In my book, The Ukrainian War as Revenge  Philosophy of War: Each Justice and Revenge, Retaliation, and Sanctions, I discussed sanctions in detail (For more information on how this book was published, please refer to my article “On the Trilogy of the Ukrainian War: Questioning the Nature of the Ukrainian War from Ressentiment ” [https://www.21cryomakai.com/%e9%9b%91%e6%84%9f/1436/]). However, the content is not always sufficient. Therefore, I would like to supplement this article by introducing some considerations on sanctions that I did not write enough about here.

 

About “Private Sanctions”

In my book, I dealt with the so-called “official sanctions,” a system in which a sovereign state goes all out to force domestic corporations and individuals to impose restrictions on corporations and individuals in the target country. However, the war in Ukraine triggered a phenomenon in which private companies, so to speak, voluntarily withdrew from Russia, thereby encouraging Russian employees to oppose President Vladimir Putin and reducing the profits of Russian companies, thereby facilitating the cessation of the war in any way possible. These were “private sanctions,” so to speak, and they were implemented on a scale never seen before. I will discuss “private sanctions,” which I have completely ignored in my book, in the “First Section,” and attempt a supplemental discussion of “public sanctions” in the “Second Section.

 

First Section

Well known is a study by a Yale University team that has tracked the responses of more than 1,200 companies since the invasion of Ukraine began (See https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain). More than 1,000 companies have announced that they are voluntarily scaling back their operations in Russia beyond the minimum legally mandated by international sanctions, according to the report.

It should be noted, however, that such investigations not only have a campaign effect in encouraging private companies to impose sanctions beyond the official sanctions, but can also lead to bashing and boycotts of companies that do nothing. In this sense, the survey is extremely “fishy,” but it is worth considering for the time being.

The survey was divided into the following five types: (1) Withdrawal (companies that completely sever all ties with Russia and withdraw from the country), (2) Suspension (companies that temporarily scale back most or all of their operations, leaving the option of returning), (3) Scaling back (companies that scale back some operations while continuing others), (4) Postponing new investment and development (companies that continue substantial operations, but (companies that postpone future planned investments, development, or marketing), and (5) refusal (companies that do not comply with requests to withdraw or scale back activities) – these are the five types of companies that are publicly announced.

The term “withdrawal” can mean either a forced withdrawal in the aftermath of official sanctions or a completely voluntary withdrawal. The latter is worthy of being called “private sanctions,” but as for the former, whether it qualifies as a “private sanction” or not is a bit of a question. The losses associated with the withdrawal would have to be written off, but the accounting treatment of such losses would also be problematic, and above all, the scale of the impact on the Russian side would be questioned.

Whether “suspension” or “downsizing” can also be called “private sanctions” is a difficult question. There may be cases where it is difficult to continue production due to delays in the supply of parts and services. As for “postponement of new investment and development,” there is a question mark over whether it has enough influence to be called a “sanction. Of course, “refusal” does not constitute a “private sanction.

While it is possible to take a variety of different views on individual companies, the Yale survey itself is only a rough sketch, and it is difficult to determine the extent to which cases actually deserve “private sanctions”. Rather, as will be discussed below, one cannot help but suspect that Yale is simply trying to appeal to the domestic market by giving the impression that it is “doing something.”

 

Shareholder Prioritization and the Stakeholder Approach

Therefore, I would like to consider another aspect of how to theoretically analyze a company’s “private sanctions” when it imposes “private sanctions.” In doing so, it is precisely the article “Private Sanctions” that is helpful (See Oliver D. Hart, David Thesmar, and Luigi Zingales, Private Sanctions, National Bureau of Economic Research, https://www.nber.org/system/files/working_papers/w30728/w30728.pdf). At issue are two conflicts over the debate of who should run the company and for whom, that is, the shareholder-first and stakeholder approach. The former, because it emphasizes management that prioritizes corporate profits, considers that “private sanctions” by the corporation should also be made in the interest of the corporation, i.e., in the interest of shareholders. The latter considers that “private sanctions” should also be in line with the intentions of stakeholders, since they believe that corporate management should take into account the impact on stakeholders.

According to the paper introduced, the theory that drives companies to sanction, for example, is the idea that “private sanctions” are viewed as “value-maximizing decisions aimed at protecting corporate reputation or minimizing the risk of incurring official sanctions.” Writing in the Financial Times on March 9, 2022, in an article titled “Sanctions more than ethics have spurred corporate flight from Russia,” Alan Beattie noted that “looking at their operations in Russia and elsewhere, most multinationals seem far more driven directly or indirectly by official sanctions than by sudden fits of corporate conscience.” Since companies doing business with banned companies could be cut off from the dollar payment system, a growing number of companies are scaling back or withdrawing from business with Russia in any case, in order to avoid in advance serious sanctions that could have a serious negative impact on their activities.

On the other hand, a paper analyzing corporate responses to Russia’s invasion of Ukraine with respect to stakeholder relations drew some interesting conclusions. It is Anete Pajuste & Anna Toniolo, Corporate Response to the War in Ukraine: Stakeholder Governance or Stakeholder Pressure?, https://ecgi.global/sites/default/files/working_papers/documents/ukrainefinal.pdf. First, we found that companies that quickly announced their exit from Russia actually had less revenue exposure to Russia (the amount or balance of exposure to market price volatility risk or specific risks in the company’s earnings). In other words, since the decision to withdraw from Russia would not be a major blow, there was an incentive to use the withdrawal to improve their advertising image. It suggests that some corporate leaders have attempted so-called “woke-washing,” defined as “converting the language of social activism into marketing materials.” To put it plainly, some companies have adopted a “mock” strategy of raising public awareness by pretending to be an enlightened company that is “highly aware of issues such as social injustice and racism” by promptly deciding to withdraw from Russia in response to the Russian invasion of Ukraine, and by appealing to the public about it.

