People, Business and Government Amid the Sanctions Pandemic
Expoforum, Peterburgskoye highway 64/1, St. Petersburg
List of speakers

In recent years, the idea has taken root that sanctions, or rather unilateral restrictive measures, have become the “new normal” in modern international relations. However, while these measures have the most negative consequences for the economy and social sphere of the target countries, they also contribute to the destabilisation of the system of international relations and the world market. The first session of the Valdai Discussion Club at SPIEF-21 was devoted to the adaptation of states, societies and business to this unhealthy reality.

The discussion of sanctions is almost always associated with terminological confusion, recalled Ivan Timofeev, the moderator of the discussion. Sanctions in the strict sense of the word can only be imposed by the UN Security Council — only such sanctions are legitimate and binding on all members of the international community.

As for restrictive measures imposed by individual countries or associations of countries, they are a priori illegal from the point of view of international law.

Alena Douhan, UN Special Rapporteur on the Negative Impact of Unilateral Coercive Measures on the Enjoyment of Human Rights, developed this topic in her presentation. She clarified that international law recognises unilateral countermeasures applied by a state in response to the illegal actions of another state. But such countermeasures should be proportional to the committed violation, and not pursue the goals set by the state that introduces them. Obviously, most of the so-called sanctions imposed by Western states do not fit this definition.

Sanctions, no matter how “smart” they are declared to be, inevitably affect the general population. Restrictions on business operations lead to higher prices and inflation, while targeted states lose the ability to trade with the outside world, Douhan stressed, citing the example of countries such as Syria, Iran, Cuba and Venezuela. With the introduction of unilateral sanctions, all of the socio-economic rights of citizens are affected, she said. In turn, Gilles Carbonnier, Vice-President of the International Committee of the Red Cross (ICRC), noted that even humanitarian organisations face problems in carrying out their activities in the crisis areas of countries under sanctions. The desire of banks and contractor companies to control their risks and not be subject to sanctions has a negative impact on the work of the ICRC, especially in Syria.

Coercive unilateral measures generally create an atmosphere of fear in the business world, Douhan noted, which, apparently, is the goal of those who introduce them. Fines imposed on banks that interact with companies and sanctioned individuals amount to millions of dollars, which impedes their normal business activities. A striking example, to which the participants in the discussion referred more than once was the situation with the French bank BNP Paribas, which in 2014 was fined $9 billion by the US authorities for conducting transactions with persons and companies included by the US authorities in its sanctions list. The threat of fines and criminal prosecution (in the United States, violators of sanctions regimes face up to 20 years in prison) leads to the spread of the practice of over-compliance with sanctions.

Risks Sanctions Pose to the Global Financial System and International Business. Valdai Discussion Club Session at SPIEF-2021

Some of the practical aspects of business activity in such a climate were highlighted by Arnaud Dubien, Director of the Franco-Russian Observo Analytical Centre. According to him, French companies operating in Russia have passed three stages in their attitude to the sanctions — from the initial shock in 2014, through the illusion that sanctions will be weakened or lifted in the near future, to gradual adaptation to new realities. Today, French companies in Russia are doing well, he said optimistically. They continue to invest in various industries and remain the number one foreign employer in Russia. Financing remains the most important problem for them in the context of the sanctions policy. Thus, Total had to turn to Chinese banks to finance the Yamal LNG project. French banks, according to Dubien, do not even want to look at projects mentioning the word “Russia”. The government supports the activities of French companies in Russia, but makes it clear that one should not expect a change in the general framework of interaction. Referring to the problem of over-compliance, Dubien noted that officials of the US Office of Foreign Assets Control (OFAC) sit at the headquarters of many French companies, monitoring compliance with the sanctions regimes, which means access to the most sensitive information about their activities.

Why do companies agree to such an invasion of their business activities? The answer is simple: According to Tony Ewing, Managing Director of Conquer Risk Capital & Advisory Board Member at RC Investments, in banking, it is cheaper to follow rules and regulations than to pay multimillion-dollar fines later. In other words, there is no reason to expect business initiatives to change the sanctions status quo — this is a matter for the state.

