Fighting Sanctions: From Legislation to Strategy

President Vladimir Putin has signed federal law "On Measures (Countermeasures) Against Unfriendly Actions of the United States of America and Other Foreign Countries." The State Duma is also discussing sanctions-related amendments to the Criminal Code.

The said strategy is unlikely to be effective if it is aimed at inflicting maximum damage “at any cost” and directed against an abstract “West” without regard for important distinctions in Western states’ policies.

What could be the strategy’s long-term priorities?

The first long-term counteraction priority is not so much international trade as international finance. The US sanction policy is based on the dollar domination and America’s ability to use global financial exterritorial sanctions. Retaliating against these sanctions with trade restrictions is the same as using a slingshot against an elephant. Today Russia has practically no means of opposing financial pressure with. Part of the threat is neutralized by the fact that Russia is deeply integrated in the world economy. For example, art. 242 of the CAATSA on sanctions against Russian sovereign debt has not been implemented because the measure would affect US investors as well. But this does not remove the problem of vulnerability to financial sanctions as such. A really global task for the Russian foreign policy in this area should be the creation of a coalition of countries concerned with evolving alternative payment systems. Moscow’s natural ally in this regard is Beijing, which is also vulnerable to financial sanctions and has a more impressive potential for creating alternative financial systems. There is no need to prioritize the annihilation of the dollar at any cost. But an alternative will provide a guarantee against Washington’s possible abuses of its financial leadership.

The second priority is to diversify trade ties and intensify them to an extent where exterritorial sanctions will be unable to disrupt partnerships with third countries. For example, Russia is a major supplier of arms to India. US exterritorial sanctions against New Delhi will inevitably evoke India’s strong political response, given the importance of its cooperation with Moscow for Indian national security. But this task also boosts the competitiveness of Russian goods and services. Sanctions will make Russia dramatically improve the quality of its exports and consequently will entail qualitative changes in the Russian economy. An economy based on commodity revenues is vulnerable to sanctions.

The third priority is developing and upgrading international legislation on unilateral sanctions. Russia’s conviction that the UN Security Council is the only legitimate source of sanctions should be actively promoted in cooperation with other countries. Another permanent member of the UN Security Council, China, shares this conviction. Sanctions-caused economic damage and human rights violations should be systematically monitored. Sanctions must become unacceptable on both legal and ethical grounds.

Working on these priorities will require much time and great effort. But at least this work will be of proactive nature. Local success can be achieved in defense but initiative is the only key to more serious outcomes.

President Vladimir Putin has signed federal law "On Measures (Countermeasures) Against Unfriendly Actions of the United States of America and Other Foreign Countries." The State Duma is also discussing sanctions-related amendments to the Criminal Code.

Both pieces of legislation sparked a broad public response while still at the drafting stage. Eventually the lawmakers downplayed the most controversial clauses on the import of medicines and other sensitive issues. The new law authorizes the president to respond to anti-Russia sanctions in many ways. The main problem today is how to devise a strategy for its application and develop an effective policy of counteraction. A simple set of technical measures to restrict trade is unlikely to have a significant effect. What we need is a truly long-term vision of the problem and an equally long-term planning horizon for counter-sanctions.

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The new law has upgraded the existing legal framework. Until quite recently, all Russian sanctions and counter-sanctions were based on the Federal Law of December 30, 2006, No. 281-FZ On Special Economic Measures, which provided the president and the government with sufficient leverage, including powers to restrict aid programs, ban financial operations and foreign business operations, terminate trade contracts, regulate duties, ban ships from entering Russian ports, restrict tourism, etc. For example, the law made it possible to comply with international obligations in the event of a UN Security Council decision to impose sanctions on one country or another. It was also quite sufficient for adopting retaliatory measures against the West after it introduced sectoral and personal sanctions in 2014. But it was adopted in a fundamentally different political environment.

The new law fully reflects the new reality and clearly identifies its main function as a means of responding to hostile actions. This means that in its spirit it is more defensive than offensive. It defines the United States as the main source of hostile influences (the 2006 law lacks this kind of definitions). Generally, the powers it grants to the Russian President are more or less the same as in the Law On Special Economic Measures, if with a clearer focus on actions against the sources of sanctions.

According to the lawmakers, it is a framework enabling the president to choose what is more appropriate in each specific situation. In other words, we cannot speculate on his successful or otherwise counteraction to sanctions unless we link it to a strategy of concrete actions that might become an important step towards implementing the law. Devising the strategy is the prerogative of the government and the Presidential Executive Office. Its priorities and its implementation will largely determine the success of the new law. What should be taken into consideration in the process of drafting the strategy?