In short, the Yale University study described above has the effect of a “public campaign” on a global scale. In this sense, the survey requires a careful and detailed analysis of what companies that have decided to withdraw or downsize are really thinking. As we have already pointed out, the survey itself is “fishy.” (Let us note that the reason we introduced the Yale University survey in this paper was to make you aware of this “fishiness.”)

Second, they tested the propagation of the boycott campaign by word of mouth on Twitter and also tested its relationship with management’s decision to take positive action in support of Ukraine and withdrawal from Russia, and found that the decision to withdraw from Russia was significantly and positively correlated with the boycott campaign. This represents the first time that a boycott campaign using Twitter has proven its impact in encouraging business leaders to withdraw from Russia. It would indicate that stakeholder pressure is important in the decisions of companies to pursue a broader agenda than profit maximization. The reality is that large corporations are subject to a “notoriety tax,” so to speak, and are prone to bashing if they do not live up to it.

Third, this pressure is concentrated on large companies, excluding small business owners from this managerial constraint. Thus, small business owners are free to operate without this important managerial constraint, even though they may be just as harmful to society as large businesses.

 

The General American View of “Private Sanctions”

The paper presented, “Private Sanctions,” statistically estimates Americans’ reactions to “private sanctions” based on a survey of a representative sample of the U.S. population through an online company (Respondi). The survey was conducted between May 10 and June 1, 2022. There were 4239 raw responses. Respondi automatically excluded 1324 respondents who failed the attention test, creating a final sample of 2915 observations. Approximately 3,000 respondents were randomly assigned to three different “stakeholder” treatments in which respondents were to think of themselves as employees, customers, or shareholders of a hypothetical company exposed to Russia. This virtual company refuses to close its operations in Russia, and participants are surveyed to see how they react. The results revealed the following.

First, stakeholders want the companies they patronize to clarify their positions. Only 37% believe that leaving Russia is a purely business decision and that it is best resolved by weighing the economic costs and benefits. This is true whether the patrons of a company are customers, employees, or shareholders. Only 30% say that only the government should impose sanctions. Stakeholders are very much in favor of companies imposing sanctions on Russia. Sixty-one percent believe that “doing business in Russia is like being an accomplice to war” and that “companies should cut ties with Russia no matter what the consequences.” Thus, a minority of respondents agree with Milton Friedman’s maxim that “the business of business is business.”

Second, the majority of stakeholders want to punish companies that refuse to shut down their Russian operations. When offered the option of selling their shares if they are shareholders, quitting their jobs if they are employees, or boycotting a product if they are consumers, their “willingness to punish” is strongly influenced by the personal cost they pay. When punishing a company does not involve personal costs, 66% of respondents want to punish companies that do not withdraw from Russia. If the cost of the boycott was $100, 53% were willing to boycott. When the cost was $500, the percentage of respondents willing to boycott dropped to 43%. The sensitivity to this cost is very large, suggesting that participants are trading cost for moral obligation.

Third, setting up a simple framework for analyzing the factors that influence an individual’s decision to boycott a company that does not withdraw from Russia, the motivation to act is purely de-logical in the case of participants who were told that the boycott would have no effect on the target company.

Fourth, the willingness to impose sanctions was found to be highly related to moral values and less related to sociodemographic attributes. Participants with higher Mercy and Authority scores and lower Purity and Loyalty scores were more willing to punish “immoral” firms. Interestingly, willingness to punish is also strongly influenced by age. Older generations are much more willing than younger generations to punish companies that do not withdraw from Russia. This may be explained by the specific topic of older participants who grew up during the Cold War having a more negative view of Russia. Even taking these factors into account, the report states that liberals are more aggressive in sanctioning than conservatives, but that the explanatory power of the political trend is small.

Finally, it is emotional empathy that plays a major role in stakeholders’ willingness to sanction, which is independent of the consequences of the sanction. Thus, the success of “private sanctions” as a strategy will depend largely on these aspects. It is this “emotional empathy” that is brought about by mass media such as television. But you can see that the information in that mass media is greatly distorted if you read my “Ukrainian War Trilogy” (In case you’re wondering, a book titled “How You’ve Been Deceived” will be published in the spring of 2023.). It must be pointed out that “private sanctions” are likely to be biased in favor of the state by the state and the mass media in collusion with the state.

 

Response to “Private Sanctions” on the Russian Side

In response to official sanctions against Russia, the Russian government imposes “official sanctions” against its adversaries. The problem is the response to the “private sanctions” presented here. As already noted, it is not easy to determine whether the response of individual foreign companies operating in Russia constitutes “private sanctions.

Here is an interesting case study. It is about the subsequent progress of the bill on external control of foreign companies, which was submitted to the House of Representatives on April 12, 2022. As detailed in my book Putin 3.0 written in Japanese (pp. 149-150), the bill allows for the introduction of external management and the transfer of “unfriendly” foreign assets into trust for companies that have declared that they will cease doing business in Russia by court order “in the absence of clear economic grounds” after February 24, 2022. The prerequisite is stipulated that “unfriendly” foreigners must own at least 25% of the company. It is also possible to sell at auction, in which case the state-owned company VEB.RF or another organization would be the external management body performing that function. Prior to the auction, a new company would be formed based on the old company and sold to an interested investor or, in the absence of an investor, to the state at the lowest price.

