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Columbia Energy Exchange

How U.S. Sanctions Can Backfire


Agathe Demarais

Global Forecasting Director of the Economist Intelligence Unit


Agathe Demarais [00:00:03] Sanctions are crucial because they fill in the void between empty diplomatic declarations on the one hand and deadly military interventions on the other hand. I think that there is a risk, if there is sanctions are used, that sanctions will have side effects and ripple effects that could make them ineffective in a few decades. And I think that would be a very dangerous development because without sanctions, then Western democracies would have no leverage, no tool to essentially apply pressure on Russia, China, Iran, Venezuela, Cuba and other such countries.

Bill Loveless [00:00:37] The U.S. has used sanctions to influence geopolitics for decades, including measures targeting oil and gas trade. Most recently, the U.S. and other G7 nations rallied to put a price cap on Russian oil as punishment for the invasion in Ukraine. In the past, sanctions focused on trade embargoes like the grain embargo against the Soviet Union in 1980 and much broader restrictions against Cuba in 1960. Today, they focus on financial impacts and with the United States global financial clout. This strategy can be very effective, but unilateral sanctions can fuel tensions with allies and result in unintended consequences. So how does the U.S. use financial pressure to address conflicts with other nations? What are the geopolitical and economic impacts of the current sanctions? And how could they affect America’s standing in the global order? This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Bill Loveless. Today on the show, Agathe Demarais. Agathe is the global forecasting director of the Economist Intelligence Unit, part of the Economist Group, a global media and research company. Before joining the EU, she worked as an economic adviser for the diplomatic corps of the French Treasury. Agathe is the author of the new book Backfire How Sanctions Reshaped the World Against U.S. Interests. It explores the surprising ways sanctions affect multinational companies, governments and ultimately millions of people around the world. And we’re proud to say that backfire is part of the Center on Global Energy Policies book series published by the Columbia University Press. I spoke with Hogarth about what’s in the arsenal of U.S. sanctions and why they’ve become so popular in the past two decades. We discussed how they’ve been used as a foreign policy tool both in the past and present. And she shares what the future of sanctions could look like. Here’s our conversation. Agathe Demarais, welcome to Columbia Energy Exchange.

Agathe Demarais [00:02:52] Thank you so much for having me. I’m delighted to be here with you today.

Bill Loveless [00:02:55] Well, I look forward to to talking about your book. I’ve enjoyed it. I’ve learned a lot for it. But, you know, first for our listeners, tell us a little bit about your background, your work today, and why you find it meaningful.

Agathe Demarais [00:03:09] Well, I think that my background is the reason why I chose to write a book about sanctions and the ripple effects. I used to be a French diplomat. Well, technically, French treasury posted in Moscow and then Lebanon, and I was actually posted in Moscow in 2014 when Russia annexed Crimea and started to back separatist rebels in the Donbass region. So from one day to another before that, I used to cover Russia and six countries for economic and financial affairs. And from one day to another, I joined a French sanctions task force to implement well imposed sanctions against Russia and designed them mostly. So that was my intro to sanctions. Then I moved to Beirut. I worked on sanctions against Iran, against Syria, also, very much so. And in Russia and in Lebanon, I had the idea that sanctions have an impact on these economies, but they also had impacts elsewhere around the world. And so that gave me the idea about the book. And then in 2017, already almost six years ago, I did what nobody does. I left the French civil service for life. I left it and I joined the Economist Intelligence Unit in London. So I do economic and political analysis and forecasts, and I’m what is called the global forecasting director at the EU, based in London. And I cover global issues.

Bill Loveless [00:04:26] Well, the title of the book Backfires Simple, but but hard hitting. Its subtitle is How Sanctions Reshape the World Against U.S. Interests. You know, we’ll get into into this in some detail, But but first, generally, what is the message you’re trying to send?

