Insights / 31.08.2020

Institutionalizing Sanctions as a Global Political and Competition Tool: a Brief Overview

Sanctions programs have been an important part of the political and economic landscape for centuries. They serve to reprimand a country or a group of countries that “misbehave.” Generally, sanctions can be broken down into two main categories: comprehensive and non-comprehensive sanctions. There is a category of so-called “rogue” countries, such as North Korea, Iran, etc., and the United States and several other countries apply comprehensive sanctions against them. Some other sanctioned countries (Russia, China) fall into the category of non-comprehensive sanctions.

Lately, we have seen a tremendous rise in the application of unilateral sanctions. Not only are the sanctions becoming tougher and more punitive, the geographic spread of sanctions has widened dramatically. Unilateral sanctions are becoming an everyday tool for putting political and sometimes economic pressure on “misbehaving” countries, thus institutionalizing the application of sanctions and making them a routinely used instrument to tame “offending” global players. In this article we will briefly outline the current trends as well as similarities and differences in sanctions. This article does not claim to be a deep and thorough analysis of the matter. Instead, the purpose of this article is to give the reader a high-level overview of sanctions-related developments.


EU vs. US: A Different Approach

In terms of the fundamental principles of sanctions, the European Union’s approach differs strikingly from that of the United States. Let’s start by looking at the basics of EU sanctions.

As set forth in the Guidelines on Implementation and Evaluation of Restrictive Measures (Sanctions) in the Framework of the EU Common Foreign and Security Policy (the “EU Guidelines”), sanctions are imposed by the EU to bring about a change in policy or activity by the target country, part of a country, government, entities or individuals. Sanctions should not be punitive or excessive. The legal context of the sanctions concerned should be clearly set out.

The EU Guidelines state that sanctions must always be proportionate to their objective. They must respect human rights and fundamental freedoms. EU sanctions should also respect the international obligations of the European Community and its Member States, in particular, the WTO Agreements.

Unlike US sanctions regulations, the EU Guidelines clearly state that sanctions should not have an economic motivation. In other words, the goal of EU sanctions is not a finance- or economy-driven consideration but a reaction to an abuse by the target country of the fundamental human rights and freedoms such as freedom of speech, freedom from selective justice, a country’s sovereignty and integrity, and other rights and freedoms commonly recognized and accepted in democratic societies.

To briefly sum up the EU sanctions regulations, there are clearly set boundaries that define the EU’s restrictive measures policies. These boundaries include, inter alia, a requirement for the sanctions concerned to be proportionate and not punitive or excessive. Sanctions should be reviewed periodically (on an annual or semi-annual basis), and any positive development of the target country or entity should be encouraged. Sanctions must not be based on economic considerations, and should not be used as a tool for restricting international competition.

When it comes to US restrictive measures, the situation changes radically. The United States of America is undoubtedly the world’s absolute leader in sanctions. Numerous federal agencies administer dozens of sanctions programs in every corner of the planet.

There are a huge number of Federal Acts, Executive Orders, OFAC Directives and many other legal instruments dealing with sanctions. US sanctions cover the following countries/jurisdictions: Belarus, Burundi, Central African Republic, Cuba, Democratic Republic of the Congo, Hong Kong, Iran, Libya, Mali, Nicaragua, Somalia, Syria, Ukraine/Russia, Venezuela, Zimbabwe. Also, there are a number of specific sanctions programs based not on geographical but on other factors. These include the International Criminal Court-related program, sanctions programs based on the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), the Narcotics Trafficking sanctions program, the Counter Terrorism sanctions program, the Cyber-Related sanctions program, the Foreign Interference in the United States Election sanctions program, the Magnitsky sanctions program, the Rough Diamond Control program, the Transnational Criminal Organizations sanctions program, etc.