To be more specific, the system is designed to introduce external control to Russian legal entities if they (1) have left management without transferring authority since February 24 and declared the termination of their activities “in the absence of obvious economic grounds,” (2) have reduced staff by more than one-third, (3) have reduced sales for three months compared to the same quarter last year, or (4) are likely to pose a threat or increase consumer costs through their actions or inactions.

In other words, these are the conditions for what the Russian side considers “private sanctions.” Then, as a sanction or retaliation for the “private sanctions,” the Russians wanted the bill to allow for the external management of foreign assets or the transfer of assets in trust.

But while the bill passed the first reading of the House of Representatives on May 24, it has not passed the House as of the end of 2022. Deliberations are continuing, but the prospects for passage of the bill are uncertain.

Perhaps this bill, if enacted and enforced, would not only provoke a furious response from foreign investors, but could also influence discussions of seizure, freezing, and confiscation of Russian investors’ assets located abroad. For this reason, the Russian side seems to be taking a cautious stance.

Thus, “private sanctions” do indeed exist as a subtle issue that differs from “official sanctions” by the state. Therefore, it is an issue that cannot be ignored, and I wanted to write it down as a supplement to my book, The Ukrainian War as Revenge.

 

 

Second Section

In the following section, I would like to develop a supplementary argument on “official sanctions.” Let me begin by discussing sanctions at the United Nations and under international law, which I did not detail in my book, The War in Ukraine as Revenge.

 

Sanctions under Article 41 of the Charter of the United Nations

The United Nations Security Council may take action to maintain or restore international peace and security in accordance with Chapter VII of the Charter of the United Nations. “Sanctions measures” under Article 41, which sets forth measures that the Security Council may decide upon as “non-military measures,” encompass a wide range of coercive measures that do not involve the use of force. This explanation is from the Security Council website (https://www.un.org/securitycouncil/sanctions/information), which shows that the Council itself positions “non-military measures” = “sanctions.”

Since 1966, the Security Council has established 30 sanctions regimes in Southern Rhodesia, South Africa, the former Yugoslavia (2), Haiti, Iraq (2), Angola, Rwanda, Sierra Leone, Somalia and Eritrea. This is an example of sanctions being adopted through the UN decision-making mechanism, i.e., collectively, and the aforementioned Southern Rhodesia (now Zimbabwe) was the first to be punished through the mechanism of non-military restrictions (Following the 1966 incidents of racial segregation and restrictions on the rights of the majority black population by a white government independent of Britain, the United Nations banned Rhodesia from buying oil, weapons, airplanes, cars, and the sale of various goods. 13 years later, these sanctions had the desired effect of putting the country’s black population in power through internationally controlled elections). Currently, there are 14 sanctions regimes focusing on support for the political resolution of conflicts, nuclear nonproliferation, and counterterrorism. However, because of the lack of clarity regarding lifting, it should be remembered that in the 2005 World Summit Declaration, the UN General Assembly, with the support of the Secretary-General, called on the Security Council to ensure fair and clear procedures for the imposition and lifting of sanctions.

On the other hand, there are sanctions imposed unilaterally by the state. There is no universally accepted definition of such unilateral measures. The UN Human Rights Council has explicitly noted that “unilateral sanctions” or “unilateral coercive measures” “at the same time, it follows that unilateral coercive measures, regardless of their legality under a particular body of international law, may negatively impact human rights in various ways” (See https://documents-dds-ny.un.org/doc/UNDOC/GEN/G12/100/67/PDF/G1210067.pdf?OpenElement). Nevertheless, the decision to take such measures is left to each nation to make on its own, based on its subjective judgment that the actions of another nation violate international law. For example, as of the end of 2022, the United States has 38 sanctions programs in place (See https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information).

 

Reflections on the Iraq Sanctions

A historical review of UN sanctions shows that the UN sanctions against Iraq were a turning point. This was in 1990, after Iraqi President Saddam Hussein decided to invade the territory of his neighbor in order to end Kuwait’s economic war against his country. UN Resolution 661 (https://digitallibrary.un.org/record/94221) of August 1990 took steps to prohibit trade in goods strictly for medical purposes and in humanitarian situations, with the exception of foodstuffs. Despite comprehensive sanctions and threats of military force, Saddam did not surrender. Sanctions were lifted in 2003 after the dictator was overthrown. As a result of the sanctions, Iraq’s economy was destroyed. A December 1999 report (https://www.icrc.org/en/doc/resources/documents/report/57jqap.htm) by the International Committee of the Red Cross stated, “Now, after nine years of trade sanctions, imposed by the UN after Iraq’s invasion of Kuwait in August 1990, the situation of the civilian population is increasingly desperate. Deteriorating living conditions, inflation, and low salaries make people’s everyday lives a continuing struggle, while food shortages and the lack of medicines and clean drinking water threaten their very survival.” One article tells that four million Iraqis have become refugees (See https://archive.globalpolicy.org/humanitarian-issues-in-iraq/consequences-of-the-war-and-occupation-of-iraq/35722.html).

This prompted Denis Halliday, the UN humanitarian coordinator for Iraq until September 1998, to resign in order to oppose economic sanctions against Iraq. In February 2000, Halliday’s successor, Humanitarian Coordinator Hans von Sponeck, also resigned in protest at the impact of the sanctions on civilians. Twenty-four hours later, the head of the UN World Food Program in Iraq, Germany’s Jutta Purghart, resigned her post (See https://www.theguardian.com/world/2000/feb/16/iraq.unitednations).

