Global Responses to Secondary Sanctions

Sanctions are a foreign policy tool that governments use to influence behavioural change. While their effectiveness remains hotly debated, secondary sanctions are becoming more commonplace, and a pressing issue for governments and private businesses alike. Primary sanctions are imposed directly on a country or its citizens, rendering illegal any business that the sanctioned entity conducts with a nexus to the sanctioning jurisdiction. By contrast, secondary sanctions target third parties that do business with a sanctioned entity, no matter the jurisdiction. As such, the threat of secondary sanctions pushes entities to choose either to do business with the US and have access to the US financial system, or to do business with sanctioned parties, but not both. Given the interconnectedness of global trade flows, countries and companies across the world are exposed to this rising threat.

To perhaps a greater extent than primary sanctions, with secondary sanctions the legislative framework and economic utility of the designating country, relative to the sanctioned entity, is crucial. The US is beginning to flex its considerable muscle on this point. In 2021, it introduced legislation that authorised secondary sanctions on companies in third countries supporting the military junta in Myanmar (though it has so far held back from enacting this). Similarly, President Biden’s executive order last December – beefing up and broadening the US administration’s ability to impose sanctions on financial institutions servicing the Russian military-industrial base – allows for the imposition of secondary sanctions on targets that have previously eluded punitive measures.

Entities around the world have woken up to this reality and have moderated their approach to sanctioned entities. Turkey’s exports to Russia, for example, fell by a third year-on-year in the first three months of 2024, after Washington threatened that Turkish banks could no longer rely on access to the American financial system if they continued to trade with Russia.

Meanwhile, the situation regarding Chinese companies’ trade of dual-use items with Russia has become increasingly fraught. US Secretary of State Antony Blinken’s visit to Beijing in late April this year was underscored by a warning that the Biden administration was willing to impose sanctions on Chinese entities abetting Russia’s war in Ukraine. In early May 2024, the US followed through on this threat, imposing secondary sanctions on 20 companies based in China and Hong Kong.

The Chinese leadership appears to be alert to the risks of provoking such retaliatory Western secondary sanctions, and keen to avoid them. As such, in response to the increased threat of its companies losing access to Western markets because of their trade with Russia, China could keep its trade within acceptable boundaries. This trend is evident in both public policy and corporate behaviour in China – three of its four largest banks are already restricting wire payments from sanctioned Russian counterparts, while half of Russia’s payments to China now go through third-country ‘middlemen’. Overall, Chinese exports to Russia in March dropped by 15.7 percent year-on-year, but Beijing will face increasing international pressure given Moscow’s greater reliance on China. The US has primarily targeted ‘high-priority battlefield goods’, such as microchips, ball bearings, lasers and electrical machinery, via the deterrent effect of secondary sanctions, following a successful campaign by Ukraine and its allies to shift US policy on the matter.

China believes in geopolitical and economic stability as fundamental to its interests and is therefore not content with Putin’s invasion of Ukraine, nor the pressure that Russia’s reliance on China places upon its wider economic and trade ties. However, China also opposes – both in private and in public – Western sanctions on Russia, due to their detrimental knock-on economic effects on industry, including in the energy sector and financial services. So, despite China’s criticism of unilateral sanctions, both state-owned and private Chinese enterprises, such as Sinopec and Alibaba, are going to great lengths to avoid primary or secondary sanctions. Since Russia’s full-scale invasion of Ukraine, we have observed an active effort on their part to keep Russia and its economy at arm’s length, significantly reducing foreign investment in Russia’s energy sector.

Beyond China, a global reliance on sanctioned entities for raw materials means that some governments and companies are still prepared to take on the risk of secondary sanctions, banking in part on diplomacy and economic necessity to protect them. Numerous countries continue to import significant quantities of Russian oil and gas. Figures from late April show that India imports the lion’s share of Russia’s crude oil, and many European states – such as France, Belgium and Portugal – buy large amounts of Russian LNG, though overall EU imports of pipeline Russian gas are a fraction of their pre-war levels.

However, as Europe gradually moves away from Russian energy dependence, stricter sanction regimes – as advocated by some Ukrainian and Western voices – could lead to more common, harsher penalties on those that continue this trade. Members of the UK House of Lords floated the possibility of designating UK-based insurers of vessels transporting Russian oil above the G7 price cap, and on foreign governments providing landing permits for Russian oil ‘shadow tankers’. In the US, if Congress passes the proposed ‘Ending Importation of Laundered Russian Oil Act’, the world’s most powerful democracy will be enabled to sanction financial institutions, companies and individuals outside of the US and Russia. These potential punishments leave even those companies more tangentially engaged with sanctioned entities at a higher risk of sanctions.

Orbis understands the risks of doing business in exposed sectors during such turbulent geopolitical times. Our analytical capabilities, coupled with high-quality sources and intelligence, enables us to advise clients on the evolving risks stemming from secondary sanctions.

If you want to hear more about how Orbis’ investigative work including sanctions violations, asset-tracing, and wider corporate intelligence work, contact us at [email protected].