War by Other Means

by Robert D Blackwill

  The most important present test cases for sanctions—Iran and Russia—could not be more different. Iran is not well integrated into global financial markets, many of the sanctions emanated from the UN Security Council, and the target of the sanctions—Iran’s nuclear program—spans decades and remains under the exclusive purview of Tehran. Unencumbered by economic costs and buoyed by widespread global support, the U.S. strategy was one of maximal economic denial. By contrast, Russia is far more integrated into global markets, the sanctions were mostly a U.S.-EU exercise instead of a UN Security Council matter, and the sanctions were precipitated by a military conflict involving Russia and another state. These factors called for an approach that was more attentive to U.S. and EU economic exposure and more calibrated, leaving Russia “exit ramps” in what was a fast-moving situation. To the degree that U.S. sanctions manage to succeed across cases as different as these, it should offer a fairly telling indicator of the strength and efficacy of U.S. sanctions policy more generally.

  The question of what constitutes success in sanctions, though, is more varied than most observers appreciate. Sanctions, like any other geoeconomic instrument, can have multiple aims and multiple audiences—signaling seriousness to adversaries, demonstrating commitment to allies, sending deterrent signals to third parties, indicating willingness to escalate, or inflicting economic costs. And often aims such as these exist in addition to primary stated objectives, which typically center on changing regime behavior or policy in some way. Gary Samore, who served as the White House expert for arms control and weapons of mass destruction in the first term of the Obama administration, argued in 2013 that “the sanctions have worked to pressure Iran to accept temporary limits on its nuclear program. But whether the remaining sanctions and the threat of additional sanctions will be sufficient to force Iran to accept more extensive and permanent nuclear limits is unclear.”62 We now know the answer to that question.

  Sanctions against Russia may have exerted some deterrent effect on Moscow’s handling of the Ukraine crisis but have not thus far led to a fundamental change in Russian policy. Still, incremental progress is important, and too often overlooked. The problem is that measuring the deterrent effect would depend on a counterfactual—what Moscow would have done otherwise, were the sanctions not in place—and so is an impossible exercise.

  Finally, sanctions can generate knock-on effects that, while not exactly intended, are notable all the same. Take Armenia, for example, where government officials in Yerevan are once again keener on some kind of economic agreement with the EU, in part because Russia’s financial troubles have had a serious impact on the Armenian economy.63 Or the Balkans, where Russia’s financial limitations in the wake of sanctions have raised questions among its Balkan partners about Moscow’s ability to deliver on energy infrastructure proposals.64

  What success sanctions against Iran and Russia have achieved traces back to a mix of further innovations to sanctions themselves, together with basic teamwork, foreign and domestic. The United States employed novel financial instruments to moderate Iranian behavior, and across the Bush and Obama administrations has secured widespread international compliance. The Comprehensive Iran Accountability, Sanctions, and Divestment Act of 2010 authorized the Treasury Secretary to require that U.S. banks terminate correspondent banking relationships with foreign banks that knowingly engaged in significant transactions with designated Iranian banks.65 The Treasury Department went immediately to work. By the time the United States and Iran began secret negotiations in March 2013, the Treasury had “conducted outreach to more than 145 foreign financial institutions in more than 60 countries as well as to foreign governments, regulators, and other trade groups and associations.”66

  Impressive as these strides are, they have not been easy or inevitable. What looked from the outside like a steady increase in pressure, in lockstep with allies, was far messier than headlines conveyed. On questions of escalating sanctions, arguments almost invariably lined up along predictable bureaucratic lines. Economic-minded arguments against escalating sanctions tended to cite concerns about provoking a cascade of unforeseeable and uncontrollable economic consequences. Such assertions—effectively, that one cannot know the costs or risks—are almost impossible to counter. In fact, economic analysis and predictions offered in support of such assertions often turned out to be flat wrong—time and again, various horrible consequences never came to pass. When in July 2014 Washington and Brussels were considering proposals to level so-called sectoral sanctions on Russia’s banking and energy sectors, many prominent economic commentators warned simultaneously and without any hint of irony that there was no means of predicting the magnitude of economic fallout but that it was likely to be higher than anticipated.67 And when, after all of the hand-wringing, these feared sectoral sanctions finally did come to pass, nothing much about the eurozone’s economic woes changed.68 The United States, meanwhile, went on to enjoy its lowest levels of unemployment and fastest levels of growth in years throughout the remainder of 2014. And far from spiking, oil and gas prices instead touched record lows in the months following the tougher U.S.-EU energy sanctions on Russia.

