Closing Loopholes: Outlining the U.S. and EU Sanctions Policy Onward

The Official Journal of the European Union has published decisions and regulations included into the sixth package of anti-Russian sanctions. The release of the new legal framework has been postponed several times on account of disagreements among the EU countries, with the most sensitive issue being the ban on Russian oil imports. The partial loss of the EU oil market is bad news for Russia, but long expected. Moscow will have to divert its amounts to Asia, selling oil at a discount. However, even such a transfer of export is unlikely to result in a radical revenue drop in the current supplier’s market situation.

The protracted negotiation of the new sanctions has created the impression that the EU sanctions tools are now exhausted, much as the West at large. This impression is far from the truth, though. The next packages will be less spectacular, but they will be detrimental to specific businesses and areas of the economy.

New packages of sanctions are hardly capable of destroying Russia’s economy. More importantly, though, they cannot change Moscow’s political course. Despite all the losses from the breakdown of relations with the West, the Russian Juggernaut is stubbornly moving forward. No promises to lift sanctions in exchange for political concessions simply won’t work, given the emotional heat of the standoff. Especially in view of the case of Iran, a country that went ahead with the phasing out of its nuclear program in 2015 only to face a full range of U.S. sanctions. And all the more so because the West as such bears the losses from the imposed restrictions.

It seems that Russia has set a course for a radical reformatting of Ukrainian territory. Ukraine’s fate is now decided on the battlefield rather than in the offices of sanctions strategists. Meanwhile, Russian business has no choice but to look for new opportunities in Asian markets. Even with all the difficulties and threats, such attempts stand a chance of success.

Oil and KAMAZ

The Official Journal of the European Union has published decisions and regulations included into the sixth package of anti-Russian sanctions. The release of the new legal framework has been postponed several times on account of disagreements among the EU countries, with the most sensitive issue being the ban on Russian oil imports. Brussels, however, managed to reach consensus after much negotiation. The import of Russian oil and petroleum products into the EU is now prohibited, albeit with a number of reservations. The European Union continues to pursue its consistent policy of squeezing Russian energy resources from its market. Previously, Brussels banned deliveries of Russian coal. Restrictions on gas are not ruled out in the future either, although they will require much more effort as they incur higher costs.

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The partial loss of the EU oil market is bad news for Russia, but long expected. Moscow will have to divert its amounts to Asia, selling oil at a discount. However, even such a transfer of export is unlikely to result in a radical revenue drop in the current supplier’s market situation. It is only possible with a significant rollback in oil prices. The new EU sanctions will have little impact on the Russian economy in the short term, especially given the aforementioned exceptions.

Other measures of the sixth package seem even less critical. The disconnection of three Russian banks from SWIFT does not make much of a difference for the Russian financial system, especially in light of the earlier sanctions. Russian competitors of European companies will benefit from the ban on the provision of consulting services. The expanded list of personal blocking sanctions against the military and senior officials as well as their families is insensitive to the economy. The blocking of Kamaz, Sukhoi and other companies is rather unpleasant, but this was apparently a matter of time. Especially so, because many of them were affected by sanctions even earlier, through export bans.

The aftertaste of sanctions

The protracted negotiation of the new sanctions has created the impression that the EU sanctions tools are now exhausted, much as the West at large. This impression is far from the truth, though. Western countries may continue to expand the lists of blocked persons or the range of export controls. The next packages will be less spectacular, but they will be detrimental to specific businesses and areas of the economy. There remain prospects of expanded secondary sanctions and sealed workarounds for the restrictions that were imposed earlier. Secondary sanctions, criminal and administrative prosecution of violators of restrictive measures make apprehensive Russian counterparties in China, India and other friendly countries.

Secondary sanctions are few, but very illustrative. For example, the U.S. imposed blocking sanctions against China’s COSCO Shipping Tanker for alleged shipments of Iranian oil in 2019. It managed to get rid of the sanctions rather quickly by administrative means, but the very fact was an important signal for the Chinese business.

Secondary sanctions were also adopted against Russia-linked assets, such as the Russian-Venezuelan Eurofinance Mosnarbank or the Swiss-based TNK Trading International and Rosneft Trading. Businesses are even more intimidated by the risks of penalties and criminal prosecution. Chinese telecommunications giant ZTE paid more than $1 billion to U.S. authorities for trying to circumvent U.S. sanctions against Iran, while Huawei CFO Meng Wenzhou spent nearly three years under house arrest in Canada. Similarly, the U.S. sought her extradition due to violations of sanctions against Tehran. The number of administrative and criminal prosecutions for such cases runs into the dozens per year.

Russians have also faced criminal prosecution. Russian citizen Oleg Nikitin and his overseas partners were sentenced to prison by a U.S. federal court for attempting to buy a turbine in the U.S. through intermediaries for a Russian company in circumvention of sanctions. U.S. authorities have learned to uncover intermediary supply schemes through third countries quite effectively. Overcompliance—that is, refusing to deal with sanctioned jurisdictions even when they do not conflict with restrictive measures regimes—has appeared in both Western and Eastern business circles.

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This leads to a paradox in relations with countries friendly to Russia. Their governments do not adhere to Western sanctions, but big businesses with stakes in the U.S. or EU markets largely comply with the restrictive measures in place there. However, this risk should not be absolutized either. For example, Chinese companies will work with Russia in areas where there are no Western components in goods or license obligations. Such motivation will dramatically increase as transactions in yuan and rubles, which can bypass SWIFT, are now devised.

New packages of sanctions are hardly capable of destroying Russia’s economy. More importantly, though, they cannot change Moscow’s political course. Despite all the losses from the breakdown of relations with the West, the Russian Juggernaut is stubbornly moving forward. No promises to lift sanctions in exchange for political concessions simply won’t work, given the emotional heat of the standoff. Especially in view of the case of Iran, a country that went ahead with the phasing out of its nuclear program in 2015 only to face a full range of U.S. sanctions. And all the more so because the West as such bears the losses from the imposed restrictions.

It seems that Russia has set a course for a radical reformatting of Ukrainian territory. Ukraine’s fate is now decided on the battlefield rather than in the offices of sanctions strategists. Meanwhile, Russian business has no choice but to look for new opportunities in Asian markets. Even with all the difficulties and threats, such attempts stand a chance of success.