The Sanctions Will Grow in Size and Intensity

The lifting of sanctions against RUSAL, EN+ and EuroSibEnergo caused a moderate wave of optimism in the market. The success of the Barker plan has demonstrated that a solution to the problem with respect to major Russian companies is possible in principle. Especially when it comes to the interests of foreign business partners and the global stability of the industry. One of the conditions for lifting the sanctions against RUSAL was the change in ownership, which has resulted in foreign control over the company growing significantly.

The sanctions will grow in size and intensity. Moscow and Washington are a long way from resolving their key contradictions. The political reasons for the sanctions remain, and there are no safety mechanisms in place in the event that new problems should arise. The political climate will fuel the existing sanctions and give rise to new ones. The only question is whether the process will proceed gradually or in fits and starts.

What is more, the precedent of RUSAL and other similar cases has shown that it is possible to punish individual Russian citizens effectively while at the same time establishing control over their assets and removing industry risks. If the scheme works, why not use it against other Russian companies? Especially if their owners have a “black mark” against their names.  

The key questions now are: Who’s next? When will it happen? And what will be the impetus for it?  

The lifting of sanctions against RUSAL, EN+ and EuroSibEnergo caused a moderate wave of optimism in the market. The success of the Barker plan has demonstrated that a solution to the problem with respect to major Russian companies is possible in principle. Especially when it comes to the interests of foreign business partners and the global stability of the industry. One of the conditions for lifting the sanctions against RUSAL was the change in ownership, which has resulted in foreign control over the company growing significantly.

The United States Department of the Treasury can place the companies back on the SDN list any time it pleases, should U.S. officials spot something they do not like. But this is of little concern to foreign businesses. The companies are operating, supplying their products and remaining on the production chains.

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Despite all this, it would be premature to consider this event a change in the sanctions policy against Russia.

The sanctions will grow in size and intensity. Moscow and Washington are a long way from resolving their key contradictions. The political reasons for the sanctions remain, and there are no safety mechanisms in place in the event that new problems should arise. The political climate will fuel the existing sanctions and give rise to new ones. The only question is whether the process will proceed gradually or in fits and starts.

What is more, the precedent of RUSAL and other similar cases has shown that it is possible to punish individual Russian citizens effectively while at the same time establishing control over their assets and removing industry risks. If the scheme works, why not use it against other Russian companies? Especially if their owners have a “black mark” against their names.

The key questions now are: Who’s next? When will it happen? And what will be the impetus for it?

The sanctions introduced against a number of companies, including RUSAL, on April 6, 2018 came out of nowhere. Formally, there were legal grounds for the sanctions (CAATSA, etc.), but they were not tied to any significant political event at the time. This essentially means that sanctions can be arbitrarily doled out again at any time in the future. The most vulnerable to such machinations are Russian companies whose role on the international stage is far less unique than that of RUSAL or EN+. Fearing new sanctions, foreign companies are being particularly cautious and may very well refuse to do business with Russian companies even when, from a legal perspective, there is nothing preventing them from doing so.

The events in Venezuela also serve as a valuable lesson here. The United States could step up sanctions should the situation inside the country get any worse. Washington has been increasing pressure on Caracas since 2014, when over 100 individuals and legal entities were placed on the SDN list and sectoral sanctions and debt limitations were imposed.

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However, that pressure increased manifold with the beginning of the confrontation between Nicolás Maduro and Juan Guaidó. Venezuela’s state-owned oil producing company was placed on the SDN list. At the same time, the United States Department of the Treasury again tried to mitigate the costs for business. It is possible to purchase oil from Venezuela, but the money now goes into a special account. Just like the country’s frozen assets, these funds have been made available to the opposition.

In other words, sanctions have been transformed from an instrument of coercion into a kind of political technology.

Now the Venezuelan opposition is fuelled by the country’s own resources. Of course, Maduro can put the brake on supplies and production. However, in addition to the technological difficulties associated with doing this, suspending mining operations will no doubt lead to new protests. The United States is withholding Venezuelan money from the Venezuelan government. This is a huge problem for the oil economy. All the more so because the sanctions also affect another source of income, namely gold mining.

The January sanctions are a signal: large pieces of property can be taken away in a civilized manner, and if there is even a whiff of weakness in domestic policy, then the pressure will only multiply.