How Do Sanctions Work? New U.S. Bill Targets Russia And Europe Is Nervous

Putin and Lavrov
Russian President Vladimir Putin (L) and Foreign Minister Sergey Lavrov stand while waiting for Turkish President Tayyip Erdogan prior to their talks at the G-20 summit in Hamburg, Germany July 8, 2017. Alexander Zemlianichenko/Pool/Reuters

The House of Representatives overwhelmingly backed a bill to strengthen sanctions on Russia over interference in the U.S. presidential election. Pending likely approval from the Senate, the bill looks set to become the first major piece of legislation U.S. lawmakers will place on President Donald Trump's desk, a signature away from being law.

The bill has already incurred the wrath of Russian politicians who expected a different outcome given Trump's repeated campaign pledges to "get along" with Russia. Here is how the sanctions are meant to work and why they are upsetting Moscow and others:

What are the sanctions?

Trump's predecessor, Barack Obama, introduced several rounds of sanctions on Russian officials, businessmen and state holdings since 2014. The U.S. and EU blacklisted a largely overlapping group of people and pro-Kremlin businesses after several events—most crucially the annexation of Crimea in early 2014 and the shooting down of passenger liner MH17 above eastern Ukraine by Russian-armed militants.

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The blacklist of individuals comprises of business, state and military officials that the Treasury regards as close to Putin. It ranges from businessmen like the Rotenberg brothers and Gennady Timchenko whose companies receive generous contracts from the Russian government to the infamous Russian political clique of former security officials—the siloviki—linked to oil chief Igor Sechin, anti-drugs chief Viktor Ivanov, Putin's ex-chief of staff Sergei Ivanov and former parliament speaker Sergei Naryshkin. Many of the people on the list are longtime friends and associates of Putin from his hometown of St Petersburg.

They all received asset bans and travel freezes, while the state banks, state oil companies, and major arms makers that many of the individuals took charge of, also made the blacklist. More recently in 2016 President Obama expelled 35 Russian diplomats from the U.S. and closed two luxury diplomatic compounds. Unlike the Ukraine-related sanctions, these were the result of intelligence from the security services that Russia interfered in the U.S. presidential election.

The House-passed bill pushes the possibility of codifying these sanctions into law. If the bill is ratified—which also includes new sanctions targeting Iran and North Korea—lifting sanctions on Russia will now be a matter for U.S. lawmakers, not the U.S. president.

What are the sanctions meant to do?

Russian officials have attributed a handful of nefarious intended purposes for the sanctions, including the motivation to hamper Russian business in its ability to compete with the U.S. Former British Ambassador to Russia, Sir Roderic Lyne says that, as stated the sanctions are intended to "show the Russian government that actions have consequences."

"Sanctions are costly on both sides, but after the annexation of Crimea etc it was essential to show Moscow that Western reaction would go beyond just verbal condemnation," he says. "Russia has adapted to the existing sanctions and will adapt to new ones. They have had a marginal effect on the Russian economy, but have been a much less significant factor than the fall in the oil price and the long-run effect of Putin's economic strategy, which has failed to modernize Russia, damaged competitiveness, allowed corruption to flourish and inhibited growth."

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Russia has endured an economic recession over the last three years with wild currency fluctuations, though it is currently projecting a sluggish exit from its downturn. The individual cost of sanctions is difficult to pin down though Russian officials have repeatedly urged for them to be dropped.

Last month Russia's top state oil chief, Igor Sechin claimed sanctions coincided with a market capitalization plummet for his Rosneft company worth $31 billion.

Russia's so-called counter-sanctions, introduced in response to Western sanctions, embargoed imports of many food products from Europe. They have hurt pro-Western neighbors of Russia's who bank on agricultural trade but have also led to jumps in food prices in Russia. The added ethical and public relations fiasco with the counter-sanctions came after images of Russian authorities destroying seized goods appeared at a time of dire economic straits for many Russian families.

Why is Europe upset with the sanctions?

So far, the EU and Canada have backed the U.S. government on Russia sanctions with broad uniformity. The new bill, however, contains a provision that is making some European officials sweat audibly.

The phrasing of the bill is more general than the restrictions so far, targeting any company that contributes to renovation or construction of Russia's export pipelines. The clause, though less prescient a concern for the U.S., could jeopardize a handful of European companies that deal in importing Russian energy.

"One key question now is how Europe will react," Sir Lyne says. "Over Ukraine, the US and EU marched in step. That is not the case now; and the new bill has the potential to make Europe pay a much higher price than the US."

The EU has never been more dependent on Russian gas, according to Bloomberg, as Russia's state-run gas monopoly Gazprom now pumps over a third (34 percent) of Russia's gas. At present, Gazprom has put the kibosh on one pipeline to the EU, known as South Stream but agreed one that will bring gas on the EU's borders, to Turkey.

By far the new U.S. bill place the most distressing question mark on the pipeline to northern Europe known as Nord Stream II. Five of Europe's biggest energy companies are all signed on to partner Gazprom in pumping gas westwards.

Anglo-Dutch group Royal Dutch Shell, Austria's OMV, France's Engie and Germany's Uniper and Wintershall have agreed to work with Gazprom on the pipeline, collectively covering around half of the nearly $11 billion cost.

The European Commission President Jean Claude-Juncker warned Wednesday that Brussels needs to act "within days" if the U.S. does provide Europe with reassurance that the sanctions will not jeopardize EU interests. A U.S. official, speaking on the condition of anonymity told European news site EUobserver, that the European companies would likely not be punished by the U.S. as part of the sanctions but called the situation a "risk" regardless.

"The Europeans intensely dislike U.S. extraterritoriality, and this will widen the breach between the EU and U.S.," Sir Lyne says. "For the Russians, that is a silver lining."

The ambiguity has already given platform to Russian officials, picking at the apparent divide. Gazprom's board chairman Viktor Zubkov dismissed the sanctions last month, accusing the U.S. of harming Europe's interests of "chasing purely economic interests, lobbying for American energy companies in Europe."

"Just as the project is well underway toward realization, with the basic engineering done and the the concrete piping being continuously laid, new insinuations begin—tougher sanctions against Russia's energy sector," Zubkov said at an energy event in Vienna. "In Europe, this threatens the gas supply of the region."

Russian senators have already decried the sanctions as ill-considered and harmful for Russia-U.S. ties, while the head of the International Affairs Committee Konstantin Kosachev said Moscow will now seek a better relationship with the EU as a result.

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