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Transatlantic Coordination on Russian Sanctions

The ongoing war in Ukraine has elicited a vigorous transatlantic response, with the United States, the European Union, and other Western partners joining forces to impose comprehensive sanctions on Russia.

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Key Insights

  • The invasion of Ukraine has resulted in strong transatlantic cooperation against Russia, largely surpassing the response observed during Russia’s annexation of Crimea and intervention in the Donbas region in 2014. The transition from targeted sanctions to a comprehensive sanctions regime illustrates a strengthened resolve for impactful measures.
  • Divergences in strategic views and domestic politics across the transatlantic alliance have nonetheless challenged the unity and effectiveness of the sanction regime.
  • Russia’s intensifying economic pivot toward Asia and its sophisticated evasion techniques, which involve numerous third parties, emphasize the need for broader international cooperation beyond the transatlantic alliance to sustain an effective sanctions framework.
  • While Russia attempts to dodge the effects of the regime, the overall impact of sanctions on Russia’s economy is evident, yet Russia can continue to sustain a prolonged conflict.
  • The conundrum of managing confiscated Russian assets in Western financial institutions highlights the necessity for a US-EU approach that adheres to international law.

Introduction

The ongoing war in Ukraine has elicited a vigorous transatlantic response, with the United States, the European Union, and other Western partners joining forces to impose comprehensive sanctions on Russia. The transatlantic sanctions regime went hand-in-hand with increasing financial aid and military assistance to Ukraine. This brief analyzes the development, impacts, and forthcoming challenges of these sanctions. It also considers potential issues with maintaining unity and strategic alignment, addressing sanctions evasion, promoting broader international cooperation, and respecting international law.

1. Enhanced Strategic Cooperation

The new measures added to the sanction regime against Russia since February 2022 illustrate an unprecedented level of transatlantic cooperation that surpasses previous measures in both scope and impact. Led by the United States, the European Union, the United Kingdom, Canada, and other international actors, the sanctions strategically target multiple sectors of Russia's economy, including its banking, energy, and defense sectors.

An early and critical move was the joint decision to disconnect select Russian banks from the SWIFT financial messaging system, a crucial channel for international financial transactions. This action was supplemented by measures against the Central Bank of the Russian Federation (Bank of Russia or CBR), designed to destabilize its financial reserves and currency stability.

The EU and the US have sequentially and synergistically intensified the pressure through successive sanction packages. While the US imposed an import ban on Russian oil, gas, and energy in March 2022, the EU took concurrent action by instituting further transaction bans on Russian banks, including the CBR. In June 2022, the EU joined the US in targeting Sberbank, Russia’s largest bank, with a SWIFT ban. In May 2023, the EU announced that the cumulated frozen assets from the CBR under its jurisdiction was over $200 billion and the total frozen assets in G7 countries was over $300 billion.

Sanction efforts have also seen the formation of the “Russian Elites, Proxies, and Oligarchs” task force in March 2022, freezing and blocking over $30 billion in assets. Comprising members from the G7 countries, the EU, and Australia, this initiative shows an unprecedented willingness to gather intelligence and prosecute key individuals to cut off revenue streams and prevent the circumvention of sanctions.

Another distinctive feature of this cooperation is the introduction of price caps on Russian oil, enacted by the G7, the EU, and Australia in December 2022. This measure aims to limit Russia’s oil revenues while maintaining the global supply of Russian oil. The policy seeks to minimize Russia’s financial gains without causing a global energy crisis.

Recent measures in 2023 further reinforce this comprehensive strategy. The expansion of existing sanctions by the EU, US, UK, and Canada over the summer aims at debilitating Russia's high-technology and financial sectors restricting Russia’s access to foreign military equipment. These sanctions are expected to exert long-term pressures on Russia’s global economic standing. The inclusion of new criteria like spreading propaganda also indicates that the EU is adapting its punitive measures to counter unconventional forms of warfare.

The scope of this cooperation has also spanned across other international forums, including the Financial Action Task Force, an intergovernmental body fighting money laundering and terrorism financing. Harnessing the cumulative economic and political power of the transatlantic alliance, this sanctions regime seeks to isolate Russia and to send a strong message against its actions in Ukraine.

2. Challenges in Strategic Alignment

Transatlantic unity against Russia nonetheless faces challenges, resulting from varying economic interests, energy concerns, and internal political dynamics within the EU and the US. These divergences can affect the sustainability of the sanctions regime and the provision of assistance to Ukraine.

