It is becoming increasingly apparent that isolating Russia and totally cutting it off from the global economy is not going to be easy.
As I discussed last week, from Mexico to Brazil to China to India and much of Africa, the world is resisting Washington’s call to treat Russia as a pariah nation. In the words of James Pindell, “Most of three huge continents—Asia, Africa, and South America—are either still working with Russia or trying to project the image of neutrality.”
Yes, the US will certainly inflict a lot of damage on the Russian economy with its sanctions, but it’s unlikely to be enough damage to incapacitate the Moscow regime. This is because much of the world has shown it plans to continue having relations with the Russians, albeit while taking some efforts to avoid any direct policy confrontation with Washington.
But this all also means that if Washington wants to press the issue of global cooperation and assistance with US sanctions, the US is going to have to threaten many other regimes with secondary sanctions—sanctions designed to force compliance with the initial sanctions on Russia. This will be diplomatically and economically costly for the US. After all, if the US is trying to build up alliances and economic partnerships against a potential Russia-China bloc, trying to impoverish dozens of countries as punishment for noncompliance with Russia sanctions will only encourage other regimes to insulate themselves from both the US economy and the US dollar. Whether or not this happens will largely depend on how hard the US is willing to bully third-party countries in order to win compliance with its Russia sanctions.
What Are Secondary Sanctions?
Before we proceed, let’s look at what exactly secondary sanctions—and the closely related “extraterritorial” sanctions—are.
At their most basic, secondary sanctions are sanctions imposed on a third party that is not the target of the initial, primary sanctions. For example, if the United States wants to force a change of policy in Iran, the US will impose sanctions directly on Iran but might also decide that this isn’t enough. The US might also seek to prevent other countries from doing business with Iran as well. In order to do this, the US will then impose secondary sanctions on firms and entities in other countries that do business with Iran.
More specifically, as outlined by the Atlantic Council, extraterritorial sanctions mean
the sanctioning country can extend its economic sanctions policy to apply to foreign-based firms outside of its jurisdiction. A well-known example is the Helms-Burton Act, which President Bill Clinton signed into law in March 1996 as the Cuban Liberty and Democratic Solidarity Act. The legislation tightened the conditions of the existing economic embargo against Cuba. It provided for penalties on foreign-owned (non-US) companies that engaged in the “wrongful trafficking in property confiscated by the Castro regime” through trade with and investment in Cuba. The Helms-Burton Act required US multinational corporations to extend their compliance practices to their foreign-based subsidiaries. The act was met with protests from countries where the foreign subsidiaries were located, which viewed the sanctions as illegal.
And secondary sanctions are cases in which
the sanctioning country can prohibit firms and individuals in other countries from conducting commercial transactions with US citizens and businesses, to inhibit their economic relationship with the country targeted with “primary” economic sanctions. A contemporary example is the secondary sanctions the United States has placed on Chinese firms and individuals for undertaking financial transactions with North Korea. On June 19, 2017, the United States imposed sanctions on a Chinese bank (Bank of Dandong), a Chinese firm (Dalian Global Unity Shipping Co.), and two Chinese citizens (Sun Wei and Li Hong Ri). The Bank of Dandong is banned from conducting any banking with US-based firms. Dalian Global is banned from commercial transactions with US firms and citizens. For Wei and Ri, the sanctions froze their assets and banned them from any business with US-based firms or individuals.
In geopolitical terms, what this means is the US government is directly attempting to punish and regulate foreign firms and foreign individuals even in cases where the United States is not a party to the trade or investment taking place.
Why Much of the World Will Push Back
Needless to say, this rubs many foreigners and their regimes the wrong way. Imagine, for example, how Americans react any time they’re told foreigners are somehow meddling in American affairs. Moreover, Washington has ratcheted up its use of sanctions in this way in recent decades, whether to sanction China, Iran, Russia, or other countries. This has led to growing pushback from many third-party states that find themselves targeted by these secondary sanctions. As one observer remarked back in 2021:
This unchecked power to levy sanctions inevitably has met with strong opposition from across the globe, not only from governments and businesses targeted by US sanctions but also by those in third countries whose foreign policy and business interests are curtailed by US secondary sanctions. The EU and Canada and other nations traditionally aligned with the US have led the pushback up to this point, and now China has entered the fray, increasing the risk of geopolitical confrontation as well as increasing the compliance risks for multinational companies.
Now, by extending very harsh sanctions to Russia, the US is greatly expanding the scope of its sanction regime, and to a country that is far more globally connected than Iran or Cuba or North Korea. It’s one thing to demand other countries sanction a handful of small countries with a small global economic footprint. It’s quite something else to demand that the world go along with US sanctions of a large country like Russia.
