06.10.2022
How the US Forces Third Countries to Support Sanctions
Valdai Papers
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Ekaterina Arapova

Ph.D. in Economics; Director,
Senior Research Fellow,
Sanctions Policy Expertise Center;
Head of the Department for Academic Development,
Institute of International  Studies,
MGIMO University.

Valdai Discussion Club

The United States has released the “genie from the bottle” and now it is not known in which direction global sanctions may begin to develop. If the United States uses its dominance in the global financial system and the dollar monopoly in the mechanism of secondary sanctions, then China uses its positions in global value chains. And this response, in the medium term, may turn out to be quite symmetrical, given the share of Chinese materials and components in global production, writes Ekaterina Arapova.

Sanctions against Russia have become a catalyst for accelerating the establishment of sanctions “alliances” within the boundaries of the collective West. These include a number of other American satellites, including Australia, New Zealand, historically “neutral” Switzerland, etc.

The coalition confidently demonstrates a high level of both consolidation of positions and harmonisation of sanctions tools, regardless of the level of development of sanctions legislation. For example, in Australia, the development of the legal framework for the imposition of sanctions is at an incomparably lower level than in the United States or Europe. The country actually does not have the concept of “blocking sanctions”; however, “commitment” to the general course and the introduction of a similar sanctions package against Russia is obvious. A paradoxical situation arises when the legal enforcement of these rules actually outstrips the process of institutionalisation and legalisation of sanctions regimes.

The sanctions consolidation of a group of “unfriendly” countries is largely a direct consequence of their high trade, investment and debt interdependence. The high integration of developed markets among themselves, as well as their dependence on the United States, makes them feel that it is impossible to break the “vicious circle” and that they must be forced to follow a common historical fate and “collective” interests that dominate national ones, which spurs the process of “consolidation from above”.

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At the same time, more than half of the G20 and the vast majority of the countries of the Global South are not ready to support the efforts of the US and Europe to isolate Russia. This is where both diplomatic and economic instruments of coercion have come into play. These are notes by American diplomats addressed to those who did not adopt the sanctions. Political persons who have assets in American jurisdiction have been blackmailed (in order to achieve the “necessary” results of voting at the UN), and threats of sanctions against governments and businesses for cooperation with sanctioned countries. For countries that highly value their own national sovereignty, there is a well-developed instrument of coercion — a scheme of pressure “from below” on market players through the mechanism of secondary sanctions, which is the prosecution of individuals and legal entities who are affiliated and/or maintain economic relations with target companies subject to “primary” economic sanctions. The situation is further aggravated by the fact that any company can easily fall under US enforcement, even without directly violating US sanctions laws, if one of its counterparties continues to interact with sanctioned players.

By passing the Countering America’s Adversaries Through Sanctions Act (CAATSA), the United States effectively gave itself the right to enforce its own unilateral sanctions regimes within all global market players which are part of US Nexus. At the same time, the limits of the US sanctions jurisdiction are interpreted very broadly and include three levels: 1. The US financial system (dollar transactions via SWIFT around the world) 2. All transactions conducted in the US (regardless of the citizenship of persons and the “nationality” of companies — the case of Russian Oleg Nikitin is illustrative) 3. All transactions conducted by legal entities controlled by the United States (or owned by American entities) and by American citizens, regardless of the currency of the transaction. Moreover, even after a change in “status” (for example, a change of ownership from American to another), the American regulator can hold the company liable for actions that violate the sanctions legislation, which were actually committed in the past, when the company had a US Nexus for some reason.

If the US regulator reveals cases where US sanctions legislation was violated, the risks for business and top management can be enormous. The tools of coercion are very wide-ranging, from fines to criminal prosecution.

Sanctions, including secondary ones, turn into a tool for taking funds and assets, as well as for bankrupting competitors. The “Global American Cop” actively practices the confiscation of cargo going to sanctioned countries or to persons under sanctions.

For example, in October 2020, the US authorities sold Iranian oil en route to Venezuela and confiscated it in August the same year. In July 2021, the Federal District Court for the Southern District of New York ruled to confiscate the tanker Courageous for supplying fuel to the DPRK in circumvention of US and UN Security Council sanctions. In May 2022, the US Department of Justice confiscated Iranian oil transported by the Russian tanker Lana (which, however, had to be returned to the country of origin after Greece overturned the decision allowing confiscation). Delayed payments on receivables by sanctioned companies can also easily turn into a reason for imposing secondary sanctions on the creditor, since the US Treasury can interpret it as a way of lending to an agent under sanctions.

