By Simon O. Williams, BA, LLM

Sanctions are used to punish, deter, and encourage. Following the instability in Crimea and Eastern Ukraine since spring 2014, the United States has imposed a series of four sanctions on the Russian Federation, targeting state institutions, Russian companies, and a handful of Russian individuals. While there is substantial debate in media and policy circles concerning the effects and outcomes of these restrictions, little discussion has taken place on the mechanics of the US imposed sanctions. This assessment seeks to elucidate the legal foundation of US sanctions on Russia for a clearer understanding of the sanctions framework.

Foundation in US Law

According to national law, US sanctions must be initiated by legal authority from the President or Congress. The authority which prescribes power to the President for issuing Executive Sanctions is the US International Emergency Economic Powers Act (IEEPA) passed by the US Congress in 1977. IEEPA was created to effectively shut down target economies and severely debilitate targeted individuals, companies, and organizations. This is the primary legal authority triggered by an Executive Order, signed by the President of the United States, as was done for the recent series of Russia-targeted sanctions in the wake of the Crimea crisis.

In order to engage IEEPA, the president must indicate that there is an extraordinary threat outside the United States, declare a national emergency with regard to the extraordinary threat, and assert that this threat endangers the national security, foreign policy, or economy of the United States.

This being done, IEEPA is triggered and has broad legal latitude. The Act empowers American executive agencies to investigate, block, reject, prevent, prohibit, or otherwise regulate transactions in property or other interests held by foreign nationals which are or may come under the jurisdiction of the United States.

The Sanctions Toolbox

According to officials at the <link http: www.treasury.gov resource-center sanctions pages default.aspx>Office of Foreign Assets Control (OFAC), a division of the US Department of the Treasury which is the lead agency that engineers and oversees sanctions processes, the IEEPA toolbox includes both country and region based sanctions as well as targeted sanctions which focus on blacklisting individuals or companies and/or freezing their assets. OFAC indicates that blacklisting or freezing US assets or restricting access to US financial institutions, places targets in a state of “muerte civil,” creating in essence “zones of economic radioactivity” for the countries concerned. This is evident in past US sanctions imposed on countries such as North Korea or Cuba as the sanctions prohibit investments in, exports to, imports from, or facilitation of any of the above, including insurance, reinsurance, and other support services.

Lack of access to such support can be crippling not only to foreign targeted individuals and companies, but to foreign economies broadly. Why would this be the case? Can’t sanctioned entities simply receive funding from other international financial epicenters like Singapore, Dubai, or Beijing? 

It’s not so simple, because, as OFAC indicates, “reinsurance, insurance, and US Dollar clearing are the ‘secret sauce’ of the sanctions” as “all roads lead to New York City.”

Eighty-seven percent of international transactions are made in US Dollars, and despite the world insurance market being heavily syndicated at Lloyd’s of London, it is largely financed by Wall Street banks. As a result, almost all of these insurance, reinsurance, and other general US Dollar transactions are done in or through the United States because no matter the primary financial institution, US Dollar clearing is near universally conducted via US correspondent banks. Thus, the US Government has jurisdiction to deny these transactions in cyberspace, even if the transaction data is only in the US, or on American owned servers (including in US banks abroad), for under a millisecond.

Dulling the Double Edged Sword

In designing the sanctions, OFAC considered possible mitigating factors, or reverse effects of sanctions’ bounce-back that could hurt the American economy. Decreased trade for US companies operating in the region is obvious, but unavoidable. 

Most economic barometers indicate that the targeted sanctions have been largely successful. Yet, this does not mean imposing the sanctions has been cost free to the United States. The US Dollar transaction considerations, mentioned above, have made the Dollar less favorable as the ‘go-to-currency’ for some investors with ties to the region. OFAC weighed this concern and evaluated that in the near-term, this poses little problem, but long-term could hurt the status of the Dollarized world economy.

As the economy of the Russian Federation is larger than the combined size of all other economies which the United States has sanctioned, Russian exposure to the international financial community is huge. Unlike other sanctioned countries, such as Iran and North Korea, in which American investors do not and cannot have passive investments, such as mutual funds, for example, it is likely that investors may very well possess some holdings in emerging market portfolios which include Russian assets, creating additional adverse spin-off effects of the sanctions on American investors or foreign investors with US based holdings.

