Russian companies’ ‘self-sanction’ raises US fears of economic comeback

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

“Because we have so many changes at once, governments are not able to step in and give specific clarifications and we see many, many examples of authorities taking different positions,” Walker said in an interview. . “Companies are asking, ‘Should we apply sanctions to this entity?’ and the government will come back and say, ‘You have to make your own decision.’ »

Recognizing this concern, on May 25, the Treasury Department’s Office of Foreign Assets Control, or OFAC, which oversees sanctions regimes, extended a blanket license so companies could continue to pay taxes, fees and charges. import duties related to business activities in Russia. until September 30. The message was clear: doing business in Russia is allowed, provided the companies do not work with sanctioned entities.

In addition, a recent decree banning management consulting and accounting firms from doing business with Russia did not include anything on agriculture, medicine or telecommunications, an intentional decision to let this business activity continue, according to Adam Smith, former senior adviser to OFAC.

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The concessions and adjustments highlight the difficulties of sanctioning the world’s 11th largest economy. Previous sanctions campaigns against countries like Iran and North Korea aimed to impose a similar level of isolation on much smaller economies. Russia’s ties to global commodity markets – especially energy and grain – have made this case much more complicated.

There is no indication that administration officials believe their sanctions policy was wrong or that they want to reduce the pressure. On the contrary, officials have said a key U.S. goal is to ensure that Russia cannot do to other nations what it did to Ukraine.

But the collateral damage from the sanctions was greater than expected.

When the invasion began, the Biden administration believed that if the penalties exempted food and energy, the impact on inflation in the country would be minimal. Since then, energy and food have become the main drivers of the highest US inflation rates in 40 years, a huge political liability for President Joe Biden and the Democratic Party as the mid-term elections approach. November term.

Treasury Secretary Janet Yellen said she was “wrong” to believe last year that inflationary pressures would pass. One of the results she’s seeing now has to do with price spikes due to an unexpected self-sanction, according to a person familiar with her thinking.

So while Ukrainian President Volodymyr Zelenskiy has urged American companies to stop doing business in Russia, telling a joint session of Congress that the Russian market is “flooded with our blood,” the Biden administration has encouraged some businesses , particularly for agriculture, medicine and telecommunications. For example, the US government is quietly encouraging agricultural and shipping companies to buy and ship more Russian fertilizers, according to people familiar with the efforts, as fears of sanctions have led to a sharp drop in supplies, putting pressure on prices. foodstuffs.

This follows warnings from the United Nations and aid groups that hunger and poverty could skyrocket if the price of staples like wheat remains high. The unrest triggered by rising food and energy prices has already hit countries like Sri Lanka, Egypt, Tunisia and Peru.

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The Biden administration rejects any suggestion that sanctions are part of the problem, stressing that the US does not penalize humanitarian goods or food, and blaming Putin’s decision to attack Ukraine, including targeting shipping on the Black Sea.

“The story that sanctions are the root of the problem, I think, is deeply misleading,” Ambassador Jim O’Brien, head of the Department of Sanctions Coordination Office, told reporters last week. State. “Sometimes companies are confused about what is allowed and what is not, and we will try to clarify so they can move forward. But we are also working proactively trying to inform businesses of what they are allowed to do.

About 1,000 companies have so far announced that they are reducing their activities in Russia, according to data collected by the Yale Chief Executive Leadership Institute. This underscores one of the reasons the sanctions are so popular with policymakers: they essentially outsource US policy to the private sector, making it less surgical, less calibrated and less responsive to policy changes, said Smith, the former OFAC adviser.

This becomes important as all sides seek to end the war. The lifting of sanctions can be presented as an incentive to contribute to a diplomatic resolution of the conflict. But right now, it’s hard to even offer that as a potential upside to starting negotiations, because much of the corporate US pullout has been self-inflicted. Companies could face public backlash if they are seen to be rushing into the Russian market.

Smith also said that in the longer term, the United States could undermine its “soft power” in Russia by abandoning the local market to brands from other countries – or even to Russian companies that grab Russia’s assets. business at little or no cost.

The departure of leading US companies is “causing psychological harm to Russia, psychological harm,” Smith said. But “at the end of the day, is removing elements of American soft power where the United States wants to be?”

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