Capital-Market Access: New Frontier in the Sanctions Debate

Gary Clyde Hufbauer is Reginald Jones Senior Fellow at the Institute for International Economics. He is coauthor of Economic Sanctions Reconsidered, 3rd ed. (forthcoming), World Capital Markets: Challenge to the G-10 (2001), and Using Sanctions to Fight Terrorism, International Economics Policy Brief 01-11 (2001). Barbara Oegg is a research associate at the Institute for International Economics. She is coauthor of Using Sanctions to Fight Terrorism, International Economics Policy Brief 01-11 (2001).

The House and Senate will soon meet in conference to decide whether to enact unprecedented sanctions that would deny access to US capital markets to foreign companies that do business with a sanctioned nation. The narrow objective of the Sudan Peace Act-the House version of which includes these capital-market sanctions-is to persuade the Sudanese government to enter into peace negotiations. Its broader but unstated objective is to enlarge the scope of "acceptable" sanctions. This is a new idea, a bad idea, and a frontier that should not be crossed.

The House version of the Sudan Peace Act (H.R. 2052), which was approved by an overwhelming margin (422-2) in June 2001, requires the president to use the International Emergency Economic Powers Act to "prohibit any entity engaged in development of the oil and gas sector in Sudan from raising capital in the United States or from trading its securities (or depository receipts with respect to its securities) in any capital market in the United States."¹ The legislation also requires that entities engaged in any commercial activity in Sudan disclose the nature and extent of these activities to the Securities and Exchange Commission (SEC).

The Senate version of the legislation (S. 180), favored by the White House, omits the capital-market sanctions provision as well as the disclosure requirements. Several Republican senators are currently blocking a House-Senate conference aimed at ironing out the differences between the two bills by holding up the appointment of Senate conferees (the House appointed its conferees in late 2001).²

US companies are already barred from doing business with Sudan under a 1997 Executive Order. Thus the capital-market sanctions and disclosure provisions will only affect foreign companies-specifically Canadian oil company Talisman Energy Inc., Swedish oil company Lundin AB, and China National Petroleum Company.

Stripped to its essence, the House version (H.R. 2052) reflects a distressingly familiar pattern in the recent history of US economic sanctions. In an effort to change the objectionable behavior of a foreign country, the United States first imposes unilateral economic sanctions. Frustrated by the target country's defiance and the lack of cooperation by allies and trading partners, the US Congress then seeks to extend the reach of unilateral US measures by imposing secondary sanctions on firms located in third countries. In the 1990s, Congress passed the Helms-Burton Act targeting foreign companies that invest in Cuba, and the Iran-Libya Sanctions Act (ILSA) seeking to prevent European companies from investing in the oil sector in Iran and Libya. The extraterritorial scope of these measures irritated key US allies; as a result neither the Helms-Burton Act nor the ILSA has ever been enforced.

Preventing foreign-based companies that invest in Sudan from raising capital in the United States will substantially diminish the oil revenues that allow the Khartoum government to prolong an 18-year old civil war-so argue the proponents of capital-market sanctions. However, the success of capital-market sanctions in achieving their stated foreign policy goals hinges on three questionable assumptions: 1) that the companies will actually pull out of Sudan and not simply choose to list on non-US financial markets instead; 2) that the impact of the sanctions will be felt by the Sudanese government rather than by the foreign companies against which the sanctions are imposed; and 3) that political change will follow the hoped-for economic impact. All three assumptions are problematic.

Even if the costs associated with exclusion from US capital markets force Talisman and Lundin to pull out of Sudan, there may be other companies willing and able to take their place. Moreover, several Sudanese nongovernmental organizations have voiced concerns that the two Western companies might be replaced by companies from countries less sensitive to corporate responsibilities and human rights, and thus less likely to raise these issues with the Sudanese government.³

The involvement of the China National Petroleum Company in Sudan poses other issues. Past US sanctions against the Chinese government to improve human rights and stop nuclear proliferation there have not been overly successful. China sees itself as a great power, alongside the United States and Russia. It is not to be "bullied" by the United States. Given the strategic importance of oil for China, the likelihood that economic sanctions will be more successful this time around is not high.