For example, Africa depends heavily on Russian wheat, and even more heavily on Ukrainian and Russian wheat combined. With Ukrainian wheat production greatly reduced thanks to the Russian invasion, Egypt, South Africa, and numerous other African states will be even more reliant on Russian wheat. Essentially, the US is forcing up the price of food in Africa just as Africa is still reeling from a hunger crisis in the wake of covid lockdowns and trade disruptions. It is likely not a coincidence that nearly one-third of African states refused to vote in favor of the UN resolution condemning the Russian invasion.
Meanwhile, India, like many other countries, deals frequently with Russia as a source of weapons. Russia is also a key source of numerous important raw materials like aluminum, palladium, oil, and fertilizer for countries across Asia, Africa, and South America.
A turn toward enthusiastic enforcement of secondary sanctions will put the US in direct conflict with these regimes that have no interest in opposing the US’s policies toward Russia specifically but are unprepared to totally cut off their trade relations with Russia.
China Remains the Big Challenge
Ultimately, should the US go down this path, it may be able to use its clout to force many smaller, geopolitically weak countries to go along. This will, however, reduce the US’s so-called soft power—the real source of US global power—by humiliating smaller regimes and driving up the cost of living for the developing world’s economically beleaguered households.
But the real question is China. It may not even be possible for the US to force compliance in the short term if China refuses to embrace US efforts to isolate Russia. China’s trade connections to South America, Africa, and the rest of Asia, of course, are far more extensive than those of Russia. This makes it far more difficult to impose politically effective sanctions on China than on Russia.
Nonetheless, Washington has already started making threats toward Beijing. This week, Washington imposed new minor sanctions on some Chinese officials, but Washington claimed the sanctions were motivated by Beijing’s repression of certain ethnic minorities in China. The sanctions may nonetheless be calculated to send the message of “we will sanction China if we feel like it.” Moreover, US threats against China are mounting, and CNBC reported last week:
The White House has warned China not to provide Russia with an economic lifeline as the Kremlin steps up its onslaught on Ukraine. The U.S. says it fears China, a key strategic ally of Moscow, may seek to cushion the impact of measures designed to destroy Russia’s economy if the war continues. . . .
Since Russia’s attack on Ukraine, Beijing has refused to call it an invasion and said China would maintain normal trade with both countries. China has not joined the U.S., EU and other countries’ sanctions on Russia.
The Biden administration also recently reiterated that the president has laid out the “implications and consequences” for Chinese premier Xi Jinping should China provide “material support” to Russia. (What “material support” means would depend heavily on how the US defines it.) Senate Republicans are already crafting legislation designed to punish China should it assist Russia with finding ways to work around the US’s attempts to cut it out of the global financial system.
Domestic Politics Matter for Beijing
From its perspective, however, Beijing—for domestic political reasons—can’t be seen as being pushed around by US sanctions. For a glimpse of this we can look to a March 17 press conference intended primarily for the Chinese public. According to the state-owned Xinhua news agency:
Sanctions are never effective means to resolve problems, [Beijing spokesman] Zhao [Lijian] stressed, adding that China opposes all forms of unilateral sanctions and “long-arm jurisdiction” by the U.S., and will resolutely defend the legitimate rights and interests of Chinese companies and individuals.
Wielding the baton of sanctions while seeking China’s support and cooperation simply won’t work, said Zhao, stressing that the Chinese side urges the U.S. not to undermine China’s legitimate rights and interests in any form. If the U.S. insists on going its own way, China will definitely take strong countermeasures.
Chinese nationalism—in no short supply either within the regime or among the general public—simply won’t permit China to easily submit to US sanctions that approach anything like what we’re seeing imposed on Russia. Should Beijing decide to push back, the US will find itself not only in a sanctions war with Russia, but with much-larger China as well.
The short-term effects of an aggressive assault with secondary sanctions by Washington will not be dramatic or immediately apparent. In fact, the US is likely to get a sizable amount of compliance in the moment. But short-term victories can often lead to long-term defeat. If Washington pursues a path as a “global sanctions cop” picking winners and losers, this will only encourage more regimes to decouple from the dollar.
Moreover, the US’s recent seizure of Russia’s central bank reserves should make any regime think twice about holding large amounts of dollars. If Washington can do it to Russia, Washington can do it to anyone, and other regimes are likely to see this and slowly flee the dollar.
Washington, however, thinks only in the short term, and it’s clear that the US regime now fancies itself the leader of some kind of new world order in which are revived old notions of a “free world” (i.e., the “first world”) followed by lesser regions of poorer states and rogue states. The United States, though, is no longer in any position to remake the world in its image. It’s not 1945 or even 1970, so the United States will find itself contending with a Global South that has many more options than it did in the first decades following the Second World War.
Reprinted with permission from Mises.org.