damned.