Agathe Demarais [00:04:43] So the message I’m trying to send is a simple one. I should really make it clear the book is not and how sanctions, not at all. And I think that some people who would just read the title of the book and the subtitle could think that, but it’s absolutely not the case. It’s actually the exact opposite. But that’s the message of the book, is that sanctions are like antibiotics. And they are critical. They are crucial. Sanctions are crucial because they fill in the void between empty diplomatic declarations on the one hand and deadly military interventions on the other hand on the diplomatic spectrum. So they’re really, really important. And they’ve been a very useful tool for U.S. diplomacy in recent decades. We’ve seen, for instance, the nuclear deal being concluded in 2015, which I think was due in no small part to sanctions and the impact of sanctions on the Iranian economy. But to go back to the antibiotics analogy, I think that there is a risk if there is sanctions overuse, that sanctions will have side effects and ripple effects that could make them ineffective in a few decades. And I think that would be a very dangerous development because without sanctions, then Western democracies would have no leverage, no tool to essentially apply pressure on Russia, China, Iran, Venezuela, Cuba and other such countries. So I think that would be a very dangerous development. And the idea of the book is to explore these side effects and explore their impact on the effectiveness of sanctions and have a think about the future of sanctions and about how we can preserve this tool so that it remains effective in the long run.

Bill Loveless [00:06:14] Not just for those who may not be fluent in the terminology. What are sanctions and what are some of the weapons that are available to a country like the United States and their sanctions arsenal?

Agathe Demarais [00:06:29] I think that’s a perfect question because I think there’s a lot of confusion about what sanctions are, as sometimes people would say trade tariffs, for instance, or sanctions. And that is not really the case. I’m no expert about trade tariffs at all. If you ask me any questions about them. Sanctions are essentially a way to apply pressure, economic and financial pressure on countries like Russia so that it will change its behavior. And sanctions can also make it more difficult for a country, again, Russia, to do stuff, and in that case, it is to wage war against Ukraine. So I will give one example. At the moment, sanctions on Russia have a clear objective. It is to weigh on the Russian economy technologically, economically, financially, so that it is more difficult for Moscow to wage war against Ukraine. So that’s the general definition. But then sanctions, they can take many different forms. They can be a trade embargo. These were old sanctions. I would say, as I explain in the book, this is what the US applied against Cuba in 1960. There was also a trade embargo imposed against North Korea after the Korean War. But these type of sanctions aren’t really used anymore. They’re really a blunt tool and they do have humanitarian impacts. And so recent sanctions, the modern ones, they target financial links. That’s why that’s why they’re called financial sanctions. Essentially the point of sanctions is to cut financial ties or make it illegal to do some financial transactions. Say, for instance, if you want to do business these days with the Russian military, well, your bank, if it respects U.S. sanctions and Western sanctions in general, should tell you, no, that’s not possible because of sanctions. We can’t do that. And so what that illustrates is that the U.S. has a global financial clout that is unmatched. And so the U.S. can say, well, if something is prohibited, as per financial sanctions, then banks around the world will comply with these sanctions and will make it very difficult to do this transaction.

Bill Loveless [00:08:26] You know, you write that you discovered sanctions while working as a financial attache for the French treasury in Moscow in 2014. That timing is interesting for a number of reasons. Tell us about that.

Agathe Demarais [00:08:42] Well, essentially, I was a financial attache in Moscow for a French treasury starting in 2011, and it was covering financial and economic affairs for Russia. I think these were very, very different times. This is something that I should mention here before in 2014, of course, there were a lot of diplomatic disagreements between Russia and Western countries, but these were entirely different times. We still had relations with Russia. And then 2014 happened. I remember actually, I worked at the Olympics in Sochi in February 2014 as a diplomatic political leader, and then from one day to another and thinkable At the time happened, Russia annexed Crimea and started to back separatist rebels into Donbass. And so from one day to another, I joined a French task force that designed, not really implemented. Implementing sanctions was only a very small part of our role. It was other French agencies and European agencies that did that. My role was about designing sanctions against Russia and making sure and this is something that is very important for policymakers, that sanctions were as robust as possible while having as few side effects on European economies as possible. And this was very difficult because the U.S. at the time, and even more so today, had little economic ties with Russia, if we’re completely honest. But that wasn’t the case for Europe at the time. Europe’s energy mix depended on sort of it on Russian energy. So that was really tricky. That was really a precise thing to do, and that was what I started doing. And I found it really interesting. And so that’s why I continued after and I was posted in the Middle East and I was on the ground covering Iran in 2015 when the nuclear deal was signed. And I also worked on Syria sanctions. But what was interesting is that I would have conversations when I was in Lebanon with Syrian friends and they would tell me about the side effects of sanctions. I remember one friend telling me he couldn’t buy a bike for his son for his birthday, and according to him, that was due to sanctions. And I was very skeptical of this. And so that’s what gave me also the idea of the book, trying to untangle what is really due to sanctions, what is not really due to sanctions. And I think, well, a few years later, here we are. And my book is talking about exactly that.