Certain political factions within the EU, either explicitly or implicitly, lean toward Russia (e.g., Hungary, Austria, and far-right parties in France, Germany, Italy, Slovakia, and others). In the US, members of the Republican party, including several presidential candidates, have expressed skepticism about the level of military support and financial aid that the Biden administration has provided Ukraine, ahead of the 2024 elections. Such internal discord threatens to erode the transatlantic collective political will, aid to Ukraine, and the long-term viability of sanctions.

Europe’s substantial reliance on Russian gas and oil compounds these vulnerabilities, which are intensified by shifts in global energy systems and US economic policies. Achieving unanimity among EU member states for sectoral sanctions is therefore difficult, prompting the use of derogations (e.g., for Russian-oil dependent countries such as Croatia). While this tool facilitates consensus, it can also dilute the effectiveness of the sanctions.

Although EU members have been importing energy from alternative suppliers, there have been concerns in the US that future economic pressures could lead to a softer stance on Russia across Europe. So far, the EU has generally assumed a robust geopolitical role in response to the crisis, incorporating military aid and financial assistance to Ukraine in addition to sanctions.

The EU’s ongoing transition toward renewable energy adds complexity to the situation. While this strategy aligns with the EU’s goals of reducing dependency on Russian energy, it also brings stress to the transatlantic alliance over new US subsidies for green technologies. Due to America’s protectionist policies, especially the $400 billion Inflation Reduction Act, Europe risks losing investment to the US, as some European firms are already investing more in the US’ green energy sector than in Europe’s. This trend could potentially lead to further deindustrialization in Europe.

Recent efforts to address some of these challenges include a US commitment to increase shipments of liquified natural gas to Europe, and both sides are attempting to synchronize their green energy objectives. These measures may offer short-term relief, but the alignment of broader strategic goals remains crucial for the durability of the sanctions regime.

While the sanctions regime against Russia is still fully in force, these factors have contributed to tensions between transatlantic allies. The US considers that Europe fails to adequately invest in its own security, and the EU is increasingly troubled by America’s inward-focused economic policies.

3. Russia’s Economic Pivot and Sanctions Evasion

Russia's shift towards other important economic poles, coupled with sanctions-dodging tactics with third parties, constitute an additional challenge to the efficacy of the sanctions regime. This reality underscores the need for an expanded international coalition and the development of counter-evasion mechanisms.

Moscow has demonstrated a capacity for financial and logistical maneuvering to circumvent sanctions. A cornerstone of Russia’s resilience in the face of sanctions is its strategic shift towards economic powerhouses like China and India, which have not imposed similar restrictions. These two countries now account for 75% of total Russian crude oil exports. Additionally, an intricate web of third-party traders and financial entities further contributes to the undermining of the sanctions.

Despite the EU’s ban on Russian oil imports and price caps imposed by the G7, Russia has successfully rerouted its oil trade to other markets. China and India have rapidly replaced Europe as key buyers of Russian crude oil. Even in the case of refined oil, data shows a seamless rerouting to countries like Brazil, Turkey, the UAE, and North African nations. Moreover, exports of diesel have remained consistent, reaching as high as 1.3 million barrels per day in March 2023.

Simultaneously, third-party intermediaries are capitalizing on the vacuum left by the sanctions. Firms like Bellatrix, backed by the Russian Agricultural Bank, serve as influential conduits. These entities procure oil predominantly from Russian state-owned companies and then reroute it through increasingly complex supply chains that often involve other intermediaries, such as Coral Energy in Dubai. These tactics are undermining sanctions, allowing Russian oil to find its way back to Europe through legal, albeit circuitous, route.

The emergence of “creative techniques,” such as ship-to-ship transfers and the use of military-grade equipment to send fake location signals, compounds the challenge. Western firms like Shell and Vitol, although operating within the law, are engaged in trades that effectively defeat the purpose of the sanctions. Consequently, Russian crude oil has been sold over the $60/barrel price cap established by the G7 and partners. Given the still high international demand for Russian fuel and the growing adaptability of traders and financial entities, these findings expose clear weaknesses in the sanctions regime.

The evolving sophistication of Russia’s circumvention tactics challenges the West to adjust its approach, emphasizing the urgency for global cooperation and stronger enforcement mechanisms. Building a broader international coalition that includes key emerging economies could plug existing loopholes.

