Since the end of the Cold War, economic sanctions have increasingly been used by big players as a tool of foreign policy. The initiators of sanctions use trade and financial restrictions to try to force the target countries to change course politically as well as to influence internal political processes. The United States has positioned itself as the largest sanctions initiator. Over the past hundred years, the US has used them more often than all other nations and the UN combined. The Americans remain second to none in terms of the number of developed state institutions involved in the policy of sanctions. The US sanctions apparatus far exceeds the capabilities of the UN and any other country in terms of financial, human and organisational resources.

Valdai Club

May 2019

The European Union is also showing increasing activity as an initiator of sanctions. There are several conditions for this. First, the EU is a powerful economy with huge human, financial and technological potential. Economic power is the most important condition, without which an effective policy of sanctions is simply impossible. After all, sanctions are effective when the initiator can inflict much greater harm on the target country than vice versa. Second, the European Union has not yet become an independent military-political force. Its foreign policy is based on soft power and economic instruments, so in conflict situations, sanctions are the best option. Third, the EU coordinates its sanctions policy with the actions of the United States, its main ally. The growing number of sanctions on the part of Washington has also led to the growth of sanctions initiated by Brussels.

At the same time, there are a number of distinguished features that define the EU approach. One of the key elements is the commitment of Brussels to multilateral diplomacy. The EU avoids being the sole initiator of sanctions. This is an important difference from the United States. The Americans often impose sanctions without any regard for others. They recognise the importance of coalition pressure on the target countries and strive to involve their allies and a wider range of countries in launching sanctions. However, their support for the United States is more instrumental – the more sizable the coalition, the greater its potential for taking a toll on the economies of sanctioned countries. However, for the EU, the multilateral use of sanctions remains an important normative issue and even means of conveying shared values. The European Union carefully implements UN Security Council resolutions, and EU countries which are members of the UN Security Council have often offered their own draft resolutions on sanctions.

The EU, however, allows sanctions which bypass the decisions of the UN Security Council. Here the policy of Brussels differs from the positions of Moscow and Beijing, which consider the UN Security Council as the only legitimate source of sanctions. These countries also use unilateral measures, but so far they've done it much less often in comparison with the EU and especially the USA. However, by bypassing the UN, the EU is trying to combine efforts with the United States and other Western countries, that is, to provide a multilateral format. At the same time, the EU retains its own view on many problems and calibrates a set of restrictive measures at its sole discretion.
Another important distinction of EU policy is its extremely reserved attitude towards extraterritorial sanctions. The European Union authorities may well use secondary sanctions, that is, to punish certain companies or organisations for violating existing restrictions. However, Brussels uses such measures within its jurisdiction. The United States, on the contrary, is increasingly introducing secondary sanctions against foreigners, putting foreign companies on the SDN list or fining violators.

Interestingly, over the past ten years, most of the related fines were levied against European companies. This situation may well be called the "European paradox." EU authorities support many US sanctions initiatives, but at the same time many Europeans are negatively affected by the secondary sanctions. They pay the most fines. According to the Russian International Affairs Council (RIAC), over the past 10 years, out of 201 US Treasury fines, 40 were levied against EU companies and 133 were paid by US companies. In just 10 years, the US Treasury has collected $ 5.6 billion in fines. Of these, the Europeans paid more than $ 4.6 billion (83%), and the Americans only paid 177.2 million (3%). This distribution resembles the "Pareto law": most of the revenue is generated by a minority of players. And this minority is concentrated in Europe, whereas the smaller proportion was paid by the US-based majority. Of course, such a distribution can hardly be the result of the deliberate activity of American authorities. But the fact remains: Europeans pay the most.

At least since the 1990s, The European Union has tried to take measures to protect itself from secondary US sanctions. A serious incentive was the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) on the Iranian nuclear programme. Washington unilaterally resumed large-scale financial and sectoral sanctions against Iran. A significant number of companies operating in the Iranian market, including European ones, turned out to be facing the threat of secondary sanctions and subsequent penalties. The EU has resumed the so-called 1996 Blocking Statute, which should shield European companies from secondary sanctions. However, a significant number of big EU companies have already left Iran. Many large European companies which do business in Iran also conduct business in the US, and preferred to maintain their loyalty to American requirements, even though Brussels was critical of the US withdrawal from the JCPOA and introduced protective measures. The threat of having problems with the US authorities in the form of fines and "weaning" from the US market and financial system outweighs possible profits in the Iranian market.

