Tag Archives: economic sanctions

Co-Dependent Enemies: US Sanctions and the Russian Titanium

Ttitanium tube containing the Russian flag, in the Arctic seabed 2007

The United States imposed sanctions on Russia’s state arms export agency and four defense industry enterprises for alleged violations of international arms control regimes restricting export of nuclear and missile technologies to Iran, North Korea and Syria on Wednesday.

A notice posted on the U.S. government’s Federal Register on the State Department’s behalf on September 2, 2015 said the move was a response to violations of the Iran, North Korea and Syrian Nonproliferation Act (INKSNA).  The act prohibits the transfer of goods, services and technologies restricted under international arms control agreements such as the Missile Technology Control Regime to Iran, North Korea and Syria.

A spokesman from the U.S. Embassy in Moscow, Will Stevens, told The Moscow Times that the Russian entities sanctioned under the act were among 23 foreign entities — including firms and entities based in China, Turkey and the United Arab Emirates — found to be engaging in violations of arms export conventions.

Russian arms export agency Rosoboronexport said it was unable to comment on the issue at this time.  The Russian defense industry firms that were involved in the alleged INKSNA violations were fighter jet manufacturer MiG, the high-precision weapons maker Instrument Design Bureau (KBP) Tula, NPO Mashinostroyenia — a rocket and missile design bureau in Reutov, outside Moscow — and Katod in Novosibirsk, which makes night-vision optics, among other things. The sanctions prevent any U.S. companies or government agencies from doing business with the sanctioned Russian arms entities.

The U.S. did not specify which arms deals in particular triggered the latest sanctions actions imposed on Russia’s defense industry…

Vadim Kozyulin of the Moscow-based PIR Center think tank argued that the imposition of sanctions under the Iran, North Korea and Syria Non-Proliferation Act was politically motivated …Kozyulin speculated that the arms transfers in question are deliveries to Syrian President Bashar Assad’s embattled regime, or the expected future delivery of advanced S-300 air defense systems to Iran — which, he pointed out, is not prohibited by any United Nations resolutions governing arms sales to Iran…

Russia’s largest arms export partners are nations such as China, India and Algeria…“This is not the first time that the U.S. has imposed sanctions on Russian defense companies,” Kozyulin noted. “I used to compile a list of such cases and I guess that you can count about 40 to 50 times when Russian companies were sanctioned by the U.S. since 1998.”…

However, Yury Barmin, an independent Russian expert on the global arms trade, said that “some Russian companies may import spare parts from the U.S. and the latest sanctions may force them to revise their procurement strategies and delay some outstanding orders.”…
Russians responded to the timing of the U.S. decision to place sanctions on 23 global entities for alleged INKSNA violations by accusing Washington of pursuing and protecting its own interests in the global arms market. Barmin argued that Wednesday’s sanctions were only implemented after the completion of a Pentagon contract with Rosoboronexport to deliver 30 Russian-built Mi-17 helicopters to the Afghan military in the wake of NATO’s withdrawal.“Now that this deal has been concluded the U.S. deemed it possible to impose sanctions,” he said.

The CEO of Russian defense firm Katod, which was producing night-vision goggles for sale on the U.S. market, told  that his company was sanctioned because the U.S. feared Russian competition in this segment of the arms market….

Barmin too pointed to the lack of contact with U.S. financial institutions and argued that existing measures will have little impact, “unless Rosoboronexport [is] prevented from performing banking transactions globally, which would imply cutting Russia off from SWIFT altogether.”

If the tit-for-tat game of sanctions with Russia continues, and the U.S. manages to cause significant damage to the Russian defense industry, Kozyulin pointed out that Russia holds certain trump cards that it could use to fight back at the U.S. defense industry.  “For example, Russian titanium,” which is used for Boeing aircraft, “and engines for space rockets might be prohibited for export to the U.S.”

Excerpts from Matthew Bodner, U.S. Sanctions Russian Arms Export Agency for Non-Proliferation Violation, Moscow Times, Sept. 2, 2015

White Gloves War: Sanctions against Russia

Laser weapons system use glass.  Glass could be considered dual-equipment.  Pictured here  the Laser Weapon System (LaWS) aboard USS Ponce. Image from wikipedia

Since Russia annexed Crimea last year, it has become almost impossible for scientists in Russia to buy anything in the United States or Japan that has a dual purpose, said physicist Alexander Shilov, who works in the Institute of Laser Physics in Russia’s scientific hub of Akademgorodok, or Academy Town — part of Russia’s third-largest city of Novosibirsk…The U.S. and EU sanctions were designed to halt exports to the Russian defense sector. When announcing a new round of sanctions in July 2014, the European Union noted specifically that they “should not affect the exports of dual-use goods and technology” to Russia for “non-military use.” In reality, many Western companies were so spooked by the sanctions and the penalties they could face for violating them that the door was shut completely, the scientists say….

