Referenews

Uneven sanctions

Perhaps the most critical tool the United States and its partners have used against Russia are traditional economic sanctions.

These penalties generally target individuals, companies and state bodies. They can also hit financial institutions, including the central bank of a country that houses many of its national assets. If, say, Country X imposes financial sanctions on a Russian oligarch, that usually means the citizens of Country X cannot do business with that oligarch and that oligarch’s assets in Country X are frozen.

The U.S. has a long track record of imposing economic sanctions on overseas entities, and because so many people and companies do business using the U.S. dollar, Washington’s reach is long. Violators potentially face criminal charges, hefty fines and frozen assets.

But the U.S. also has established legislation, resources and government bodies, such as the Treasury Department’s Office of Foreign Assets Control, devoted to tracking down sanctions violators. Other countries have less robust systems and are more likely to let violators slip through.

“Personally, I don’t know how good the Italian authorities are at sanctions enforcement. I think that Italian banks are more afraid of OFAC and the Justice Department in the U.S. than they are of their own regulators,” said Edward Fishman, a former senior official at the State Department who is now at Columbia University’s Center on Global Energy Policy.

To deter workarounds, Washington is increasingly turning to “secondary sanctions.” This allows the U.S. to penalize foreign-based entities for doing business with sanctioned Russian entities.

In December, President Joe Biden issued
an executive order that, among other things, could result in foreign banks losing access to the U.S. financial system if they do business with Russia’s military-industrial complex. Treasury on Friday announced additional sanctions under this authority targeting 26 entities in 11 countries, including China, Serbia, the United Arab Emirates and Liechtenstein.

The measures marked an aggressive expansion of the administration’s strategy against Putin, and could discourage banks from entire sectors in an effort to comply with the rules.

Some U.S. allies consider secondary sanctions an overreach of Washington’s authority since it could hit third parties not subject to sanctions.

Still, the measures aren’t nearly as strict as rules the U.S. has in place to target Iran, which punish foreign banks for transactions of any kind with an Iranian bank.

One big loophole is
an exemption that allows energy-related transactions with sanctioned Russian banks. While that has prevented major turmoil in global energy markets, it has also allowed a significant amount of capital to continue flowing into Russia’s economy.

Adeyemo said no decision has been made on whether to extend the exemption but defended the move as part of an overall strategy to prevent a negative impact on developing countries reliant on Russian energy exports while suppressing Russia’s oil revenues.

“If we were to be in a place where we cut off some of Russia’s oil, and the prices were to spike, they could earn more money potentially selling less oil,” he said.

The EU is also making an effort to expand its sanctions regime to other countries. Brussels has been sending its special sanctions envoy David O’Sullivan to present evidence of evasion and circumvention to outside governments, hoping they will then join the bloc’s penalties scheme. It’s also floating the idea of creating an EU-wide authority
to oversee sanctions enforcement — effectively Brussels’ answer to OFAC.

Considering how sensitive it is to take responsibilities away from national European governments, however, it could be a while before this is established. O’Sullivan did not respond to a request for comment.

“The time for admiring the challenge is gone,” said Tom Keatinge, director at the Center for Financial Crime and Security Studies of RUSI Europe, an international think tank.

“The EU has more levers it can pull than the U.S., considering it’s the world’s largest trading bloc. Raw economics. It’s just a question of how to use this power.”