The shadow of sanctions: reputational risk, financial reintegration, and the political economy of sanctions relief
| Author | Benjamin Raynor |
| DOI | http://doi.org/10.1177/13540661221100540 |
| Published date | 01 September 2022 |
| Date | 01 September 2022 |
E
JR
I
https://doi.org/10.1177/13540661221100540
European Journal of
International Relations
2022, Vol. 28(3) 696 –721
© The Author(s) 2022
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/13540661221100540
journals.sagepub.com/home/ejt
The shadow of sanctions:
reputational risk, financial
reintegration, and the political
economy of sanctions relief
Benjamin Raynor
The University of California, Irvine, USA
Abstract
Financial sanctions have become a major component of American foreign policy.
Since 2015, the number of blacklisted actors has nearly tripled, coinciding with US
financial campaigns against Iran, North Korea, and Russia. This paper centers an under-
examined paradox of this proliferation: the complexity of lifting financial sanctions.
Indeed, successful sanctions regimes necessitate both sticks (punitive sanctions) and
carrots (economic incentives). Yet financial sanctions often limit the economic benefits
promised to target states, as banks and other financial institutions risk hefty material
and reputational costs if they are to cooperate with previously sanctioned actors. Thus,
while financial sanctions are effective at producing negative market reactions against
a target, they can be hugely damaging if market actors do not cooperate with the
lifting of sanctions. To capture this dynamic, this paper leverages process-tracing to
observe financial market reactions to sanctions relief in three key cases—Iran (2010–
2015), North Korea (2002–2007), and Libya (1996–2008). It finds that in each case,
the presence or absence of US Treasury blacklisting corresponds to the post-sanction
willingness of financial actors to extend sanctions relief to targeted states. In doing
so, this study identifies “reputational risk” as the primary causal mechanism limiting a
target’s reintegration into the global economy.
Keywords
Sanctions, International Relations, political economy, international political economy,
globalization, global finance
Corresponding author:
Benjamin Raynor, UC Irvine School of Social Sciences, The University of California, 3151 Social Sciences
Plaza, Irvine, CA 92617, USA.
Email: raynorb@uci.edu
1100540EJT0010.1177/13540661221100540European Journal of International RelationsRaynor
research-article2022
Article
Raynor 697
Introduction
Why do global financial actors sometimes choose to reintegrate previously sanctioned
states to the global economy, though at other times choose not to? Sanctioned states may
reasonably anticipate that when sanctions are removed, they should receive some form
of relief, meaning that global financial actors—from banks to multinational corpora-
tions—should return to status quo capital flows and foreign direct investment. However,
there are marked inconsistencies in the ways that previously sanctioned states experience
such relief. In many cases, global financial actors have been so reticent to reinvest in
previously sanctioned economies that the sanctioning states (or senders) have had to
engage in lobbying efforts designed to assuage financial actors, and generate investment
(Lakshmanan, 2016; Schwartz and Patrick, 2016).
Within the wider context of sanctions literature, little is yet known about the condi-
tions in which target states succeed or fail in their economic recoveries, or the factors
affecting their ability to attract global investment after sanctions have been removed.
Rather, sanctions literature has, historically, focused on key issues related to sanctions
effectiveness, the threat of sanctions, whether such measures are applied multilaterally or
unilaterally, and compliance and enforcement problems, among others. Despite these
important scholarly contributions, few empirical studies have explored the dynamics of
the post-sanction environment. This is a significant gap in sanctions literature, which this
study seeks to address.
In this study, I argue that the extent to which financial actors reintegrate previously
sanctioned states depends on the type of sanctions program initially deployed by the
sender, that is, primary or secondary sanctions, a distinction that requires brief explica-
tion. First and foremost, sanctions are intended to alter a target state’s malign behavior.
In doing so, however, sender states must use sanctions to interrupt the business practices
of multinational corporations. These corporations typically have business interests in the
target state, and act as the intermediaries between target states and the global economy.
Primary and secondary sanctions, however, target multinational corporations in different
ways.
Primary sanctions are economic restrictions that require compliance from multina-
tional corporations and individuals domiciled in the sender state. In the United States, for
example, the Office of Foreign Assets Control (OFAC) may issue a variety of sanc-
tions—such as asset freezes and economic embargoes—directly against firms and insti-
tutions in the target state. US persons and multinational corporations must then screen
their customers against the OFAC list of sanctioned actors to ensure that they are not
doing business with a sanctioned entity. Primary measures, however, do not impact non-
US firms (i.e. third parties), who would thus retain access to sanctioned economies with-
out recourse from the US government.
Secondary sanctions, on the other hand, are intended to affect third-party multina-
tional corporations and individuals—that is, actors not domiciled in the sender state.
Secondary measures do so by threatening to impose penalties on third parties for con-
ducting business with their counterparts in the target state, such as firms domiciled in the
target state or government institutions representing a target government (e.g. the Iranian
Central Bank). Such penalties might include preventing offending third parties from
To continue reading
Request your trial