Bill Loveless [00:10:53] Yeah. And that comparison between the sanctions that the U.S. and EU and other nations imposed against Russia over Crimea back in 2014 are interesting, especially in comparison to what’s going on today with the expanded war in Ukraine. And we can talk more about that. But it was interesting, you mentioned collateral damage. You know, sanctions can be very effective. You make that point. But you write that U.S. sanctions policies are often not well thought out and applied, that the repercussions are sometimes counterproductive, that there is collateral damage. What do you mean by that?

Agathe Demarais [00:11:31] Well, I actually gave a few examples in the book, and I will focus here on transatlantic relations. I think that it has happened in the past and certainly so after the US exit from the nuclear deal in 2018 and all the Nord Stream two pipeline saga, and I will say a few more words about this, it has happened that US unilateral sanctions, that is to say sanctions that are applied only by the US creates and fuel tensions with U.S. allies. And so the two examples that I gave about this were the U.S. exit from the nuclear deal in 2018. It puts European companies in a very, very bizarre position because the EU was still part of the nuclear deal. And so European companies in theory were still allowed to remain in Tehran. And actually European countries were telling their companies, please do stay in Iran, because we want to show Iran that it has an interest in remaining in the deal and in continuing to comply with the deal. But at the same time, the U.S. and the Trump administration did something that made it very difficult for European companies to stay in Iran. The US imposed secondary sanctions against Iran. So I will define this because I think there’s a lot of confusion about what secondary sanctions are when the U.S.. When the U.S. imposes secondary sanctions, it tells all companies around the world, not only American ones, but also all foreign companies, European, Japanese, Australian, any company around the world that they must make a choice. They can choose to remain in Iran, but if they do so, they will lose access to the U.S. market. They must withdrew from the US. They cannot use the US dollar anymore. They can’t use U.S. financial channels anymore. And so that’s a no brainer really, because no multinational can simply exit the U.S. market, especially to stay in Iran, which is a small economy. And so that’s the point of secondary sanctions. And so European companies facing the threat of secondary sanctions, they all exited Iran. And I are going to book that. This created a lot of tensions between the U.S. and the EU. And in my view, such tensions only actually benefit countries under sanctions such as Iran, such as Russia. And on the Russian example I discussed in the book the Nord Stream two pipeline saga. So Nord Stream two was supposed to connect. It was supposed to be a gas pipeline. And I say supposed to be because there is no Nord Stream two anymore, a gas pipeline connecting Russia to Germany directly. So of course, in hindsight it wasn’t a great idea to import more gas from Russia. But at the time in Europe there were a lot of debates about the pipeline somewhere pro Nord Stream two, somewhere against Nord Stream two. Everybody had reasons to back or refuse the construction of the pipeline. But there was a big consensus in Europe and it was that the US which was imposing sanctions on the Russians, who was taking things one step too far by essentially meddling in European affairs. And I felt sometimes that this point was a bit lost in the American debate, but in my view, such tensions on the benefits, well, in that case, Russia, because I’m pretty sure that every time there was a crack in the transatlantic alliance and some disagreements over in response to I’m pretty sure Putin rejoiced, that’s exactly his point and his objective to sow divisions and tensions between both sides of the Atlantic.

Bill Loveless [00:14:57] Yeah, And of course, you know, in the end, following Russia’s invasion of Ukraine, Nord Stream two did stop in its tracks because Germany stepped in and said that would be the case. But these tensions between the United States and Europe are not recent. They go back decades. Right. You write about that in the book. In the 1980s during the Reagan administration, there were tensions then over plans to build a pipeline for gas delivery from Russia to Europe.

Agathe Demarais [00:15:29] Yes, absolutely. There was actually a make or maybe it was the Nord Stream two saga that was a repeat of that. But there was tension at the time for the construction of a pipeline that was due to connect the former Soviet Union to Europe. And at the time the US was already trying to impose sanctions to derail the construction of the pipeline. In the end, the pipeline was constructed. That was very interesting because Doris of insights for today is that at the time there was a young Columbia student called Anthony Blinken, who had written his well, dissertation about the fact that it should be more important for the US to preserve transatlantic unity rather than block the construction of the pipeline. And what was very interesting is that following Biden’s inauguration and Blinken becoming Secretary of State, well, the US lifted sanctions against Nord Stream two, and I think that was very significant and that was probably due in no small part to the fact that Anthony Blinken is especially keen to preserve transatlantic relations in the context of sanctions.

