How Productive are Sanctions?

[Marina Schwarz + 1,576]

Discuss. With factual backing of arguments, wherever possible.

[Epic + 390]

I think this was a great question.  I had hoped that someone with more insight on the subject would take a stab at it, but as that has not happened, I'll give you my best shot.

I think sanctions are both very effective and quite ineffective at the same time, with the circumstances of each individual situation dictating the effectiveness of the sanctions.  Since sanctions are currency specific, I'd use US sanctions for my examples, which means I'll be speaking about the USD.

So, sanctions do two things, first, they prevent you from accessing your USDs, and they prevent you from gaining access to new USDs.  Both of these can be very problematic for businesses with debts denominated in USD, whether those debts are long term, such as bonds, or short term, such as payrolls.  Primarily, these two things will prevent you from doing business with customers and other companies that use USDs.  So, the effectiveness of the sanctions is entirely dependent upon how business you do with USD.  If you do not do much business in USD, sanctions will have little effect.  The more business you do with USD, the greater the effect US sanctions will have. 

To illustrate, let's assume you own a business worth $5 billion USD, and you have $1 billion in bonds (demoninated in USD) coming due soon, and you have $2 billion USD in cash.  If you or your country is suddenly sanctioned by the US, then you lose access to your $2 billion.  Moreover, you lose the ability borrow in USD.  Since you no longer have access to USD, you will not be able to pay back your $1 billion USD debt when it comes due.  This means that unless you can renegotiate that debt, your company will go bankrupt and creditors will seize your business assets.  This make your goods more expensive due to the inefficiencies created by the bankruptcy proceedings, causing you to lose a lot of wealth.  When applied to the entire country, it will create a huge liquidity crunch that can absolutely crush a nation.  

...but only if that nation needs USDs.

Let's say you are a country like Iran which has a lot of exports (oil), and those exports are denominated in USD.  This means if you want to export your goods, you need to transact in USD...which, according to the sanctions, you don't have.  That is a serious problem.  On the other hand, let's say Iran wants to sanction the US.  This is not a serious problem at all for the US, because the US does not need Iranian Rials to do business, whereas Iran does need USDs to do business.  So here we see an example of both sanctions being very effective (US sanctioning Iran) and sanctions having absolutely no effect (Iran sanctioning the US).  

But there are ways around sanctions.  For instance, the 2007-2015 sanctions on Iran really hurt the Iranian economy, but not nearly as much as those sanctions should have.  This is because Turkey and Russia supported Iran in a very clever Oil-for-Gold trade.  Again, sanctions only have as much of an effect on a country as that country depends on access to a particular currency.  Since Iran was able to trade oil for gold, then the sanctions has much less of an effect because, due to that oil for gold trade, Iran was much less dependent on USD than it otherwise would have been.  Of course, the banks who facilitated the gold for oil trade were illegally performing this function (according to the sanctions), and I think a lot of people went to jail and had to pay fines when they were finally caught; still, if the price is right, people will find a way to make a market for those goods, even if that means making a black market.  

Those black markets lessen the effect of the sanctions.  

So, to sum up, sanctions are effective when you need to do business with the sanctioned currency.  If you don't need to do business with that currency, then sanctions will have little or no effect.  Right now, the US is the largest market in the world.  Businesses that are shut out of that market will suffer, some more than others.  Although US sanction are very powerful because of the size of the US market and the demand of USDs to do business, there are still ways to avoid those sanctions.  So the real question isn't whether US sanctions are effective (they are very effective), the real question is how closely is the US willing to monitor the cheaters who create black markets to illegally bypass US sanctions.  I have a feeling the US is going to watch Iran and its allies a lot more closely this time around, and because of that, the sanctions on Iran could be devastating.  However, the next question is how badly the US will respond to those ignoring the sanctions.  For instance, if India continues to import Iranian oil after the US sanctions take full effective, will the US then sanction India for its violations?  If India desperately needs USDs, then they are less likely to attempt to violate US sanctions so as not to risk the loss of USD.  On the other hand, the US must also weigh the impact of applying the full force of its sanctions on India, as that would mean the US would lose access to the Indian productive facilities.  For instance, Ford, Cisco, Microsoft, GE, and American Express all off-shore to India, and so these US companies will be harmed if sanctions are imposed on India for violating sanctions with Iran.  If the US sanctions India for dealing with Iran after the US imposes sanctions on Iran, then US is effectively shooting itself in the foot.  At first, shooting oneself in the foot sounds like a bad idea, but if your foot is currently in a bear trap, then suddenly it doesn't sound so bad if it will free you from the trap.  After all, it is better to injure a foot than to die from the trap.  

