Russia sanctions: Looking ahead
By Jake Plenderleith, 22 April 2024
Sanctions are often described as a diplomatic tool. If that’s right, then the tool in question is probably a spanner: an instrument used to apply or loosen pressure. The corollary is that military action is a hammer – pressure exerted via blunt force. The latter is considered unsophisticated and crude, the former subtle, relatively safe, and, in sanction’s finely tuned precision, firmly on the right side of the moral ledger. It is little wonder, then, that sanctions are the reflexive instrument of choice at the United Nations when potential conflict rears its head.
But what if the intended outcome of sanctions proves nugatory? In short, what if they have little to no effect on the target?
Russia is an instructive case. Many predicted that the sanctions packages imposed on Russian individuals and entities in the wake of Russia’s invasion of Ukraine would hobble the (less than robust) Russian economy and undermine the country’s military efforts. Those predictions have proven short sighted. Russia’s economy is doing much better [1] than anticipated, and President Vladimir Putin is as firmly ensconced in power as ever.
Russo-Ukrainian war
More than two years have passed since 24 February 2022, and there is little sign that the war is nearing conclusion. The Russian presidential elections in March this year saw Putin re-elected with 88% of the vote for a fifth, and third consecutive, term, confirming Russia’s ongoing engagement in the conflict. Ukraine and its allies are equally committed to thwarting Russian aggression. Even if voices in Washington to curb funding to Ukraine grow louder and more insistent, the likelihood of the Biden administration withdrawing its support of President Zelensky is slim. True, there is one destabilising factor, the upcoming US presidential elections in November, where the election of former president Donald Trump could see the war brought to an abrupt end [2] in a manner unlikely to be favourable to Ukraine.
There are many ethical, humanitarian and political knots to untangle here, but as compliance practitioners, our focus is on adhering to legislation and regulation. Taking into account all of the political wrangling, and with Ukraine and its allies keen to apply further non-military pressure on the Russian government, it’s worth asking what we can expect in the months ahead, including whether further sanctions are likely. If they are, we need to know what form they will take, and how we can prepare to adhere to them.
More measures?
Sanctions against Russia jumped more than 800% [3] following its full-scale invasion of Ukraine in February 2022. This was a remarkable surge with which compliance professionals were immediately confronted. By February 2024, the EU had rolled out its twelfth package of sanctions on Russian entities since the conflict began. More than 1,500 individuals and entities are sanctioned by the UK alone.[4]
We can see where things might be heading if we consider where things have gone wrong. A big problem has been sanctions evasion. Last year saw record enforcement action imposed by the US Office of Foreign Asset Control (OFAC) in relation to sanctions – $1.5 billion. Some $557 million of this was concerned with Russia sanctions. Current thinking goes that the number of sanctions imposed on Russia is near exhausted, and that governments will now shift their attentions to ensuring that those sanctions already in place are adhered to. Now, then, is the time to make sure your firm’s measures are healthy and proportionate.
The wise approach is to go back to first principles and ensure that your firm’s compliance policies are fit for purpose. Firms without the appropriate policies in place will be incredibly vulnerable should they be found to be in breach. Important, too, is whether your firm’s screening systems are correctly pitched to flag designated entities, and that steps are taken to ensure the use of third-part intermediaries is not aiding sanctions circumvention.
Appropriate staff training remains key. Indeed it is perhaps more important than ever, given the breadth, depth and complexity of sanctions imposed on Russia, and the commitment, demonstrated by OFAC’s enforcement history, of Western governments (especially the US) to ensure firms are compliant. The UK’s far fewer number of fines imposed for breaching Russia sanctions should not be read as a green light for greater latitude in relation to screening and controls.
Looking ahead
Talk abounds in compliance circles about the importance of ‘scanning the horizon’, looking ahead to try and figure out how events might play out. To do so today fills one with uncertainty. But what compliance professionals should recognise is that the current fractious state of geopolitics is not a deviation from the norm, but a continuation of the status quo. This goes beyond Russia and encompasses other global pressure points: Israel-Palestine, Iran, Houthi attacks on vessels in the Red Sea. Though each has the potential to swell into something far bigger, forcing the hand of governments to act, including through the application of sanctions packages, they do form part of a predictable pattern. Conflict, now and for a long time, has been a permanent feature of international relations.
Equally, it is worth remembering that events can de-escalate with unexpected alacrity, the paragon of which is the collapse of the Berlin Wall. Nobody expected it to fall when it did. The lesson is that the future cannot be predicated with any certainty. Fortunately, it is not the job of compliance to try and map the future, but to keep an eye on international developments and prepare for potential outcomes. If this is combined with rigorous systems and controls, compliance professionals can look to the future confident that they are prepared for whatever comes their way.