Thus, the United Nations Millennium Declaration (https://www.ohchr.org/en/instruments-mechanisms/instruments/united-nations-millennium-declaration), adopted on September 8, 2000, included the statement “to minimize the adverse effects of United Nations economic sanctions on innocent populations, to subject such sanctions regimes to regular reviews and to eliminate the adverse effects of sanctions on third parties.” The result is a reflection on how ostensible humanitarian efforts to enforce peace can have dire humanitarian consequences, and a modification of the previously implicit principle that the suffering of the population will lead to pressure on the government. Usually it is the general public that is affected, not the political elite that triggered the sanctions. The UN appears to be gradually steering away from a comprehensive sanctions policy and limiting itself to targeted measures.

 

Cold War Dysfunction

The League of Nations implemented four cases of collective sanctions: 1921 (against Yugoslavia), 1925 (against Greece), 1932-1935 (against Paraguay and Bolivia, resolution of the Chaco War), and, most famously and most unsuccessfully, 1935-1936, when it joined with Britain to impose collective sanctions on Italy for its invasion of Ethiopia. In the latter case, the sanctions failed because other European countries did not follow the League’s restrictions (See Lance Davis & Stanley Engerman, “History Lessons: Sanctions: Neither War nor Peace,” Journal of Economic Perspectives, 2003, https://pubs.aeaweb.org/doi/pdf/10.1257/089533003765888502).

In contrast, after the hard axis of geopolitical confrontation between the Soviet Union and the United States was formed after 1945, mankind could not agree on sanctions when it wanted to punish someone on “their” team, be it in the Eastern or Western bloc, or in a First World country. The fact that the list of sanctions imposed by the United Nations since 1945 includes mainly peripheral and African countries was a result of the Cold War between the United States and the Soviet Union. It should be firmly noted that this was not only for the unilateral retention of interests in the Soviet bloc alone, but also for the retention of interests of the United States, which has been involved in numerous incidents, whether in Panama, Vietnam, or the Korean War.

After the collapse of the Soviet Union, as the unipolar dominance of the U.S. progressed, so to speak, sanctions by or led by the U.S. would be unilaterally implemented even without the imposition of sanctions by the UN, amid resistance by Russia and China in the Security Council.

As for Russia, as of December 2022, “more than 1,245 restrictions have been placed by the United States and more than 1,000 by G7 countries” (See https://expert.ru/expert/2022/51/gonka-ogranicheniy-yest-li-predel-sanktsiyam/). In the last six months alone, restrictions have been placed on Russia that cumulatively exceed the sanctions imposed on Iran over the past 40 years.

 

Position under International Law

Many unilateral sanctions against Russia are coordinated and often target the same commodity group or service category. These unilateral sanctions can be divided into sanctions against individuals or entities, bans on the import or export of goods, bans or restrictions on the provision of services, increases in import tariffs, and transportation restrictions. There are different views on whether such unilateral sanctions are justified. Contemporary international law holds that sovereignty per se cannot be a sufficient basis for the arbitrary use of force, be it military intervention or economic restrictions. According to this view, unilateral sanctions would only be considered legitimate if there is a threat to national security or as a measure to counter the wrongful acts of another country. However, as discussed in my book, The War in Ukraine as Revenge, under contemporary “global international law,” “interventionism is infested as if U.S. justice is the justice of the world,” and it acts as if it is “universal ‘justice'” (p. 207).

On the other hand, there is the Declaration on the Non-Intervention of States in Internal Affairs and the Protection of their Independence and Sovereignty, adopted by the UN General Assembly on December 21, 1965. It states that “no State may use or encourage the use of economic, political or any other type of measures to coerce another State in order to obtain from it the subordination of the exercise of its sovereign rights or to secure from it advantages of any kind. Also, no State shall organize, assist, foment, finance, incite or tolerate subversive, terrorist, or armed activities directed towards the violent overthrow of the regime of another State, or interfere in civil strife in another State.”

However, in addition to “primary sanctions” against targets within its own jurisdiction, the U.S. is increasingly imposing “secondary sanctions” against third country actors who continue to trade with the target country, i.e., extraterritorial actors. This can be seen as a violation of the sovereignty of the third country concerned. It could be argued that unilateral economic sanctions violate the free trade regime of the World Trade Organization (WTO).

 

Secondary Sanctions by the United States

In 1789, the United States adopted the Alien Tort Statute (ATS), which gave U.S. courts the right to hear suits by aliens for violations of U.S. or international law that did not take place in the United States (See Agathe Demarais, Backfire: How Sanctions Reshape the World against U.S. Interests, Columbia University Press, 2022). During the eighteenth and nineteenth centuries, this law was primarily aimed at piracy in international waters. In the 20th century, the U.S. also issued other extraterritorially applicable laws regarding antitrust, banking, and labor regulations. However, U.S. extraterritoriality law has for the most part been a minor phenomenon of interest only to a few specialized attorneys.

In the early 1980s, the situation changed dramatically. The father of a young man who was tortured to death while in custody in Paraguay was informed that a Paraguayan police officer, one of those who tortured his son, was in the United States. The police officer had been living in New York City for nine months on a tourist visa, in violation of U.S. immigration regulations. The father had the officer arrested for overstaying his U.S. visa. While the police officer was waiting at the Brooklyn Naval Base for repatriation to Paraguay, the father sued the officer at ATS. The U.S. federal court upheld this claim on the grounds that the ATS was relevant and the federal court had jurisdiction over the case, even though the crime took place 8,000 kilometers from the U.S. and did not involve U.S. persons. Paraguayan family wins $10.4 million (However, the police officer did not have any assets in the U.S., so the money could not be recovered.). Since then, foreigners who have suffered human rights violations anywhere in the world will use the ATS to sue the perpetrators and obtain compensation in the United States.