What’s more, foreign-made equipment is now less affordable for Russian scientists because of the depreciation in the Russian ruble, which lost nearly half of its value since the Crimean annexation.

The scientists’ plight has been compounded by the Kremlin’s own crackdown on Russian private funding of science, stemming from suspicions of Western influence. The government this year labeled the Dynasty foundation, Russia’s largest source of private funding for science, a “foreign agent” — which makes the group vulnerable to an array of surprise checks and audits. It is a Cold War term that carries connotations of spying. The foundation fell afoul of the officialdom because its Russian founder funds the organization from money transferred from his foreign bank accounts.  “If Dynasty was named a foreign agent, then everyone who had contracts with Dynasty is an accomplice of a foreign agent,” said Shilov. “We are all spies now.”

The government has become increasingly suspicious of foreign-funded non-governmental organizations, seeing them as potential agents of a hostile West. Russia has brushed off the sanctions imposed by the United States and European Union, saying that Russia has plenty of resources to replace banned imports with its own production.

Excerpts from  NATALIYA VASILYEVA5, Russian scientists squeezed by sanctions, Kremlin policies, Associated Press, July 20, 2015

Sanctions against Sanctions: Sovereign Financial Systems, Russia

Visa

International payment operators Visa and MasterCard have started processing domestic payments inside Russia’s new national processing system, launched in response to U.S. sanctions against Moscow that saw cards from several Russian banks blocked in 2014. Observers see the creation of the National Card Payment System as the first step towards an autonomous financial system in Russia.

“The national system has already been introduced, quickly and at a little cost, and it has fully resolved the problem of payments inside the country,” says Sergei Khestanov, professor of finance and banking at the Russian Presidential Academy of National Economy and Public Administration.  If Visa and Mastercard do not fulfill the requirements of the Central Bank, they will have to pay a security deposit, whose size will be linked directly to the turnover of the credit card systems. Morgan Stanley estimated the figure at $950 million for Visa and $500 million for MasterCard.

According to Khestanov, processing Visa transactions through the national system should be viewed as a compromise: The Russian government’s control of the transactions will strengthen, but the international systems will continue to operate in Russia.  “The potential of the development of the Russian cashless payment market is still enormous,” explains Anton Soroko, an analyst at Finam Investment Holding.,,,For the time being, experts are avoiding any clear-cut predictions of success, and say that Visa’s protocols are more complex than MasterCard’s. “We will see if this will be successful only after the infrastructure assumes the full burden,” says chief analyst at UFS IS Ilya Balakirev.

The next stage should be the Russian national payment system’s issuance of plastic cards, which is slated for December 2015.The picture is further complicated by the emergence of Asian operators as an alternative to western payment systems. Immediately after the introduction of sanctions against Russia by the U.S., the Chinese bank card system UnionPay entered the Russian market in April 2014, followed in March 2015 by Japan Credit Bureau (JCB). By 2017 Russia is planning to issue about two million UnionPay cards and three million JCB cards.

Excerpts from Alexei Lossan, Visa and MasterCard join Russia’s National Card Payment System, Russia Beyond the Headlines, Apr.  2, 2015

Financial Sanctions Against Russia and Iran: the use of SWIFT

Swift

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.  SWIFT is not an international organization.  It is instead a cooperative society under Belgian law and it is owned by its member financial institutions…

But the network’s very usefulness means it is increasingly being cast in a new role, as a tool of international sanctions. In 2012 it was obliged, under European law, to cut off access for Iranian banks that had been subjected to sanctions by the European Union. Now there are calls for Russian banks to be banned from SWIFT in response to Russia’s invasion of Ukraine.

A group of American senators is arguing for the measure, which could be inserted into a broader bill on sanctions against Russia that has a good chance of being passed in the next session of Congress. The European Parliament passed a resolution in September calling on the EU to consider mandating a cut-off…European governments are divided, with Britain and Poland among the keenest.

The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks.

The impact of a reprise on Russia’s already fragile economy would be huge. Its banks are more connected to international trade and capital markets than Iran’s were. They are heavy users not only of SWIFT itself but also of other payment systems to which it connects them, such as America’s Fedwire and the European Central Bank’s Target2. Kommersant, a Russian newspaper, has reported that more than 90% of transactions involving Russian banks cross borders.

