Russia’s invasion of Ukraine a year ago triggered a barrage of harsh sanctions from the US and its allies, a historic deployment of economic measures likely to have a lasting impact on businesses.
Financial crime experts largely agree that the imposition of a sweeping package of sanctions by the US and other countries against Russia marks a turning point in the use of economic measures as a foreign policy tool. The US and its allies spearheaded a new breed of sanctions strategy: targeted, coordinated, and designed to inflict maximum pain on a globally significant economy.
“We’ve never had such a significant economy that has had such significant sanctions imposed so quickly,” said Daniel Tannebaum, a former US Treasury Department official who is a partner at consulting firm Oliver Wyman LLC.
According to data compiled by researchers at the Yale School of Management, more than 1,000 companies restricted their operations in Russia after the invasion on February 24, 2022.
Businesses have found that the government’s approach to relying on economic leverage rather than other state tools such as direct military intervention has put them at the forefront of the West’s foreign policy push.
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The sanctions were not comprehensive and left many companies with opportunities to continue operating. However, hundreds of companies fled, reckoning that the looming threat of increased sanctions and reputational risks warranted an exit.
“The tectonic plates have really shifted here,” said Jeffrey Sonnenfeld, a Yale researcher who has tracked the exodus of companies from Russia, of the widespread decision by companies to leave the country. “There is nothing quite like it, not just in recent history or in our own lifetime.”
Prof. Sonnenfeld said that during the apartheid-era collective boycotts of the 1980s, about six times as many large companies shut down operations in Russia as in South Africa, in response to the economic measures and the associated reputational risks of staying in the country, said he called.
Prof. Sonnenfeld and Mr. Tannebaum have both been personally sanctioned by Russia, which has accused critics of engaging in a “russophobic” campaign.
Whether the sanctions are effective is still being debated. Deputy Finance Minister Wally Adeyemo
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said earlier this week that the US had managed to undercut Russia’s military-industrial complex, pointing to a number of economic and other metrics. Irrespective of this, the increase in the volume of sanctions compared to previous conflicts is undeniable. Corporate compliance professionals are facing what many perceive as an unprecedented increase in their sanctions-related workload.
In the weeks following the Russian invasion, almost 2,400 companies were hit with Russia-related sanctions by authorities in the US, European Union and UK, according to data from analytics firm LexisNexis Risk Solutions. In the same period in 2021, about 150 companies were added in all sanction categories.
The numbers have grown steadily. The Biden administration said Friday it will put more than 200 people and organizations on US sanctions watch lists, further tightening the economic net around Russia.
Anatoly Antonov,
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Russia’s ambassador to the US said Friday that the US had failed to isolate the country. “Washington and its allies are unsuccessful in their attempts to ‘strangle’ Russia with sanctions,” he said. “We have learned to live under economic and political pressure.”
Although the US has a long history of imposing sanctions on geopolitical opponents such as Cuba, Iran and Venezuela, the current measures are unique in that they have arguably banished an economically powerful country from the global economy. Russia was a member of the Group of Eight, a political forum of the world’s major high-income countries, as recently as 2014.
Russia has effectively been relegated to a much smaller role in the global economy since the 2022 sanctions push, particularly as European companies realigned their supply chains, said Lindsay Newman, head of geopolitical thought leadership at S&P Global Market Intelligence.
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Sanctions have enjoyed widespread political support, including bipartisan support in the US, in part because they allow countries to pursue their foreign policy goals relatively cheaply and without deploying their armies, said Dr. newman
“The defining feature of this geopolitical landscape is this increasing interdependence between economic and security sectors,” she said. “Countries continue to rely on these foreign policy tools. Business has to find its way around it.”
Although governments create the sanctions lists, companies and their advisors bear the brunt of the real cost of implementation.
“I refer to sanctions as a fully outsourced foreign policy tool that has been outsourced to the private sector,” said Adam M. Smith, who advised the US Treasury Department’s Office of International Asset Control during the Obama administration and is now a partner at the law firm Gibson Dunn & Crutcher LLP.
The Russia sanctions have acted as a “wake-up call” for the C-suite, Mr Smith said.
“Russia is just a new ball game,” he said.
Compliance officers have become increasingly important in their organizations as leadership works to cope with the tightened regulatory environment, he said. Some organizations have begun to carefully outline scenarios that may affect them in the future, with many keeping an eye on tensions between China and Taiwan and any developments that might provoke future sanctions.
The use of coordinated sanctions, both in Russia and as a broader foreign policy tool, does not appear to be disappearing, experts agree.
“The direction of these sanctions was clear,” said John Murphy, senior vice president of international policy at the US Chamber of Commerce, a lobby group representing companies. “Further sanctions are still quite possible, although not likely.”
Oliver Wyman’s Mr. Tannebaum said he is working with several companies that are looking ahead and “playing out potential scenarios for Chinese escalation in Taiwan.”
“Many companies were caught off guard by the actual invasion [of Ukraine] on February 24, who really didn’t think it was going to happen and worse, he had no plan,” he said. “Companies need to be prepared and have a potential exit plan.”
Write to Richard Vanderford at [email protected]