However, there were no examples of extraterritorial application of sanctions. Agathe Demarais, who introduced the program, writes, “until the mid-1990s Washington’s sanctions program were not extraterritorial” (p. 70). At the time, most U.S. sanctions were directed against entire countries, such as Cuba, or against specific individuals or companies, and sanctioned individuals or companies were added to the “Specially Designated Nationals and Blocked Designated Persons” (SDN) list maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC), where they were prohibited from using U.S. dollars, doing business in the United States, or with Americans. To comply with the sanctions, U.S. companies simply needed to ensure that they were not doing business with embargoed countries and that their foreign business partners were not on the SDN list. Non-U.S. firms, on the other hand, did not have to worry about the Washington blockade or the SDN list. Theoretically, this was because corporations outside the U.S. were not supposed to respect U.S. laws, including sanctions rules.

However, in February 1996, the Cuban Air Force shot down two planes of a Florida-based Cuban dissident group. In retaliation, the United States adopted the Helm-Burton Act, which extended the U.S. trade embargo that prohibited U.S. companies from doing business with Cuba to all international companies. The Helm-Burton Act is the first U.S. step toward extraterritorial application of sanctions. Naturally, European governments condemned the law as a violation of their sovereignty. The European Union (EU) filed a complaint with the WTO. Intense negotiations followed, but eventually President Bill Clinton backed down, waiving the provisions of the Helm-Barton Act that applied to non-U.S. companies. However, “the idea of U.S. extraterritorial sanctions was born” (Demarais, 2022, p. 71).

After 14 years, the idea of extraterritorial sanctions will be revived. In 2010, the U.S. Congress adopted new sanctions against Iran. The sanctions were novel in that they introduced the concept of “secondary sanctions,” in which foreign companies that do not respect U.S. sanctions are threatened with being added to the SDN list. As with the SDN list, companies subject to secondary sanctions will lose access to U.S. dollars and must exit the U.S. market. In addition, the executive would be subject to potential individual penalties. The U.S. claim was “circumspect.” Secondary sanctions did not target non-U.S. firms, but forced foreign firms to choose between the U.S. market and the market of the sanctioned country. However, this choice is not a fair one. This is because few global companies are willing to lose access to dollars and stop doing business with the world’s largest economy. As a result, almost all international companies will be forced to comply with U.S. sanctions for fear of becoming targets of sanctions themselves. Secondary sanctions would expand the scope of U.S. sanctions beyond its borders to the point where they would actually control the world as a rule that everyone must follow U.S. rules.

On August 2, 2017, then U.S. President Donald Trump signed into law new sanctions against Russia, Iran, and North Korea. Most of the sanctions programs initiated by Congress against these three countries included the possibility of imposing secondary sanctions. The reason for the subtle wording is that it is concerned with the nature of secondary sanctions. The U.S. dared to be vague about what criteria it would use to impose secondary sanctions, in an attempt to increase uncertainty and deter secondary sanctions. U.S. policymakers were well aware of the power of secondary sanctions in their deterrent effect, and therefore sought to make the threat of secondary sanctions as fleeting as possible in order to act as a deterrent to discourage or discourage international companies from entering into transactions that might be subject to secondary sanctions.

 

The Dark Struggle over Nord Stream 2

Let me explain how the U.S. government has been obstructing the laying of “Nord Stream 2,” a gas pipeline (PL) laid on the bottom of the Baltic Sea to transport Russian gas to Germany, while flirting with secondary sanctions. Nord Stream 1 (NS-1) and Nord Stream 2 (NT-2) were blown up on September 26, 2022. The culprits have not yet been identified, but the U.S. sabotage of the NS-2 construction will give you an idea of how much of an “eyesore” this PL was for the U.S. side.

Before I explain the NS-2, I would like to introduce the “dirty tricks” the U.S. has played in connection with the laying of the gas PL. It has to do with then President Ronald Reagan’s 1981 request to then Prime Minister Yoshiyuki Suzuki at the Ottawa G7 Summit to prevent Japan’s Komatsu (Komatsu Ltd.) from selling equipment to the Soviet Union for the construction of a PL from Siberia to Europe. Reagan argued that the gas pipeline was a threat to U.S. national security and that the Kremlin would use the gas export proceeds to bolster Soviet forces. Komatsu’s contract amounted to $85 million, but Suzuki responded to Reagan’s request and asked Komatsu to put the contract on hold. However, 10 days later, the U.S. Department of Commerce granted an export license to Caterpillar, a U.S. company, for a contract that Komatsu was asked to cancel. Since then, there has been a growing perception that the U.S. government wants to use the term “security” to enhance its own economic interests at the expense of its allies. However, this fact will be forgotten before long. In particular, I would like to note that the Japanese mass media, which lacks a critical attitude toward the U.S. government, does not adequately inform the Japanese people of the “viciousness” of the U.S. government.

Citing security reasons, the U.S. government repeatedly sabotaged the construction of NS-1, which began supplying gas to Europe in November 2011, or the construction of NS-2 alongside NS-1. Even though both PLs are to be laid on the bottom of the Baltic Sea and have no direct bearing on U.S. security, the U.S. government was concerned that Russia would increase its influence in Europe by making European countries more dependent on Russian energy resources. During the Cold War between the U.S. and the Soviet Union, this concern would not be without nodding, but even after the collapse of the Soviet Union, there were certain forces within the U.S. that were considered to be averse to Russia, the successor state of the Soviet Union.

