The Currency Constraint: Explaining the Selective Enforcement of U.S. Financial Sanctions

Economic sanctions remain one of the most widely used foreign policy tools. At the same time, their enforcement is often incomplete and selective. If sender states are concerned about sanctions effectiveness, variation in enforcement is counterproductive. We argue that sender states face a trade-off between effective coercion in the present and the ability to use coercion in the future. We develop a formal model to explore the mixed incentives of senders such as the U.S. in enforcing their financial sanctions against banks. Using data on U.S. enforcement actions taken in support of the Iranian sanctions regime from 2003 to 2014 and three illustrative case examples, we evaluate the hypothesis that sanctions enforcement should be greater when the position of the U.S. dollar is strong relative to alternative settlement mechanisms. Our findings support this contention.