The conflict in Ukraine might reach a turning point this summer as EU sanctions against Russia near their expiration date and the “Minsk II” ceasefire in eastern Ukraine comes under increasing strain. Russian troops are reportedly massing near Ukraine’s borders, and observers are documenting up to 80 daily ceasefire violations, including a separatist offensive last week. Ukrainian leaders are bracing for intensified violence in the weeks ahead when, according to Ukrainian Prime Minister Arseniy Yatseniuk, “the chances of a new [Russian] offensive are very, very high.”
The EU Council is scheduled to hold a meeting in late June to consider extending its “sectoral sanctions” on Russia, those targeting energy, defense, and financial firms, before they expire on July 31. If just a single EU nation objects to the renewal—and several, including Greece and Hungary, have expressed hesitation—then the entire sanctions regime may collapse. It would force the United States, whose own policy response to Russia has benefited from close coordination with international partners, to confront difficult decisions about the future course of its Russia sanctions policy. These include whether to ratchet up its own sanctions, with or without the European Union, within the three categories imposed thus far (blocking, export control, and sectoral) or seek new types of restrictive measures (secondary and country sanctions).
Several options are unlikely unless the security situation further deteriorates in Eastern Europe—whether in Ukraine or, more dramatically, in NATO countries in the Baltics. They carry varying benefits and costs, including the precision with which they can be targeted, potential diplomatic challenges with allies and partners, the extent to which they are a disproportionate burden on U.S. industries, and administrative complexity. What is clear is that the United States has the opportunity to select from a broad menu of responses to protect its interests in the region.
To date, the United States has “blocked” approximately 130 Russian and Ukrainian officials, businessmen, separatists, and companies. Blocking sanctions are the most common among the measures the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has used in recent years. In these cases, OFAC names individuals or entities as specially designated nationals (SDNs). All SDN assets under U.S. jurisdiction must be frozen, and nearly all commercial and financial dealings with SDNs by U.S. persons are prohibited.
Blocking sanctions have been a preferred measure because they can be deployed quickly and with precision, avoiding significant collateral harm to U.S. businesses, the global economy, and the Russian people. And OFAC has made SDN designations quite regularly: It has added new Russian and Ukrainian SDNs eight times since the outbreak of violence in eastern Ukraine and Crimea.
If the United States were to ratchet up blocking sanctions, it might start demanding that foreign subsidiaries and joint ventures of U.S. companies also stop dealing with blocked individuals and institutions. One key challenge to SDN designations in this case has been coordination with the European Union. For example, the European Union has targeted nearly 60 more persons and entities than the United States, and although the United States has named Bank Rossiya, a prominent Russian lending institution, the European Union has not, hindering a unified U.S.–EU sanctions campaign. Meanwhile, relatively few major Russian institutions have actually been blocked, leaving most Russian enterprises free to continue business activities in the United States or Europe.
If the United States were to ratchet up blocking sanctions, it might start demanding that foreign subsidiaries and joint ventures of U.S. companies also stop dealing with blocked individuals and institutions. This type of “extraterritorial” escalation has precedent: In 2012, the United States applied certain Iran-related sanctions to entities “owned or controlled” by U.S. persons, and the Cuba sanctions program continues to impose comparable restrictions. Such a measure would cut off any remaining economic contacts between the offshore-registered affiliates of U.S. companies and the blocked Russian targets.
The United States has also placed “export control” measures—the use of export licensing policy and other regulations to restrict the flow of certain U.S. goods, technology, and services—on exports and re-exports to Russia. Like blocking sanctions, export controls can deprive specific firms, sectors, or national economies of U.S. technology, down to precise tariff classifications.
For example, the U.S. Department of Commerce has added numerous Russian energy and defense firms to its “Entity List” under the Export Administration Regulations, which limits exports of certain U.S. goods and technology to the listed firms. Moreover, certain “dual-use” items may not be exported to any Russian military end-user, and the U.S. Department of State has restricted the export to Russia of all defense-related goods controlled under the International Trafficking in Arms (ITAR) regulations. Certain dual-use items may also not be exported to Russia for use in unconventional (deepwater, Arctic offshore, or shale) Russian oil projects.
The United States has already stepped up its export controls a number of times since the conflict began. It could decide to further extend export controls to the other Russian industrial sectors targeted by Executive Order 13662 beyond energy and defense: metals, mining, and engineering would be plausible next steps. The United States might also decide to extend the current export prohibitions in place against unconventional oil projects to traditional oil and natural gas projects in Russia, similar to restrictions included in the Iran Sanctions Act (ISA) and Comprehensive Iran Sanctions and Divestment Act (CISADA). The United States could also ban outright the export of specific technology to Russia (regardless of end-user or end use), akin to existing EU sanctions.
The most severe and perhaps least likely response in this area could be to require a license for all exports to Russia, effectively placing Russia under a trade embargo comparable to those against Iran and Cuba. Such a measure could be more crippling to the Russian economy than any of the current sanctions, but would almost certainly cause significant collateral harm to regional and global economies and to the Russian people.
The third category of sanctions that the United States has placed on Russia is a new sanctions paradigm, so-called “sectoral” sanctions. Although other sanctions programs have featured sanctions targeting strategic industrial sectors (most notably, the Iranian energy sector), the sectoral sanctions imposed against Russia have taken a more modest form. OFAC has listed 11 Russian energy, defense, and financial firms on its “Sectoral Sanctions Identifications List” (SSIL), which curtails their ability to raise new capital on the medium- to long-term debt and equity markets or to roll over old debt. The sectoral sanctions also prohibit the provision of goods or services in support of any unconventional oil projects carried out by five SSIL designees in the Russian energy sector.