In September 2018, the construction entity for NS-2, Switzerland-based Nord Stream 2 AG, will begin laying the gas PL for the subsea portion from the Finnish side. The total transport capacity of the two NS-2s was estimated to be 55 billion m3 per year, and the construction cost of the offshore portion was 9.5 billion euros (about $11 billion at the rate of the time). Gazprom will pay 50% of the PL construction costs, while the rest will be financed by Austria’s OMV, which signed a partnership agreement in 2017; Engie (formerly GdF) of France; Shell of the UK and the Netherlands; and Germany’s Wintershall and Uniper (formerly E.On, since January 2016, conventional generation and energy trading business will be integrated into Uniper) will finance the project. The total cost of the project was 4.75 billion euros. Construction was targeted to be completed by the end of 2019. The project was huge and involved some 150 European companies in one way or another.

However, there was some sabotage by the U.S. side leading up to the construction. To begin with, the construction of NS-2 was announced in 2015 by Gazprom and its five European partners. Immediately thereafter, preparatory work began, including issuing tenders to select suppliers of steel pipe, but the U.S. Congress threatened to impose secondary sanctions on international companies that financed or supported Russian energy projects through the aforementioned 2017 sanctions package against the three countries.

The target of the threat was European energy companies that financed NT-2. Without even clarifying whether any previous financing would be subject to retroactive secondary sanctions, in December 2018, after construction had begun, the U.S. House of Representatives voted to require European governments to reject the project, calling NS-2 “an outrage against European energy security and U.S. interests.” In response, on the 12th of the same month, the European Parliament adopted a resolution calling for the rejection of the project on the grounds that it is a “political project that poses a threat to Europe’s energy security. The fact that the U.S. and Europe were so at odds over the NS-2 should be remembered.

The opponents have a point. Once the NS-2 is completed, the Ukrainian economy will no longer need to rely on gas PLs to Europe via Ukraine, and that will be a blow to the Ukrainian economy, since reduced Russian exports to Europe via Ukraine will mean reduced tolls that Ukraine has been getting. It was even estimated that revenues would decrease by as much as $2 billion per year. Therefore, the argument can be made that it is important for European countries to continue Gazprom’s use of gas PL to Europe via Ukraine for the sake of Ukraine’s reconstruction, and that it is desirable to cancel the NS-2 construction itself.

On the other hand, the U.S. had a desire to compete with Russia’s gas exports to Europe by converting shale gas extracted in the U.S. into LNG for stable export to Europe. If NS-2 is built, more and more gas will be supplied to Europe, which will be detrimental to U.S. LNG exports to Europe. That is why they wanted to bring the NS-2 construction to a halt at all costs.

 

The U.S. Threatened with Secondary Sanctions

What ended up happening was that in December 2019, the U.S. Congress sanctioned Nord Stream 2 by adopting a bill that threatened to impose secondary sanctions on companies laying submarine pipes for the NS-2 project. After two years of futile attempts, Congress finally succeeded in threatening the completion of Nord Stream 2. The ultimatum worked, and within hours of the congressional vote, Allseas, the Swiss-Dutch company that had provided the large, highly specialized vessels to lay the 200,000 pipes that make up the pipeline, rushed out of the project.

Despite Allseas’ withdrawal, Gazprom had a Plan B for laying the pipeline. Three years ago, when the preparatory work for the pipeline was underway, Gazprom had purchased the vessel Academik Cherskiy, which was to be used for the laying of the pipeline. There were already less than 200 kilometers of seabed laying remaining that needed to be done. In addition, Gazprom hired an additional pipe-laying vessel, the Fortuna. Thus, it appeared that the pipe laying would make much progress after the summer of 2020. But in August 2020, prominent anti-government leader Aleksei Navaliny was exposed to a nerve agent and fell into critical condition. The attempted poisoning raised suspicions that the Russian government was responsible, leading NS-2 opponents to call on Germany to abandon the pipeline in retaliation. But then Chancellor Angela Merkel did not give in to U.S. pressure. In response, in October 2020, the Trump administration issued guidelines that further expanded the scope of previous sanctions. In late 2020, the Office of Foreign Assets Control (OFAC) sanctioned the vessel for resuming work on the German and Danish portions of the Fortuna, but to no avail. This was because the NS-2 was already almost at the completion stage.

In early 2021, the United States introduced new sanctions targeting insurance and certification companies involved in the project. Only Western companies had the expertise necessary for certification, and defying U.S. sanctions was not allowed as a risk. PL was about to be built, but U.S. sanctions made it unlikely to operate. But with the birth of President Joe Biden in January 2021, the tide has turned. The U.S. side folded, claiming that the two countries could not cooperate in dealing with the problem of Russia if the U.S. and Germany remained at loggerheads. Four months after taking office, the Biden administration lifted penalties on NS-2, saying in a State Department report that “it is in the national interest of the United States to abandon the measure.” As a result, the construction of NS-2 was completed in September 2021! (The final decision to operate the NS-2 was left to the German government, but after the outbreak of the war in Ukraine made the timing of the operation uncertain, the bombing would have occurred in September 2022). Compromise at this time may be the reason behind the relatively aligned U.S.-German response in the war in Ukraine.

 

Another Issue Concerning Secondary Sanctions

By all accounts, secondary sanctions appear to violate the national sovereignty of a third, extraterritorial country. When the U.S. government imposes this tyranny on its allies, the European countries naturally oppose it, notwithstanding Japan’s blind obedience to the U.S. In addition to the case involving NS-2, there is another similar analogy. It concerns the Society for Worldwide Interbank Financial Telecommunications (SWIFT), an organization that provides global payment services. In response to Europe’s desire to resume trade with Iran, the U.S. has tried to use the secondary sanctions under SWIFT as a threat to prevent Iran from strengthening cooperation with European countries.

