Symbolic or Substantive? Financial Sanctions Against Russia
March 21st, 2014
March 21st, 2014
I’ve noted before that sanctions, while certainly well-intentioned, are often meaningless in practice. In large part, this occurs because of many of the opacity issues in the international financial system. As a result of these flaws, whether intentionally or not, sanctions are often (although not always) purely symbolic. So in the case of Russia, which is now on the receiving end of the so-called “toughest sanctions since the Cold War,” are financial sanctions symbolic or substantive? Given the current dynamics in Russia and abroad, are they likely to work?
If you’ve been reading the news at all, you already know that events are unfolding fast in the Crimea. Just last week, Crimea was very much a part of Ukraine. After a referendum vote on Sunday, when an overwhelming majority of residents voted in favor of independence and membership in the Russian Federation, the jurisdiction’s lawmakers formally seceded from Ukraine. Yesterday, Russia formally annexed Crimea.
Ukrainian interim Prime Minister Arseniy Yatsenyuk responded with anger, calling the annexation “a robbery on an international scale.” Most of the international community, including the United States and European Union, has made clear it supports the Ukrainian government in this sentiment. The White House refused to recognize the results of the referendum before they were even released, and Senior Advisor David Pfeiffer noted Russia’s actions were a violation of international law.
In an effort to put their money with their mouths are, however, on Monday of this week, these Western governments also placed sanctions on about two dozen Russian officials and their allies in Crimea. In essence these sanctions had two components: (1) they ban travel of some officials to the U.S. and EU; and (2) they freeze any assets of these officials.
The first component of these sanctions is purely and utterly symbolic. As one Russian official succinctly put it: “So what if I can’t get a visa to the United States? I didn’t want to go there anyway.”
The second component of these sanctions does, however, deserve a second look.
According to Russian law, government officials are actually already prohibited from holding assets overseas. Top state officials – at every level of government – can be punished or dismissed if they hold overseas accounts. The aim of the law is to provide better national security, spur investment in the domestic economy, and stem corruption. The opaque international financial system and secrecy jurisdictions allow Russian officials to easily circumvent these laws.
Although the same rules apply when considering the U.S. and EU asset bans. It’s not news that secrecy jurisdictions enable many countries to circumvent financial sanctions. In the case of Iran, former district attorney Robert Morgenthau has shown how Venezuela uses banking secrecy to help some Iranian banks gain access to financial markets in the U.S., though it is illegal. Other times individual banks will use secrecy to violate sanctions for financial gain. For example, Barclays Plc violated trade laws by facilitating transactions with banks in Cuba, Iran, Libya, Sudan and Burma between 1995 and 2006. So their likelihood of success in the case of Russia is already relatively low.
Unfortunately, because of an international banking system that, when it comes to illicit deposits, leaks like a sieve, it would appear that the recent U.S. and EU sanctions against Russia are purely symbolic. In fact, these may be the “toughest sanctions” to hit Russia since the Cold War, but that, it pains me to say, doesn’t really mean much.