February 18, 2015

How Will America React When One of Its Companies is Sanctioned?

By Peter Harrell

For the past decade, the United States has led an unprecedented revolution in the use of targeted sanctions. Over the past week alone, President Obama has emphasized the potency of the current sanctions on Iran in threatening to veto new congressional measures while raising the prospect of increased economic pressure on Russia over its renewed aggression in eastern Ukraine.

But it is only a matter of time before a foreign government turns the tables and uses targeted sanctions against a U.S. company to put pressure on the United States.

To date, the few targeted sanctions that foreign governments have imposed on Americans have been no more than symbolic—when Russia sanctioned Arizona Senator John McCain in retaliation for U.S. sanctions last year, McCain quipped “I guess this means my spring break in Siberia is off.” This, however, will not always be the case. As U.S. companies continue to expand overseas and rely heavily on foreign suppliers and foreign markets, other governments are virtually certain to try to use sanctions to pressure the United States and our allies.

It is impossible to predict the events that will provoke sanctions against an American company, but there are a number of possibilities. One of the countries involved in territorial disputes in the South China Sea could threaten sanctions against U.S. or European firms that provide oil equipment or other services to a rival claimant. A government could retaliate against U.S. intelligence surveillance by threatening sanctions against technology companies that provide surveillance equipment or expertise. Or a U.S. defense contractor could risk sanctions by a government that objects to some U.S. military activity.

Sanctions by a foreign government may look different from our own. The dominant U.S. presence in international finance means that the global financial system is an effective lever of U.S. pressure. Adversaries are likely to rely on their own sources of leverage. For some, financial pressure may be an effective tool. For others, access to their markets, control of specialized technologies, or imposing limits a U.S. company’s access to resources may be a more important source of pressure.

When this happens, the United States understandably will react with outrage. We have used sanctions to advance broad international goals and universal values, but an adversary is much more likely to use sanctions capriciously and in ways that undermine a rules-based international order. The U.S. will have to use all the tools at our disposal—diplomatic, political, and economic—to protect our companies and our interests.

The question, however, is whether this will be enough. The U.S. government and private sector need to harden American defenses and reduce our vulnerabilities against targeted economic sanctions by taking a few practical steps.

First, the United States needs to systematically study vulnerabilities. Our experience with Iran, Russia, terrorist organizations and other rogue actors gives the U.S. government a sophisticated understanding of the vulnerabilities of other countries to economic and financial pressure campaigns, but Washington has not undertaken a comparable analysis of our defensive risks. Just as the Department of Defense analyzes the vulnerabilities of military supplies, we need to undertake a systematic review of the financial nodes, supply chains, technological resources, and strategic materials that could provide an adversary with leverage against us.

Second, the U.S. government—working with allies and non-governmental experts—should articulate and promote international norms governing the use of economic coercion as we have done in the military and cyber domains. The United States uses sanctions against rogue, illicit and corrupt conduct, like nuclear weapons proliferation, terrorism, and violations of territorial integrity; but we have not developed a coherent set of norms governing the use of coercive economic tools. Identifying and promoting global norms would give us a powerful framework to deter against arbitrary sanctions by foreign countries that attack our interests and the rules-based international order.

Third, U.S. companies should more systematically identify specific vulnerabilities in their supply chains and markets. They should ask: “if a foreign government wanted to put pressure on my operations, are there vulnerabilities it could exploit?” This kind of assessment not need to be expensive or novel. Companies already assess the risk of disruptions by natural disasters like the 2011 tsunami in Japan or damage to computer systems, and take preventative steps to mitigate those risks. Examining sanctions vulnerabilities could simply be incorporated into those other periodic assessments and efforts to make themselves more resilient in the face of such challenges.

These steps will not prevent a foreign government from threatening sanctions on the United States. The U.S. and our allies have shown just how effective sanctions can be, and it is almost inevitable that other countries will try to use them. But by beginning to address the risks now, Washington and its allies can deter the misuse of sanctions by others and reduce our potential vulnerabilities. 

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