Having failed to achieve much with sanctions against Russia, the United States has begun threatening "secondary sanctions" against third-party countries and companies that have trade relations with Russia, marking a new stage in economic pressure on Russia. These highly extraterritorial sanctions will force more global enterprises to "take sides," significantly increasing the political risks of international trade and profoundly impacting the international trade and political landscape.

However, unexpectedly, countries such as India did not yield this time, indicating that the U.S. sanction and economic warfare capabilities based on market size, technological advantages, and the global transaction network are being challenged.

This article is excerpted from "Sanctions and Economic Warfare." It combines the history of the United States using smart sanctions and secondary sanctions to demonstrate American hegemony since the post-Cold War era, particularly over the past decade, and deeply analyzes how the U.S. implements "targeted strikes" through modern financial and trade networks, as well as its side effects.

By Zhai Dongsheng

Smart Sanctions Against Individuals

As early as after the 2014 Crimean crisis, Russia was subjected to financial sanctions by Western countries. In March 2014, the United States and the European Union announced sanctions against Russian individuals and companies accused of undermining democracy, misappropriating Ukrainian property, and violating human rights, which included visa bans and asset freezes. Subsequently, the United States and the European Union gradually expanded sanctions against Russian officials responsible for the Crimean policy and Russian companies operating in Crimea.

In this round of sanctions against Russia, a novel aspect was the U.S. sanctioning four of Putin's close aides, including Kovalchuk, Rotenberg brothers, and Timchenko. The EU sanctioned Kovalchuk and Arkady Rotenberg, as well as Putin's fifth close aide Shamarov. These sanctions aimed to economically isolate Crimea, punish the so-called "perpetrators," and prevent further military actions by Russia.

Kovalchuk is called "Putin's private banker" by Western media

Evidently, these precise financial sanctions are based on a Western concept and way of thinking, which assumes that Russia is a "kleptocracy" controlled by a few oligarchs. By sanctioning Putin's friends, confidants, and Russian oligarchs, it aims to influence Russia's foreign policy.

The sanctions against Russian oligarchs reflect a shift in Western sanction policies, moving from comprehensive sanctions similar to those against Iraq—equivalent to an economic carpet bombing—to more precise "smart sanctions," which can be compared to precision-guided weapons in economic nationalism. Smart sanctions, also known as targeted sanctions or selective sanctions, are measures targeting specific individuals (especially ruling elites), entities, or transactions.

Although traditional comprehensive sanctions were once the preferred method, in the first two decades of the 21st century, smart sanctions have become a more favored economic coercion tool for decision-makers. Smart sanctions usually include asset freezes, financial sanctions, refusal to sell luxury goods, industry sanctions (such as arms embargoes and restrictions on dual-use technologies), and travel restrictions.

Since smart sanctions shift the harm from ordinary citizens to the leadership of the target country, they are easier to gain public support in the initiating country compared to comprehensive sanctions, which often lead to humanitarian disasters. Smart sanctions can also damage the reputation of the sanction targets, as rumors can sometimes hurt political figures more than economic losses.

To implement smart sanctions, the initiating country needs to accurately identify the assets of the target country's leaders, ensuring that the leaders do not have other means to obtain wealth. Of course, to ensure the effectiveness of smart sanctions, the sanctioned elite must have the ability to influence decision-makers (e.g., through palace coups) or be able to become the driving force behind changing the country's basic direction or regime (e.g., mass uprisings).

Additionally, they must have vulnerabilities worth exploiting, such as private overseas investments, foreign real estate, or relatives abroad, otherwise they cannot be forced to take the political actions desired by the sanctioning party. For example, studies by Mirko Drakulic and others on Iranian listed companies associated with Iran's Islamic Revolutionary Guard Corps and Supreme Leader Khamenei show that focusing on striking the commercial interests of Iran's political elites is an effective way to increase the success rate of sanctions.

Smart sanctions provide decision-makers with a strategic balance point, allowing them to find a compromise between comprehensive sanctions and inaction, facilitating the weighing of the "political efficacy" and "moral consequences" of sanctions. In this regard, a significant advantage of smart sanctions is their compliance with the principle of proportionality in international law, alleviating the collateral damage caused by extensive comprehensive sanctions to innocent civilians, especially vulnerable social groups and third parties.

To protect the interests of innocent people and consider potential humanitarian issues caused by sanctions, many contemporary sanction schemes include "humanitarian exceptions" as defined by the United Nations. This mechanism allows humanitarian aid supplies such as food and medicines to enter the sanctioned country and permits necessary economic activities to continue to meet humanitarian needs.

