(Repeats July 17 column. John Kemp is a Reuters market analyst.
The views expressed are his own)
By John Kemp
LONDON, July 17 Targeting major Russian energy
firms may come to be seen as the turning point at which U.S.
sanctions policy over-reached and spurred a major effort to
re-route financial transactions away from the United States.
Prohibiting core Russian energy companies such as Rosneft,
Gazprombank, Novatek and Vnesheconombank from arranging equity
or long-term debt finance from or through "U.S. persons" marks a
major escalation in the sanctions battle between the United
States and its European allies on the one hand and the Russian
Federation on the other.
But sanctions will remain useful only if they are employed
sparingly. Their utility is in danger of being blunted through
Like any other weapon, if sanctions are used too often,
opponents will develop countermeasures.
The calculus is simple: sanctions will remain effective only
as long as the cost of complying with them is lower than the
cost of developing ways to circumvent them.
Compliance and circumvention costs are directly related to
the frequency with which sanctions are imposed.
If sanctions are used rarely, the cost of complying with
them is low, and it is generally not worth expending significant
resources to develop ways to circumvent them.
But as sanctions are used more frequently, compliance costs
rise, and the incentive to spend time and effort to avoid them
To maximise the disruption and inconvenience associated with
sanctions, their use must be occasional. Once sanctions become
the norm, the financial system will adapt to work around them.
Over-use of sanctions threatens to spur a shift away from
using financial institutions and networks that fall under the
jurisdiction of the United States.
Russia's energy firms join a long list of foreign
corporations, banks, individuals and even countries that have
recently fallen afoul of U.S. policy and law.
In addition to sanctions imposed on individuals suspected of
involvement in narcotics trafficking, terrorism and weapons of
mass destruction, the United States is enforcing comprehensive
financial sanctions on Syria, Iran, Cuba and North Korea.
Sanctions have also been imposed in relation to Belarus, the
Central African Republic, Ivory Coast, Democratic Republic of
Congo, Iraq, Lebanon, Myanmar, Somalia, Sudan, Yemen and
Zimbabwe, according to the U.S. Treasury's website.
The United States is also enforcing secondary sanctions
(penalties on firms accused of helping others evade sanctions)
on entities in China, Cyprus, Georgia, Liechtenstein,
Switzerland, Ukraine and the United Arab Emirates.
Even before the crisis over Ukraine, Russian entities had
been targeted with sanctions over the death in custody of
accountant Sergei Magnitsky.
There are now literally thousands of individuals and
companies on the various sanctions lists drawn up and enforced
by the U.S. Treasury's Office of Foreign Assets Control (OFAC).
Other banks and corporations that have had cause to rue
their financial involvement with the United States include
Argentina (locked in a dispute with U.S. courts over defaulted
debt), France (which has found BNP Paribas, one of its largest
banks, fined $9 billion for sanctions-related transactions), and
Switzerland (where some banks have been refusing to open
accounts for U.S. citizens and anyone connected with the United
States owing to concerns about tax evasion penalties).
The increasing frequency with which U.S. policymakers resort
to sanctions and a more stringent enforcement regime have
prompted growing complaints from banks, corporations and foreign
In July, France's Finance Minister Michel Sapin called for a
shift away from the exclusive use of the U.S. dollar for global
payments in response to the unprecedented fine on BNP.
The chief executives of French oil giant Total and one of
its largest industrial firms also echoed the call for a switch
away from the U.S. currency.
De-dollarisation would help banks and firms outside the
United States insulate themselves from the reach of U.S. policy.
"Companies like ours are in a bind because we sell a lot in
dollars but we do not always want to deal with all the U.S.
rules and regulations," the unnamed French industrial executive
told the Financial Times ("France hits out at dollar dominance
in international transactions", July 6).
France has a long history of complaining about what the
country's politicians call U.S. "hegemony". In the 1960s,
France's then-finance minister Valery Giscard d'Estaing railed
against the "exorbitant privilege" conferred by the dollar's
role as the global currency. France has often challenged the
pre-eminence of the United States, but with little success.
