Making Russia Sanctions Sting

In response to Russia’s horrific invasion of Ukraine, the United States has marshaled its allies in an economic war with no obvious precedent. Within days of Vladimir Putin’s declaration of war in February, the United States galvanized the world’s leading democracies to impose sweeping sanctions on Russia’s financial sector, including the country’s central bank — the largest sanctions target in recent history.

From the beginning of the campaign, the United States and its allies moved carefully in one key area: energy. Russia is a petro-state, dependent on oil and gas sales for two-thirds of its export revenues and half of its budget. But with global oil prices high and inflation afflicting much of the West, Washington and Brussels have been reluctant to take actions that could nudge oil prices — and inflation — still higher.

Early in the war, Washington banned domestic imports of Russian oil. Still, to ensure that sanctions didn’t inadvertently curb the flow of Russian oil to other countries, the Biden administration issued a license that exempts Russia’s energy sales from the thicket of U.S. restrictions. This exemption has allowed the Kremlin to continue to rake in billionsfrom oil exports as its armies perpetrated untold atrocities in Ukraine. In December, that license will finally expire, and the United States and its allies will begin enforcing a price cap on Russia’s oil exports.

Given that sanctions have thus far spared the Kremlin’s main source of cash, it’s remarkable they’ve been so impactful. The IMF projects Russia’s economy will contract by 6 percent this year and another 3.5 percent next year. If the IMF forecast proves accurate, this year’s fall would eclipse that of the devastating 1998 Russian financial crisis — and it would even exceed the hit Iran’s economy took during the peak of international sanctions against that country, in 2012.

It’s also remarkable the West has mustered this much pressure without support from one of the world’s most fearsome sanctioners: the U.S. Congress.

Congress has played a major role in providing support to Ukraine’s war effort. But it has largely held back on Russia sanctions. For the West’s campaign against Russia’s oil sales to work, that needs to change.

The most successful sanctions campaign in modern times offers a blueprint: the U.S. effort to constrict Iran’s economy in the leadup to the 2015 nuclear deal. During the George W. Bush administration, the United States led a worldwide push to shut Iran out of the global financial system. President Barack Obama inherited the effort and took it to new heights, implementing a global strategy that cut Iran’s oil exports by more than half and locked up over $100 billion of its energy proceeds in restricted bank accounts overseas.

As the United States had enforced a domestic embargo on Iran since the 1990s, the only way to pressure Tehran’s finances was to influence how the rest of the world did business with Iran. To do so, Washington threatened to use a tool known as “secondary sanctions,” which presented foreign banks and companies with a stark choice: They could do business with the United States or Iran, but not both. The vast majority chose the United States and ceased business with Iran.

This campaign would not have been possible without Congress. It was Congress that passed hard-hitting laws requiring secondary sanctions, starting with the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, which threatened penalties on foreign financial institutions that continued to deal with Iranian banks. When Obama administration officials urged foreign governments and firms to cut ties with Iran, this legislation provided them with essential leverage. With Congress as the “bad cop,” the Obama administration could play hardball on global sanctions implementation while retaining good diplomatic relations.

The most important of these congressional initiatives came in late 2011, when Sen. Robert Menendez (D-N.J.) and Sen. Mark Kirk (R-Ill.) secured an amendment to the annual defense policy bill that threatened secondary sanctions against buyers of Iranian oil. At the urging of the Obama administration, the amendment also included a clause that provided exemptions for countries that significantly reduced their oil purchases from Iran every six months. This gave the Obama administration leeway to secure gradual reductions of Iranian oil purchases from countries such as China, India and Turkey. A few months later, Congress strengthened the law by requiring payments for Iran’s oil to flow into restricted offshore accounts, where the money could only be used for bilateral trade or for humanitarian purchases.

It was these ingenious sanctions that throttled Iran’s economy in 2012 — the first year Iran suffered a recession since the early 1990s — and brought Tehran to the nuclear negotiating table. And while the Obama administration implemented the sanctions skillfully, the White House originally opposed them. Treasury Secretary Tim Geithner went so far as to write a letter opposing the amendment, just hours before it passed the Senate by a whopping 100-0 vote.

It is natural for the executive branch to bristle at congressional forays into sanctions policy. Sanctions have become a centerpiece of U.S. foreign policy, and presidents of both parties have generally not appreciated efforts by Congress to intrude.

But the historical record shows that, more often than not, congressional sanctions actually strengthen the president’s hand. In the case of the Menendez-Kirk amendment, the European Union followed up just a few days later with an oil embargo on Iran of its own. There’s little doubt the EU decision was sped up by Congress’ overwhelming support for secondary oil sanctions.

In retrospect, the Menendez-Kirk amendment played a critical role in pressuring Tehran by hitting the core of Iran’s economy — its energy revenues. Like Russia’s energy sector today, Iran’s had been spared heavy sanctions up until that point. The brilliance of Menendez-Kirk was that it combined legally mandated sanctions with flexibility that allowed the Obama administration to find the best approach for implementation.

The price cap on Russian oil that will go into effect in December is the most ambitious use of sanctions since the Menendez-Kirk amendment. Securing international support for this policy — which the Biden administration had been pushing for months — was a remarkable feat of diplomatic persistence. But even though the policy is backed by the G7, which accounts for nearly half of global GDP, there are concerns that firms in China, India and other countries that don’t enforce sanctions on Russia could undermine the price cap by making side paymentsto Russia or developing supply chains that avoid Western companies entirely. OPEC’s decision last week to cut oil production by 2 million barrels per day will push up oil prices and heighten these concerns.

The price cap is a first-of-its-kind sanction — a descendant of the 2012 Iran oil sanctions, to be sure, but harder to implement and aimed at a much bigger oil producer. The best way to ensure its success is for Congress to act as well and back up the administration. By requiring secondary sanctions on anyone that violates the price cap, Congress can give the Biden administration the stick it needs to make the policy work.

Sen. Chris Van Hollen (D-Md.) and Sen. Pat Toomey (R-Pa.) recently put forward an amendmentto this year’s defense bill that would do just that. It contains an unambiguous requirement to impose secondary sanctions on violators of the price cap while giving the Biden administration flexibility to flesh out the details. The amendment could be improved by giving the White House the option to choose another path to cut Russia’s oil revenues — for instance, by forcing all payments for Russian oil to flow into restricted overseas accounts — but it is a solid piece of legislation.

So far, the Biden administration has yet to take a stand on the proposal. Certainly, the administration has done an impressive job on Russia sanctions to date, and it would be reasonable for officials to question whether they really need assistance from Congress.

But the White House would be wise to heed a lesson from recent sanctions history: Congressional action can provide the heft that’s needed to enforce difficult global sanctions regimes. The Obama administration started by opposing congressional sanctions on Iranian oil in 2011, only to later argue that they were essential to bringing Tehran to the negotiating table.

Now the Biden administration has a chance to get it right from the outset.

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By: Edward Fishman
Title: Opinion | Making Russia Sanctions Sting
Sourced From: www.politico.com/news/magazine/2022/10/13/making-russia-sanctions-sting-00061478
Published Date: Thu, 13 Oct 2022 03:30:00 EST

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