Self-sanctioning Russia

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Private Supplements to Public Regulation

Commercial actors around the world are reacting to Russia’s invasion of Ukraine by voluntarily reducing their exposure to Russia-connected trades. Although the economic sanctions imposed by the EU, UK, US, Japan, and other major powers have been rapid and sweeping, the deliberate choice by the business community to willingly de-couple from Russia-linked transactions has further amplified the force of the collective response. As sanctioning authorities bar a range of private sector activities with a Russia nexus, commercial entities have mobilized to wind down operations, cancel projects, divert resources, and re-calibrate risk mitigation and due diligence processes in efforts to stay in sanctions compliance. But parallel to these compliance initiatives, businesses have also voluntarily distanced themselves from the Russian economy, even in sectors outside the scope of the sanctions. These “self-sanctions” or “moral sanctions” reflect an advancing dynamic in economic warfare. Not only are sovereign states and supranational organizations designing and implementing economic measures to punish and deter Russian aggression, private actors, too, are adding layers of economic pressure at their own initiative. This piece examines this phenomenon, offering an overview of the current trend along with a brief commentary on its implications for a diplomatic solution in Ukraine.  

Overcompliance or Ethical Initiative?

International business actors have grown accustomed to sanctions compliance in recent years due to regulatory measures targeting Iran, North Korea, Syria, and Venezuela. Contemporary sanctions techniques imposed by public authorities involve restricting private sector activities under the threat of punitive action such as financial penalties, asset seizures, blacklisting, and criminal prosecution. These measures may be applied directly against actors named as primary targets, such as those blacklisted via the US Treasury’s Specially Designated Nationals list. In addition, those who do business with entities named by the primary sanctions risk being hit with secondary sanctions themselves. The looming threat of these indirect sanctions oblige commercial actors to broadly guard against the possibility of inadvertent violations, which requires comprehensive know-your-customer inquiries and thorough pre-transaction investigations when engaging in transactions near the periphery of sanctions regimes.

These due diligence efforts have led to the perception of commercial actors “over-complying” with sanctions beyond the explicit mandates imposed by regulatory authorities. By pro-actively distancing themselves from at-risk counterparties, sectors, and geographic territories, commercial actors attempt to reduce the likelihood of secondary sanctions exposure. Over-compliance may also be generated by private actors taking the initiative to roll back commercial engagement in anticipation of new rounds of sanctions potentially appearing on the horizon.  This strategy acts to hedge risk in the case of rapidly applied measures added by regulatory authorities in the event of an escalation of the geopolitical controversy underlying the sanctions regime.

While sanctions over-compliance may be rationale business strategy, it is not always viewed positively. In the Iran context, for instance, where sanctions policy has fragmented in recent years, overcompliance with US sanctions (in contravention of EU sanctions rollbacks) has caused complications for access to medical products and pharmaceuticals even though they have been excluded from the US sanctions regime. This over-compliance may occur in part because regulators have at times described sanctioned activities in vague terms whether through broad statutory drafting or perhaps in conscious attempts to steer commercial actors away from economic engagement with targeted nations even beyond the scope of the mandates embedded in statutory law.  

A form of over-compliance has already become pronounced in the nascent Russia sanctions landscape. Since Russia’s invasion of Ukraine began on February 24, 2022, regulatory authorities from the major industrialized economies have imposed remarkably coordinated sanctions. These include far-reaching restrictions on trade with Russia, including blacklisting of political elites and state-owned companies, prohibiting certain financial services, restricting the import of bulk commodities, and, to a more limited degree, regulating the import of energy products. Due to Russia’s deep ties with the global economy (especially its export of oil and natural gas), the EU thus far has been hesitant to restrict the import of Russian energy. At the same time, however, private actors have also quickly self-regulated above and beyond sanctions mandates. These decisions could be driven in part by attitudes of overcompliance in preemptive reaction anticipating further rounds of sanctions, but public posturing by business leaders suggests that commercial actors are also disengaging from Russia as an ethical response to the war.

Companies with global presences such as Boeing, Deloitte, Ikea, Volvo, 3M, and upwards of 700 others have withdrawn or announced plans to wind down engagement in Russia. Many of these companies have issued statements explaining their rationale for divestment: Coca-Cola, for instance, decried the “unconscionable effects from these tragic events in Ukraine”; Apple stated its commitment to “stand with all of the people who are suffering as a result of the violence”; And KPMG announced its decision to leave Russia explaining, “This decision…is a consequence of the actions of the Russian Government. We are a purpose-led and values driven organization that believes in doing the right thing.”