One of the core pieces of legislation on which US sanctions are based is the International Emergency Economic Powers Act (“IEEPA”). Among other things, the IEEPA provides a basis for the US president to impose sanctions. It states that the president may exercise his/her authorities to deal with any so-called unusual and extraordinary threat overseas to (i) the national security, (ii) foreign policy, or (iii) economy of the United States. This is a far cry from the EU sanctions doctrine. Unlike the EU, the scope of an unusual and extraordinary threat includes the US economy. In other words, any other nation’s move that puts a part of the US economy at risk may be a sanctionable offense, even if it is totally legal and valid under the home jurisdiction. This is exactly what is prohibited under the EU Guidelines in terms of economic motivation.

The question of why a political or economic situation many thousands of miles away from the United States might create an unusual and extraordinary threat to the United States has yet to be answered, especially if there are almost no political and economic ties between the United States and the target country. We believe the answer may lie deep in the post-WWII roots of the Washington-based political establishment’s perception of the world beyond US borders. The author of this article was born and raised in a non-US country, so it impossible for him to find justification for such an approach. Therefore, we won’t go deeper into this issue.

Another unique feature of US sanctions contrasting with EU sanctions is that US sanctions apply extraterritorially much more often than EU restrictive measures or those of any other jurisdiction. As a general rule, in order for the US authorities to apply sanctions, a US nexus is needed in a given situation. That could be the use of the US dollar in a cross-border transaction, a US-originated piece of technology, know-how or equipment, a US national or company, etc. That said, the CAATSA states that in some cases so-called secondary sanctions may be imposed, and no US nexus is necessary for the secondary sanctions to apply. Put simply, if a European-based company were dealing with a, say, Russian sanctioned company in a “significant financial transaction,” the main US sanctions watchdog, the Office of Foreign Assets Control (“OFAC”), might consider putting that European company on a sanctions list even if there was no US nexus whatsoever. Many experts agree that secondary sanctions are the most effective tool in the US sanctions toolkit to scare any potential partners away from the “bad guys.”


Sanctions as a Business Competition Tool

Here is some sanctions-related news we have been hearing lately.

China. In 2017 China bought an S-300 air missile defense system from Russia. In September 2018 China’s military equipment agency and its director were put on the SDN list because of that purchase. This was the first case of actual application of secondary sanctions under the CAATSA.

Turkey. In December 2017 Turkey purchased an S-400 air missile defense system from Russia. Turkey is a NATO member country, although that didn’t stop some members of the US Congress and high-ranking members of the US administration from threatening Turkey with sanctions. The United States National Defense Authorization Act for Fiscal Year 2020 states that the US administration should do everything possible to replace the S-400 air defense missile system with a US Patriot system. By the time of this writing the effort had not yet met with success.

India. In 2016 and 2018 India and Russia signed a deal for the purchase of several S-400 air defense missile systems with a total value of US$5.43 billion. Senior US officials threatened India with sanctions. It is reported to have been said that

“The challenge we have with any state like India is new acquisitions on significant systems that would either put at risk our platforms or expose our technologies to an adversary. And so we said this very simple – Turkey was a perfect example.”[1]

Russia. In 2017 the United States sanctioned Kaspersky Lab, one of Russia’s leading and most successful IP and antivirus developers. The National Defense Authorization Act for Fiscal Year 2018 prohibited any US governmental authority from using any hardware, software or services developed or provided by Kaspersky Lab or its affiliates. Of course, a national security threat was cited to justify the sanctions.

China. As of 2019, the Trump administration started a sanctions campaign against Huawei Technologies, a leading Chinese mobile phone manufacturer and IP developer, including of 5G networks. Since 2019, when the Bureau of Industry and Security (“BIS”) added Huawei Technologies and 114 of its overseas-related affiliates to the Entity List, companies wishing to export US items were required to obtain a license. As usual, the inclusion of Huawei Technologies on the Entity List was justified by a threat to US national security.

“Despite the Entity List actions the Department took last year, Huawei and its foreign affiliates have stepped-up efforts to undermine these national security-based restrictions through an indigenization effort. However, that effort is still dependent on U.S. technologies,” said Secretary of Commerce Wilbur Ross. “This is not how a responsible global corporate citizen behaves.  We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests.” [2]

Effectively, Huawei Technologies is forbidden from using most US-originated hardware or software, including computer chips, semiconductors, software programs for smartphones such as Android, etc.