However, the situation also underscores the limited global condemnation of the Russian invasion. The BRICS countries and numerous emerging economies consider the West’s ire against Russia as hypocritical, notably with regard to the 2003 US-led invasion of Iraq. In fact, only Western states, Japan, South Korea, and Taiwan are currently imposing sanctions on Russia, and the G20 leaders’ declaration in September 2023 failed to condemn the Russian invasion.

4. Sanctions’ Costs on Russia

While Russia successfully works around certain sanctions, these techniques are insufficient to mitigate the overall impact of the regime on the Russian economy.

The limited success of evasion tactics primarily lies in the complex interdependence between Russia and Europe. Prior to the invasion, the EU was Russia’s largest trade partner, accounting for 37.3% of the country’s total trade in goods with the world. 36.5% of Russia’s imports came from the EU and 37.9% of its exports went to the EU. Further, the EU was the largest investor in Russia, with €311.4 billion in foreign direct investment (FDI), while Russia’s FDI stock in the EU was estimated at €136 billion.

The sanctions imposed on Russia are multifaceted and target critical sectors, including finance, energy, and high-tech imports crucial for military applications such as advanced semi-conductors. The scale of Russia’s economic structure makes it very difficult to quickly pivot to new trading partners in all sectors and to find alternative sources of revenue compensating for lost business opportunities.

The transatlantic sanctions regime has thus restricted Russia’s access to essential high-end “dual-use” components like engines and microchips, vital for advanced weaponry. To circumvent these restrictions, Russia has resorted to measures such as halting biometric passport applications to save microchips and repurposing chips from imported washing machines. These sanctions-induced workarounds enable Russia to continue limited production of its key guided missiles.

The efficacy of the sanctions may also include secondary effects that deter non-Western allies from aiding Russia. Numerous countries, including China, have shown limited enthusiasm to get involved in complex schemes to help Russia circumvent sanctions on strategic products. Fears of being targeted with secondary sanctions and/or losing access to high-technology products can in effect prevent third parties from engaging in trade activities that would breach certain US and EU sanctions.

While Russia’s economy benefited from high energy prices in 2022, the transatlantic sanctions on its oil sector are yielding results, according to a recent study using financial data for the first quarter of 2023. The CBR reported that Russia’s total goods exports for first quarter 2023 was valued at $100.8 billion, a 28% decline compared to the $140.6 billion in the last quarter of 2022. Crude oil and oil product exports alone accounted for a $15.6 billion drop, making up 40% of the total decline. The study implies that two-thirds of the decline is attributable to sanctions. Concurrently, data from Russia’s Ministry of Finance revealed that total oil and gas revenues were 47% lower than the last quarter of 2022 and 45% lower compared to the first quarter of 2022, contributing to a substantially wider fiscal deficit.

Further, Russia’s currency, the ruble, is at its lowest value since the invasion of Ukraine began; in August 2023, the ruble dropped past 100 to one US dollar. Despite an emergency intervention by the CBR, which raised interest rates to 12% in August and 13% in September, the currency remains weak. Experts suggest that Russia’s currency turmoil is in part due to the G7’s imposition of price caps on Russian oil. Further, Russia's current-account surplus shrank by 86% to $25 billion due to increased war expenditures. While the weak currency inflates the ruble value of Russia’s oil revenues, it simultaneously raises the cost of imports, which could constrain Russia’s military actions.

Russia could contemplate using its foreign reserves to stabilize its currency, but over half of its reserves in the West are inaccessible due to sanctions. Using the remaining reserves poses its challenges, given many of Russia’s institutions face transaction-limiting sanctions. Russia faces a strategic conundrum: either reduce military expenditures to minimize imports, or let the civilian economy bear the brunt of the toll through inflation and reduced purchasing power.

Sanctions imposed on Russia have proven to be far more than a political statement; they have had a significant economic impact. Yet, the Russian economy has shown surprising resilience despite the ongoing war and sanctions, with GDP figures much higher than financial institutions anticipated. Accordingly, the sanctions regime does not fundamentally alter Russia’s capacity to sustain a long war, even if the Russian government will face tough choices in the short and medium term.

Finally, while the sanctions regime seems not to have negative humanitarian side effects on civilian populations, certain experts warn that parts of the regime, such as travel bans for civilians, are counterproductive in facilitating regime change.