Sapin's comments drew a blunt response from Barry
Eichengreen, professor of economics at the University of
California and one of the world's foremost experts on currency
France does not have the "moral authority" or financial
muscle to replace the dollar with another system, according to
Eichengreen ("France lacks the moral authority to depose the
dollar", Financial Times, July 8).
Argentina's government, too, has complained about what it
sees as neo-imperialism, following its repeated defeats in the
U.S. legal system over payments on defaulted debt.
But as long as the backlash was confined to such
long-standing malcontents as France and Argentina, and sanctions
were targeted at countries of marginal financial significance
such as Myanmar, Somalia and Sudan, the criticism could be
However, sanctions policy is starting to ensnare companies
that have plenty of money (Swiss and European banks, Russian oil
firms), other permanent members of the U.N. Security Council
(Russia and China) and countries that cannot safely be ignored
"Sanctions tend to have a boomerang effect, and without any
doubt in this case they are driving Russian-American relations
to a dead end, they are causing very serious damage," Russia's
President Vladimir Putin warned on Wednesday.
"I am convinced that this is to the detriment of the
long-term strategic national interests of the American
government and the American people," he added.
As the list of companies and countries smarting from U.S.
sanctions grows longer, there is a real risk an alternative
financial network bypassing the United States will emerge.
U.S. policymakers scoff at the idea that payments and
financial transactions could be routed away from the United
States. "They may not like it, but it is not clear what France
and other critics can do to alter the status quo," Eichengreen
Dollar payment systems outside the United States would
require liquidity that only the Federal Reserve can provide.
"The only feasible alternative, then, is to induce non-U.S.
exporters to take euros and renminbi in payment for goods and
services," according to Eichengreen.
"For the euro and renminbi to be attractive ... markets in
those currencies will need to be deep and liquid ... Market
liquidity requires a diverse clientele."
But a diverse potential clientele is precisely what is
starting to emerge in the long list of companies, countries and
individuals who want to transact away from U.S. regulation.
Building a rival financial architecture outside U.S.
jurisdiction would be difficult and expensive. But in various
ways, the European Union, Switzerland, Russia and China are all
trying to win a bigger share of the global financial services
and payments market, and have an interest in helping route
payments and financing away from the United States.
Continued U.S. dominance is not a foregone conclusion,
whatever U.S. policymakers may think.
Like all such shifts in the international payments regime
(from Spanish pieces of eight to pounds sterling and U.S.
dollars), the transition would likely be slow and almost
invisible at the start before accelerating later.
There is some evidence that U.S. policymakers understand the
dangers. The United States has been especially cautious about
imposing sanctions on companies and individuals in China, which
is a vital trading and financial partner as well as a potential
rival and has both the economic and foreign-policy muscle to
protect its interests.
HUBRIS AND NEMESIS?
Writing for the Financial Times, Eichengreen insisted there
was no risk to the dollar's role in the international payments
system provided sanctions and other use of U.S. financial
leverage were not "arbitrary and capricious".
But while sanctions may seem rational and sensible when
viewed from the United States, the view in foreign capitals is
often very different.
In February, the Wall Street Journal carried a lengthy and
rather boosterish profile of OFAC, testament to the growing
importance of this once-obscure agency within the U.S. Treasury.
"OFAC rises as sanctions become a major policy tool," the
Journal's headline explained. "Sanctions have become a leading
tool of U.S. foreign policy."
According to a Georgetown University professor cited in the
article: "The U.S. government (has) recognised the value of
economic coercion in terms of pursuing national security and
foreign policy goals."
In fact, as the United States has become more cautious about
intervening militarily, sanctions have come to be seen as an
increasingly attractive alternative.
But there was more than a touch of hubris in the Journal
article, and there is a real danger that over-use will blunt the
sanctions tool, which would be a pity because sanctions have a
valuable role when employed appropriately and sparingly.
The United States can make extensive use of financial
sanctions to pursue foreign-policy goals, or it can remain the
world's dominant financial and payments centre, but it probably
cannot do both.
(Editing by Dale Hudson)