Analysis 12-06-2022


Economic Sanctions: 215 years
of Failed American Diplomatic Efforts


“History repeats itself, but in such cunning disguise that we never detect the resemblance until the damage is done.” Sidney J. Harris

215 years ago, this month (December) the fledgling United States instituted a foreign policy that failed then, continued to fail during several confects, and promises the same failures as nations debate the price that Russia should be allowed to sell its oil.

Someone in the State Department should take a course in American Diplomatic History and read up on the 1807 Embargo Act.

Ever since the beginning of the American Revolution, the Americans believed that not buying goods from Britain would pressure them into granting independence.  For ten years, the Nonimportation Agreements passed by several groups including the Continental Congress in 1774 created non import and non-export committees.

As we now know, the American Revolution was won on the battlefield, not by economic sanctions.  But the idea that commercial retaliation would work had ingrained itself into American Foreign Policy.  In 1806, during the Napoleonic Wars, the US Congress passed an act that limited the importation of some British goods. The act was delayed for a year to negotiate with the British.

Instead of cooling passions, Congress passed the Embargo Act in December 1807.  While it punished Great Britain by restricting British imports, it caused more harm to American farmers, merchants that traded internationally, and American shipping.  British and French merchants that had large inventories of American cotton just raised prices.

American efforts at economic sanctions would eventually lead to the War of 1812.

American economic sanctions have reached heights of ridiculousness.  While the US And Germany were at war, they both needed Switzerland – Germany for banking and the US for precision clockworks for bomb fuses.

While the Axis powers allowed smuggling of clockworks to the allies, the Bank of International Settlements, under American BIS president Thomas McKittrick, still handled foreign exchange transactions for the German Reichsbank.  These transactions were necessary for Germany to import tungsten from Spain and Portugal.

While assisting German financial transactions, McKittrick was also passing information on to American intelligence.

At the other end of the tungsten pipeline was a British Naval Intelligence officer, who monitored those tungsten movements to Germany – while gambling at a Lisbon casino with the senior German intelligence officer for Portugal.  His name was Ian Fleming the future creator of British spy James Bond.

However, modern American economic sanctions haven’t gone as smoothly as a James bond caper.  For four decades, Iran has smuggled its oil out of the country in exchange for gold, nuclear components, and military items.

American economic sanctions against Russia for its invasion of Ukraine are proving no better.  While causing inflation and threatening a winter without heat in Europe, it  is weakening relations with several American allies that need oil and can’t afford it.

Meanwhile, Biden is pushing “Green Subsidies” that help American industries, while punishing European industries at this economically sensitive time.  A senior European official told Politico, “If you look at it soberly, the country that is profiting from this war, is the US because they are selling more gas and at higher prices, and because they are selling more weapons.”

Talks have broken down amongst European diplomats on the cap on oil prices coming from Russia.  Poland has rejected a price of $65 a barrel as too “soft,” while Greece insists it will not consider any price less than $70.

The debate has been going on for a while.  The EU has proposed a cap on Russian oil of $65 – $70. Poland wants a cap of $20 and say that $30 is too high.  The Baltic nations agree.  But, Cyprus, Greece, and Malta say $70 is too low.

The market price for Russian crude is running at about $70, which means that any oil cap will mean nothing.  In addition, the US is close to issuing Chevron a license to pump oil in Venezuela, which could help ease oil prices.

Poland notes that the cost for producing a barrel of Russian crude oil is just $20, so any price higher than that rewards Russia.  Cyprus, Greece, and Malta have large shipping industries and fear that too high a price cap will destroy the shipping industry.  If the cap is too low, they want compensation.

For all this talk, it must be remembered that the nations must agree unanimously.

And, for all this talk, even the diplomats can’t figure out how to prevent cheating.

Ironically, a book was written in 1776 that explained economics and how it is harder to employ economic sanctions than one thinks.  It is called “The Wealth of Nations” and it was written by Adam Smith.  It was the first modern study of economics and while it was well received in Scotland and Britain, it must have been embargoed because it would have explained the fallacy of American economic sanctions to American diplomats.

Whenever there are economic sanctions imposed, creative minds find a way around them.  Officially full oil tankers could be partially full.  The invoice would be for the full tanker, but the amount delivered would be less – giving the Russians a higher price than allowed.

Of course, that would rely on some collusion by companies and nations, but that happens now.  Malaysia, who cooperates with oil producers like Venezuela and Iran, seems to be exporting more oil than it produces.  Undoubtedly the extra oil comes from other sources.

Greece also appears to be cheating as its tankers carry our ship-to-ship oil transfers.

OPEC could also benefit if Russia cuts back production.

All of this must be solved by December 5th as that is when the oil embargo takes effect if there is no solution.

Meanwhile, these sanctions are hurting American relations with some of its European allies.  America is pushing the oil cap proposal, which isn’t hurting the American consumer as much because energy prices are much lower in the US than Europe.  European nations would like to see more American fuel exports – at the lower American prices.

Oil caps are also threatening the European energy markets, which could cause long term damage to the free market.  Earlier this week, the European Commission issued a statement declaring a “safety price ceiling” for gas prices of $280 dollars per megawatt hour.

This move is designed to act as an “instrument to automatically intervene on the gas markets in case of extreme gas price hikes.”

Energy traders are more sanguine.  The European Federation Traders said, “Even a short intervention would have severe, unintended and irreversible consequences in harming market confidence that the value of gas is known and transparent.”

Ironically, the one time the US didn’t employ economic sanctions, they benefited.

At the beginning of the American Civil War, the Confederacy decided to employ economic sanctions against France and England to persuade them to recognize the rebelling states.  Since the South was the biggest supplier of cotton to the textile industries of France and England, they assumed that economic sanctions would put economic pressure on the two countries.

However, 1860 saw a bumper crop of cotton that filled the warehouses in Europe.  Merchants in England and France merely raised prices, which increased their profits.

Meanwhile, textile manufacturers began looking for other sources of cotton and discovered Egypt.  While the Confederacy was forced to burn surplus stockpiles of cotton, its former clients were buying from Egypt.

American diplomats really need to study their own diplomatic history.