Amid the second anniversary of the start of the Special Military Operation (SVO) in Ukraine, a number of Western countries and associations launched a new set of sanctions against Russia, as expected. In quantitative terms, the number of Russian companies and citizens subject to restrictive measures was indeed high. However, the latest wave of sanctions does not bring qualitative changes – their impact on the Russian economy and its relations with foreign partners is unlikely to be fundamental.
The most significant package of restrictive measures was introduced by the United States. More than 500 Russian citizens and organisations were included in the list of blocked entities. Financial blocking sanctions mean that the assets of these individuals in US jurisdictions are frozen. In addition, US citizens, US organisations and their subsidiaries abroad are effectively prohibited from any economic transactions with these individuals. It has become common to hit companies from several sectors of the economy at once. Among them are machine tool building and metalworking, the chemical industry, electronics, industrial automation, optics, navigation equipment production, battery production, the aerospace industry, transport and logistics, and the financial sector. However, Russian industrial and technology companies are already a typical target of US blocking sanctions. The structure of the sectoral coverage of blocking sanctions has remained virtually unchanged.
Secondary sanctions against a number of companies from third countries cooperating with Russia can be considered equally common. These include six companies from China (which supplies electronics and optics to the Russian Federation), four companies from Serbia (for their cooperation with the Russian technology sector), and one company each from Liechtenstein and Germany (operations with Russian precious metals), Estonia (supplies in the interests of the Russian military-industrial complex), Ireland (supplies of electronics to the Russian Federation), Vietnam (supplies of goods from the EU for the Russian military-industrial complex), the UAE (supplies of spare aircraft parts and electronics to the Russian Federation), Kyrgyzstan (supplies of spare aircraft parts to Russia, bypassing US export controls) and Finland (supplies of spare parts for trucks in the Russian Federation). A trend already familiar from 2023 is being reproduced here – the predominance of blocking sanctions for the supply of dual-use goods to Russia or violation of US export controls, as well as the absence of large companies among those subject to secondary sanctions. Mostly we are talking about small companies or intermediary firms. Moreover, they can be located both in countries friendly to Russia and in countries initiating sanctions.
The US has also expanded trade sanctions. The US Department of Commerce has added 93 companies to its Entity List. They are prohibited from supplying dual-use items on the US Commercial Control List. However, 63 companies are Russian. It is already prohibited to supply these goods to Russia, that is, their inclusion in the Entity List changes little. The rest are companies are from third countries: eight from China, sixteen from Turkey, four from the UAE, two from Kyrgyzstan, and one each from India and the Republic of Korea. In other words, we are talking about secondary trade sanctions. But the restrictions only apply to these companies, and not to the country as a whole. In 2023, there were already two precedents of secondary sanctions in the form of companies collaborating with Russian counterparties being added to the Entity List. At the same time, this time the United States did not expand the list of goods under export control (last February such expansions were large-scale). The reason may be due to the fact that almost all dual-use goods and many industrial goods are already prohibited for delivery to Russia. It should also be noted that the list of priority goods for export control has been expanded. Previously there were 45 items, now there are 50 (mainly electronics).
Despite the fact that it is mainly small companies that are hit by secondary sanctions, the impact of sanctions on business in friendly countries should not be underestimated. For example, amendments to Executive Order 14024, introduced in December 2023, include a mechanism for imposing blocking and other US financial sanctions on financial institutions from third countries that conduct transactions in the interests of the Russian military-industrial complex or certain dual-use goods. Banks in friendly countries may show “excessive compliance”, avoiding transactions with Russian partners for fear of falling under sanctions, even if the transactions were carried out in national currencies.
As for the EU, the new sanctions have their own characteristic;. 87 organisations and 105 individuals were included in the lists of blocked persons. However, even here the structure of the distribution of sanctions changes little. Among Russian citizens, heads of Russian regions, heads of defence and industrial companies, and heads of public organisations are blocked. The list of dual-use goods prohibited for delivery to Russia has been expanded. But even before, it was difficult to gain access to it.
The new secondary EU sanctions have become peculiar. A number of companies from Turkey, Thailand, Kazakhstan, China, Serbia, India, Singapore, Uzbekistan and Sri Lanka have been listed in Annex IV of Regulation 833/2014. This annex defines a list of persons for whom exceptions exist for the supply of dual-use goods, as defined in Articles 2 and 2a of Regulation 833/2014. It can be assumed that in relation to these companies from third countries, both the supply of dual-use goods and exceptions for them will be prohibited. However, the meaning of Art. 2 and 2a is to prohibit the supply of these goods to Russia as a whole. In relation to third countries, we are talking only about companies listed in Annex IV. In practice, this means that foreign companies named in Annex IV can simply be replaced by other firms with a high risk appetite. However, the EU still has other mechanisms for rolling out secondary sanctions. In particular, the Council of the EU may use the grounds of Art. 3 of Regulation 269/2014 for blocking sanctions against persons from third countries, as has previously happened in relation to individual Iranian citizens who collaborated with the Russian Federation. In addition, there is a legal mechanism for sanctions against individual countries that circumvent EU export controls. So far, these measures have not been taken. It is quite possible that Brussels is setting aside steps for the further escalation of sanctions.
The UK has extended blocking financial sanctions to a number of large Russian industrial companies. The country has also decided to introduce secondary sanctions against Russia’s partners from third countries, but unlike Brussels, it has applied the mechanism of blocking sanctions to them. They include companies from Turkey, China, the UAE and Switzerland.
The lists of blocked persons have also been expanded or are about to be expanded by Canada, Japan, Australia and New Zealand.
Will the impact of new sanctions on the Russian economy be fundamental? Hardly. Yes, the number of blocked individuals is relatively high. But financial, industrial, defence and technology companies have long lived under a regime of sanctions against Russia as a whole, as well as individual sectors of its economy. The new blocking sanctions aren’t having a shock effect on the economy. Secondary sanctions are also unlikely to have a shock effect. Large companies have long been cautious in dealing with Russia, and smaller companies with an appetite for risk will continue to seek high returns. Third-country governments can crack down on firms in their jurisdictions that violate US, EU, and other Western jurisdictions’ export controls. At least, such signals are coming to them from Washington and Brussels. But such “arm-twisting” is still of a moderate nature. Of course, sanctions continue to distort normal market relations. They increase costs and force businesses to switch to grey schemes. However, the political goals of the sanctions remain unrealised: they do not affect Russia’s foreign or domestic policy.
The Valdai Discussion Club was established in 2004. It is named after Lake Valdai, which is located close to Veliky Novgorod, where the Club’s first meeting took place.