Great Britain has banned new Huawei 5G equipment and has ordered the removal of all Huawei equipment from UK 5G networks by the end of 2027. UK Digital Secretary Oliver Dowden said in a statement to the House of Commons: “By the time of the next election we will have implemented in law an irreversible path for the complete removal of Huawei equipment from our 5G networks.” [3]

On August 6, 2020 President Trump issued two Executive Orders: one banning the Chinese-related TikTok video-sharing mobile app, the other banning the Chinese-owned WeChat social media and payment system network. In the second Executive Order President Trump states that

“WeChat, a messaging, social media, and electronic payment application owned by the Chinese company Tencent Holdings Ltd., reportedly has over one billion users worldwide, including users in the United States. Like TikTok, WeChat automatically captures vast swaths of information from its users. This data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information<…> WeChat, like TikTok, also reportedly censors content that the Chinese Communist Party deems politically sensitive and may also be used for disinformation campaigns that benefit the Chinese Communist Party<…> The United States must take aggressive action against the owner of WeChat to protect our national security.” [4]

Russia’s Nord Stream 2. US Senators Ted Cruz, Tom Cotton and Ron Johnson sent a letter to the port’s management, saying the sanctions would be “obligatory” and had to be applied with full force. Sassnitz port is a key logistics hub for the nearly complete pipeline project that connects Germany with Russia and which has been heavily criticized by the US government for allegedly increasing European dependence on Russian fossil fuels. The senators warned the port authorities that continuing to host Russian construction vessels and move or store materials for the pipeline would “destroy the financial survival of your business,” Wetzel writes. The senators also threatened managers and shareholders of the port individually, saying they would no longer be allowed to travel to the US and that all assets “in our area of responsibility” would be frozen. The Republican lawmakers reiterated US government claims that Nord Stream 2 is a “severe threat to the national security of the USA” and argue that both parties in the US Congress are determined to prevent the project’s completion so that “these threats never materialize.” [5]

Notably, the US administration is aggressively promoting US liquefied natural gas (LNG) and pushing Germany to close down Nord Stream 2 to clear to the way for American LNG. It should also be noted that the inventor of the Nord Stream 2 and TurkStream sanctions, Mr. Ted Cruz, is a Republican senator from Texas. German mass media have discovered ties between Mr. Cruz and some Texas oil & gas companies.


Where Does This All Lead?

As one can clearly see, sanctions-related priorities have shifted dramatically of late. Sanctions are more often being used as a tool to restrict international competition rather than protect fundamental human rights and freedoms. This statement is particularly true for the United States, although we believe that the EU’s sectoral sanctions on Russia in the oil & gas and banking & finance sectors might also be viewed as such.

In the recent hostility between the US and China, the US administration’s actions have hardly anything to do with fundamental human rights or a broad political agenda. The Huawei case looks more like the elimination of a formidable competitor in the already crowded 5G network market in the United States. The TikTok/WeChat case may be seen as eliminating a threat to the monopoly of US networks. What is interesting is that in both cases the US administration cites a threat to national security as an excuse to impose sanctions. Sadly, the imaginary threat to national security is being used to justify restrictive actions that would otherwise not have been allowed under the WTO treaties and a myriad of bilateral and multilateral international treaties of which the US is a member country, let alone various national laws contradicting the US administration’s stand on these matters.

