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Time for New Leverage in Syria: DIRT Sanctions
August 15, 2011
At the United Nations last week, a representative of Secretary-General Ban Ki-moon gave the Security Council what was described as a “chilling and horrifying” briefing on the situation in Syria. The United States is ratcheting up the pressure on the Assad regime where it can and Secretary of State Clinton called on other countries to join it in boycotting Syria’s oil exports, so far unsuccessfully.
Clearly it’s time for a fresh idea that could increase the pressure on Assad, while avoiding the humanitarian consequences of broad sanctions that concern the EU and others: declare that any new loans to the Syrian government, and new contracts with the state-owned oil industry, are illegitimate and need not be honored by a democratic successor government. Think of this as Deterrence of Illegitimate Resource Transfers (DIRT) Sanctions.
A DIRT Sanction declaration would not likely have large, immediate effects on the Syrian economy, but it would further isolate the regime and signal that the squeeze is only going to get tighter over time. It would also reduce the burden on whatever government follows the Assad regime.
Update: Prevention of Odious Obligations: A New Tool to Help Stem Violence in Syria
Long-standing, comprehensive U.S. sanctions against Syria over its support for terrorist groups leave the United States with little opportunity for additional unilateral leverage. The European Union, Canada, and a few other countries have adopted limited sanctions—banning bilateral aid, imposing an arms embargo, and imposing travel bans and asset freezes against designated individuals or businesses (a summary is here). Unfortunately, such narrowly targeted sanctions—shaped by concerns arising from the unintended humanitarian impact of the global, comprehensive sanctions against Iraq—have been ineffective.
The proposed DIRT Sanction grows out of research and analysis done by a CGD working group last year. The DIRT Sanction is designed to do some or all of the following three things, all of which are highly relevant in the case of Syria:
- Reduce the resources available to a regime to suppressing its people;
- Induce the regime to change its behavior; and
- Spare a future, legitimate government and its people from having to repay an “odious debt” or abide by contracts tainted by corruption.
To achieve these outcomes, the international community, as represented by a multilateral organization or ad hoc coalition or regional grouping, simply declares that any new loans and, where relevant, long-term contracts undertaken by the regime will be deemed illegitimate and thus not be enforceable in the courts of the countries making the declaration.
Would you sign a contract under these conditions? If you did, would you extract a higher price? Exactly.
The increased risk of nonpayment is intended to deter international lenders and investors from doing business with the targeted regime. And assuming that some contracts (say, for oil deliveries or exploration rights) are signed, despite the DIRT Sanction, a democratic successor government would be able to repudiate contracts deemed illegitimate and still retain access to international credit markets.
So how might a DIRT Sanction work in Syria? The working group report set out two criteria for a declaration of illegitimacy: that the regime is abusing human rights and suppressing its people; and that there is evidence of corruption. Syria clearly meets these tests: the abuses of human rights are terrible and obvious, and Transparency International ranks Syria as one of the most corrupt countries in the world.
Who should make the DIRT Sanction declaration? The United States and European Union would be key from an enforcement perspective. Having the Arab League, which has been harshly critical of Assad’s behavior in recent days, join in declaring business with the Assad regime illegitimate would add political potency.
Would such sanctions really bring pressure on Assad? Though the working group proposal was originally designed to address the problem of illegitimate debt, in Syria’s case the lever clearly would be investment in the oil industry. Since 2005, Syria has received nearly five times as much each year in new foreign investment as it has in new loans. Much of that investment is from Europe (Royal Dutch Shell) and China (China National Petroleum Company) and has gone into the petroleum sector, where it is desperately needed to reverse falling production and exports.
Thus, including oil sector contracts in the declaration would be crucial to success. Note that the proposal aims to discourage only contracts or loans extended after the date of the DIRT Sanction declaration; it would thus have no immediate impact on oil sales or current investments.
According to the Energy Information Administration, Syria sells most of its oil through 12-month contracts. As these come up for renewal, buyers will need to think carefully about whether the Assad regime will still be in place for another year. Investors who would be committing to Syria for years to come would presumably be even more cautious.
The international community is currently grappling for tools to respond to President Assad’s brutality against his own people. A broad coalition declaring that loans and oil contracts with such a regime would be regarded as illegitimate and not transferable to a democratic successor would further isolate Assad’s regime and signal that Syria’s economy will be under pressure until things change. That could be enough to tip the balance. At a minimum, it would protect Syrians in the future from having to deliver on obligations made by a corrupt dictator engaged in the systematic killing of civilian protesters.