Bill Loveless [00:16:37] Yeah, it’s interesting to understand sometimes who are holding positions in government and what their past has been and how it how it carries forward. You know, the discussion on Iran was in doing and covering that section, that period you wrote about total and the difficulties that French oil and gas major had struggled with when the Trump administration pulled the U.S. out of the Iran nuclear deal. Remind us of what happened there.

Agathe Demarais [00:17:12] Well, essentially what happened is that after the U.S. pulled out of the nuclear deal, the U.S. imposed secondary sanctions against Iran. So what happened is that all European companies, including total, the French energy giant, had to make a choice between the Iranian market and the American market. And that was really a no brainer. And so to that, I had to ditch a multibillion dollar investment in gas fields in Iran, which was obviously not something that Total wanted to do. But the way to put it at the time was that it just wasn’t a choice. You can’t stop being present on the U.S. market when you’re an energy giant. But that really fueled diplomatic tensions. Actually, there had been really concerted efforts from European countries, especially France, of course, but also Germany and the U.K. to try to negotiate some exemptions or try to have the U.S.. Well, have an interest in European economic concerns. And that failed miserably. And I think that was dangerous, in my view, is that at the time, this fueled the view in Europe that the U.S. was using sanctions to advance its own economic interests. And as I say in the book, I doubt that this is the case. In reality, I doubt there is a growing U.S. strategy to use sanctions to advance its interests. But again, the fact that some policymakers in Europe think so, in my view, is dangerous for transatlantic relations.

Bill Loveless [00:18:37] With Russia’s invasion of Ukraine. We’ve seen a series of increasingly severe sanctions against Moscow by the U.S., the United Kingdom, the European Union. What impact are they having or not having?

Agathe Demarais [00:18:51] They have a big impact. And I think that I should mention two things here. The first thing is that Russia is really trying hard to make people think that sanctions have no impact on the Russian economy. And every time I say that in the media, some pro-Russian people try to attack me, which in my view shows that something must be going on, because I don’t think that Russia would spend that much time and energy trying to say sanctions have no impact on the Russian economy. If that wasn’t the case. And the second thing is that we have to be careful about assessing the state of the Russian economy because Russia has made statistics a propaganda tool. But we can still have an idea about what’s really going on when we piece the data together. And what we see is that the Russian economy was in a recession in 2022. The latest data that we have date back to November and year on year. That is to say, compare it to November 2021. In November 2022, Russia’s GDP was 4% lower. So one could say, well, that’s not that much. That’s still twice as much as the recession closed by the COVID pandemic in Russia in 2020. And, of course, this is going to continue. And that is really significant because usually when a country experiences a recession in one year, it will bounce almost automatically in the following year, but that won’t happen in 2023. So the Russian economy is in a recession. If we take a look at other indicators, we see that industrial production, including oil and gas extraction, has dropped. Latest data were -2% in November, year on year. So significant retail trade -8% in November. While Russian households are not very keen to buy stuff and consumer stuff and car production, which is usually a very good bellwether of the state of an economy, was down 80% in November. So we’re really talking about a crash. And I think this data point in particular is very interesting because it illustrates two things. The first thing is that consumer sentiment has dropped off a cliff because people do not buy cars anymore. They tend to buy cars when they think that the economy is in good shape. And the second thing is that this illustrates the fact that sanctions are making it very difficult for Russian car companies to get access to spare parts from Western companies. And so Russian cars are back to the Lada, essentially, you know, very basic cars.

Bill Loveless [00:21:14] Classic car.

Agathe Demarais [00:21:16] A classic vintage, very vintage. And so I think that all of these data points, they all point in the same direction. The Russian economy is in a difficult position and things won’t get any better. Russia has lost access to its main destination for exports for energy. That was Europe. Not anymore. And I think that Russia has no easy solution. There’s a lot of talk about the Russian pivo towards China, but I’m skeptical that China will start from one day to another to buy all of the oil and gas that Russia used to exports towards Europe. So no easy solution, I would say, for Russia here.

Bill Loveless [00:21:53] Yeah. And they and the sanctions vary, right. The financial sanctions that the U.S., the EU and the UK have imposed us barred Russia from making debt payments using foreign currency held in U.S. banks. Major Russian banks have been removed from the international financial messaging system. SWIFT, which has delayed payments to Russia for oil and gas exports. And then there have been the there’s other financial ones as well there. There’s the impacts you mentioned on oil and and energy exports from Russia. You know, are they effective across the board, these various sanctions or do some have more impact than others?