The last thing that needs to be said about sanction has to do with currency value.  There is not enough liquidity for the big players to park their US dollars in stocks or real estate.  As such, many nations park their spare cash in US treasuries.  But therein lies another problem.  If those nations decide to exchange their US treasuries (denominated in US dollars) for, say, Chinese treasuries (denominated in yuan), the value of those assets will change based upon the strength of the underlying currency.  No one wants to be holding yuan denominated treasuries if the yuan is devaluing.  Therefore, the stronger the currency, the more likely that the big players will being holding your currency; moreover, the more big players that hold your currency, then the more effective your sanctions will be. 

Strong dollar = strong sanctions = strong nation. 

The problem with a strong currency is that the strong currency will result in a trade deficit, which in a majority of cases will weaken the nation in the long term.  This problem is easily countered by tariffs.  The problem with tariffs, however, is that they make it very difficult for the big players to take advantage of the little guys (because free trade works like a subsidy for the big players in the sense that the little guys do not have the capital to establish international supply-chains, thus creating a barrier-of-entry for the little guys and a monopoly for the big guys).  Since the big players are hurt by tariffs, and since the big players own the news media, this is why you see so much fake news out their trying to convince the average voter of the dangers that tariffs impose.  Tariffs impose no such dangers, at least not any more danger than a tax increase imposes.  Therefore, if tariffs impose dangers (as they say), then tax reductions ought to reduce those dangers.  However, as many of you probably witnessed in the US fake news media, more often than not, the people who complained about the tariffs were also the very same people who complained about the recent US tax reduction. 

Think logically.

You can't have it both ways.  Lowering taxes has the opposite effect as adding tariffs, so you cannot speak out against both at the same time, yet the fake news media did and still does speak out against both, which is, of course, why they are the fake news.  

This last point is also why I come to the oilprice forums to get my news.  Less bias + good people = oilprice ftw. 

[Jan van Eck + 7,558]

Unless Sanctions are imposed by a group of nations, then they remain as nothing more than an attempt by one to impose authority on another.  In the case of Iran, the Mullahs have no intention of allowing the USA to impose its will on them. So Iran says, "OK, you don't like me, you don't want to trade, then screw you guys, we won't sell to you, we don't need you."  

In an effort to "enforce" its sanctions, the US can say: "OK, bankers, if you do business in any manner whatsoever with Iran, we will bar you from doing business in America."  So now the non-parties in say Italy and France have to take notice and make a choice. Are they ready to dump their US business and close their offices in New York in order to do business with the Mullahs?  Probably not. 

But let's say that some banker somewhere decides to throw in his lot with Iran, presumably for fat fees, and sets up the trading accounts to facilitate deals and payments for Iran.  So the oil flows anyway, and all the Iranians suffer is a loss of some markets and the costs of paying a fatter banking fee. 

So the US does not like it and says: "Hey, Greeks, if your tanker attempts to sail with Iran Oil, then the US Navy will shell it and sink it once it gets to the Indian Ocean, and your crews can swim for it."  Now the contest is really "up the ante," and to make good, Trump has to start sinking tankers. Is that a plausible result?  Hey, could be.  So the insurers refuse to insure the Greeks going in to pick up Iran oil at Kharg Island, which rather dries up ship capacity, which is the situation facing Iran today - no Greeks. 

So now the Iranians buy some old ships and crew them themselves, and offer to provide the oil "delivered" to the customer unloading terminal, which is the situation today.  And so Trump says:  "Now we do a secondary boycott.  We don't like those Iranian guys; if you do business with them, then you cannot do business with the USA.  We will hit you with a 100% tariff and we will impound your countries' bank deposit assets in the USA."   And at this point it gets seriously heavy, because you don't have a navy big enough to take on the US Navy, and you are being bullied and blackmailed by Mr. Trump in his personal vendetta with the Mullahs.  And we are just about there today.

SO now what?  I predict that Iran oil will continue to flow, in volume, but the Iranians are going to have to deal with the oil and maritime equivalents of international gun dealers, some really unscrupulous people who will find buyers for that oil if the brokerage discount is big enough.  So if the discount goes to $20/bbl and the ship is 2 million barrels, then the dealer picks up $40 million for buying it and secretly selling it. And he has to pay off the buyer for the buyer's risk, so that kickback is say $20 million on the load, but when all is done, the Dealer still picks up $20 million for each ship he handles, and for that kind of money, the oil will flow and the buyers will be found.

So you will have these tankers roaming about with the GPS Trackers turned off  (or, better yet, put on board some rendezvoused fishing trawler and sent in the other direction to throw off the trail), then arriving in say Mozambique for ship-to-ship transfer to another tanker, then that tanker heading down to South Africa and selling the oil there.  That is what happened during Apartheid, and it will happen again. 

 

Edited September 19, 2018 by Jan van Eck