Sectoral sanctions, in other words, may be a misnomer in this case, since these sanctions do not actually apply to entire Russian industrial sectors but rather only to enumerated activities with select firms within each sector. Like blocking and export control sanctions, sectoral sanctions confer the advantage of more precise targeting, but have also entailed pronounced (if not unprecedented) administrative complexity: For example, OFAC has had to immediately confront the challenges of defining the scope of “equity” and “debt,” exempting certain complex financial instruments (such as derivatives) from the prohibition, and clarifying coverage of projects that produce both oil and gas.
Should Russia march further into Ukraine or other parts of Eastern Europe, then it could provoke an even more drastic escalation. In this case, the United States might favor the kind of major sanctions escalation it has used in the past: secondary sanctions and country sanctions. Should the United States elect to ramp up sectoral sanctions, it might first identify additional energy, finance, or defense firms or target new industrial sectors (such as metals, mining, and engineering) or apply the existing restrictions to other types of oil or natural gas projects. The United States might also decide to convert Russian sectoral sanctions into more comprehensive sanctions across some or all of the targeted sectors, similar to those imposed against Iran under CISADA. Such measures apply broadly against the Iranian energy sector, including foreign investment, services, and most Iranian energy imports or exports. The United States could also decrease the time horizon of SSIL debt (from, generally, 30 days) with which U.S. persons may not be involved, thus prohibiting even routine terms of payment beyond the proscribed period, or apply not just debt but also equity market restrictions to the SSIL energy firms (which are currently exempt).
U.S. sanctions against Iran provide another possible template for sectoral sanctions: “disclosure” sanctions similar to Section 219 of the Iran Threat Reduction Act (ITRA). Section 219 requires U.S. and foreign companies publicly traded in the United States to report to the U.S. Securities Exchange Commission certain types of particularly sensitive contracts that they or their affiliates undertake with respect to Iran, such as those involving the Iranian government, weapons proliferation, energy development, or the suppression of human rights. The United States could decide to establish a comparable requirement with respect to Russia, likely (as in the Iran case) by congressional legislation.
Finally, the United Kingdom and others have advocated that Russia (or, specific Russian firms or sectors) be barred from participating in the SWIFT network, the key messaging system for processing an estimated $6 trillion in daily international financial transactions among nearly 11,000 banks worldwide. Given SWIFT’s registration in Belgium, the European Union would be expected to take a lead role in such a decision, as it did in excluding numerous Iranian financial institutions from SWIFT in 2012 after sustained U.S. pressure through ITRA. But given hesitance among some EU countries to deepen the sanctions and the potential impact on financial markets, such a move by the European Union may prove unlikely.
Should Russia march further into Ukraine or other parts of Eastern Europe, then it could provoke an even more drastic escalation. In this case, the United States might favor the kind of major sanctions escalation it has used in the past: secondary sanctions and country sanctions.
Under a secondary sanctions program, the United States could decide to apply sanctions not only to U.S. persons, but also to non-U.S. persons, including U.S.-owned or controlled foreign subsidiaries, joint ventures, and foreign firms themselves, similar to provisions of CISADA and the Iran Freedom and Counter-Proliferation Act (IFCA). This would potentially include, for example, “blacklisting” non-U.S. firms from U.S. federal procurement contracts, restricting the opening of U.S. correspondent accounts by foreign banks that process Russia-related transactions, or limiting foreign firms’ access to other U.S. financial or dollar-denominated instruments. Such sanctions are often a final resort and may cause diplomatic rifts with allies. Indeed, at least one major recent U.S. sanctions enforcement case against a European financial institution resulted in a direct petition to the U.S. president from his European counterpart.
The Ukraine Freedom Support Act, passed by Congress in late 2014, contains a seed for eventual secondary sanctions by authorizing sanctions against non-U.S. persons or foreign financial institutions engaged in dealings with certain types of unconventional Russian oil projects, arms transfers to Syria, or activities relating to other sanctioned Russian persons. However, Congress left these sanctions provisions “permissive.” In other words, imposing these sanctions is up to the president.
Although least likely under current circumstances, the United States could also, at some point, decide to pursue the most severe sanctions escalation against Russia by deploying “country” sanctions, placing it in a category with Iran, Cuba, and Sudan by establishing a comprehensive ban on nearly all financial and commercial dealings with the country. By moving far beyond the precise targeting of the Russian leadership, its inner circle, and strategic industrial sectors, country sanctions would effectively extend the recent trade embargo against the region of Crimea to Russia. Such an escalation could also restrict access to most parts of the Russian market, presumably applying to state-owned enterprises, ruble-denominated trading, government contracts, and beyond. This measure may be unlikely under current circumstances given its collateral impact and the unlikely prospect of multilateral support. Rather, it would be a “nuclear option” in sanctions terms that would most likely be deployed, if at all, only in response to the most aggressive Russian military action in Eastern Europe.
With EU sanctions and the Minsk II ceasefire increasingly tenuous, the weeks ahead could entail considerable flux in the international sanctions regime against Russia. Although the exact nature of any new Russia sanctions may be difficult to predict, the United States could decide to deploy from a large—and growing—sanctions arsenal.