Another package of US sanctions has caused a stir in connection with restrictive measures against companies from Kyrgyzstan that work with Russia. In fact, such restrictions fit into an already-existing trend. Companies from friendly countries are under threat of blocking sanctions for dealing with sanctioned Russian entities or violating US export control rules. At the same time, Washington is stepping up work with the authorities of these countries in order to more effectively control the behaviour of foreign business, in a way that suits American interests. Despite Russia's friendly relations or even alliances with a number of states, companies from these countries often continue to observe US sanctions laws.
In the latest package of US financial blocking sanctions against Russia, introduced on July 20 this year, four companies from Kyrgyzstan were included. According to the US authorities, all four companies were engaged in the supply of dual-use goods under US export control to Russian customers through Kyrgyz jurisdiction
Moreover, we are talking about a group of trade items, the control of which the US authorities consider a priority. A list of nine such priority items was published on May 19, 2023
by the US Financial Crimes Enforcement Network (FINCEN) and the Bureau of Industry and Security of the US Department of Commerce.
We are talking, first of all, about electronics. The number of trade items banned for delivery to Russia is in the thousands, but these nine positions are the priority. Blocking sanctions on the grounds of violation of export controls will be introduced primarily for transactions with these goods. The legal basis in this case is Art. 1 (i) (a) of Executive Order of the President of the United States No. 1424 dated April 15, 2021. This provision gives the authority to the US Department of the Treasury to impose blocking sanctions against persons working with certain sectors of the Russian economy. The technology sector is one of them
Such grounds are extremely broad and in fact mean that blocking sanctions can be applied against any foreign counterparty of the Russian technology sector. Other sectors of the Russian economy that may result in such US sanctions include the financial sector, defence industry, energy, mining, aviation and space, construction, etc. This does not mean that absolutely all counterparties are blocked. But the sword of Damocles of sanctions hangs over them, and occasional lockdowns like the four Kyrgyz companies show that the mechanism is in place. At the same time, Russian customers are also blocked. So far, practice suggests that the key targets of such sanctions will be suppliers of dual-use goods, especially for priority commodity items.
It is noteworthy that all four companies from Kyrgyzstan had "red flags" or indicators that US sanctions regulators were focusing on them.
In addition to operating in a Russian-friendly jurisdiction and dealing in priority export control items, all of these companies were opened after the start of the Special Military Operation. Three of them appeared in March 2022, and one in June last year. All four companies, judging by the release of the US Treasury, were focused exclusively on working with Russian customers.
This picture is typical. Blocking sanctions for interacting with previously blocked individuals or on the grounds of violating export controls rarely fall on large or even medium-sized firms. Usually they are subject to administrative action, especially if there is any connection with the jurisdiction of the United States. But in relation to small intermediary firms focused on sanctions jurisdictions, blocking sanctions are already used quite often. Moreover, such intermediary companies often have nothing to do with America’s jurisdiction and it is more difficult to levy administrative fines against them.
Kyrgyz companies are not the first to be hit by blocking sanctions for working with Russian customers. For example, on February 24 of this year, the Swiss-Italian businessman Walter Moretti and his partners from Germany and India were added to the list of blocked persons. Blocking sanctions were also imposed on two Indian legal entities that were used as intermediaries for the supply of high-tech goods to Russia. At the same time, the Americans blocked a number of companies and persons associated with them from Liechtenstein, the Netherlands, Poland, Germany, Finland, and Estonia. In March and April 2023, companies from Armenia, China, the United Arab Emirates, Turkey, and Uzbekistan fell under blocking sanctions for similar reasons. Legal entities associated with financial transactions in favour of previously blocked persons or related assets in third countries (in the UAE, Cyprus, Switzerland, etc.) were blocked.
In none of the mentioned cases, has the application of sanctions caused any serious diplomatic tensions between the US and the countries in which the blocked firms are registered or whose citizens are blocked individuals. In the case of US allies and partners who also impose sanctions, this situation is understandable. In the case of other countries, the authorities prefer not to enter a conflict in order to avoid more serious sanctions, and often turn a blind eye to the activities of partners of Russian firms. However, the US and EU authorities are increasingly insisting that they should not turn a blind eye to entities which both bypass export controls and interact with sanctioned Russian financial institutions and other blocked individuals. In particular, it was reported about the tightening of regulatory measures in Kyrgyzstan regarding the circulation of dual-use goods after the relevant explanatory work was carried out by representatives of the US, EU and UK authorities. One of the results was the detention of a batch of 14 unmanned aerial vehicles, the transit of which was carried out through Kyrgyzstan. After July 20 of this year, the US Treasury has imposed blocking sanctions against the Unistream payment system; a number of financial institutions in Kazakhstan, Uzbekistan, Armenia and Georgia have suspended work with it. It is unlikely that the authorities of these countries forced banks to take such actions, but the compliance services of banks act in a proactive manner, fearing being placed under blocking sanctions or fined by the US Department of the Treasury.
It is obvious that the blocking of companies from friendly countries working with Russia will continue. So far, the United States is blocking those firms that are directly related to sanctioned persons, act in their interests, or are involved in circumventing export controls. Moreover, in the latter case, we are talking about the supply of dual-use goods. Up to now, for example, there have been no cases of blocking sanctions for the supply through third countries of "luxury goods" or other less technologically advanced manufactured goods. But this practice may appear in the future.
The European Union is also introducing instruments into its law that allow the application of similar sanctions. For example, paragraph (h) Art. 3 of EU Council Regulation 269/2014 empowers the Council to impose blocking sanctions against any individuals or legal entities involved in circumventing sanctions against Russia.
There is no mass practice comparable to the American one yet, but the mechanism itself already exists. In addition, the recent 11th package of EU sanctions against Russia includes mechanisms that allow the use of export controls against countries whose companies are involved in circumventing export restrictions against Russia.
In this case, countries, rather than individual companies, will bear the responsibility for bypassing the 11th package, which also named 87 companies from third countries, which, according to the EU authorities, bypass the Union's export controls and are subject to restrictive measures
The application of blocking sanctions against third countries for conducting transactions with Russian persons in circumvention of export controls or financial restrictions indicates the expansion of this practice. It creates additional risks for Russian counterparties in friendly countries. Moreover, both counterparties themselves and the authorities of these countries take this risk seriously, regardless of the level of allied or partnership relations with Moscow. Such sanctions are unlikely to ensure the blockade of Russia desired by the Western initiators. This was not achieved even with respect to Iran, whose economy is smaller than Russia's. However, one should keep in mind the costs for business and not have illusions about the connection between political relations with friendly countries and the real strategies of business and authorities, taking into account sanctions risks from Western countries.