During Saddam's era, the UN launched the "Oil-for-Food Program"

On the basis of humanitarian exemptions, to fully consider the interests of third parties, some sanction initiators' policies also include "diplomatic exemptions." This exemption is mainly reflected in two aspects in practice: one is providing compensation for the negative spillover effects suffered by the sanctioned country's neighbors and trading partners, such as Egypt and Turkey receiving partial compensation due to Iraq's sanctions; the second is allowing countries highly dependent on the sanctioned country to gradually reduce economic and trade relations with the sanctioned country instead of immediately cutting them off, which helps the international community form a consensus on sanctions.

For example, the Obama administration agreed to grant "significant reduction exceptions" (SRE) to countries such as the EU (mainly Greece, Italy, and Spain), China, India, Japan, Turkey, and South Korea, which imported large amounts of Iranian oil. According to SRE exemptions, these economies could continue importing oil from Iran and gradually adjust their oil import structures, but with the condition that they reduce the amount of oil imported from Iran by about 20% every 180 days.

A further advantage of smart sanctions is that they advance policy objectives while avoiding full-scale confrontation in bilateral relations, allowing cooperation in other issue areas.

Compared to traditional trade and investment sanctions, the effectiveness of targeted smart sanctions remains a topic of ongoing research and discussion. Although smart sanctions are theoretically considered more precise and efficient, due to insufficient attention and emphasis on such cases in existing major databases, empirical research on targeted sanctions is still in its early stages.

Therefore, academia has not yet formed a unified view on the relative effectiveness of targeted sanctions, and there is currently no conclusive evidence to indicate that targeted sanctions are more effective than traditional sanctions. Drezner pointed out that "smart sanctions are sometimes smart," while Heinrich and Ellison also believe that although targeted sanctions perform better in human rights protection, they may not necessarily be more effective than traditional sanctions from an effectiveness perspective.

However, in the field of financial sanctions, the situation may be different. Tao Shigui emphasized that asymmetric monetary power and the power to set international financial rules are two major advantages of U.S. financial sanctions. Considering the U.S.'s dominant position in the global financial system and the status of the dollar as a world currency in international payments, target countries and their potential third-party partners face greater challenges in breaking through financial sanctions. Banks and other financial institutions may be reluctant to engage with sanctioned financial entities to avoid reputational costs and the risk of significant penalties from the U.S. government.

In some ways, smart sanctions may even backfire, with the targeted sanctions becoming a badge of loyalty or a confirmation of capability. Overall, smart sanctions, especially in the financial field, may offer a new form of sanctions, but their true effectiveness and scope of impact still need more empirical research to verify.

Secondary Sanctions Based on Network Power

The dynamic evolution of contemporary economic sanctions indeed reflects a dual trend of precision and expansion. On one hand, as previously mentioned, the precision, cleverness, and customization of sanctions have led to the rise of smart sanctions. When designing and implementing sanction programs, sanctioning countries attempt to distinguish between innocent groups and governments, individuals, and entities responsible for "provocative behavior," striving to focus on the latter while providing pathways or appropriate relief for the former. On the other hand, Western developed countries, especially the United States, have expanded the scope of economic sanctions, extending them from specific sanction targets to third parties with economic ties to the sanction targets. This generalization and expansion of sanctions are mainly reflected in the sharp increase in secondary sanctions cases implemented by the United States in recent years.

Secondary sanctions differ essentially from direct sanctions. Direct sanctions primarily target the government, entities, or individuals of the sanctioned country, aiming to limit their economic ties with the United States. Secondary sanctions, on the other hand, target third-party countries or entities, usually threatening to cut their trade, financial, monetary, and technological ties with the United States to force them to comply with the United States' unilateral sanction regulations.

This approach aims to "spontaneously" restrict or stop specific economic ties between them and the sanctioned country, thereby closing sanction loopholes and enhancing the effectiveness of sanctions. The jurisdictional basis for U.S. secondary sanctions is widely considered very weak and often criticized as an improper extraterritorial application of U.S. domestic law, hence facing strong opposition and resistance from many countries. This sanction method has triggered legal and moral controversies in international relations and has had profound impacts on the global economic and political landscape.

Prolonged sanctions have made Cuba's economy lag behind

The motives and policy behaviors of the United States in implementing secondary sanctions became increasingly evident at the end of the 20th century. In 1996, the United States passed the "Damato Act" and the "Helms-Burton Act" targeting Cuba, both of which contained secondary sanctions. These measures caused strong dissatisfaction and resistance from other Western countries, forcing the United States to temporarily abandon this strategy.

However, the "9·11" incident and the Iranian nuclear crisis in 2002 provided the United States with new opportunities to implement secondary sanctions, leading to more frequent use of secondary sanctions in international politics and resolving international disputes. Marked by the 2010 "Comprehensive Iran Sanctions, Accountability, and Divestment Act," the United States has successively introduced multiple laws containing secondary sanctions provisions. In 2018, after the United States withdrew from the Iran nuclear deal, it resumed strict direct sanctions and secondary sanctions against Iran. According to the research team led by Huang Ying from the China Institute of Modern International Relations, current U.S. secondary sanctions exhibit the following characteristics.