Actors in the lucrative energy markets are among the most high-profile actors to voluntarily divest from Russia. Just days after the invasion began, BP announced plans to sell its stake in a project in Russia reportedly worth $25 billion. According BP, this move was not driven by sanctions compliance but instead because it was “the right things to do.” ExxonMobil likewise announced its decision to pull out of major projects and pledged no new investment in Russia. It also issued a statement carrying an unequivocal condemnation of the invasion: “We deplore Russia’s military action that violates the territorial integrity of Ukraine and endangers its people.” Shell, which initially continued to purchase Russian oil (at a discounted rate), soon also committed to phase out such transactions in the future. In a statement, Shell explained it was “acutely aware that our decision last week to purchase a cargo of Russian crude…was not the right one and we are sorry.” With these major energy companies making the independent decisions to steer clear of Russia-linked transactions, this has rattled oil prices even when regulators have clarified to industry participants that sanctions would not apply to such deals.

Ethics are not the only concerns driving this type of self-regulation from global businesses, as safety and logistical challenges are also part of the calculous businesses are weighing when determining whether to continue engaging in Russia-related transactions. Citing security risks, container shipping lines Maersk, MSC, CMA-CGM, and others have announced they will stop servicing Russian ports. Bulk carriers and tankers have continued to facilitate some trading, but as sanctions risk evolves and shipping industry actors such as bunker fuel providers, marine insurers, and pilot services self-sanction, some actors have given up on trying to navigate these complexities and have instead decided to voluntarily halt Russia-linked transactions all together.

Yet some companies have been hesitant to depart Russia voluntarily due to humanitarian concerns, although these actors have been careful to explain their decisions publicly. Technology companies such as Meta (Facebook, Instagram, etc.) have resisted pulling out of Russia due to concerns that it could further disrupt access to reliable information about the war. Pharmaceutical companies, such as Johnson & Johnson, Bayer, and Pfizer, have also continued to provide medicine in Russia on grounds that failing to do so would be unethical.  Companies such as Nestle have likewise continued selling certain goods such baby food and items used for hospital nutrition. Similar humanitarian reasoning has been employed by commodity trading companies on the basis that immediately disengaging from Russia-linked transactions could destabilize food supply chains. In a statement announcing its decision to scale back activities and investment in Russia, agricultural commodity trader Cargill explained, “We will continue to operate our essential food and feed facilities in Russia. Food is a basic human right and should never be used as a weapon.” With some observers indicating that the Russia sanctions could substantially impact fertilizer supplies and threaten food security around the world, these kinds of humanitarian arguments may gain traction if the war in Ukraine protracts.   

Still some companies have been resistant to the moralistic dialogue surrounding Russia and Ukraine altogether. These businesses have remained defiant in the face of public pressure, earning their moment in the unwelcomed spotlight a group of Yale academics have described as the “Hall of Shame.” The Yale School of Management Chief Executive Leadership Institute is keeping an updated list of companies indicating whether they have divested in Russia, with each company on the list assigned letter grade from A to F — with the worst offending companies “digging in” with business-as-usual in Russia. Even some of those companies raising humanitarian arguments for continuing some Russia-related operations are being harshly assessed, such as Cargill which is currently earning a “D” grade.

Looking Ahead

Viewed collectively, these strategic business decisions regarding whether to divest in Russia or stay the course appear to be driven by factors extending beyond sanctions compliance, including ethics, security, logistics, and of course public perception.  As other scholars have observed, these private responses implicate values articulated in international legal instruments such as the UN Guiding Principles on Business and Human Rights, but they also reflect a broader trend as businesses have recently become more vocal and active in public discourse surrounding social responsibility including environmental, political, public health, and public safety controversies. The war in Ukraine is demonstrating this appetite once again, but in a much more comprehensive form.

The self-sanctions phenomenon leaves a trail of questions regarding what these layers of voluntary measures will mean for a potential resolution of the war. One benefit of employing sanctions as a geopolitical technique utilizing the prospect of a roll back as a bargaining chip in diplomatic negotiations. If private actors are self-sanctioning after weighing their own moral and strategic compasses, do governments and multilateral actors suffer a diminished capacity to offer meaningful sanctions roll back that would otherwise give them leverage by offering the carrot of economic re-engagement? While sanctioning authorities can demand that private companies refrain from engaging with targeted actors under the threat of sanctions penalties, they lack the power to affirmatively mandate commercial investment.  With businesses now deciding for themselves that it is time to exit Russia, they may remain a reckoning force in attempts to reach a resolution.  

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