5. Russian Assets and Adherence to International Norms

Russia’s economic fate is inextricably linked to its geopolitical aggression, as over $300 billion of the CBR’s $587 billion foreign-currency reserves are frozen due to transatlantic sanctions.

The handling of frozen Russian assets requires a collaborative EU-US strategy that complies with international law to maintain both legality and legitimacy, as calls to use these funds towards Ukraine’s defense are intensifying. The question is how to leverage these funds to aid Ukraine’s reconstruction while safeguarding the principles of the so-called rules-based international liberal order.

The moral argument for assisting Ukraine seems straightforward, as the nation has endured unprovoked aggression, and its people face dire conditions. Russia has also repeatedly violated international law – notably the U.N. charter – with the annexation of Crimea, intervention in the Donbas region, and full invasion of Ukraine. Yet, a core pillar of the international liberal order, promoted by most transatlantic allies, is the importance of acting within established international rules and norms. As state assets are protected from unilateral appropriation by other states under international law (and typically under domestic laws too), directly seizing these assets inevitably weakens a rules-based framework. Only a few avenues, such as a vote in the U.N. Security Council or a decision by the International Court of Justice, which are both unlikely to occur considering Russia’s position in these institutions, could provide a legal basis for such action.

In the US, some experts and policymakers have vigorously advocated for the seizure of CBR’s assets in Western accounts. So far, the Biden administration has resisted such calls on the basis of both US and international law. The most questionable argument in favor of the use of CBR’s assets is the precedent that the Bush administration transferred $1.7 billion in Iraqi government funds to compensate victims of terrorism in 2003, while the US-led military intervention that enabled the asset seizure – which was not sanctioned by the U.N. Security Council – is one important cause for the lack of legitimacy transatlantic allies are facing with the rest of the world in their confrontation with Russia.

The evolving stance in Europe, where the great majority of the CBR’s assets are immobilized ($220 billion), also illustrates the intricacies involved in this matter. The European Commission initially leaned toward using the frozen assets but reconsidered due to concerns about breaching key principles of state immunity and international law. Moreover, the European Central Bank warned that these decisions could jeopardize the global standing of the euro and hurt international financial stability.

A more tenable solution currently under consideration in the EU focuses on the indirect benefits accrued from these assets. Instead of direct asset appropriation, transatlantic allies can impose taxes on the income generated from the frozen assets. This move would channel much-needed funds towards Ukraine's recovery efforts. Western entities that manage these assets would see their profits redirected to aid Ukraine, providing tangible financial assistance. Further, by avoiding direct appropriation, this strategy would uphold the sanctity of international norms and state immunity principles.

In conclusion, while the immediate moral imperatives demand swift action to assist Ukraine, it is crucial to act in a manner that respects and preserves the international liberal order. Taxing profits from frozen Russian assets offers a balanced approach, providing aid to Ukraine while upholding foundational global principles. So far, the US, the EU, and most EU members have displayed unity on this matter: despite the appeal of using CBR’s frozen assets towards the war effort, the consensus has prioritized respecting international rules and norms. 

Future Directions

This analysis calls for further examination of strategies for preserving transatlantic unity amidst external pressures, evaluating the efficacy of sanctions in achieving geopolitical objectives, and understanding their broader economic and political implications. Furthermore, a comprehensive study of global sanctions evasion dynamics and corresponding countermeasures is critical.

Broader Connections

The sanctions implementation against Russia intersects with various transatlantic policy concerns, including energy security, defense cooperation, adherence to international law, and trade policies. Additionally, it offers valuable insights for navigating future geopolitical crises.

Policy Recommendations

  1. Encourage persistent dialogue between transatlantic partners to ensure strategic alignment and enhance the effectiveness of sanctions.
  2. Develop comprehensive plans for energy diversification within the EU to reduce dependence on Russian energy.
  3. Regularly reevaluate and adapt sanctions strategies in response to the evolving geopolitical climate.
  4. Expand international cooperation beyond transatlantic allies to effectively counter Russia’s economic pivot and sanctions evasion tactics.
  5. Address the legal complexities surrounding the management of frozen Russian assets collaboratively, ensuring compliance with international law.

About the Author

Manuel Reinert is a researcher and consultant, who completed his PhD from American University in 2023.