In Russia-related affairs the situation has changed colossally in recent years. While the 2013-2014 events in Ukraine and Russia’s reaction initially resulted in a uniform and harmonized set of actions, from 2018 onwards the EU and US views on Russia-related sanctions pressure have diverged. In terms of EU sanctions they have not changed since 2014 and largely remain the same. US sanctions, on the other hand, have taken a different path. The CAATSA became effective in 2018. A whole new set of sanctions against Russia arose. In particular, so-called secondary sanctions were introduced. In short, any significant transaction between a Russian SDN and a non-US person may result in that non-US person being sanctioned. In this context, the word “significant” is misleading as there is no financial, economic or monetary threshold to apply, and literally any deal may be deemed significant. US officials have repeatedly confirmed that the ultimate reason for secondary sanctions is to scare off Russia’s potential partners, mainly from Europe. Surprisingly, Washington’s secondary sanctions threat mostly refers to the industries that are subject to the fiercest competition between the two countries, especially oil & gas, IP/IT and weapons. At the same time, certain space satellite programs and rocket engines have intentionally been excluded from the Russia-related sanctions, as the United States is still dependent on cooperation with Russia in certain space-related programs. This proves our point that the rationale for the US sanctions on Russia lies in the sphere of international competition (or elimination thereof) rather than bringing in democratic changes or respect for basic human rights. This becomes even clearer if we consider the latest tensions over Nord Stream 2, a gas pipeline from Northwest Russia to the German Baltic Sea coast.

The US administration has threatened to sanction sea vessels and companies engaged in underwater construction of the Nord Stream 2 pipeline. A Swiss company, AllSeas, that was engaged in underwater Nord Stream 2 pipeline construction stopped all work for Nord Stream 2 after it received direct threat letters from a group of US congressmen. As noted above, a set of new sanctions on Nord Stream 2 will be introduced in the near future, most likely incorporated into the Defense Appropriations Act for Fiscal Year 2021. At the same time, the US administration is putting enormous pressure on Germany and other European countries to make them buy US liquefied natural gas (LNG). In doing so, US officials cite an alleged threat to energy security coming from the Kremlin. The fact that Germany categorically opposes this narrative doesn’t seem to bother the White House.

As for the Turkey incident, we believe the US administration was angered by the fact that President Erdogan signed a multi-billion dollar deal with a NATO adversary. According to their narrative, threatening Turkey with sanctions might push Turkey out of the deal with the Russians and help to sell the US-made Patriot air missile defense system. Once again, there is direct competition and the US administration references a threat to US national security. As for the India affair, Russia has been selling weapons to India for decades. The US government is trying to change the status quo, citing the sanctions threat as a persuasion tool.

Where do these cases lead us? We believe that the perception of unilateral sanctions has changed over the last decade or so. In contrast to the classic concept of sanctions as a tool for political change, today’s sanctions trend can best be described as a disguise mechanism where the officially declared goal often doesn’t match the real purpose. If this trend continues, the forecast for global and regional political and economic stability is grim.

First, as the civil societies in the countries concerned realize that the officially declared purposes of the sanctions do not correspond to the actual intentions, sanctions may be viewed as a veil to cunningly mask the true course of action. This may lead to sanctions being devalued and unjustified in the eyes of many.

Second, the inconsistency between the officially declared and the actual purpose of sanctions will provoke a heightened level of uncertainty in various businesses, especially those having a presence in both the sanctions-imposing countries and the target countries. This will result in added costs to maintain international business operations, in particular in terms of extra personnel hired for compliance checks and assessment of sanctions-related risks, as well as expensive software programs and training courses. In some cases, this may force otherwise flourishing businesses to close.

Third, the excessive use of unilateral sanctions breaches one of the core principles of business operations, i.e., that private businesses should not be held responsible for the actions of their governments.

Fourth, and most importantly, the use of sanctions as a cover up to unjustly gain competitive advantages is plain wrong and upsets the fragile balance of international peace and stability.

To sum up, we do believe that sanctions are necessary and well justified in certain cases. They are appropriate to use against a dictator, an authoritarian rule, a human rights offender, a corrupt politician, a civil society oppressor, a genocidal regime, etc. Sanctions should carefully target only those directly responsible for the acts of bad will, and should not affect non-offending persons. Sanctions should not disturb international and local businesses and should not result in unjustified losses and expenses.

We also believe that sanctions must not be used to artificially restrict fair competition on a global scale. Sanctions should not be used selectively to oppress competitors, even if the competing countries are not on friendly speaking terms. More importantly, we believe that citing a “threat to national security” in purely economic cases is inappropriate and should not be used to indiscriminately target an excessively wide range of businesses and persons in the target countries. There is already a mechanism in place under multiple WTO treaties to resolve trade and economic tensions.







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