A strategy to counteract the sanctions should be based on an integral picture of processes unfolding in the world and Russia’s role and place in these processes. We should also understand the reasons why the sanctions were introduced. If we reduce counteraction to sanctions to some purely technical measures (quotes, tariffs, barriers, bans, etc.), the strategy will inevitably be reactive in nature. Technique is unlikely to replace strategy. We will respond to sanction attacks while ignoring what precisely we want to achieve and how to reach the goals set. It should be drafted by a number of agencies with an active involvement of the expert community.

Furthermore, the strategy should be based on an understanding that any policy of sanctions derives from an overwhelming economic, technological and financial superiority of the attacking countries over the target country. This means that the best long-term guarantee against any sanctions is an effective, advanced economy with a significant factor of safety that needs to be created. In this regard, we will have to address a difficult dilemma between the economy’s openness and its self-reliance. An open economy is more vulnerable to sanctions. But self-reliance has its price as well: self-isolation from the global economy may prove more costly in the long run. It will be difficult to strike a balance between the two extremes, although in Russia’s case this task is made easier by the limits to its isolation from partners even within the Western community.

It should also be understood that under the current circumstances our ability to retaliate with sanctions against the attackers is seriously restricted. Trade sanctions against the United States will hardly cause any tangible damage that would force Washington to revise its political course. Our trade with the Americans is approximately half of the US-Belgian trade. Technically, US businesses could be made to leave Russia. They will sustain losses but will adapt soon and find new markets. Besides, these measures will inevitably affect Russian businesses. After all, commercial ties are mutually beneficial and no one imposed them on us. It is much easier to ruin them than to start anew. As far as the EU is concerned, restrictions against it could be even more damaging. Since 2014, EU companies’ sanctions-related losses in Russia have been comparable with Russia’s own losses. Trade is growing between the two sides despite the sanctions. Safeguarding mutually beneficial ties is as important as protecting the Russian economy.

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Moreover, it is important to understand that the US and EU sanctions against Russia are underpinned by a fundamentally different logic, even though the political rhetoric issuing from Washington and Brussels is largely similar. For example, the United States readily escalates the sanctions, finding more pretexts to introduce sanctions and expanding the lists of targeted companies and individuals. The Americans are actively using sanctions to discriminate against Russian businesses. The EU sanctions are a totally different matter. Brussels has not moved beyond the “Ukrainian package” despite pressure from its partners. The counter-sanctions policy should take these details into account. The policies of opposing US and EU sanctions should be clearly differentiated. The Russian stereotype that the Europeans are “Washington’s vassals” is counterproductive. It only brings our policy to the American denominator, thus strengthening the US positions.

In other words, the said strategy is unlikely to be effective if it is aimed at inflicting maximum damage “at any cost” and directed against an abstract “West” without regard for important distinctions in Western states’ policies.

What could be the strategy’s long-term priorities?

The first long-term counteraction priority is not so much international trade as international finance. The US sanction policy is based on the dollar domination and America’s ability to use global financial exterritorial sanctions. Retaliating against these sanctions with trade restrictions is the same as using a slingshot against an elephant. Today Russia has practically no means of opposing financial pressure with. Part of the threat is neutralized by the fact that Russia is deeply integrated in the world economy. For example, art. 242 of the CAATSA on sanctions against Russian sovereign debt has not been implemented because the measure would affect US investors as well. But this does not remove the problem of vulnerability to financial sanctions as such. A really global task for the Russian foreign policy in this area should be the creation of a coalition of countries concerned with evolving alternative payment systems. Moscow’s natural ally in this regard is Beijing, which is also vulnerable to financial sanctions and has a more impressive potential for creating alternative financial systems. There is no need to prioritize the annihilation of the dollar at any cost. But an alternative will provide a guarantee against Washington’s possible abuses of its financial leadership.

The second priority is to diversify trade ties and intensify them to an extent where exterritorial sanctions will be unable to disrupt partnerships with third countries. For example, Russia is a major supplier of arms to India. US exterritorial sanctions against New Delhi will inevitably evoke India’s strong political response, given the importance of its cooperation with Moscow for Indian national security. But this task also boosts the competitiveness of Russian goods and services. Sanctions will make Russia dramatically improve the quality of its exports and consequently will entail qualitative changes in the Russian economy. An economy based on commodity revenues is vulnerable to sanctions.

The third priority is developing and upgrading international legislation on unilateral sanctions. Russia’s conviction that the UN Security Council is the only legitimate source of sanctions should be actively promoted in cooperation with other countries. Another permanent member of the UN Security Council, China, shares this conviction. Sanctions-caused economic damage and human rights violations should be systematically monitored. Sanctions must become unacceptable on both legal and ethical grounds.

Working on these priorities will require much time and great effort. But at least this work will be of proactive nature. Local success can be achieved in defense but initiative is the only key to more serious outcomes.

Author: Ivan Timofeev is Programme Director of the Valdai Discussion Club, Director of Programs at Russian International Affairs Council (RIAC).

First published in Valdai Discussion Club.