Subject to Change?   Reassessing economic sanctions under the Biden administration

James Treanor and Adam Gould
Cadwalader, Wickersham & Taft LLP

In recent decades, economic sanctions have emerged as a critical, and sometimes favorite, tool of foreign policy for U.S. presidents and lawmakers of both political parties. With the recent release of the Department of the Treasury’s 2021 Sanctions Review, however, this longstanding trend shows signs of moderating – at least in certain areas – under President Joseph R. Biden. In fact, many of the Review’s recommendations have already been put into practice, reflecting a new approach to economic sanctions.

Indications are that the Biden administration will, where possible, be focused on coordinating its sanctions policies with allies and partners. In addition, sanctions may be used readily in response to human rights abuses, the erosion of democratic norms, and public corruption around the world. However, it is less clear how sanctions will be utilized with respect to other significant national security challenges, especially where multilateral support for U.S. policies is weak, and collateral consequences may be significant.

The Biden administration’s sanctions review was announced even before Inauguration Day. During Janet Yellen’s January 19 confirmation hearing before the U.S. Senate Finance Committee for her nomination to serve as Secretary of the Treasury, Yellen indicated that, if confirmed, her deputy, Wally Adeyemo, would undertake a review to ensure sanctions are used “in a strategic way and in the most effective way we can.”

Adeyemo – who oversees the Office of Foreign Assets Control (OFAC), the agency primarily responsible for administering and enforcing U.S. sanctions – told senators during his own confirmation process that the review would ensure sanctions are deployed “in service of a clear foreign policy goal.” Furthermore, the coordination of sanctions policy with allies and partners emerged as a clear theme in Adeyemo’s answers to senators’ questions. For instance, he cited counterterrorism sanctions – including where “coordinated with allies” – as an example where sanctions were employed effectively, and he voiced his strong commitment “to the implementation of human rights sanctions, working closely with . . . our allies abroad.”

In light of statements like these, many of the Sanctions Review’s key findings and recommendations for improving and modernizing sanctions are unsurprising. Specifically, the Review stresses that to be effective, sanctions should be linked “to a clear policy objective[,]” and care should be taken to ensure “that the costs [of sanctions] fall on intended targets and that potential negative impact on others is minimized.” Moreover, the Review finds that the “economic and political impact” of sanctions can be magnified “when coordinated… with allies and partners[,]” and that multilateral actions “also help to mitigate the economic impact on American workers and firms.”

As discussed below, elements of these core messages from the Sanctions Review are already reflected in the Biden administration’s sanctions policies with respect to major targets like China, Russia, and Iran. These developments have implications for the future direction of other key sanctions programs, including those related to Cuba, North Korea, and Venezuela, and they also inform how sanctions may be used in connection with emerging issues, such as instability in Afghanistan.

China: Keeping up the pressure

Perhaps nowhere is the potential impact of economic sanctions greater than with respect to China – the world’s second-largest economy and leading exporter, and an important international financial hub. But while China’s economic clout continues to grow, ties between Beijing and Washington have frayed in recent years due to increasing friction over issues including alleged unfair trade practices, cyber-hacking and critical infrastructure security, the erosion of democratic norms in Hong Kong, and abuses against Uighur and other minority groups in the Xinjiang region and elsewhere. The U.S. government has responded on several fronts, from increased criminal prosecutions by the Department of Justice, to more stringent export controls, to a new law requiring Chinese companies listed on U.S. exchanges to subject themselves to audit oversight by U.S. regulators.

During the final year of the Trump administration, sanctions were added to the U.S. arsenal against China, with prohibitions imposed on dealings in connection with not one but three issues: Hong Kong, Xinjiang, and China’s military-industrial complex. And in a mark of just how bipartisan the tough line on China has become, President Biden has to date largely reaffirmed his predecessor’s China sanctions.

Already, OFAC has imposed new sanctions on Chinese officials in connection with policies in Hong Kong and Xinjiang, and Treasury and other departments released detailed advisories for the business community underscoring sanctions and other risks related to dealings in or with both regions (see here and here). In the securities arena, President Biden amended and clarified – but did not walk back – his predecessor’s sanctions on trading in securities of publicly-listed Chinese companies with links to the country’s military and security services. President Biden even provided a new basis for imposing securities-related sanctions in a June 3 executive order targeting the use of Chinese surveillance technology “to facilitate repression or serious human rights abuse.”

