Sanctions have caused damage and continue to distort normal market relations, writes Valdai Club Programme Director Ivan Timofeev. But business continues to find alternative ways. The regime of Western sanctions against Russia is likely to continue for decades. Therefore, investing in diversification is in many ways a non-alternative strategy.
The US Treasury has introduced another series of financial blocking sanctions against Russian citizens and legal entities. The introduction of a large new package of restrictions can hardly be called a new phenomenon. Over the past year and a half, they have become routine. However, the latest wave of sanctions is notable for its emphasis on certain sectors of the Russian economy, as well as the practice of applying secondary sanctions against companies in third countries involved in circumventing American restrictions.
Blocking financial sanctions today can be considered a key tool of restrictive measures. They are often called “targeted sanctions”, because they are aimed at specific individuals or organisations. Such sanctions would prohibit US persons or persons in US jurisdictions from engaging in any economic transactions with those on the Specially Designated Nationals and Blocked Persons List (SDN). The assets of blocked persons in the United States must be frozen, that is, the owner cannot access them while sanctions are in effect. They can be in force for years or even decades. In addition, Americans have a very broad understanding of their jurisdiction. A transaction in the interests of a blocked organisation may be carried out without the participation of US citizens, but if, for example, it is carried out in US dollars and even indirectly comes into contact with the American financial system, companies and citizens of third countries may face administrative and even criminal prosecution by US authorities. In other words, Washington’s blocking sanctions extend far beyond US territory. Given the still-high role of American financial institutions in the global economy, US sanctions affect many countries. Even businesses in Russia-friendly jurisdictions are forced to take the threat of secondary sanctions seriously—that is, being added to the list of blocked persons for transactions with people and structures already on this list. The risks of being involved in criminal and administrative investigations are also taken seriously, at least when we are talking about large companies which actively participate in global trade and financial relations.
Stringent blocking sanctions targeting Russia were first introduced in 2014. Since the start of the Special Military Operation, the intensity of their application has increased significantly. The number of Russian individuals blocked by Executive Order No. 14024 of April 15, 2021 alone is approaching two thousand. This figure does not include those assets in which already-blocked persons hold a stake of 50% or more. It would seem that the number is relatively small. But the list of blocked persons includes a large number of systemically important Russian companies from the financial sector, high-tech and industrial industries, the mining sector, the defence industry, etc. The purpose of such sanctions is to isolate the Russian economy from American-centric global finance, to block the possibility of normal foreign economic activity, inflict maximum damage, and force it to make political concessions on the Ukrainian issue and other security issues.
As part of a new round of US sanctions, more than a hundred Russian companies have been blocked. Their distribution by sector indicates a continued focus on defence industry enterprises and the electronics industry. Blocking sanctions have hit domestic car manufacturers, the mining sector (primarily coal mining), metallurgists, transport and logistics companies, the construction industry, geological exploration, and trading firms. Two banks have been blocked. Considering that a significant proportion of Russian banking assets became subject to blocking sanctions over the previous year and a half, this number should not be perceived as small. In general, the sectoral distribution of new blocking sanctions reflects the priorities enshrined in US regulatory documents. These include, for example, the Determinations of the US Treasury Department pursuant to Executive Order 14024. They identify sectors of the Russian economy whose companies can be blocked only on the grounds of belonging to these sectors. Most likely, the chosen line of attack will continue further. Washington will lead the way to block almost all assets in these sectors.
Also of interest is the blocking of foreign firms that, according to US authorities, are involved in circumventing sanctions against Russia. The new package highlights two companies registered in Finland. According to the US Treasury, they were used to supply electronics to Russia. The same applies to two companies from Turkey. In general, the practice of using blocking sanctions against those firms from third countries that violate US export control regulations is developing. On July 20 this year, four companies from Kyrgyzstan were blocked in a similar manner.
Earlier packages included companies from India, China, and a number of European countries. It is noteworthy that these are mostly small and recently created companies focused on supplying prohibited goods to Russia. However, so far, the Americans are not persecuting everyone in this way. The emphasis is on suppliers of those goods that the United States considers a priority for control. We are talking, first of all, about electronics.
At the same time, the new sanctions were hardly a big surprise for Russian companies. Now they will work using the same logic under which previously blocked firms operated — using national currencies in payments, supply chains and logistics schemes independent of the United States and its allies. If last year such a restructuring often caused a shock, then this year we can talk about the accumulation of adaptation experience. The same experience is being accumulated in friendly countries among companies which work with Russia. If last year they weighed risks and losses while avoiding making hasty decisions, then this year they have found algorithms for working with Russian counterparties. Of course, sanctions have caused damage and continue to distort normal market relations. But business continues to find alternative ways. The regime of Western sanctions against Russia is likely to continue for decades. Therefore, investing in diversification is in many ways a non-alternative strategy.