Agathe Demarais [00:22:35] Well, I think that the ones you’ve mentioned are very effective. So to unpack everything, because I think there’s a lot to unpack here. There was a freeze of different exchange reserves of the Russian Central Bank, and that was significant. But I should add one caveat here. Russia had about 640 billion U.S. dollars in foreign exchange reserves before the invasion of Ukraine. Only half of these have effectively been frozen. And why is this? Because the other half was denominated in non-Western currencies. So the Indian rupee or the Chinese renminbi or gold. And so this still provided Russia with a cushion, you know. But that was still significant and probably a move that Vladimir Putin didn’t expect. Then Russian banks, some Russian banks, and that is an important caveat, have been cut off from Swift. Not all of them. And that is really important to remember. What is swift? It’s like a global Rolodex of banks connecting all banks to each other, to rude financial transfers. It sort of gives addresses for all financial transfers. But actually and that is interesting to make sure that some of Russia’s exports could continue to go through energy exports to Europe in 2022 when these were still possible, when Russia had to cut off the gas flow. And also fertilizer exports, which are critical for emerging countries that rely on Russian fertilizers to grow crops. Well, some Russian banks are still connected to Swift. So I think the impact of this measure disconnecting some banks, but not all, was significant. But as long as Russia has at least one bank connected to Swift, I think that things will be okay. And then finally, energy experts. Yes, this is going to bite. I think definitely we’ve seen some measures, essentially a ban in the European Union on the Russian oil imports. This is going to really have an impact on Russia because, well, the European Union was the first destination for Russian energy exports, then on gas. That’s interesting. There are no sanctions at the moment prohibiting Europe’s buying Russian gas, but it’s Russia that has turned off the gas stop. And I would argue here that Russia has really shot itself in the foot because it has made it far easier for the EU to impose this oil ban, this energy ban. Essentially, I think the EU is a bit reluctant to do that in the first place. But Russia has made the equation much, much more simple. And so looking ahead, I think there is no easy solution for Russia because exporting oil, of course, to China, that is going to be possible, but it’s down at a discount. We know that Russian oil, the euro oil, is sold at a discount at the moment. And for gas well, to export gas, for instance, to China, you need pipelines. And to build these pipelines, you need time, money and technology. And all of these are in short supply for Russia. And finally, as I argue in the book Backfire, I would actually argue that the most important sanctions against Russia were dues that the US imposed in 2014 against the Russian energy sector. What do these sanctions do? And I think that they went a bit under unnoticed at the time.

Bill Loveless [00:25:47] And I found this. I have to say I find this particularly interesting because, yes, I don’t know if this counters common thinking on sanctions these days, but it seemed as though you were saying the tougher sanctions in some ways that were had were were more effective than some of the things that have been done more recently.

Agathe Demarais [00:26:03] I think the most effective sanctions they date back to 2014, in my view, at least. And I’m pretty sure that these are the ones that the Kremlin is most worried about. So what do they do? These sanctions make it impossible for Russian energy firms to get access to Western financing and more importantly, to Western technology. And why is this a real problem for Russia these days? Well, because a number of Russian oil and gas fields are coming to maturity, which is a polite and diplomatic way to say their reserves are fast depleting. So Russia needs to explore and develop new oil and gas fields. And these are located in the Arctic. Well, it’s really cold in the Arctic and nights half of the year. And so that requires a lot of money and a lot of technology. And money is not coming from Western countries. Maybe it will come from China, but there will be strings attached. And technology that is more critical because at the moment, the technology that would be needed to develop these gas fields in the Arctic, while the technology is mostly American. So no easy fix for that. And what that means going forward is that Russia is essentially running on its reserves for energy fields, but these will slowly, gradually decline. We’re really talking about a slow asphyxiation of the Russian economy because, you know, energy is 30% of Russia’s GDP, half of fiscal revenues, almost two thirds of exports. Russia does one thing. Export energy. That’s the the bedrock of the Russian economy. And so in the long run, what that all means is that Russia will slowly lose its status as a global energy superpower. And actually, the latest data from the International Energy Agency confirm just that at the moment. 30% of globally traded oil and gas comes from Russia. So it’s huge. But this share will fall down to 15% by 2030, 2030 tomorrow. And so, well, clearly, a loss of Russia’s coveted status as a global energy superpower is coming.