SWIFT was established in 1973. It was co-founded by 248 banks from 19 countries. It is a cooperative established under Belgian law and owned by its members. To date, SWIFT unites more than 11,000 organizations in over 200 countries, mostly banks, but also about 1,000 non-financial companies. SWIFT itself was created in the mid-1970s to break the monopoly of First National City Bank (the predecessor of Citibank) in the U.S. payments market, but it is easier to understand it as an information system than a payments system. This is because SWIFT allows one bank to communicate all information about how much it has paid to whom at another bank. Since approximately 40% of the payments processed by SWIFT are denominated in US dollars, it is necessary to maintain a close relationship with the US. If SWIFT wants to maintain access to U.S. dollars, it has no choice but to cooperate with the U.S. and prevent payments that violate U.S. sanctions. That is why the U.S. government has gone so far as to use the threat of withdrawing from SWIFT as a secondary sanction.

Indeed, in 2012, SWIFT once excluded Iranian banks from its network due to strong U.S. pressure. In March 2012, the first financial institutions were detached from the system. In this case, SWIFT took the form of following the comprehensive sanctions measures against Iran confirmed to the Belgian Ministry of Finance by the European Council (the highest political body of the EU, consisting of the EU Heads of State and Government and the European Commission). At the time, Western regulators were taking a unified view on Iran, which means they were following pressure from Western governments. Thus, Iran became almost impossible to send and receive money.

After the 2015 Iran Nuclear Agreement (Comprehensive Joint Plan of Action [JCPOA] on the Islamic Republic of Iran’s nuclear program signed by Iran, Russia, the United States, China, the United Kingdom, France, and Germany), sanctions were phased down but not completed (In particular, all international reserves seized by Iran have not been unfrozen). Nevertheless, many Iranian banks have been removed from the European sanctions list and have since rejoined SWIFT.

However, mitigation was brief. In 2018, then-President Trump announced the U.S. withdrawal from the JCPOA and imposed additional sanctions on Iran. More than 700 Iranian entities, individuals, ships, and aircraft were sanctioned. Many Iranian banks were denied access to SWIFT, but no additional European sanctions followed the U.S. sanctions in this case. Europe was interested in maintaining the nuclear deal and strongly opposed the joint U.S. diplomatic offer (demarche). Then-U.S. Treasury Secretary Steven Mnuchin makes a veiled threat on November 2, 2018 that SWIFT could face U.S. sanctions if it provides services to Iranian financial institutions. SWIFT announced on November 5 that it would suspend access to its cross-border payment network for “certain Iranian banks” in response to the reinstatement of U.S. sanctions. What this means is that SWIFT is merely an “executive agency of the U.S. government.” That is why China, India, and Russia, which want to escape U.S. domination, will be tasked with building an international payment and information system to replace SWIFT. Not only that, the EU will also seriously seek to counter the US.

 

Shanghai Cooperation Organization Response

In March 2020, at a meeting of the Shanghai Cooperation Organization (SCO) in Moscow attended by representatives of the finance ministries and central banks of China, India, Russia, Pakistan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan, trade in their respective currencies, including the Chinese renminbi, Indian rupee, and Russian ruble The two countries agree to launch a process to conduct trade in their respective currencies, including the Chinese yuan, Indian rupee and Russian ruble, as soon as possible. The aim was to encourage the shift away from U.S. dollar-denominated settlements in order to evade U.S. sanctions. Transactions denominated in dollars must go through an American bank somewhere, making them susceptible to U.S. sanctions. To avoid this, the need to establish a mechanism to allow settlement between SCO’s members in non-dollar terms was clearly recognized.

A few months later, something unusual happens to the Russian statistics. For the first time in history, more than half of the trade between Russia and China was settled in currencies other than the dollar. Chinese and Russian companies expanded their use of the ruble and yuan for international transactions.

 

China’s Response

China, looking ahead to a decisive confrontation with the United States in the future, took the need to move away from dollar settlement most seriously. China immediately moved to expand bilateral currency swaps. Currency swaps are agreements that allow for the direct exchange of one country’s currency for another without involving dollars or other currencies, and they came into the spotlight during the financial crisis of 2008-2009. At the time, the U.S. Federal Reserve (Fed) agreed to have an open line to send U.S. dollars to the European Central Bank (ECB), in an attempt to avert a crisis of U.S. dollar shortages in developed economies. The aforementioned Demarais’s book notes that China’s central bank, the People’s Bank of China, has more swap lines than the Fed, with “60 currency swap agreements worth nearly US$500 billion.”

Separately, China had begun building its own financial messaging service to process international payments in renminbi, called Cross-Border Interbank Payment System (CIPS), in 2012; the first phase was launched in Shanghai in October 2015.

But in the year of 2016, CIPS processed only $700 million in transactions, or about 10% of SWIFT’s daily transaction volume, according to Demarais. Not only was CIPS linked to only 20 banks worldwide, but it was also impractical, operating only 11 hours a day and unable to handle securities purchases or investment flows. Nevertheless, the Chinese government continues to encourage emerging economies and others to use CIPS, and in 2021, CIPS processed over $12 trillion in transactions. This is only a fraction of Swift’s sales, but still represents a 17-fold jump in five years. Demarais notes that “around 1,300 banks in more than 100 countries have now joined the framework” (p. 130). Russian bank VTB, under US sanctions since 2014, joined CIPS in 2016. Since then, 20 more Russian banks have joined CIPS, including those excluded from Swift following Russia’s invasion of Ukraine.

