Russia and Global Security Risks
Russian Debt and Sanctions. Amended Again

Russian securities represent only a small component of investment portfolios, which are comprised of completely different securities. They can be both sovereign and corporate. Patriotic pledges are good for communicating with voters. However, profit is important to investors. If the law allows transactions, they will prioritise income, writes Valdai Club Programme Director Ivan Timofeev.

In the United States, there is a renewed discussion about the advisability of expanding sanctions on Russian sovereign debt. Similar sanctions already exist: they were introduced sequentially by Donald Trump and Joseph Biden. There is an opinion in Congress that the existing sanctions are insufficient and need further expansion. The proposed amendment on tougher sanctions is unlikely to find serious support so far. However, the measure itself will remain on the agenda and can be used as a threat against Moscow.

The draft amendment to the National Defense Authorization Act for Fiscal Year 2022 was introduced by Rep. Brad Sherman, a Democrat. The amendment prohibits American individuals and legal entities from performing transactions with debt securities issued by the Russian Central Bank, The National Wealth Fund, the Treasury or any institutions associated with these structures. We are also talking about any other financial liabilities exceeding 14 days which are classified by the President of the United States as Russian sovereign debt. In other words, Brad Sherman is proposing to extend sanctions on sovereign debt securities issued in any currency in both the primary and secondary markets. The reason cited for the sanctions is Russia’s interference in the American elections.

This is not the first time Congressman Sherman has made such proposals targeting Russia. In 2019, he launched a similar initiative. At that time, one of the resonant bills on sanctions for alleged interference in the elections was the so-called DETER Act. It never became law, and the chances of passing it were low. Brad Sherman borrowed from it a key part on sanctions against Russian sovereign debt and tried to pass it in the form of an amendment to the 2020 Defense Authorization Act. This approach was rational in its own way, since the Defense Authorization Act is adopted anyway, which enhances the chance on the passage of “attached” amendments and bills in the form of separate articles. However, the Sherman amendment nevertheless did not pass.

In 2021, Brad Sherman decided to try again. There are already a number of US restrictions on Russian sovereign debt. In 2019, Donald Trump banned Americans from conducting transactions with Russian sovereign bonds in the primary market which were denominated in foreign currencies. The US Treasury directive clarified that the sanctions did not apply to the debt securities of Russian state-owned companies. Sanctions were imposed pursuant to the Chemical and Bacteriological Weapons Destruction Act 1991 (CBW Act) in response to the alleged poisoning of Sergei and Yulia Skripal in the UK in 2018. Joe Biden extended the sanctions to sovereign bonds denominated in rubles. However, he has limited these to the primary market.

Russia and Global Security Risks
From Sanctions to Irreconcilable Differences, or Waiting for a New US Sanctions Programme
Anastasia Likhacheva
American sanctions methodology necessitates the ethical legitimisation of sanctions: they are not officially introduced with the justification that it is beneficial to the United States. Therefore, the ethical issue will remain, but will soon be spun in a new way, writes Valdai Club expert Anastasia Likhacheva.

However, Brad Sherman assumes that the measures taken by Trump and Biden are ineffective and don’t do Russia much harm. Moreover, in his speech to the House of Representatives, he referred to the opinion of the Russian Ministry of Finance about the ineffectiveness of the sanctions. Congressman Sherman did not offer any further calculations or assessments. His idea is that Russia needs to suffer real economic damage in order to stop the practice of interference in elections. Sherman called for American investors to invest in the national economy, and not lend to Russia. There are many supporters of this point of view in the United States. However, obstacles may arise in the way to the passage of the amendment.

First of all, such a measure may not find support in the Administration. This is connected, of course, not with love for Moscow, but with specific pragmatic interests. Second, US financial authorities believe that comprehensive sanctions on Russian debt, along with damage to Russia itself, will also hit American investors. At least, the US Treasury expressed this point of view in 2018 in a report submitted to Congress in accordance with the requirements of Art. 242 of CAATSA 2017. This view is unlikely to be changed. The ban on the purchase of Russian securities discriminates against American investors in comparison with others. The Sherman Amendment does not imply secondary sanctions against foreigners for purchasing Russian securities. If it does appear, then the discontent of US allies and partners will be very serious.

Escalating sanctions on Russian debt will also confuse the cards of American diplomacy. Consultations on strategic stability and cyber security are underway. There are still few points of contact. However, Washington does not intend to end negotiations. The problem of interference in the elections, due to which new sanctions are proposed, has not gone away. At least the 2021 National Intelligence Report assessed the presence of such interference. Nevertheless, the scale of the problem is much smaller than it was in 2016. In addition, Biden has already responded to the problem with his executive order 14024, by imposing sanctions, including in relation to Russian debt securities. In the current situation, the White House simply does not need escalation. It is much more convenient to have this trump card in reserve and be able to threaten Moscow with it on occasion.

Finally, Brad Sherman’s point that investors’ money in Russian securities should be redirected towards the US national economy is not good at all. This is speculative capital. Russian securities represent only a small component of investment portfolios, which are comprised of completely different securities. They can be both sovereign and corporate. Patriotic pledges are good for communicating with voters. This is probably what Brad Sherman is counting on. However, profit is important to investors. If the law allows transactions, they will prioritise income.

It is also important to understand that sanctions bills are routine for Congress. There have been several hundred in the past several years, not including those reports of the executive authorities where sanctions are prescribed. Part of American political life is competition between the legislative and executive branches of government for foreign policy. Disputes about the meaning of Articles 1 and 2 of the US Constitution, that is, about the powers of the President and Congress, are still going on. Sanctions law is one of the areas of this competition. Therefore, bills on sanctions will remain commonplace.

Close attention should be paid to those projects that also have support in the Senate, and which do not contradict the line of the Administration. This, for example, happened with the legislation against Nord Stream-2. The new Sherman amendment does not yet make that impression. An indirect sign is that it contains the responsibility of the executive branch to prepare reports on election interference. However, this practice already exists. Moreover, it is enshrined in executive order 13848 of September 12, 2018. The amendment could simply propose its codification, especially since the order contains very detailed sanctions in case of interference in the elections. Indirectly, this indicates a weak study of the project.

However, this does not mean that the problem does not exist. In the event of a new political crisis, the escalation of sanctions on Russian debt may again be on the agenda. More detailed bills may appear in Congress.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.