In recent years, the US executive branch has been increasingly moving from issuing administrative penalties in the form of fines to criminal prosecution for non-compliance with sanctions regimes and the development of sanctions circumvention schemes (provided by IEEPA). As an example, Broad Tech System employees were sued for supplying chemicals to a Chinese company; Joyce Elibachus (top manager of the American company Edsun Equipments LLC) was sentenced to 18 months in prison for the supply of spare aviation parts to Iran which were intended for Mahan Air, and so on.

Moreover, the line between the absolutely legal concept of “adapting to sanctions” and “bypassing sanctions”, which is now undergoing a rapid process of legal registration as a criminal offense, is gradually beginning to blur. On the first line of sanctions are operations with crypto-currencies. Cryptocurrency transactions are subject to US sanctions, and circumventing these is fraught with criminal liability. OFAC has already imposed sanctions against Chatex, a cryptobank. There are restrictions on transfers to the crypto wallets of the Russian crypto exchange SUEX, HYDRA and Garantex, which are under sanctions, sanctions were imposed against the cryptocurrency service Tornado Cash, in the spring of 2022, the US Treasury imposed sanctions against Blender, a bitcoin transaction mixing service, which is also perceived as a tool to circumvent sanctions.

The next level of sanctions attacks target transactions using alternative payment systems bypassing SWIFT. An important precedent was the introduction of blocking sanctions against Transcapitalbank, which offered financial institutions in Asia, China and the Middle East the opportunity to circumvent sanctions through the TKB Business system, which allows for the exchange of financial messages to bypass SWIFT, including dollar transactions. The blocking was made possible by the bank’s belonging to the Russian financial sector in accordance with Decree 14024 of April 15, 2021 (hybrid sanctions format, when banks or companies are blocked on the basis of belonging to a sector that are subject to sectoral restrictions). Thus, the risks are gradually growing that any financial institutions seeking to conduct transactions in dollars and euros bypassing SWIFT may fall under blocking sanctions.

To make matters worse, the US is beginning to dish out justice not only for violations of its own sanctions laws, but also of UN law. For example, the extradition case of DPRK citizen Moon Chol Myong to the United States for the supply of luxury goods from Singapore to the DPRK, in violation of the UN sanctions regime, is noteworthy.

As a result of the broad interpretation by the United States of the concept of “national security”, threats to which are the basis for the introduction of restrictive measures, as well as a rich sanctions arsenal, a completely opaque market environment is being formed, when market players risk falling under punitive measures, even without having information about potential violations of the sanctions. Calculating sanctions risks is becoming increasingly difficult. Market players, realizing this, are forced, on the one hand, to introduce powerful sanctions compliance systems (depriving them, incidentally, of an important part of their income that could be reinvested in operating activities and work for profit growth), and on the other, refuse any transactions that seem to be at least somewhat risky in terms of violating US sanctions laws.

The more a particular company is incorporated into global value chains and the more extensive the geography of its counterparties (lenders, investors, clients and other partnerships), the more uncertain and high-risk the market environment becomes for it. In turn, the higher the risk of falling under the penalties of the American Treasury, and, accordingly, the higher the level of its over-compliance.

American lawmakers regularly publish so-called sanctions risk avoidance guides for businesses (in particular, Hong Kong Business Advisory, Xinjang Supply Chain Business Advisory, Travel Advisory, sanctions compliance guides for virtual currency market participants, etc.), thereby spinning the sanctions panic and further encouraging businesses to reinsure their own risks.

However, the growing risks do not remain unanswered, and are sometimes addressed quite symmetrically. The expansion of the practice of secondary sanctions is gradually increasing the opposition of payment systems, the trend towards the de-dollarisation of the system of international settlements, and reducing dependence on the American dollar printing press. The formation of sanctions alliances is beginning to be accompanied by the development of “anti-sanctions” blocs, and the “extraterritoriality” of sanctions legislation is becoming not only an American phenomenon. China formulates this principle in the Data Protection Law, and it was tested on Lithuania, when the Chinese threatened to ban companies with production in Lithuania from accessing its own market, and a number of multinational companies with a large presence in China were strongly recommended to stop purchasing Lithuanian products and services.

The United States has released the “genie from the bottle” and now it is not known in which direction global sanctions may begin to develop. If the United States uses its dominance in the global financial system and the dollar monopoly in the mechanism of secondary sanctions, then China uses its positions in global value chains. And this response, in the medium term, may turn out to be quite symmetrical, given the share of Chinese materials and components in global production. Isn’t it time for the American authorities to think about the fact that, while maintaining the current inertia, the extraterritorial sanctions abyss on the horizon of the next decade can swallow them up and hurt American transnational capital?

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