First, the methods used by the United States to implement secondary sanctions have indeed undergone significant changes, especially in the financial sector. Before 2000, U.S. secondary sanctions mainly targeted trade and investment relationships between third countries and the sanctioned country. However, with the deepening of financial globalization, especially after Al-Qaeda used the international financial system to raise funds for planning and carrying out the "9·11" terrorist attacks, the United States began to use financial tools for secondary sanctions in areas such as counterterrorism, preventing the proliferation of weapons of mass destruction, and preventing nuclear proliferation.

This includes prohibiting third-country banks from providing financial services and U.S. transaction services to sanction targets, which are widely incorporated into U.S. sanction laws, regulations, and executive orders. For example, the 2019 "Protecting Europe’s Energy Security Act" stipulates that any foreign individual or entity knowingly supporting Russia's energy pipeline projects to Germany or Turkey will have its property and property rights in the United States frozen.

Second, the frequency of implementing secondary sanctions has also significantly increased. From 1996 to 2017, the United States carried out 25 secondary sanctions against individuals on the "Special Designated Nationals List" (SDN list). During the Trump administration, secondary sanctions became the main tool for U.S. economic coercion.

After the United States withdrew from the Iran nuclear deal in 2018, as part of its "maximum pressure" policy on Iran, the enforcement of secondary sanctions significantly intensified, increasing from 2 in 2018 to 23 in 2019, reaching a peak of 78 in 2020. During President Trump's first term, the United States carried out a total of 104 secondary sanctions, with 48 Chinese entities and 18 Russian entities being sanctioned for violating U.S. secondary sanctions against other countries. A total of 45 Chinese entities were sanctioned in the U.S. sanctions against Iran.

Overall, the secondary sanctions provisions included in the U.S. economic sanctions against Russia and China are relatively few. However, as the Ukraine crisis escalated in early 2022, calls within the U.S. for expanding secondary sanctions against Russia have been growing louder. After Russia launched its "special military operation" against Ukraine, the United States and its allies imposed a comprehensive economic blockade on Russia, including freezing most of its foreign exchange reserves and state wealth fund. On May 19, G7 finance ministers discussed a plan for secondary sanctions against Russia, including setting a price cap on Russian oil, and if foreign buyers do not comply with this restriction, they will be prohibited from conducting transactions with U.S. and allied companies. However, the effectiveness of this plan may depend on the cooperation of India and China, otherwise it may backfire.

Russia's large shadow fleet has contributed significantly to its oil exports

Owing to factors such as the rise of global protectionism and populism, the outbreak of the COVID-19 pandemic, and the escalation of the Ukraine conflict, the cracks in the global political and economic system have deepened, and a trend of factionalization has emerged. Under these circumstances, the use and threat of U.S. secondary sanctions are not only unhelpful in repairing these cracks but may also exacerbate the fragmentation of the global political and economic system. The harm of the U.S. abuse of secondary sanctions is mainly reflected in three aspects.

Weakening the international cooperation system based on international law. The post-World War II international cooperation system is supported by international law, including the UN Charter, multilateral agreements, regional and bilateral treaties, and international customary law, which has gradually formed and been widely accepted in international interactions. However, U.S.-initiated unilateral sanctions and secondary sanctions lack legal grounds in international law and are widely opposed by the international community. The UN General Assembly has passed resolutions condemning U.S. unilateral sanctions three times in 1996, 1998, and 2002, indicating that these measures have weakened the international cooperation system.

Fragmenting the market-oriented global economic system. U.S. secondary sanctions harm the interests of third parties, including allies, inciting anti-American sentiment and challenging the free and fair global trade order advocated by the World Trade Organization. This practice undermines the foundation of economic globalization, prompting countries to reduce their reliance on the United States and triggering changes in the global economic system. U.S. sanctions against Russia have been particularly significant, not only harming Russia but also harming the United States' allies and the global economy, intensifying the fragmentation of the global economic system.

Third, weakening the international monetary system centered around the dollar. Since 2010, the weaponization of the dollar has weakened its role as an international reserve currency. The abuse of secondary sanctions by the United States may provoke fear of the U.S., reducing the attractiveness of the dollar and the U.S.-led global financial system. The international monetary system may accelerate its evolution, leading to reduced reliance on the dollar and diversification of central bank reserve assets. The U.S. weaponization of the monetary system during the Ukraine crisis may further undermine trust in the dollar system, giving rise to smaller monetary groups based on different trade blocs, making international trade settlement currencies more diversified.

"Sanctions and Economic Warfare," by Zhai Dongsheng, Ji Xianbai, and Wei Zilong, published by Renmin University Press

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