  A final problem, seen in the 2014 U.S.-EU sanctions against Russia in particular, is the lack of willingness to mount meaningful pressure on allies, either to ensure effectiveness of the sanctions themselves or to curb free-riding by allies. It took nearly seven months to convince France to suspend its sale of military equipment to Russia; once France finally did, its decision had far more to do with Russia’s growing military intervention into Ukraine than U.S. pressure.69

  For the United States, strategic patience may be the largest factor in whether sanctions manage to achieve their aims. They do not work until they do. Indeed, after seven years of steadily escalating sanctions on Iran, Washington’s fortunes finally changed in 2013. The economic hardships brought about by these crippling sanctions—worsened by profound economic mismanagement under Mahmoud Ahmadinejad—compounded popular dissatisfaction with the regime and played a role in the election of Hassan Rouhani to Iran’s presidency. And sanctions certainly influenced the Iranian regime’s willingness to begin negotiations in Geneva and to conclude the 2015 agreement.

  After the International Atomic Energy Agency confirmed that Iran had “stuck to its part of the landmark deal agreed in November [2013] to freeze its nuclear ambitions,” the United States and the EU decided to reward Iran by easing some sanctions.70 The lifting of $4.2 billion worth of sanctions over six months by the United States and the European Union in January 2014 appears to have been a factor in Iran slowing down its nuclear program.71 It thus seems as though both incentives and disincentives have influenced Iranian behavior.

  The Iran experience suggests that Washington’s new flair for sanctions has one major drawback: it is often easier to impose sanctions than to lift them. The 2015 nuclear accord underscores how both the enforcement and the removal of sanctions play a positive role in changing the actions of countries. In any case, there is no doubt that economic sanctions remain a robust—and improving—geoeconomic tool for the United States.

  Like sanctions, U.S. assistance policy seems poised to take a new, more geoeconomically assertive turn, even as assistance budgets remain squeezed by the 2011–2013 budget wars in the U.S. Congress and their resulting sequestration cuts.72 The $1 billion that Washington prepared, after agonizingly slow internal deliberations, to extend to Egypt during the past three years was hardly likely to help shape its transition trajectory, or to reinforce American influence in Cairo—especially compared to a GCC assistance plan for Egypt that looks poised to spend $40 billion over the next five years. Although it is impossible to know whether more money would have improved these outcomes, there is good reason to suggest it might have. In Egypt, unemployment worsened in the two years following Mubarak’s ouster; food prices soared 50 percent between 2010 and 2013, while GDP dropped by 50 percent. FDI fell from Mubarak-era levels of $10 million to around $1.5 million
in 2013. It was enough to draw millions of signatures on a petition calling for Morsi’s removal on economic grounds in the weeks leading up to his eventual ouster by the military. (The petition read in part, “Because the poor still have no place, we don’t want you.”)73 The degree of influence Egypt’s largest GCC donors have enjoyed in Cairo, meanwhile, lends at least good circumstantial evidence that more (and more timely) U.S. assistance dollars in the early phases of Egypt’s transition could well have increased U.S. geopolitical influence.

  The $1 billion earmarked by the United States is not simply modest in comparison to GCC spending in the region (or, for that matter, the multibillion dollar packages in economic aid and investment that China and Russia each pledged to Egypt in 2015); it is small even by the U.S. historical standards.74 A latter-day exception to the general departure from geoeconomics in the United States in recent decades was the $3 billion in annual aid promised each to Egypt and Israel in 1979 during the Camp David accord negotiations, a crucial pillar of the Egypt-Israel peace treaty that in turn has underpinned American Middle East policy for more than three decades.75 However, given America’s current domestic political climate and its domestic economic challenges, it is questionable whether this degree of U.S. generosity and strategic ambition will occur again anytime soon.

  Even beyond steadily declining aid budgets, however, another major problem facing the United States in terms of translating assistance dollars into foreign policy leverage is credibility. The United States has a lot invested in how it spends substantial sums in countries such as Pakistan and Egypt. And—short of crises like the military coup and subsequent violence that seized Egypt during the summer of 2013—these countries well appreciate how unlikely their actions are to jeopardize these assistance dollars, no matter how disagreeable those actions are to Washington.76

  That said, there are some signals that the United States may be more willing to consider toughening its stance on aid, more straightforwardly connecting these dollars to progress on certain U.S. foreign policy aims, especially around democratic reforms rather than geopolitical objectives. Secretary of State John Kerry, on a trip to Africa in May 2014 to discuss the Democratic Republic of Congo’s steps toward democracy, offered to increase the American financial commitment to the DRC to $30 million on the one condition that President Joseph Kabila not seek reelection after his current, second term in office.77 And despite substantial pressure from Egyptian officials, as well as mutual allies such as Saudi Arabia, the United States withheld civilian assistance dollars from Egypt for nearly a year, and certain types of military assistance for nearly two years, following the violence seen in the summer of 2013. However, several pressures—the urgings of GCC allies, concern over losing influence in the Arab world’s most populous nation, and the emergence of the Islamic State in the Sinai Peninsula—prodded the administration to reinstate the full amount of annual aid to Egypt in March 2015 (without forcing any real reform commitments from Cairo in return).78 These cases notwithstanding, ample opportunity remains for the United States to generate better geopolitical returns through its allocations of overseas aid.