Foreign firms that do business in Russia would suffer, too. Countries that trade heavily with Russia, such as Germany and Italy, are therefore none too keen…

SWIFT’s own rules allow it to cut off banks involved in illegal activity, and it has occasionally done so. But if it ends up being used frequently for sanctions, it could come to be seen as an instrument of foreign policy…Already there are calls for it to be used in other conflicts: pro-Palestinian groups have recently sought for Israel’s banks to be shut out, for instance. And as China’s economic clout grows, might it want Taiwanese banks excluded?

Another risk is that using SWIFT in this way could lead to the creation of a rival. Russia’s central bank is pre-emptively working to develop an alternative network; China has also shown interest in shifting the world’s financial centre of gravity eastward. Earlier this year it co-founded a BRICS development bank with Russia, India, China and South Africa, and its UnionPay service, set up in 2002, has loosened the stranglehold of MasterCard and Visa on card payments. If China and other countries that feared being subjected to future Western sanctions joined the Russian venture, it might become an alternative to SWIFT—and one less concerned with preventing money laundering and the financing of terrorism…

America’s current crop of senior Treasury officials are similarly cautious, despite being vocal proponents of sanctions in general. SWIFT is a “global utility”, says one, and using it for sanctions should be “an extraordinary step, to be used in only the most extraordinary situations”. Blocking access to SWIFT, he frets, could mean that traffic shifts to networks that are less secure and easier to disrupt—and thus make life easier for criminals and cyberterrorists, including those in rogue governments. Against those who threaten global security, a SWIFT ban is a powerful and proven weapon. But it is also a risky one.

Financial Sanctions: The Pros and Cons of a SWIFT Response, Economist,  Nov. 22, 2014

Financial Sanctions Against Iran and the Afghan Loophole

With American and European sanctions spurring a currency crisis in Iran, officials say a growing number of Iranians are packing trucks with devalued rials and heading to the freewheeling currency market next door in American-occupied Afghanistan, to trade for dollars.  The rial has lost more than half its value against the dollar, and cross-border bank transfers and currency exchanges have become difficult, as sanctions have slashed Iran’s vital oil revenue and cut the country off from international financial markets. Iranian businesses and individuals are desperate to avoid further losses, by converting their money and moving it out for safekeeping. At the same time, the government is trying to find alternate ways to bring in hard currency.

Enter Afghanistan, where dollars function as a second national currency after years of Western spending and where financial oversight is so lax that billions of dollars in cash leave the country every year. Though Afghan and Western officials say they cannot put a precise figure on the trade with Iran, they see it as a potential challenge to the sanctions, and one that the United States, as Afghanistan’s main benefactor, helped create.  The Iranians are “in essence using our own money, and they’re getting around what we’re trying to enforce,” one American official said.  It is a new iteration of an enduring problem in Afghanistan, where Western officials are already struggling to quell a storm of corruption that has undercut the war effort. In the years since the invasion, the country has become a smuggler’s dream, with a booming opium economy and pervasive government graft that is widely believed to be a factor in funneling Western aid money to the Taliban.

On its own, the rush of Iranian money to Afghanistan is unlikely to be enough to undercut the sanctions, which are the cornerstone of Western efforts to coerce Iran into abandoning its nuclear program. But it is clear that American officials are worried. In one indication, President Obama last month quietly strengthened the sanctions by giving the Treasury Department the capacity to punish any person who buys dollars or precious metals, like gold, on behalf of the Iranian government.  “We are taking steps to make it more difficult for the government of Iran to satisfy its heightened demand for dollars — and making it clear to anyone who provides dollars to the government that they face sanctions,” said David S. Cohen, the Treasury Department under secretary for terrorism and financial intelligence.

Afghan money traders said they were told this month by American officials to not conduct business with Arian Bank, an Afghan bank owned by a pair of Iranian banks. The Treasury Department has maintained sanctions against the Afghan and Iranian banks in the past few years, and the traders said they had been recently told that the Afghan bank was being used by the Iranian government to move cash in and out of Afghanistan.  Western and Afghan officials, as well as traders in Afghan money markets, said that a number of Iranians had started seeking to buy dollars and euros with their rials as American and European sanctions tightened over the past year.  The purchases are part of efforts by wealthy and middle-class Iranians to protect their savings and business profits by moving them offshore. But with legitimate transfers out of Iran virtually impossible because of the sanctions, Iranians are instead converting their rials in Afghanistan, and then moving the money to banks in the Persian Gulf and beyond.  “The middle class is in a panic about what to do right now,” said Djavad Salehi-Isfahani, an economist at Virginia Tech and an expert on Iran’s economy.