In Europe, some politicians proposed establishing their own payment system, in the interests of European sovereignty and financial independence. In January 2019, INSTEX SAS company was registered in France (with the participation of Germany and the United Kingdom). It was tasked with securing transactions between European companies and Iran, bypassing US sanctions. So far the fate of this initiative remains unclear. The big problem is its approval by other EU members. Also, the real functionality of INSTEX remains unclear. In the end, nothing is preventing the Americans from including INSTEX in their SDN list, making it "toxic", or fining the company in proportion to the volume of its deals with Iran.

Europe's Financial Mechanism for Iran (INSTEX): Will It Be Enough to Save the JCPOA?

More than eight months after US President Donald Trump's decision to unilaterally withdraw from the 2015 nuclear deal (JCPOA) with Iran and in a bid to save the deal from the total collapse, Germany, France and Britain announced on January 31 the establishment of a new financial mechanism to enable trade with Iran.

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The prospects for INSTEX are becoming even more vague, against the background of diplomatic difficulties. After the US exit from the JCPOA, Washington found itself in diplomatic isolation on the Iran issue. However, this didn't bother the Americans much. The situation began to heat up after the United States lifted the restriction exceptions on the purchase of Iranian oil, which they made for eight countries, including Italy and Greece. In May 2019, Tehran announced that it would refuse to fulfil certain obligations under the JCPOA. In response, Washington immediately introduced harsh, newer sanctions against Iran. The EU reacted coolly to the actions of Tehran. Now Iran could be considered isolated.

The diplomatic development of the situation around the JCPOA is likely to seriously undermine European ambitions to create an alternative payment system. If Iran once again becomes a pariah state (as the Americans would like to see), then the reason that gave rise to the discussion about it will disappear. As for fines against banks and companies, Brussels is likely to leave these risks to the discretion of the business community itself. Moreover, entrepreneurs haven't demonstrated any serious, noticeable activity lobbying for alternatives. Apparently, the business sector feels comfortable in the dollar system, and the risks of secondary sanctions do not outweigh the benefits the system presents and the costs of its transformation. Moreover, outside of the Iranian problem, there is not a single issue that the sanctions policy presents that could seriously stimulate discussion about a European financial alternative. The commonality of the political positions of the United States and the EU will ensure the status quo.

US-Iran: Games that Pompeo Plays

The logic of Pompeo's movements and those of other high-ranking representatives of the State Department in recent days, as well as the nature of their discussions with their political opponents seems to boost the likelihood of a more forceful option — perhaps by organising a major provocation that will "force" America to take even tougher measures against Iran

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Ivan Timofeev

Ivan Timofeev has been a Director of Programs at Russian International Affairs Council (RIAC) since 2011. He is responsible for the intellectual performance of RIAC, leading a team of 20 full-time experts and covering more than 30 research and educational programs.

His personal background includes research on Euro-Atlantic security, political risks and economic sanctions. He has provided advise on sanctions and political risks for Russian and foreign portfolio investors, private and public companies and banks (Morgan Stanley, Sberbank and Goldman Sachs among them).
Since 2014 Ivan is a part of Valdai International Discussion Club – a community of international experts on foreign affairs and global issues where he has lead programs on Euro-Atlantic affairs and Russia-West relations.

Ivan combines policy research with solid academic career. Since 2006 he has been teaching at MGIMO-University – a leading school on International Relations in Russia. In 2009 he has been elected as an Associate Professor and qualified for this position in 2012, 2015 and 2018. In 2009-2011 Ivan was heading the Center for Analytical Monitoring at MGIMO.

He is an author and co-author of more than 80 publications, issued in Russian and international Academic Press. His works are published in English, Italian, French, Spanish and Chinese. He is a member of board of "Comparative Politics" – an academic journal on Political Science and International Relations.

Ivan is a part of professional communities: he is a full member of RIAC and a member (professor) of the Academy for Military Science.
He holds PhD in Political Science (MGIMO, 2006), MA in Society and Politics (CEU and Lancaster University, 2003) and BA in Sociology (St. Petersburg State University, 2002).

Ivan is a part of EUREN since the very beginning of the project. Together with Sabine Fischer he is an author of "Selective Engagement between the EU and Russia" - the first report of EUREN, published in 2018.