  Finally, no dimension of U.S. foreign policy holds more geoeconomic promise than energy. The United States is ushering the world toward more diversified and often localized energy supplies. Among its virtues, this diversification will weaken the geopolitical leverage that some energy suppliers have long sought to use to their advantage. The United States, by contrast, will find itself newly and uniquely positioned to use geoeconomic energy instruments to support its geopolitical objectives into the decade and beyond.

  Sizing Up America’s Geoeconomic Potential

  American geoeconomic potential is inherently promising. But Washington must first face a set of questions about the country’s overall comfort level with restoring geoeconomics as a more considered part of its foreign policy. Skeptics will argue that more straightforward attempts to link economic and geopolitical agendas will result in a race to the bottom. But the alternative cannot be to do nothing. In any case, the surest means of avoiding such a downward spiral may be to recognize what the United States is now dealing with: a set of states thoroughly comfortable employing most of the tools of geoeconomics to advance state power and geopolitical goals, often in ways that undermine U.S. national interests and chip away at the U.S.-led rules-based economic order.

  Again, for U.S. policy makers, to recognize this is not to advocate necessarily a response in kind. On the contrary, America’s long-term prosperity and security are ultimately staked upon what Benn Steil and Robert Litan call “a liberal, rules-based international economic and political order to which people around the globe aspire to be attached … An enlightened American financial statecraft will always be consistent with this principle.”79 It is, though, to advocate a different kind of policy debate, one where all sides begin from a clear geopolitical objective and where geoeconomic proposals are measured against that objective and in the context of viable alternatives. In extreme instances the alternative may be war. Where this is the case, U.S. officials need to ensure more appropriate standards of debate and comparison in weighing various options and their relative trade-offs.

  Finally, history provides precedent for a more robust strand of economic statecraft that balances U.S. goals of openness and security; changes do not necessarily need to be dislocating ones. As noted earlier, during World War II the United States established the Office of Economic Warfare, charging it to safeguard the dollar and secure vital imports on favorable terms.80 The United States supported these efforts with an economic intelligence-gathering infrastructure, which carried over into the Cold War period, equipping the country from the outset with the information it needed to fight that war.

  To be sure, the United States should not re-create an office focused on “economic warfare.” But the underlying lesson remains valid. For example, coming to terms with the uncomfortable reality that markets represented an unavoidable front in the war on terror was not easy.81 But once this point won reluctant interagency acceptance following 9/11, the U.S. government launched a range of initiatives that have since drawn wide praise for their effectiveness in targeting terrorism without sacrificing American lives and economic liberties.82 Paradigm-shifting approaches and tools have often seemed impossible or sacrilegious when they were first introduced, from convincing NATO allies to adopt nuclear “flexible response” at the height of the Cold War to proceeding with new forms of sanctions (targeting energy and central banking, for example). But after a hard-fought battle for acceptance, these have proven crucial in addressing the nuclear ambitions of North Korea and Iran.

  In short, vital and very important U.S. national interests are again at stake in how we wage a very different sort of campaign. This time the goal is to shape the behavior of states that wield substantial economic and financial muscle and are in some ways, though not in others, using this leverage to pursue policies that could be damaging to U.S. national interests. As one market observer summarized the task facing policy makers, “It’s [about] re-writing the rules of diplomacy to better engage” in a world where influence “is determined by economic power.”83 The United States has such geoeconomic assets. The abiding question is how effectively it will use them, including, as Chapter 8 addresses, in the energy arena.

  CHAPTER EIGHT

  The Geoeconomics of North America’s Energy Revolution

  Thanks to the boom in American unconventional oil and gas production, the United States is swapping its long-suffered vulnerability to imported energy in favor of a new strategic asset.

  —MEGHAN L. O’SULLIVAN, PROFESSOR AT HARVARD UNIVERSITY’S JOHN F. KENNEDY SCHOOL OF GOVERNMENT

  FOR many, many decades, energy has been a strategic liability for the United States.1 America’s ever-growing thirst for oil has shaped its foreign policy and national security strategy in ways that created sometimes incongruous alliances and complex obligations—all in the interests of securing access to reasonably priced
energy.

  These patterns are being upended. The United States is at the center of an energy revolution driven by the widespread use of fracking, with the result that it is poised to become the world’s leading producer of crude oil and natural gas liquids as well as of natural gas.2 For the coming decade and beyond, this presents America with a major new geoeconomic windfall.

  The quest to secure energy has shaped global diplomacy and warfare for more than a century—consider the search for coaling stations to supply European fleets before World War I, the Japanese decision in 1941 to invade the Dutch East Indies, Cold War competition in the Middle East, the 1991 war with Iraq, and China’s increased engagements in the Middle East, Africa, and Latin America in recent years. For much of the last hundred years, energy scarcity or the fear of it has sculpted the nature of global challenges and the response by governments to them.