More troublingly, in the eyes of Western officials, the Iranian government is seeking to bolster its reserves of dollars, euros and precious metals to stabilize its exchange rates and ensure that it can pay for imports. Iran had about $110 billion in foreign currency and precious metal reserves in 2011, and those are believed to be dwindling now.  Afghan traders have proved more than willing to trade dollars for rials, usable as a currency in many parts of western Afghanistan, at advantageous exchange rates. Hajji Najeeb Ullah Akhtary, the president of Afghanistan’s Money Exchange Union, an association of traditional money transfer and exchange businesses that are known as hawalas, said he and his members had seen a steady increase in Iranians bringing cash into Afghanistan over the past year. That comes on top of routine transfers made by Afghans living and working in Iran, including more than one million impoverished refugees, and the regular supply of rials that circulates in Afghanistan.  The cash “comes across in trucks,” he said, with transfers arranged by Afghan middlemen who take a 5 to 7 percent commission.

Iranians were converting rials into dollars in Kabul, the western border city of Herat and in the southern cities of Kandahar and Ghazni, Mr. Akhtary said. The transactions were largely conducted through hawalas, which allow people to transfer large sums of money for small fees to relatives or business associates in distant locales within minutes. The dealers in various places cover one another to make the system work, and settle up after the fact.  The markets are often ramshackle affairs that give little hint of the vast sums being moved. Kabul’s hawala market, for instance, is little more than a few dingy lanes hidden away on the banks of the Kabul River, a trickle of fetid water that winds along trash-strewed banks. But it does huge business. Outside its storefronts, men sit on the pavement behind rickety tables piled high with afghanis, Pakistani rupees, American dollars and Iranian rials, among other currencies.  One hawala dealer, Hajji Ahmed Shah Hakimi, said two routes were primarily used to bring cash in from Iran: one directly across the border with Iran and another through Pakistan.  Both he and Mr. Akhtary insisted that they were not involved in smuggling cash for Iranians or anyone else, but that other hawala traders were.

Mr. Hakimi said the sanctions on Iran were seen in Afghanistan as an American issue, and that is why some Afghans had no problem smuggling money for Iranians. Some Afghan officials echoed that view, saying the Iranian money flow was not a top concern, though the broader problem of bulk cash smuggling was.  The flow of cash in and out of Afghanistan goes largely unmonitored and unimpeded, a “country-sized” money-laundering operation, said a European forensic auditor who has tracked financial crime in Afghanistan and spoke on the condition of anonymity.

In 2011, an estimated $4.6 billion, a sum equivalent to roughly a third of Afghanistan’s gross domestic product, was stuffed into suitcases, shrink-wrapped onto pallets or packed into boxes and flown out of Kabul’s airport on commercial airline flights, most of them headed for Dubai, United Arab Emirates, according to the central bank.  Though new rules and better enforcement have begun to cut into the cash flying out of Kabul, it is anyone’s guess how much moved out of Afghanistan overland on trucks or on twice-weekly flights to Dubai from Kandahar in southern Afghanistan, said an Afghan official who tracks suspicious financial transactions and spoke on the condition of anonymity.  “Kandahar?” he said. “We have no idea what is going there.”

By MATTHEW ROSENBERG and ANNIE LOWREY, Iranian Currency Traders Find a Haven in Afghanistan, NY Times, Aug. 17, 2012

See also Financial Sanctions against Iran and the Chinese Loophole

Financial Sanctions against Iran and the Chinese Loophole

America’s chokehold on Iran’s oil trade is tightening. New sanctions that come into force on June 28th attempt to turn off Iran’s $95 billion-a-year oil trade, and stop the flow of funds into its nuclear programme. The way the rules work shows how controlling the dollar strengthens America’s grip. The way China has responded shows the limits of these efforts.  To check the stream of oil cash America needs to punish those that trade with Iran. One option is to block these countries from its own markets. But America accounts for only 12% of global trade, and by cutting off trade with offending countries it would end up hurting its own exporters. Using the dollar is a more powerful and precise weapon: over 35% of international transactions are in dollars, and many of them do not involve American firms.

Iran has a particular dollar weakness. Most of its oil—around 2.5m barrels a day (b/d) in 2011—is sold to foreigners in exchange for dollars. Previous sanctions have already cut private Iranian banks out of the oil trade, so sales are managed by the Central Bank of Iran (CBI). The CBI uses the dollars it receives to maintain the Islamic Republic’s fixed exchange rate.

