Russian sanctions will boomerang

At the beginning of the Cold War, Sen. Arthur Vandenberg declared that politics stops at the water’s edge. Indeed, Democrats and Republicans still share the imperative to protect U.S. national security and to maintain our democratic government. It is unsurprising, given Russia’s “active measures” directed at the 2016 election, that more legislation to sanction Russia has bipartisan support.  

Defending American Security from Kremlin Aggression Act of 2019 (“DASKA”) was reported out of the Senate Foreign Relations Committee last December. DASKA includes sweeping mandatory sanctions on Russia’s energy sector. Sanctions under executive order targeting strategic Russian hydrocarbon projects have been in effect since Russian forces invaded eastern Ukraine and annexed Crimea in 2014. Those measures were codified and expanded into law when President Trump signed the Countering America’s Adversaries Through Sanctions Act (CAATSA) in 2017 after congressional passage by veto-proof majorities.  

U.S. sanctions, as pressure tactics, demonstrably fail to achieve their intended objectives. To date, Russia’s conduct in Ukraine has not changed. As one observer put it, the sanctions were meant for Moscow but hit Houston. DASKA’s energy provisions would take collateral damage to new heights.

For example, DASKA requires U.S. companies to withdraw from any energy project should a Russian entity hold even a minority stake. There are nearly 150 estimated energy projects in more than 50 countries that would be affected. These projects employ thousands of people and play an important role in the energy supply chain in global hydrocarbon markets. Any disruption to the operations abroad would have a domino effect and damage many small- to medium-sized U.S. businesses. 

Numerous SMEs across the U.S. supply larger firms with parts and materials essential to their operations. A single U.S. multinational company may procure goods and services from more than 20,000 suppliers. The provision would permit Russian companies to take small stakes in new energy projects and force U.S. companies out. As for U.S. company involvement in projects inside Russia, the record since 2014 speaks volumes: U.S. companies out; Chinese and Russian oil sector start-ups in. 

But DASKA’s wide-ranging provisions don’t just threaten U.S. energy companies. 

Another would prohibit U.S. companies from engaging in transactions of Russian sovereign debt denominated in rubles, which would effectively stymie any U.S. company operations in Russia.  Though presumably intended to hurt the Russian economy, in fact, the measure would sanction U.S. companies to the benefit of their non-U.S. (read Chinese) competitors. Nearly 3,000 U.S. companies that operate in joint ventures with Russian firms could be forced to exit or shutter operations. More broadly, in the global economy with its complex network of multi-country supply chains, ever increasing U.S. sanctions cause U.S. companies to be regarded as unreliable partners.  

Broad economic sanctions are intended to cripple the sanctioned country’s economy and therefore immiserate its general population. But they also provide the ruling regime a scapegoat to justify greater control over the economy. Sanctions as coercive tactics per se have not changed Russia’s conduct of foreign policy. They have motivated unprecedented cooperation between Russia and China.

The default use of broad economic sanctions depends on U.S. dominance of global finance (which far surpasses U.S. share of global GDP). In 2016, then-Treasury Secretary Jack Lew stated, regarding U.S. sanctions, “If they make the business environment too complicated or unpredictable, or if they excessively interfere with the flow of funds, worldwide financial transactions may begin to move outside of the United States entirely — which could threaten the central role of the U.S. financial system globally.”  

Given the return of so-called “great power competition,” surely a strategy that avoids collateral damage to U.S. interests is warranted in the case of U.S. relations with Russia.    

Richard Sawaya is vice president of the National Foreign Trade Council. He is the director of USA*Engage, an advocacy coalition of businesses, agriculture groups and trade associations.