It was Vladimir Kolychev, Deputy Finance Minister of the Russian Federation, who presented the government’s perspective. First of all, he outlined the reason for the painfulness (and therefore the effectiveness) of financial sanctions: it is the trust that has developed in the business world toward the global financial infrastructure. According to him, secondary sanctions are effective precisely because economic actors are afraid of being disconnected from this infrastructure. But where the problem is, there is treatment, Kolychev said. As a result of the sanctions wars, confidence in infrastructure is declining, and countries subject to sanctions are going through this evolution faster.

First of all, this applies to settlements and international capital markets. Incidents such as the case of BNP Paribas, which was punished for using US dollars in transactions that did not involve US companies and did not take place on US territory, showed that dollar transactions are unsafe.

Russia has learned its lessons, and at the end of 2020, dollar settlements accounted for less than half of Russia’s trade.

International capital markets have also ceased to be monocentric, Kolychev stressed: the importance of Asia and Europe is growing. As for the gold and foreign currency reserves of Russia, the share of the dollar at the end of last year was less than 20%. Russia has created a national system of payment cards, there is a system of financial messages. A well-thought-out macroeconomic policy and a strong financial system have allowed Russia to pass through the waves of sanctions more or less calmly, the deputy minister said. As a result, even the market response to the recently-announced sanctions against Russian government debt has been relatively stable.

If Russia is predominantly a target country for sanctions, then our neighbour and most important economic partner, the European Union, is both the initiator of sanctions and a party affected by secondary US sanctions. Vladimir Chizhov, Permanent Representative of the Russian Federation to the EU, spoke in detail about the controversial status of the European Union in the new sanctions reality.

The EU has imposed sanctions against 32 countries, including Russia, China and, most curiously, against three EU candidate countries (Turkey, Bosnia and Herzegovina and Montenegro). Previously, for the EU, sanctions were the last tool, but today they have become the first instrument picked to deal with problems, Chizhov said. They are used to change the policies of third countries and alter the behaviour of their elites, and as such, the restrictive measures constitute illegal interference in the internal affairs of other states, the Russian diplomat emphasised.

By introducing such measures, the European Union seeks to involve states along its perimeter in sanctions policy using various methods — from persuasion to “arm-twisting”. These are candidate countries (Albania, Montenegro, North Macedonia, Serbia, Turkey,) EFTA members (Iceland, Liechtenstein, Norway, Switzerland) and the Eastern Partnership countries (usually Georgia, Moldova, Ukraine, and sometimes Armenia, but never Azerbaijan or Belarus). By joining such decisions, Chizhov said, these countries undertake the obligation to bring their national policies in line with the decisions of the EU Council. Ukraine has distinguished itself with particular zeal in this field, having implemented the EU sanctions against its own citizens. However, from the point of view of international law, the creation of such “sanctions coalitions” does not give legitimacy to the sanctions themselves.

As for countering secondary US sanctions, the EU has been doing this for a quarter of a century, starting with the adoption in 1996 of the Blocking Statute. This document requires that economic entities do not comply with the sanctions of third countries, and there is even a requirement for compensation from those who impose sanctions. Nevertheless, we see that the Blocking Statute remains on paper, the Russian diplomat noted. The impotence of the EU in this regard was especially manifested in the case of sanctions against Iran after the US withdrawal from the “nuclear deal”. The European authorities were unable to provide companies with guarantees of reliable protection against punitive measures by the US Treasury and other departments, and the companies, guided by the “zero risk” principle, decided to leave Iran. Nevertheless, the European Commission continues to develop legislative measures to counter secondary sanctions — the submission of a corresponding bill is scheduled for the fourth quarter of 2021. However, it is still difficult to say what practical effect this initiative will have.

One of the recent reports of the Valdai Club, addressed the idea of a “sanctions pandemic” that could replace COVID-19. Vladimir Chizhov expressed concern that we are already living in the era of a sanctions pandemic. Today, sanctions have a new dimension — “green”. Both the United States and the European Union are developing measures to punish third countries for insufficient efforts to tackle climate change. Russia needs to prepare for this new transformation of the sanctions reality. In particular, as Valdai Club expert Anastasia Likhacheva noted during the discussion, Russia should take measures through recognition of a positive contribution to climate change adaptation, the formation and promotion of its own environmental criteria — together with countries such as China and India, which may also be objects of similar sanctions.