America’s new sanctions laws, signed in December, target countries that fail to prove a big reduction in their oil trade with the CBI. Any bank that facilitates these trades by dealing with the CBI will be denied access to the American banking system. It would be unable to offer dollar accounts and dollar payments, since these activities rely on links to correspondent American banks. Given the importance of the dollar, customers would go elsewhere.  Unplugging lenders from the banking network is easily done. Indeed, an important international-payments system—the Society for Worldwide Interbank Financial Telecommunications, or SWIFThas already kicked out 40 Iranian banks, after pressure from America. From June 28th non-Iranian banks that deal with the CBI could face the same fate.

Soon after the new law was passed, Japan and ten EU countries reduced trade with Iran. Earlier this month seven others, including India, cut Iranian oil imports. These countries are now exempt from sanctions. As a result Iran’s exports have fallen to around 1.5m b/d, according to International Energy Agency (IEA) data.

Other countries have proved harder to influence. China is Iran’s biggest oil customer, accounting for 20% of its sales. It stands to lose a lot by reducing trade. So rather than cutting imports, China has resorted to exploiting loopholes. The sanctions law in America specifically names the CBI, so some trades have been routed via money exchanges in the Gulf instead. The countries are bartering too, with Iranian oil sometimes swapped for shipments of Chinese gold. China has also set up “swap-shop” segregated accounts which it credits when it receives oil, allowing Iran to buy Chinese goods, according to Mark Dubowitz of the Foundation for Defence of Democracies, a think-tank.

This oil-swapping system is hard to stop. Accurate oil-trade data are collated by monitoring the tracking beacons big tankers must carry in order to prevent collisions. But the Iranian fleet has been flouting safety rules and turning its beacons off since April, according to the IEA, allowing vessels to make clandestine port visits and mid-ocean oil transfers.

Even if it could spot illicit transactions, America might still choose to ignore them. The sanctions are preventing Iran from getting hold of the hard currency it needs to defend its peg, among other things. And confrontation with China could be costly for America. Of the $12 trillion-worth of Treasuries held abroad, China owns over 13%. Excluding China from America’s financial system would wall off a big customer for its own debt.

Financial sanctions: Dollar power, Economist, June 23, 2012, at 75

The Oil Needy and the Iran Sanctions: China and India

China is considering sovereign guarantees for its ships to enable the world’s second-biggest oil consumer to continue importing Iranian crude after new EU sanctions come into effect in July, the head of China’s shipowners’ association said.  Tough new European Union sanctions aimed at stopping Iran’s oil exports to Europe also ban EU insurers and reinsurers from covering tankers carrying Iranian crude anywhere in the world. Around 90 percent of the world’s tanker insurance is based in the West, so the measures threaten shipments to Iran’s top Asian buyers China, India, Japan and South Korea.

Global crude oil prices have risen nearly 20 percent since October, partly on fears over supply disruptions from Iran.  “(Ship) operators are worried that if the insurance issue cannot be resolved, they will not be able to take orders for shipping Iranian oil any longer,” Zhang Shouguo, secretary general of China Shipowners’ Association, told Reuters in a rare interview with foreign media.  “We have put forward our concern and related government departments are studying the issue.”

Iran, OPEC’s second-largest producer, exports most of its 2.2 million barrels of oil per day to Asia, and major buyers have yet to find a way around pending EU sanctions.  Like China, India and South Korea were also mulling sovereign guarantees for their tankers. Indian shipping firms indicated last week they would continue to transport Iranian oil even if limited insurance cover exposed them financially to a spill or accident.  Chinese insurers and shipowners would not take the risk on themselves and government intervention was necessary, Zhang said. Major ship insurer, China P&I club, told Reuters earlier this month it would not provide replacement cover for domestic tankers carrying Iranian oil.  Most of China’s tanker fleet, owned by firms such as China Shipping, COSCO Group and Nanjing Tankers, were covered by European insurers, analysts said.

Several government departments were considering the industry’s request, including the Ministry of Finance, China Insurance Regulatory Commission, Ministry of Transport and National Development and Reform Commission (NDRC), Zhang said. He did not say when a decision might be made.  Until recently, China was Iran’s top customer, taking more than 20 percent of its crude exports but customs data last week showed China halved its Iranian crude imports in March compared with the same month in 2011.

Excerpt, Alison Leung, China mulls guarantees for ships carrying Iran oil, Reuters, April 30, 2012