Bill Loveless [00:28:05] Interesting. You know, Russia has tried to get around the dollar, so to speak, because of some some of these sanctions. Other countries, China’s is given a lot of consideration to this as well. What is the significance? Remind us of the significance of the dollar in international trade and the extent to which. That that significance may be changing.

Agathe Demarais [00:28:37] Some for very significant 40% of trade today is denominated in U.S. dollar. I should add 40% is also denominated in euro. So we’re really talking about the two biggest global currencies. But actually, to answer your question, I would probably go back to the antibiotic analogy, because when we’re talking about sanctions resistance, unsurprisingly, because of everything we’ve discussed, that sanctions target financial ties. This sanctions resistance movement is taking place in the financial field. And you’ve hinted at the dollarization, which is essentially something that Russia and China and Iran and many other countries that are at odds with the US to put it diplomatically. This is something that they’re doing. And actually, as I tell in the book, in 2020, while from 2020, the majority of Russia-China bilateral trade was conducted in Russian ruble or in Chinese renminbi. And that really wasn’t a random thing. That was a clear strategy from Moscow and Beijing to try to shield through trade, at least partly from US. Sanctions and digitalization, of course, is a key tool to do that. And just to go back a few minutes ago, I mentioned that only half of the reserves of the recent of the central Bank of Russia have been frozen. Why is that? Well, because the other half was denominated in non-Western currencies. And so while the US and the EU have no jurisdiction to freeze reserves that are not held in third currencies.

Bill Loveless [00:30:07] Interesting. What and we talk here of Russia. I mean, you mentioned Iran, China, China’s. Tell us what is happening in Beijing in terms of its it’s look to the future and the dominance of the dollar vis a vis its own currency.

Agathe Demarais [00:30:25] Well, I’m glad you asked, because that’s the second half of what I would love to say about sanctions resistance, though we’ve mentioned deterioration. But there are two other financial innovations that are taking place and that could gradually decrease the effectiveness of US sanctions. So the first of these financial innovations, it’s alternatives to SWIFT. So the global rolodex of banks that we’ve mentioned a few minutes ago. What is this? Well, essentially China is idea is that maybe from one day to another, it could be disconnected from swift and disconnected from the global economy. So China is taking steps to make sure that this doesn’t happen or that it has a backup. And this backup is called CIPs. It is far smaller than Swift, but it is another swift. Essentially, it works just like swift, but it is far smaller, 100 times smaller, actually, in terms of the volume of transactions. But China doesn’t care about that. What China is doing is two things. The first thing is defensive. If China, China, Chinese banks are disconnected from Swift, well, China has a plan B, it can switch to CIPs and actually all banks around the world, all the major banks, 1300 by the latest count, are already connected to CIPS, including American banks, European banks or Western banks are there. So I think that is very significant. And unsurprisingly, many Russian banks, including banks under sanctions, are also connected to CIPS. So that’s the defensive capability. But I think China has a long term strategy, an offensive strategy, because China one day could very well say, well, if you want to do trade with us, and I think we shouldn’t forget that there is a chance that China will become the world’s largest economy by 2040. That’s what the latest projections show. Of course, things could change, especially if China where to invade Taiwan, for instance. But according to latest projections, this is what is going to happen. And maybe one day China could say, oh, if you want to do trade with us, and we’re, by the way, the world’s largest economy, you need to use CIPs. And what that would mean is that China would have the capability to cut off entire countries from the Chinese market of 1.4 billion people that at the moment the second largest economy in the world. And I think that this is very significant. So that’s the first innovation. And the second one is also coming mostly from China Central Bank digital currencies. More than 300 million Chinese people already use a Chinese digital currency. It is stored on the wallets of their mobile phones and they use it to pay staff in shops to do financial transfers to pay your bills. And actually, sanctions would have zero impact on such a digital currency. And what was really striking is that at the Beijing 2022 Winter Olympics, people could make payments using two things either a Visa card because Visa was the official sponsor of the Olympics or China’s digital currency. And so I think that is also very significant because, well, U.S. sanctions would have zero impact on a Chinese digital currency. And, of course. This all comes with surveillance capabilities for Chinese leadership. There is little doubt that China is tracking all transactions in real time. So just if we take a broader view, if we put everything together, digitalization, as we’ve discussed, also alternatives to swift and also central bank digital currencies, I think that none of these innovations in itself or in isolation would be enough to dent the effectiveness of sanctions. But taken together, I think there is a real risk that it will gradually decrease the effectiveness of sanctions because rogue countries will have alternatives. They won’t need to use Western financial channels. And actually this also comes with implications for U.S. national security, because tracking financial flows is a key part of the war against Islamic terror groups, for instance. But if they if they have an alternative, well, it will make the war on terror much more difficult and also the fight against nuclear proliferation. So we’re really talking about a complete shift for U.S. diplomacy and U.S. national security. And I think that’s an important one to study.