In part, this continuity likely is attributable to the fact that defense of human rights and democratic values – a stated Biden administration priority – is at the core of the Hong Kong and Xinjiang-related sanctions. Moreover, the U.S. is not alone imposing sanctions in connection with these issues. Key U.S. allies, including the United Kingdom and the European Union, have imposed their own sanctions over the treatment of Uighur and other minority groups in Xinjiang, and sanctions related to developments in Hong Kong reportedly have been under consideration in London and Brussels.

Russia: Give and take

U.S. sanctions targeting Russia have been moving in different directions concurrently under President Biden. The administration has maintained and strengthened President Trump’s aggressive – and multilateral – response to the poisoning of opposition leader and anti-corruption campaigner Alexei Navalny. First, on March 2, Washington and Brussels announced sanctions against senior Russian officials for their roles in the treatment of Navalny and his supporters and on August 20, the U.S. and the U.K. coordinated the issuance of additional sanctions to mark the one-year anniversary of Navalny’s poisoning.

At the same time, the Biden administration has backed away from the threat of serious sanctions related to construction of the Nord Stream 2 pipeline. If completed, this subsea conduit will directly link Russian gas fields with Germany and other European markets, bypassing older pipelines running through Ukraine and other Eastern European countries and thereby threatening the significant transit fees earned by those countries. The administration has underscored its continuing opposition to the pipeline, but it has refrained from imposing significant sanctions, including under the Protecting Europe’s Energy Security Act, which might actually put the project’s completion in jeopardy. Instead, President Biden has sought to achieve U.S. foreign policy goals by other means, such as a July 21 joint statement with Germany under which the German government agreed to impose sanctions and other costs on Russia should it “use energy as a weapon or commit further aggressive acts against Ukraine.”

Iran: All together now

Perhaps more than any other issue, the handling of Iran’s nuclear program epitomizes the Biden administration’s commitment to a more multilateral approach. Indeed, during President Biden’s first month in office, U.S. Secretary of State Antony Blinken joined his counterparts from the U.K., Germany, and France in issuing a statement that emphasized the importance of “engaging with partners” to thwart Iran’s nuclear ambitions.

Still, despite a series of preliminary talks and some limited sanctions relief on the U.S. side, it is unclear how successful multilateral engagement might be in resurrecting the 2015 Joint Comprehensive Plan of Action that placed curbs on Iran’s nuclear program in exchange for an easing of sanctions. Among other challenges, Iran’s conservative new president Ebrahim Raisi is expected to take a hard line in talks with the United States and other countries.

What’s next?

For companies navigating a dynamic (and in many spots unstable) international environment, foreign relations can quickly and directly impact business activities. President Biden’s commitment to working with allies and partners – along with his administration’s focus on using sanctions in response to human rights abuses, the erosion of democratic values, and corruption – could reduce the probability that expansive new sanctions will be imposed unilaterally and without warning. However, multilateralism has its limits, and strong new unilateral sanctions cannot be ruled out, for example, if the Iran nuclear talks fail, or if relations with Beijing or Moscow further deteriorate.

Conversely, the Biden administration might perceive a need for cooperative engagement with competitors like China and Russia to address important international issues, such as instability in Afghanistan and climate change. This could pave the way for a relaxation of sanctions, but even then, companies should proceed with caution. As the history of the Iran nuclear deal illustrates, sanctions removed today can be reimposed tomorrow with a change in political winds, throwing commercial relationships into disarray.

Lastly, whichever direction sanctions policy takes under President Biden, there is no indication that enforcement of sanctions violations will let up. Accordingly, companies should ensure that their screening and diligence procedures are risk-tailored and sophisticated enough to address the growing range of list- and country-based sanctions programs. Companies – including non-U.S. companies – also should ensure they understand their sanctions compliance requirements, as a number of recent OFAC enforcement actions have involved basic misunderstandings of the reach and applicability of U.S. sanctions laws.

Armed with a robust and effective sanctions compliance program, companies can prepare themselves to handle whatever geopolitical twists and turns might lie ahead.

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