The proponents of capital-market sanctions confuse economic effectiveness of sanctions with political effectiveness. A survey by the Institute for International Economics of economic sanctions imposed in the 20th century shows that sanctions can be very effective in interrupting economic relations yet fall short of their foreign policy goals.⁴ The discrepancy between economic and political effectiveness may be even more pronounced in cases where effectiveness depends upon the conduct of third parties. Experience with the Helms-Burton Act and the ILSA suggests a skeptical attitude toward the efficacy of secondary sanctions.

Prohibiting access to US capital markets as a secondary sanction in the case of Sudan would set a dangerous precedent. The claim made by supporters of capital-market sanctions-that they do not impose any costs on the US economy-is misleading. Restrictions on capital markets would run counter to the US commitment to open markets and the free flow of capital. Interfering with these markets for foreign policy purposes would, over time, provide a serious disincentive for foreign companies to list on US securities exchanges and result in their moving financing from New York to London, Frankfurt, or Tokyo. Federal Reserve Chairman Alan Greenspan argued that, despite the predominance of US capital markets, it is a mistake to assume that the United States could successfully block the capability of China or any other country to raise capital at essentially the same terms abroad.

In his testimony before the Senate Banking Committee on July 24, 2001, Greenspan said that the efficient and sophisticated US capital markets are a crucial ingredient of US economic success. Undercutting the viability of these markets has the potential to harm long-term US growth.

Sudan by itself is no more than a footnote in the sanctions debate. But the precedent set by the Sudan Peace Act would open the door for a variety of "one-cause" or "one-country" lobbies to invoke capital-market sanctions. Citing his concern about nuclear proliferation, Senator Helms has already introduced legislation (S. 1307) that would bar Chinese state-owned companies from listing on the US exchanges. Expansion of the Helms-Burton Act and the ILSA to include capital-market sanctions would almost certainly follow the Sudan Peace Act if it became law.

Press coverage on the Sudan Peace Act hinted at a possible House-Senate conference compromise that would maintain the disclosure requirements but drop the capital-market sanctions provisions. But even disclosure legislation is unnecessary. Disclosure by companies doing business with Sudan is already required under a guidance issued by acting SEC Chair Laura Unger in May 2001. The SEC guidance requires foreign companies listed on US capital markets to disclose "material business in, or with, countries, governments, or entities with which US companies would be prohibited from doing business under economic sanctions administered by OFAC."⁵ The SEC mandate that foreign corporations supply investors the requisite information about their dealings in all US-sanctioned countries is clearly preferable to the Sudan legislation that targets individual countries and companies.

On September 6, 2001, President Bush appointed former Senator John Danforth as special envoy to Sudan to explore ways in which the United States can play a useful role in bringing about lasting peace in Sudan.⁶ Since his appointment Danforth has undertaken two missions to Sudan and a mission to consult with key European allies. His efforts led, for example, to a cease-fire agreement in the Nuba mountain region in January 2002.⁷ In his May 2002 report to the president, Danforth argues that despite the many remaining obstacles, a negotiated settlement of the decade-old civil war is possible in the near term. More time should be given for the administration's initiatives to work. Meanwhile, Congress should shelve its unprecedented restrictions on US capital markets.

Notes

1. H.R. 2052, Sec. 9. Prohibition on Trading in the United States Capital Markets.

2. Inside US Trade, January 11, 2002.

3. Washington Post, June 24, 2001, A15.

4. Preliminary data drawn from research completed for the third edition of Economic Sanctions Reconsidered show that only 29 percent of economic sanctions succeeded in achieving their stated foreign policy goals in the 1990s. The success rate for US unilateral sanctions is even lower-only 18 percent of unilateral economic sanctions imposed in the 1990s were successful.

5. Acting SEC Chair Laura Unger in a letter to Congressman Frank P. Wolf, May 8, 2001. As of May 14, 2002, the Treasury's Office of Foreign Asset Control (OFAC), administers sanctions against the following list of countries, governments, and entities: Burma/Myanmar, Cuba, Iran, Iraq, Liberia, Libya, North Korea, Sierra Leone, Sudan, Taliban (Afghanistan), UNITA (Angola), and Syria (under Terrorism Sanctions Regulations).

6. White House Press Release, September 6, 2001.

7. USIS, May 14, 2002.