Bill Loveless [00:34:37] You say that you bring up decoupling, decoupling the U.S. and Chinese economies. It’s something that’s advocated by some in the U.S. and China as a means of protecting each country’s economic and security interests. You say that would be a big mistake. Why?

Agathe Demarais [00:34:54] Well, essentially, I think that we need to have a think about what would happen if we were to decouple. And I think that at least three things would happen if the US were to decouple from China. The first thing is that Western companies and I would count European companies here would lose access to Chinese market. Go back to what I was saying a few minutes ago. 1.4 billion people, usually early adopters of new technology. While China’s manufacturing output is the biggest in the world, I think that that would be significant for revenues of Western companies because with this loss in revenues, maybe they wouldn’t be able to finance some R&D expenses, for instance. So I think overall we need to have a think about what that means to lose access to Chinese market. And the other thing is that I don’t think we should expect that China would say, okay, you want to decouple, okay, fine by me, no problem. I think that China would probably double down on efforts to, well, insulate its economy, to go for well, national champions for national technology. And so I think that we need to have a think about what that all means. And finally, I think that there is a lot of unease among European partners of the US about the latest US tool to decouple. And this tool is export controls, especially on semiconductor technology. So what are semiconductors, tiny electronic components that are present in, well, everything we use these days laptops, microphone cars, everything, but also military gear. And so that’s why the US is so keen to retain advantage and to remain the best power in terms of semiconductor technology, because at the moment three American companies control the technology behind semiconductors. But I think, you know that there would be risk if the US were to impose more export controls, making it more difficult for China to access this technology, that the EU would well say that it’s not entirely sure that it wants to apply these controls or that it wants its interests to be taken into account. And I feel that that would be a repeat of all the disputes about secondary sanctions. So I think that I’m not saying decoupling is an absolutely bad idea and we absolutely shouldn’t do it. But my view is and that’s what I try to say in the book, we need to have a think about the side effects, the ripple effects, and what that all means for the US economy and the global geopolitical landscape.

Bill Loveless [00:37:31] Yeah. In your research and observations, do you what impressions do you have of the understanding that the governments in Washington and and in Europe and elsewhere have these days? How sophisticated is the policymaking, I guess, is what I’m trying to ask when it comes to sanctions policy?

Agathe Demarais [00:37:52] Well, of course, the thinking is very sophisticated, but I think that in recent decades there has been a lack of acknowledgment of the side effects and ripple effects of some US policies. And I think that it was really striking that AFAC, which is the US agency, it’s part of the US Treasury that is in charge of designing, implementing sanctions. They actually published a job and I think it was in November 2022. Don’t quote me on that, but I think around that time they were looking for an economist to have, well, a closer look at the economic impact of US sanctions. And I think that this was really telling because as I say in the book, there is no study about the side effect. Sudden ripple effects of sanctions before sanctions are imposed. I’m not saying that this would be easy to do with my former French treasury hat. I know that usually when you’re told you need to design sanctions, it’s overnight or before yesterday. You need to be very fast because you’re reacting to fast unfolding crises. But it’s still telling, in my view, that there is no such review. Such, you know, a study to assess the potential damage that sanctions will do. And I think that it would be a very positive step if there is more concern in the US about this. And the second thing that I would say is that the US has sometimes worked without fully looking for a cooperation of its allies. And in my view, the strongest, the most robust and most effective sanctions have to be imposed by a coalition of partners. This is exactly what’s happening against Russia at the moment, and this is why sanctions against Russia are so effective. If the US went it alone against Russia, I’m not entirely sure that the impact would be so big. But the US is actually stronger and US policy is much stronger when the US works with allies. And I think sometimes this hasn’t happened in recent decades. I actually find that the unity on sanctions against Russia has been extremely positive and very, very much welcome and I would hope that this will continue. But, you know, this is an uphill battle and something that has to be done every day. So let let’s just hope this continues.

