OPINION: Bust Sanctions Busters

Russia’s economy has been sanctioned, punished, and distorted as a result of its war. But loopholes and workarounds have been devised to avoid sanctions, fossil fuel bans, and the G7 oil price cap.

The West must escalate its economic war against Moscow by increasing restrictions and by punishing sanctions-busters.

In December, Washington announced sanctions on foreign banks facilitating transactions with Russia — a measure aimed at China, Turkey, the United Arab Emirates, and India — which is starting to work.

But Ukraine’s allies must crack down on illegal trade by China and confiscate the $300 billion of Russian central bank assets that were frozen after the 2022 invasion.

Last week, Congress allocated military aid to Ukraine and at the same time passed a REPO Act authorizing the confiscation of these assets in the United States. But Europe still squabbles.

“Much public attention has rightly been focused on wavering House GOP support for military aid for Ukraine (now approved), but the economic pressure campaign is also crucial leverage against Putin, and we have to step up our game,” recently wrote sanctions advocates, Yale Professor Jeffrey Sonnenfeld and his research director Steven Tian.

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Antony Blinken, America’s Secretary of State, recently rebuked China (which pledged not to send weapons) for being the “primary contributor” by providing supplies and technology to Russia’s “defence industrial base.”

The Economist also noted “trade with China is not the only problem for Western countries trying to hobble Russia’s defence industry. Despite extensive export controls, Russia still received many Western-made components in 2023. Goods from France, Germany, and Japan, have also made their way to Russia through third countries, such as Turkey and the United Arab Emirates, who have not signed up to Western sanctions.” 

Since the war’s outset, the two Yale academics encouraged and documented the 1,000 major global corporations that left Russia in protest after its invasion.

Such corporate exits have been a blow, but, as Sonnenfeld recently wrote, there are major trade leaks and even advanced semiconductors continue to pour into Russia, despite sanctions.

He added that many CEOs of leading American aviation and airline companies have been complaining for many months that Russia is “swimming” in smuggled aerospace parts.

“And proprietary Russian aircraft tracking data shows that Aeroflot and S7 inexplicably increased their number of in-service Boeing and Airbus aircraft significantly, even though both companies cut off all sales, service, and support to Russia and took steps to ensure that end users are not Russian,” he wrote. “It is not just military-grade technology being smuggled into Russia.”

He also pointed out on CNBC that Russians recently became some of the first customers globally to access the new, highly anticipated Apple Vision Pro goggles. These suddenly started popping up for sale in Russia, even before Apple launched the product anywhere else in Europe.

Washington’s Center for Strategic and International Studies found that Chinese support for Russia’s military manufacturing skyrocketed in early 2023.

In March, Kyiv Post wrote: “Ukraine’s military believes there is strong evidence that Russia is using US commercial satellite imagery to plan and guide its missile attacks. The Ukrainian military says that acquiring archived and recently produced satellite imagery has never been easier.  Furthermore, if Russia wants to attack stationary residential or industrial areas, archived high-resolution pictures, with date of acquisition and coordinates, can be purchased without too many questions being asked.”

Jeffrey Sonnenfeld, Senior Associate Dean for Leadership Studies at Yale University

The Yale experts recommend extending sanctions to Russia’s metals and commodity sectors. Metals are Russia’s second largest export generator after energy, worth $60 billion a year, and billions more are generated from sales of other commodities such as lumber, plywood, and agricultural produce. This hasn’t happened because of Russian disinformation which claims that such sanctions would create rampant inflation in prices and destabilize the global economy.

Sonnenberg disputed that conclusion: “The evidence suggests that the rampant fears that sanctions on Russian metals will destabilize the global economy are unfounded. As we show carefully in our new analysis, with global prices across key Russian metals export categories such as aluminum, nickel, copper, zinc, and cobalt currently significantly lower than pre-war levels, Russia needs to export its metals much more desperately than the world needs to purchase them … Russian metals supply is relatively insignificant for global markets (no more than 6 percent of global supply in any of the above categories) but metals revenues are hugely consequential for funding Putin’s war machine.”

Putin’s war is mostly financed by smuggling and gigantic shadow fleets of oil tankers. Such networks must be monitored and interdicted but are not. These ships have free rein to operate and even G7 shippers and insurers have become increasingly complicit. At least half of all Russian oil shipments now evade the price cap, according to research from top economists at the Kyiv School of Economics.

Why are “phantom fleets” still allowed to ship oil to China and India in defiance of price caps? Ships can be tracked and interdicted easily by navies or coast guards, but they are not. One explanation is that a total crackdown on oil smuggling would result in skyrocketing oil prices — a possibility that the US, Europe, and others want to avoid as they head into elections. However, this is a war and oil supports Russia. As American journalist and Eastern European expert Anne Applebaum aptly asked, “if we were serious about winning this war, we’d have thousands of people working on sanctions, not a few guys at the Treasury Department.”

The other question is why do China and India get off scot-free for abrogating sanctions by importing cheap oil from Russia or Iran? And why are Saudi Arabia and the UAE allowed to buy Russian energy products at low prices and flip them for profit? Sanctions without enforcement have also spawned another lucrative business model: India sells diesel and gasoline back to Europe made from banned Russian oil it imports. All these transgressors should desist or face taxes or seizures.

Instead, Western leaders become entangled in Russian talking points designed to confuse or generate fear about economic warfare. For instance, many believe the confiscation of Moscow’s frozen assets would be against international law and possibly destroy the US or Euro currencies. But invading and destroying Ukraine is against international law, and, in a legal treatise, Harvard Professor Laurence Tribe argued that it is legally justifiable to confiscate Russian assets. Besides legalities, concerns are that seizures would undermine the reserve currency status of the U.S. dollar. But this is unwarranted. Most of the world’s 180 national, or fiat, currencies are like monopoly money, issued by inept regimes or corrupt ones that crank up their printing presses to create worthless paper to buy power. The same applies to 22,000 cryptocurrencies.

The “gold standard” of currencies is the US Dollar because it is governed by a politically independent Federal Reserve System tasked with protecting monetary value and policing banks, to alleviate financial crises. This reliability, and America’s economic (and military) superiority, is why the “greenback” dominates the world’s financial transactions. Russia and others want to topple the Dollar’s dominance but cannot because, as economist Nouriel Roubini commented “you can’t replace something with nothing”.

The world is now in its third year of war in Europe and Ukraine’s allies must correct course. They cannot win a war without laying waste to the economic wealth and income of the enemy. That is why sanctions-busting must end, and sanctions-busters must be punished if the world is to stop warfare waged by the world’s most pernicious nation and to prevent others from doing the same.