Transatlantic Power in Economic Sanctions

Economic sanctions have become one of the most successful tools in achieving policy goals, and offer an effective alternative to more hawkish options. The United States has crafted sanctions regimes throughout the world, but it is without doubt most effective in partnership with its allies, notably the European Union. The US-EU economic bloc makes up roughly 45 percent of the world’s GDP, making it a powerful force when applying economic sanctions.

In order for the EU to collectively impose sanctions, member states’ representatives first meet and then the European Council acts. At a 2014 G7 meeting, leaders quickly agreed that it was necessary to respond to Russia’s annexation of Crimea from Ukraine, aligning US-EU priorities. The European Council then froze the assets of 149 individuals and thirty-seven entities.

As initial economic and diplomatic coercion failed to stop Russian aggression in Ukraine, the European Council adopted a robust sanctions regime that conformed to the agreement signed in Minsk in February. It limited access to EU capital for Russian banks and subsidiaries, as well as certain major Russian energy and defense companies. The EU sanctioned the largest Russian banks: Sberbank, VTB, Gazprombank, Vnesheconombank, and Rosselkhozbank.

Before the EU was founded in 1993, the United States and its partners and allies would coordinate policy actions such as sanctions through a series of bilateral and multilateral negotiations that often required large conferences and a series of meetings. This ended up limiting effectiveness.

Under the current EU institutional arrangement, any member state can present a proposal for sanctions, although the proposal can also be presented by the High Representative of the Union for Foreign Affairs and Security Policy, who often works in conjunction with the European Commission. Proposals are discussed by the Foreign Affairs Council and then pushed through several other stages of advisory councils. Ultimately, the decision is in the Council’s hands.

European states historically lacked serious mechanisms to compel states to join in on sanctions, and many would refuse to participate. But with the current institutional arrangement, the Council of Europe reaches a consensus, and the EU acts. Before the EU was founded, dissenting states could drag their heels in negotiations and had little incentive to change their views. But now, an EU member state such as Greece, which objects to sanctions on Russia, is compelled to participate along with the rest of the EU. The EU structure facilitates unified action, which makes tasks such as imposing a robust sanctions regime much easier for the United States.

EU institutions have gradually made progress: where they were once a loose and unwieldly organization, now there is an efficient apparatus that regulates and enforces all twenty-eight members’ obligations within the EU’s legal system.

In 1957, the Treaty of Rome gave countries the ability to coordinate trade policies in a way that would imitate economic sanctions. But European institutions still lacked the coercion element to encourage member states to work collectively, and the EU also lacked the ability to take action on political sanctions. Sanctions became a major EU policy tool with the “Basic Principles on the Use of Restrictive Measures (Sanctions)” in 2004, which called for targeted sanctions. This allowed the EU to economically target aspects of a country’s government without punishing the entire population.

The question remains as to whether these institutional mechanisms work in practice. An analysis of recent sanctions on Russia and Iran illustrates their effectiveness, and the importance of the EU as a transatlantic partner in crafting sanctions regimes.

In the case of Russian sanctions, the economic burden is not distributed equally among member states as a result of significantly different trade balances. In 2013, Germany was in first place among EU member states with €75 billion worth of trade with Russia. The Netherlands was in second place (€37 billion), Italy in third (€30 billion), and Poland last (€26 billion). With €26 billion being over 5 percent of the Polish GDP, it is quite possible that without the support of European institutions, Poland would not have cooperated to make sanctions possible.

Much of the impact of the economic sanctions imposed on Russia comes from the EU. For example, Sberbank is Russia’s largest bank with over 43.3 percent of its retail deposits and 282 branches in Europe. It also has the largest market share in business and corporate banking in Russia. The interconnectedness between the European economies and Russia cannot be overstated, with the highest share of Russia’s trade taking place with the EU.

US-EU cooperation also yielded success following action in 2012, when the two economic blocs banned trade with Iran’s oil sector. The effect was immediate, as the EU previously accounted for 20 percent of Iranian oil exports. When these sanctions were put into place, European oil exports accounted for half of the Iranian government’s revenue and one-fifth of the country’s GDP; since then, exports have been cut in half.

Initiated by the US Treasury Department and backed up by the EU, another cooperative approach targeted Iran’s trade by going after its shipping networks. This approach specifically targeted the Islamic Republic of Iran Shipping Lines (IRISL), an official government shipping line. “We have tracked and exposed them [IRISL],” Adam Szubin, Director of the Treasury Department’s Office of Foreign Asset Control, wrote in a 2011 blog post. “Altogether, we have targeted more than 150 IRISL-related vessels, companies, entities and individuals over the last three years.” This category of sanctions imposed a cost on both the Iranian corporate sector as well as the Iranian government.

Financial sanctions on Iran have proven to be particularly impactful, notably the use of SWIFT. SWIFT is an electronic payments system, and has quietly become an essential tool used by banks to operate in the global market. The threat of banning a bank from SWIFT sparks a rapid response from executives. When the United States signaled it may block Russian banks from accessing SWIFT, the CEO of Russia’s second-largest bank said, “If there is no SWIFT, there is no banking… relationship. It means that the countries are on the verge of war, or they are definitely in a cold war.”

SWIFT played a vital role in hitting Iran’s financial institutions. Iran’s fifteen leading banks were banned from the SWIFT system. Before 2012, Iranian SWIFT transactions in Europe alone totaled over $35 billion. Iran’s lack of SWIFT access crippled Iranian financial institutions, allowing the sanctions to sap the country’s political will.

Developments in Russia and Iran illustrate that US-EU cooperation on crafting economic sanctions will be vital for years to come. As both the EU and the United States face global challenges they should continue to recognize the importance of the trans-Atlantic partnership, as well as the power of sanctions in achieving policy objectives.

Nico Catano is an intern in the Atlantic Council’s Global Business and Economics program.

The Atlantic Council and The Iran Project will host a symposium on implementing the nuclear deal with Iran on Dec. 17. Click here for more details.

Image: Customers choose sausages at a food market in the southern Russian city of Stavropol on March 14. Russia’s economy slowed sharply as a collapse in oil prices and Western sanctions over the Ukraine crisis dragged on growth. (Reuters/Eduard Korniyenko)