Bill Loveless [00:40:03] You know, you follow these issues in the news. What’s catching your eye these days among the headlines?

Agathe Demarais [00:40:11] Well, at the moment, I think that something that is really interesting is the next steps in terms of sanctions against Russia. I am very curious, actually. I would love to be at 2023 already to see if we will see more steps from the US, from the EU when it comes to making it more difficult for Russia to export energy that would come possibly via the imposition of US secondary sanctions on Russia. And I think that this is often forgotten in the debate. There’s a lot of talk that sanctions against Russia are the most robust and the most effective and the most stringent ever imposed, but that’s not the case. When we take a look at the sanctions that were imposed against Iran. These were far more stringent in 2010, the years when Andrew was the US and EU on board in the run up to the conclusion of the nuclear deal. So my big question will be will the US go down the route of making it really more difficult for Russia to export its energy, possibly via secondary sanctions on the Russian energy sector? That would mean all companies around the world can’t in theory of course, by Russian oil. But I think that there is something to keep in mind. It’s that a lot of the world’s population and a lot of governments, especially in developing countries, are not on board for the sanctions efforts, actually. Two thirds of the world’s population live in countries that are either neutral or Russia leaning. When it comes to Ukraine. We mapped this at the Economist Intelligence Unit a few months ago, and I think that the US will have to strike a balance between going for very robust sanctions and also making sure that the developing world is still on board and doesn’t believe that sanctions have a negative impact on them because Russian disinformation is really strong. It works very well. We’re seeing this I speak here as a French person. You’ve heard my French accent. In places like Mali or Burkina Faso, we’re seeing a lot of resentment against France, the former colonial power. And this is really fueled by Russian propaganda and Russian disinformation claiming that sanctions or fueling food insecurity, which is wrong. It is factually incorrect, but this is gaining traction. So I think that this is also something that I’d be I’d be very keen to know how it will unfold and if there will be efforts from Western democracies to try to tackle and counter this narrative.

Bill Loveless [00:42:35] So much that we need to to follow and to watch. It’s such a dynamic time right now with these world events. Well, the book is Backfire How Sanctions Reshaped the World Against US Interests. Agathe Demarais, thanks for joining us on Columbia Energy Exchange. I learned a lot from this book and and and and understand a little bit better this complicated topic of sanctions.

Agathe Demarais [00:43:01] Thank you so much for having me. It was really great to talk with you.

Bill Loveless [00:43:08] Thank you again. Agathe Demarais and thank you for joining us on Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs. The show is hosted by Jason Bordoff and me Bill Loveless. The show is produced by Stephen Lacy and Erin Hartig from Postscript Media. Additional support from Daniel Prop, Natalie Volk and Kyu Lee. Roy Campanella is the sound engineer. For more information about the podcast or the Center on Global Energy Policy, visit us online at Energy Policy dot Colombia dot edu or follow us on social media at Columbia View Energy. And if you like what you heard, consider giving us a rating on Apple Podcasts. It helps the show reach more listeners like yourself. We’ll see you next week.

The U.S has used sanctions to influence geopolitics for decades, including measures targeting the oil and gas trade. Most recently, the U.S. and other G7 nations put a price cap on Russian oil as punishment for its invasion of Ukraine. 

In the past, sanctions focused on trade embargos—like the grain embargo against the Soviet Union in 1980 and much broader restrictions against Cuba in 1960. Today, they focus on financial impacts. It’s an effective strategy for a country with significant global financial clout like the U.S., but unilateral sanctions can fuel tensions with allies and result in unintended consequences.

So how does the U.S. use financial pressure to address conflicts with other nations? What are the geopolitical and economic impacts of current sanctions? And how could they affect America’s standing in the global order? 

Today on the show, Bill talks with Agathe Demarais, global forecasting director of the Economist Intelligence Unit and former economic advisor for the diplomatic corps of the French Treasury.

Agathe is the author of Backfire: How Sanctions Reshape the World Against U.S. Interests. The book explores how sanctions affect multinational companies, governments, and millions of people around the world. It’s part of the Center on Global Energy Policy’s book series published by the Columbia University Press.

Bill speaks with Agathe about what’s in the U.S sanctions arsenal and why they’ve become so popular in the past two decades. They also discuss the use of sanctions as a foreign policy tool in the past, present, and future. 


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