Taking these concerns into account, OFAC sought to engineer a non-traditional sanctions strategy, minimizing the US financial interests at risk, while applying sufficient pressure on targeted areas of the Russian economy. The intended goal is to create doubt in the consciousness of the Russian people and get them to question if their government best serves their future by limiting their access to US capital and debt markets. The sanctions seek to avoid blacklisting or freezing accounts instead of specifically targeting trade with companies in oil and gas technology, finance, and defense sectors.

If accounts are frozen, they are not lost. Frozen accounts are still there, still owned by the original owner, and still can receive interest even if the owner loses access to them. This is not to be confused with government seizing of accounts, as is done in cases of serious crime and war, such as when the US Government assumed ownership of US-based assets of Iraqi leaders when they invaded Kuwait in 1990.

Four Phase Framework

The US sanctions on Russia, to date, have been implemented in a series of four Executive Orders signed into force by President Obama.

The first Executive Order in the series, Number 13660, is entitled “Blocking Property of Certain Persons Contributing to the Situation in Ukraine.”  13660 authorizes sanctions on individuals and entities deemed responsible for infringing upon the sovereignty and territorial integrity of Ukraine, or for pilfering the assets of the Ukrainian people. 13660 places travel restrictions on certain individuals and government officials and declares a national emergency to deal with such threats. This indicates initiation of US action to enforce a cost on Russia and those responsible for the situation in Crimea.

The second Executive Order, Number 13661 is similarly titled to the first, but expands upon its scope “Blocking Property of Additional Persons Contributing to the Situation in Ukraine.” 13661 highlights that policies of the Russian government, especially the deployment of Russian armed forces in the Crimea region of Ukraine –- undermine democratic processes and institutions in Ukraine; threaten its peace, security, stability, sovereignty, and territorial integrity; and contribute to the misappropriation of its assets, according to the US Department of State. 13661 steps up direction of US imposed sanctions by preventing Americans, American companies, and American owned foreign branches of companies from investing in, importing to, exporting from, for facilitiating any of the above activities in support of sanctioned companies in the sectors concerned or that fall under the sanctions in Executive Order 13660. It also imposes a travel ban on individuals affiliated with the aforementioned.

The third Executive Order, Number 13662, has the same name as the second; and expands upon its scope finding that the activities and policies of the Government of the Russian Federation, especially its purported annexation of Crimea and its use of force in Ukraine, also constitute an unusual and extraordinary threat to the national security and foreign policy of the United States. More, 13662 expands the blocking of American trade with Russian financial services, energy, metals and mining, engineering, and defense and related materiel productions companies.

The fourth Executive Order, Number 13685, is entitled “Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to the Crimea Region of Ukraine.” 13685 activates additional direct sanctions preventing Americans, American companies, and American owned  foreign subsidiaries from investing in, importing to, or exporting from Crimea. Limited auxiliary financial activity is exempted. 

According to the US Department of State, these four Executive Orders, together, directly designate fourteen Ukrainian and Russian defense companies, six of Russia’s largest banks, five energy companies, and numerous individuals in Putin’s personal and government inner circle on the US sanctions list. The US government has also suspended capital and debt finance that encourages exports to Russia or imports from Russia, prohibiting economic development projects in Russia and transfer of technology in support of exploration or exploitation of Russian deepwater, Arctic offshore, or shale energy projects.

Taking a look under the hood and examining the real mechanics of US imposed sanctions on Russia can assist policy analysts, scholars, and financial institutions alike to better understand the motives and evaluate effects of the sanctions, as well as foster a frictionless path for compliance and reporting.

Simon O. Williams is the director of US based <link http: www.tactique.org>Tactique Services, providing innovative management, compliance, and investigative solutions to clients in the financial, defense, and maritime industries.

Die Meinung des Autors kann von der Meinung der Redaktion abweichen. Die Redaktion räumt dem Autor gemäß Artikel 5 des deutschen Grundgesetzes das Recht ein, seine Meinung frei zu äußern.