 

India and Russia’s Response

As for India, in 2016, India’s central bank will launch the Unified Payments Interface (UPI), a domestic payments framework. In just four years since then, it has been widely adopted throughout India, and in 2021, UPI is estimated to have processed about 35 billion transactions, equivalent to a total of about $1 trillion. Like CIPS, this system has no connection to the U.S. financial channel and is therefore not sanctioned by the U.S.

In Russia, the Financial Messaging System (Система передачи финанссовых соообщений, СПФС [SPFS]) began in 2014 under the Bank of Russia, the central bank. It operates 24 hours a day, 365 days a year and provided messaging in SWIFT and user-specific formats. The SPFS also implemented a service for the transmission of Federal Treasury financial messages. Unlike RMB-based CIPS, the SPFS has the distinction of being compatible with all currencies.

According to an article published in the Russian-language magazine Ekspert on April 26, 2021 (https://expert.ru/expert/2021/18/chem-swift-ne-shutit/), approximately 400 credit institutions and other users were connected to the SPFS, with 70,000 daily or more messages are sent per day. Monthly SPFS traffic in 2020 was about 2 million messages, exceeding 20% of all Russian domestic message traffic through SWIFT. At the time, 21 non-resident banks were reportedly connected to the system, most of them from Eurasian Economic Union member countries (such as Bergazprombank in Belarus and Eurasian Bank of Kazakhstan). A December 19, 2022, article in Ekspert magazine (https://expert.ru/expert/2022/51/bez-swift/) states, “As of the end of February 2022, 331, including banks in Belarus, Armenia, Kyrgyzstan, Kazakhstan, Tajikistan, and Cuba organizations are connected to the SPFS.” In the spring, Central Bank Governor Elivira Nabiullina announced that the number of countries connected to the SPFS had reached 12.

By 2015, Russia will launch a domestic payment card, Mir, in an attempt to compete with the Western-led Visa and MasterCard. In that same year, Moscow forced Visa and Mastercard to use the National Card Payment System, a Russian method for processing domestic transactions. They made sure that card payments would continue even after Visa and Mastercard withdrew from Russia in 2022.

 

The EU Revolt

As already explained, European countries have also faced the damage of infringement of their national business activities due to the threat of secondary sanctions by the United States. This has led them to seek ways to protect themselves from the tyranny of the U.S. government in ways that do not involve rough treatment, such as withdrawal from SWIFT.

In September 2018, the EU will unveil a novel plan to escape Washington’s clutches. Federica Mogherini, the EU’s High Representative for Foreign Affairs and Security Policy, made it clear that the EU is establishing a “special payment agency” that will work to protect non-US companies from US economic actions against Iran. It is called “Instrument iN Support of Trade Exchanges” (Instex).

The plan will be completed with the ability to bypass SWIFT by serving as a clearing house for trade between the EU and Iran that does not use the U.S. dollar. But Instex is not a bank. It is nothing more than a kind of “barter,” with European and Iranian importers and exporters communicating with each other and maintaining a trading ledger. Moreover, most European companies are reluctant to use this system for fear of retaliation from the United States.

For this reason, the U.S. passed off this attempt by the EU as no big deal. Instex launched in January 2019, but transactions did not necessarily expand, as its use was limited to food and other humanitarian aid. Still, it should be remembered that Instex continues to be the most tangible symbol of European discontent with U.S. sanctions.

 

Doubts about the effectiveness of sanctions in the first place

Thus, it will be seen that neither the UN-level sanctions nor the US-led sanctions are being implemented as a system that is acceptable to the world. Perhaps China will seek to expand its influence around the world, mimicking the U.S.’s previous self-serving and threatening methods of using sanctions and secondary sanctions.

Demarais’s book, which we have mentioned many times, tells of a “seemingly innocuous meeting” in 2011 between Chinese officials and officials of the Office of Foreign Assets Control (OFAC), a sanctions agency of the U.S. Treasury Department (p. 155). It was here that the Chinese asked technical questions about the U.S. sanctions. As a result, “it turned out that China was in the process of developing its own sanctions legislation.” Currently, in 2016-2017, Beijing’s retaliatory measures against the deployment of a U.S. missile system (the Interceptor Missile System [THAAD]) in South Korea caused the South Korean conglomerate Lotte to lose about $2 billion, with the overall loss to the South Korean economy amounting to nearly $16 billion.

But what is the point of sanctions in the first place? A paper by Kimberly Elliott titled “Evidence on the Costs and Benefits of Economic Sanctions,” published in October 1997, notes that “In the 1970s and 1980s, a mere 13 percent of unilateral US sanctions achieved any success at all” (See https://www.piie.com/commentary/testimonies/evidence-costs-and-benefits-economic-sanctions). It also states, “I estimated that economic sanctions cost the United States $15 billion to $19 billion in forgone merchandise exports to 26 target countries in 1995.” This decline in exports means more than 200,000 fewer jobs in the relatively high-wage export sector, which is a serious problem.

Is there any “justice” in sanctions that are imposed without setting a sanction deadline, with unclear objectives, and based on the maintenance of the interests of hegemonic states and the base political motivations of politicians? Official sanctions raise questions such as.

Despite this, the Japanese mass media do not criticize the Japanese government, which is only acquiescing to the U.S.-led official sanctions against Russia. From my point of view, I must condemn those in the Japanese mass media for being so ill-informed. Please start by carefully reading my book, “The Ukraine War Trilogy,” as well as this Essay.