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6 Responses to “Time for New Leverage in Syria: DIRT Sanctions”
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August 17th, 2011 at 6:21 am
[...] Ann Elliott makes a case for imposing so-called Deterrence of Illegitimate Resource Transfers (DIRT) sanctions on Syria. To impose such sanctions would mean to “declare that any new loans to the [...]
August 17th, 2011 at 4:11 pm
The idea sounds attractive, but some of the mechanics of implementing it are not clear to me. For example, how would such a declaration affect claims brought before international tribunals under Syria’s bilateral investment treaties? If an investor were to bring a case against a new, later, Syrian government for not honoring an agreement negotiated earlier during the sanction period, would a tribunal refuse to uphold, say, the oil production sharing agreement, even though relevant bilateral investment treaties would presumably still be valid? The treaties likely include no contingies for such a declaration by other countries. And if a tribunal were to rule in favor of the investor, concluding that the agreement is valid, would the U.S. or the E.U. still be obligated to enforce resulting damages under the New York Convention (or the ICSID Agreement)? There are some escape mechanisms in the enforcement agreements, but they are rarely used.
August 18th, 2011 at 10:22 am
You make a really clear case, Kim. When I first heard about the Odious Debt work, the main problem that I saw was finding clear enough criteria to determine which governments would be subjected to the sanctions. I realize now that I was thinking about the problem of countries “at the margin.” But what you’ve described here is eminently practical and applied to a country which is nowhere near the margin – it is already being condemned by US, Europe and the Arab League. So the DIRT sanctions become a way to act on a determination (i.e. that the regime is” odious”) that has already effectively been made. I hope they pick up on this.
August 18th, 2011 at 5:02 pm
Bill, thanks, I hope so too. I don’t think this proposal is a silver bullet, but I think it could help.
Lou,
Thanks for your comment. I have a couple of responses and a question back to you.
First, if the response by the international community is broad and strong enough, we hope that new contracts would be deterred, so arbitration would not be an issue.
But, second, if some contracts were to go forward, one of the criteria for invoking this tool is that the target government is corrupt. My recollection from the meetings that we both attended to help Ted Moran with the CGD report on corruption in foreign investment deals is that international investment arbitration tribunals are more inclined in recent years to refuse to uphold corrupt contracts (see the final report here: http://www.cgdev.org/content/p.....tail/15197). So enforcement of a judgment would, again, not be an issue, correct?
Third, a potential advantage of this proposal, feeding off the second point, could be that companies have more leverage to negotiate “clean” deals, without corruption that might provide a basis for undoing them later–above and beyond what currently exists because the declaration of illegitimacy would highlight the potential for corruption. That could be of at least some benefit to the citizens of the target country in the short run and might mean that the successor government chooses not to repudiate the contract later.
But I’m not a lawyer so I’m not sure what would happen if there were a successful challenge as you describe. I’d like to turn the question back to you and ask you to apply your expertise to help us on this. What are the escape clauses that you mention? Are there other ways this might be done?
Thanks again,
Kim
August 19th, 2011 at 5:46 pm
Kim, as we discussed, I think this is original and constructive, but perhaps we need a better understanding of how it relates to international investment agreements and treaties and how arbitral bodies might see this proposal. Perhaps you could get one of the panelists to provide feedback…the World Bank should be able to provide some names.
August 23rd, 2011 at 1:58 pm
Kim,
Fortunately or unfortunately (depends on your view), I am also not a lawyer. I am less sanguine than you or Ted (as expressed in his paper) about the corruption defense in arbitration. Yes, there are a few cases where the argument that a contract was obtained by corrupt means has worked in defending a country charged with violating an investment agreement, but those are rare. The standard of proof required by tribunals has, so far, been very high; and there appears to be no willingness to accept an argument that a deal was too good for the investor to have been negotiated without corruption (or ignorance).
The “escape mechanism” I was referring to in enforcement commitments is contained in the New York Convention. A state is not required to enforce a decision that would be contrary to “public policy.” Again, the provision has not been frequently used, although if a state had agreed to the proposed policy on Syria presumably it would be easier to succeed in blocking the enforcement of an arbitration decision that appears to be contrary to such a policy.
I do take the deterrence effect seriously.
Lou