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Corporate ‘Self-Sanctioning’ of Russia Has US Fearing Economic Blowback

·6 min read

(Bloomberg) -- Russia’s invasion of Ukraine galvanized the US, UK and European Union to unleash a slew of sanctions meant to punish Vladimir Putin’s government and pressure him to pull his forces back.

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But some Biden administration officials are now privately expressing concern that rather than dissuading the Kremlin as intended, the penalties are instead exacerbating inflation, worsening food insecurity and punishing ordinary Russians more than Putin or his allies.

Officials were initially impressed by the willingness of companies from BP Plc. to McDonald’s Corp. to abruptly “self-sanction,” sometimes selling assets at fire-sale prices. But the administration was caught off-guard by the potential knock-on effects -- from supply chain bottlenecks to uninsurable grain exports -- due to the companies’ decisions to leave, according to people familiar with internal discussions.

In some cases, companies have signaled that they are being extra-cautious or want clearer guidance from the US before continuing business with Russia. Until that happens, they are going beyond any legal requirements to ensure they don’t accidentally violate sanctions policies, according to Justine Walker, the head of global sanctions and risk at the Association of Certified Anti-Money Laundering Specialists, an industry group.

“Because we just have so many changes at once, governments are not able to step in and give precise clarification and we are seeing many, many examples of authorities coming to different positions,” Walker said in an interview. “Companies ask, ‘Should we be applying sanctions to this entity?’ and the government will come back and say, ‘You need to make your own decision.’”

US Quietly Urges Russia Fertilizer Deals to Unlock Grain Trade

In an acknowledgment of that concern, on May 25 the Treasury Department’s Office of Foreign Assets Control, or OFAC, which oversees sanctions regimes, extended a general license so that companies could continue to pay taxes, fees and import duties related to doing business in Russia until Sept. 30. The message was clear: Doing business in Russia is allowed, provided companies aren’t working with sanctioned entities.

In addition, a recent Executive Order barring management consulting and accounting companies from doing business with Russia didn’t include anything on agriculture, medicine or telecommunications, an intentional move to let that business activity continue, according to Adam Smith, a former senior adviser to OFAC.

The concessions and adjustments highlight the difficulties involved in sanctioning the world’s 11th-largest economy. Previous sanctions campaigns against countries such as Iran and North Korea sought to impose a similar level of isolation on much smaller economies. Russia’s ties to the global commodities markets -- particularly energy and grains -- has made this a much more complicated case.

The Evolution of Sanctions as Financial Warfare: QuickTake

There’s no sign that administration officials feel their sanctions policy was a mistake or that they want to dial back the pressure. If anything, officials have said a key US goal is to ensure Russia can’t do to other nations what it has done in Ukraine.

But the collateral damage from the sanctions has been wider than expected.

When the invasion began, the Biden administration believed that if penalties exempted food and energy, the impact on inflation at home would be minimal. Since then, energy and food have become key drivers of the highest US inflation rates in 40 years, a huge political liability for President Joe Biden and the Democratic party heading into November’s mid-term elections. Treasury Secretary Janet Yellen has said that she "was wrong" in believing last year that inflationary pressures would pass. One of the results that she's now seeing is related to the spike in prices due to unexpected self-sanctioning, according to one person familiar with her thinking.So while Ukrainian President Volodymyr Zelenskiy has urged US businesses to cease operations in Russia, telling a joint session of Congress that the Russian market was “flooded with our blood,’’ the Biden administration has been encouraging some commerce, including for agriculture, medicine and telecommunications. For instance, the US government is quietly encouraging agricultural and shipping companies to buy and carry more Russian fertilizer, according to people familiar with the efforts, as sanctions fears have led to a sharp drop in supplies, pressuring food costs.

That follows warnings from the United Nations and humanitarian groups that hunger and poverty may soar if the price of staples like wheat stay high. Turmoil triggered by rising food and energy prices has already hit countries including Sri Lanka, Egypt, Tunisia and Peru.

The Biden administration rejects any suggestion that sanctions are part of the problem, emphasizing that the US isn’t penalizing humanitarian goods or food, and putting the blame on Putin’s decision to attack Ukraine, including by targeting shipping on the Black Sea.

“The story that the sanctions are causing the problem, I think, is deeply misleading,” Ambassador Jim O’Brien, head of the State Department’s Office of Sanctions Coordination, told reporters last week. “Sometimes companies are confused about what’s allowed and what’s not, and we will try to clarify so that they are able to go forward. But we are also working proactively by trying to inform companies about what they are allowed to do.” About 1,000 companies have so far announced that they are curtailing operations in Russia, according to data collected by the Yale Chief Executive Leadership Institute. That underscores one reason sanctions are so popular with policy makers: They essentially outsource US policy to the private sector, which makes it less surgical, less calibrated and less responsive to policy changes, said Smith, the former OFAC adviser.

This becomes important as all sides seek an end to the war. The lifting of sanctions can be dangled as an incentive to help bring about a diplomatic resolution to the conflict. But right now it’s hard even to offer that as a potential benefit of entering into negotiations because much of the pullout by American businesses has been self-inflicted. Companies could face public blowback if they are seen as rushing back into the Russian market.

Smith also said that longer-term, the US may undercut its “soft power” in Russia by abandoning the local market to brands from other countries — or even to Russian firms that are snapping up company assets at little or no cost.

The departure of high-profile US firms ``does some psychological harm to Russia, psychological injury,’’ Smith said. But “at the end of the day, is removing elements of US soft power where the US wants to be?”

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