The United States, the European Union, Canada, and the UK announced coordinated sanctions against Russia this weekend. The sanctions are designed mainly to block major banks from the SWIFT financial network and isolate families close to President Vladimir Putin.
Treasury Secretary Janet Yellen said the coordinated sanctions will “deliver swift and severe consequences to the Kremlin and significantly impair their ability to use the Russian economy and financial system to further their malign activity.”
Unfortunately, collateral damage from the sanctions will also be “swift and severe” by unleashing vast levels of corruption.
That sanctions cause corruption is well known. Yet, policymakers, academics, and even journalists have largely ignored the problem. When the choices are doing nothing or going to war, sanctions are a safe middle way.
But as sanctions expert Bryan Early said in 2015, “Sanctions encourage government corruption and the development of transnational organized crime. For a state like Russia, sanctioning its government has likely contributed to making many of the problems for which it was previously criticized — such as corruption, corrosion of democratic institutions, and a lack of media freedom — even worse.”
Jill Jermano, a former senior official in the U.S. Treasury Department, wrote two months ago about the “criminalizing consequences” of multilateral sanctions. She cited case studies about the former Yugoslav Republic, Iraq, and Haiti. Another study by the Center for a New American Security “found a significant correlation between post-9/11 U.S. sanctions and increased corruption in targeted regimes.”
“While many factors drive corruption, the potential for sanctions to contribute to the problem has received little attention in policy circles,” Jermano said. She pointed out that even the U.S. Strategy on Countering Corruption that the White House released in December 2021 fails to mention “the benefit of accounting for corruption when planning for sanctions.”
Why do sanctions cause corruption?
Here’s Brian Early again: “The more restrictive and widespread sanctioning efforts become, the more profitable it also becomes to covertly trade with the target. What separates sanctions-busting trade from drug-smuggling or prohibition-running is that most foreign governments not only consider such trade legal but actively encourage it.”
Thus, sanction-busting can become an act of patriotism. That’s evident when sanctions trigger what some call the “Battle of Britain” effect. It happens when populations under siege from foreign enemies band together to resist destruction.
“Putin and his propagandists would love it if the West began treating all 144 million Russians as the Kremlin’s willing collaborators,” UK historian and journalist Owen Matthews wrote this weekend. That outcome seems likely. Analysts said the new sanctions are intended to “send the ruble into ‘free fall’ and promote soaring inflation in the Russian economy.”
What about sanctions targeting individuals? Far from being hurt, sanctioned elites can gain more power. To keep their support, the Kremlin has rewarded them with “privileged access to state contracts or other perks,” according to Jermano, the former Treasury official.
The Washington Post’s analysis of the Pandora Papers in October 2021 said despite earlier U.S. and European sanctions targeting more than 800 Russian individuals and entities, “vast quantities of Russian money continue to slosh through secret global accounts while Moscow’s actions beyond its borders seem undeterred.”
Jill Jermano warns that “working around financial sanctions can involve the same techniques that kleptocrats and their cronies use to launder and safeguard their ill-gotten gains, including using third parties to hold assets, conduct transactions, or register anonymous shell companies.”
Comprehensive sanctions can also bring corrupt (and politically similar) regimes into tighter alignment. That happened between Cuba and Venezuela, for example. Similarly, according to Nicholas Burns, the U.S. State Department’s former third-ranking official, China became Iran’s largest trading partner following imposition of UN sanctions.
There’s another problem. Sanctions often trigger divestment campaigns. London-based BP plc, one of the world’s biggest oil companies, said it would sell its almost 20 percent stake in Rosneft, a Russian government-controlled energy company. The Wall Street Journal reported that BP Chief Executive Bernard Looney and former CEO Bob Dudley will resign from Rosneft’s board.
“Analysts and bankers have said another government-sponsored buyer could be interested in acquiring BP’s Rosneft stake, citing the Qatari sovereign-wealth fund’s Rosneft holding and potential Chinese interest,” the WSJ said.
BP’s exit from Rosneft — likely just one of scores of divestitures to come — is bad news for governance and compliance at the Russian companies left behind.