I have to admit, I’ve never been a John Bolton fan, so when he reportedly wrote in his upcoming book that Treasury Secretary Steve Mnuchin was concerned that US sanctions policy would undermine the global strength of the dollar, I was skeptical.

That said, Mnuchin is one of the longest lasting members of the Trump administration, and his Goldman Sachs background – whatever you may think of the company and its firm-to-government pipeline – and his finance expertise may be something to consider when evaluating the Trump administration’s sanctions policy.

I do not know whether Bolton’s claim is true. I have no inside track to Mnuchin’s reasoning, but I did do quite a bit of reading on US sanctions policy, so I want to provide a bit of analysis.

US sanctions policy is just one tool in a vast arsenal of foreign policy weapons the United States has to help it punish adversaries and force a change in behavior. Since the terrorist attacks of 9/11, the United States Treasury and specifically the Office of Foreign Assets Control (OFAC) has become a more effective and frequently used tool of US foreign policy. In “Treasury’s War,” former Treasury Assistant Secretary for Terrorist Finance and Financial Crimes (TFFC), Juan Zarate, described a form of financial warfare, targeting rogue regimes, terrorist organizations, weapons proliferators, and transnational criminal organizations.

Since the Bush administration, OFAC sanctions have been successfully used to choke off financing of terrorism, cut off transnational criminal organizations’ access to the US dollar and the global financial system, and punish malign state actors, such as Russia after its invasion of Crimea in 2014, Iran, and North Korea.

One has to wonder, however, if there is a law of diminishing returns when it comes to US sanctions policy, and whether Mnuchin, whose vast knowledge of international financial systems and foreign policy, as a member of the President’s national security team, has presented us with a fundamental problem of sanctions policy overuse.

In 1992, the US Government Accountability Office published an assessment of the effectiveness of US sanctions policy. GAO came up with nine separate conclusions:

1. The effectiveness of sanctions should not be measured only by the targeted nation’s compliance with publicly stated objectives or demands, because sanctions are imposed to serve multiple goals;
2. Sanctions can raise the costs of trade and finance to the target nation, but do not wreck its economy, since many countries can undermine export embargoes and redirect trade;
3. Sanctions are more effective in achieving modest goals, such as upholding international norms and deterring future objectionable actions;
4. Sanctions can have collateral effects on the targeted nation’s economy and cannot be used effectively to hurt specific groups;
5. Sanctions are most effective when applied multilaterally or against friendly nations with economic and political ties to the sanctioning country;
6. International publicity can enhance the threat of future measures and is vital when the goal is to deter a nation from unacceptable behavior or show support for political opposition;
7. Success of US sanctions policy is more closely related to the threatened damage of subsequent measures than it is to the economic damage it causes;
8. Imposing harsh comprehensive sanctions immediately may be counterproductive, since the target government may use the severe economic pain to rally its population against the imposing country; and
9. Sanctions are more effective when the target nation’s culture is similar to the sanctioning nation’s and sanctions generally fail when cultural norms in the target nation demand resistance to save face.

I agree with some of these conclusions and disagree with others.

I disagree that sanctions cannot ruin a nation’s economy. Sanctions can, in fact, cause economic wreckage, especially if Marxist policies have already begun taking their toll, like they had in Venezuela. We have cut off oil supplies to the fuel-starved country and have sanctioned any shipping company that even attempts to deliver fuel to the Maduro regime, forcing shipping managers to halt their deliveries to Caracas and preventing US persons and companies from doing business with the state-controlled oil company PDVSA. Meanwhile, Venezuela’s economy is swirling the toilet like a stinky turd and the people are suffering untold privations, while Maduro and his cronies live large and blame US sanctions for the decline.

I also agree that imposing comprehensive actions all at once can have a nationalist effect on the populace, but I think that largely depends on the target country’s domestic propaganda efforts. Journalist Masha Gessen describes Russia’s renewed descent into nationalism under Putin as the latter began to crack down on political opposition after his return to the presidency. This nationalism only increased after sanctions were imposed on Russia in response to its invasion of Crimea.

And I absolutely agree that sanctions are most effective when they are imposed multilaterally.

Russia, China, and Iran have formed a malign actor cabal to help Venezuela get fuel despite US sanctions. Mexican President Obrador has threatened to sell fuel to Venezuela regardless of sanctions. Just how effective is the US sanctions policy, if powerful, but malicious actors on the international state band together to help circumvent US sanctions?

US-led financial pressure has been instrumental in helping squeeze Iran’s economy and isolate the regime of then-President Mahmoud Ahmadinejad. Former OFAC official Brian O’Toole wrote for the Atlantic Council last year that Treasury sanctions must be used judiciously and in conjunction with our allies for maximum effectiveness.

Sanctions today, though, are a tool used too often and in almost near-isolation by an administration that would prefer to govern via fiat rather than do the hard work necessary to make change on the international stage and by a Congress that seemingly can agree on little other than sanctions.

But what about Mnuchin’s alleged concern that the global strength of the dollar would be eroded? Is that related to the effectiveness of multilateral sanctions?

When the United States withdrew from the Joint Comprehensive Plan of Action (JCPOA), also known as Obama’s Iran deal, other allies who opposed the unilateral withdrawal and reimposition of sanctions developed INSTEX to help Tehran circumvent US sanctions. The governments of France, Germany and the UK developed this special purpose vehicle (SPV) to enable European businesses to maintain non-dollar trade with Iran without violating US sanctions and provide an alternative to SWIFT, which announced it would abide by renewed US sanctions on Iran.

And there lies the problem. By avoiding the use of the US dollar, these governments are weakening its status as the world’s reserve currency. As of last year, INSTEX has been operational and available to all EU governments, many of whom have joined INSTEX as stakeholders.

For now, the dollar and the United States are still strong enough to impose consequences on global payment systems for non-compliance with US sanctions, but how long can that last if the United States continues to go at it alone?

The recent announcement of a sanctions program against the International Criminal Court has also been met with worldwide consternation. Although the authority is latent, and it’s unclear whether sanctions will be imposed against any member of the ICC, what happens if the Europeans start undermining these sanctions and helping designated actors avoid use of the US dollar? How much can the dollar’s status be eroded?

If this is Mnuchin’s concern about the use of sanctions, he has a legitimate one. Weakening of the dollar as the world’s reserve currency is not an immediate threat, but continued use of the sanctions tool to bolster a strictly political agenda could become a problem in the long run.

Featured image: Treasury seal; Wikimedia Commons; in the public domain.