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On August 2, 2019, the Trump Administration imposed a second round of sanctions on Russia in response to Russia’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy. The sanctions could exacerbate tensions between the United States and Russia, as they add to a sanctions regime that has already significantly burdened Russia’s economy.

Background

In March 2018, former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England. The United Kingdom determined that the Russian government was responsible for the attacks. In response, the United States, along with Canada and a number of European countries, expelled dozens of Russian officials, and also closed the Russian consulate in Seattle. In retaliation for the attacks, the United States announced a first round of sanctions on Russia in August 2018. Those sanctions impacted, inter alia, arms sales and foreign assistance to Russia (aside from urgent humanitarian assistance and food and other agricultural products).

Overview of Sanctions

Administration officials stated that a second round of sanctions in response to the chemical attacks was necessary after Russia failed to provide adequate assurances, in accordance with the requirements of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (“the Act”), that it would halt the use of chemical and biological weapons. The State Department and Treasury Department announced these sanctions after the Trump Administration issued a late-night Executive Order on August 1, 2019, granting the two agencies the power to impose sanctions on countries that violate the Act. According to the State Department, these new measures will include:

–Sanctions preventing the extension of any loans or financial assistance to Russia by international financial institutions, such as the World Bank Group or International Monetary Fund;

-Sanctions prohibiting U.S. banks from participating in the primary market for non-ruble denominated Russian sovereign debt and lending non-ruble denominated funds to the Russian sovereign; and

-Additional export licensing restrictions on Department of Commerce-controlled goods and technology.

The measures will go into place after a 15-day Congressional notification period and will remain in place for at least one year.

On August 2, 2019, the Treasury Department Office of Foreign Assets Control (“OFAC”) issued a Russia-Related Directive implementing the second measure announced by the State Department.

The measures go into effect after August 26, 2019, and they apply to U.S. banks, which are defined to include “any entity organized under the laws of the United States or any jurisdiction within the United States (including its foreign branches), or any entity in the United States, that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures, or options, or procuring purchasers and sellers thereof, as principal or agent.” The term “Russian sovereign” includes any ministry, agency, or sovereign fund of the Russian Federation, but the term excludes Russian state-owned enterprises.

According to recently-published OFAC FAQs, the measure prevents U.S. banks from participating in the primary market for Russian sovereign debt, but the prohibition does not extend to the secondary market. Additionally, the prohibition does not apply to loans or bonds denominated in rubles. While the OFAC Directive is limited to the activities of U.S. banks as defined in the Directive, it is not clear if the secondary sanctions provisions of the Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”) could reach non-U.S. actors. Persons dealing in Russian sovereign debt that are not U.S. banks should also be alert to future changes in these rules that could affect their activities.

Written by: Ryan Fayhee, Roy (Ruoweng) Liu, Alan Kashdan, Tyler Grove and Sydney Stringer at Hughes Hubbard & Reed LLP

Money Talks

From drug kingpins to terrorists and from human traffickers to money launderers, the United States has nearly 8,000 economic sanctions in place, and the list is growing. Particularly in the post-9/11 era, the U.S. government has leveraged the global preeminence of the U.S. dollar to turn off spigots of funding for sinister activities and unwanted behaviors by state actors.

Among additional sanctions against Iran, Russia and Venezuela, The Trump administration earlier this month tightened travel restrictions to Cuba stating, “Cuba continues to play a destabilizing role in the Western Hemisphere…these actions will help to keep U.S. dollars out of the hands of Cuban military, intelligence, and security services.”

The muscle behind an array of U.S. financial sanctions derives from the reach and power of the U.S. dollar as the “lead currency” in the global economy. This status makes it possible to not only prevent U.S. individuals and companies from doing business directly with a sanctioned entity, it makes it risky to do business with third-country companies that do business with sanctioned entities. Acutely aware of their vulnerability, non-U.S. companies also frequently take steps to minimize their exposure to possible violations of U.S. sanctions lest they jeopardize their access to the U.S. financial system.

The U.S. Dollar Reigns

How strong is the dollar’s foothold in the global economy? The U.S. dollar was used in 88 percent of global foreign exchange transactions in 2016. For comparison, the euro was the medium of exchange in 31 percent of transactions in 2016, the Japanese yen in 22 percent, the British pound in 13 percent, and China’s renminbi in four percent (as two currencies may be involved in exchange, these numbers will add up to more than 100 percent).

Companies selling their goods and services outside the United States often accept dollars as payment because they can easily turn around and use dollars to pay for imported products and inputs. Or, they can hold onto their dollar revenues with confidence they are storing value.

Why is the Dollar Preferred?

The dollar is the world’s lead currency because it meets three key conditions.

First, the dollar is fully tradable and exchanged at relatively low costs. The U.S. government does not restrict the purchase or sale of the dollar.

Second, the dollar holds its value against other currencies. The United States is still considered a stable and open market economy, current tariff vagaries notwithstanding. At the end of last year, just under 62 percent of all central bank reserves were held in U.S. dollars.

Third, the United States is still the largest economy in the world, equivalent to 24 percent of global GDP. Below is a snapshot from the International Monetary Fund comparing the world’s largest economies. We have a large money supply, providing liquidity for the global economy.

Into the Arms of Another

Some have argued bad actors like North Korea will find always find ways to evade U.S. sanctions. Buyers of Iranian oil will seek alternative currencies for their transactions, both diluting the effect of sanctions and hastening reduced dependence on the dollar.

Several European countries developed a clearinghouse to enable companies to avoid the U.S. financial system in transactions involving Iran as part of their effort to salvage the nuclear pact the Trump administration pulled out of last year before restoring a slew of sanctions against Iran.

Despite initial discussions about a wider scope, Europe’s Instrument in Support of Trade Exchanges (INSTEX) will, at least for now, only facilitate trade in humanitarian goods such as pharmaceuticals, medical devices and agri-food products, all of which are already permissible under U.S. sanctions. Despite European government grumbling about being beholden to the U.S. dollar, there appeared to be little appetite on the part of European companies and commercial banks to risk U.S. penalties by using such a clearinghouse for other types of transactions.

Will the Euro or Renminbi Overtake the Dollar?

Not anytime soon.

The euro covers a large economic zone featuring sophisticated financial market institutions, but the politics surrounding continued support by members of the euro zone and unresolved debt discussions with southern states (we were talking about Grexit long before Brexit) are holding the euro back in overtaking the U.S. dollar.

Although the renminbi’s share in global transactions is still low, it should be noted that usage and overseas holdings of China’s currency by individuals, businesses and central banks has expanded in the last decade, enabling China to break through in 2016 to join the top five most-used currencies. The Chinese government is making a big push to internationalize its currency through global infrastructure investment funds associated with its Belt and Road initiative and through renminbi-denominated commodities futures contracts, among other initiatives.

China’s currency, however, is not freely convertible, its performance has been volatile, and the degree of state and private debt in China’s financial system remains murky.

The Dollar’s Achilles Heel

For the time being, most experts believe there’s no real threat to the U.S. dollar’s dominance. Europe would need to address skepticism regarding the monetary union’s future, China would need to implement significant reforms to its financial sector, and much-hyped cryptocurrencies still have long way to go to challenge the conventional system of global payments.

These are all big “ifs”. Instead, the dollar’s Achilles’ heel is of our own making. One of the biggest risks to the dollar’s long-term value is continued fiscal imbalances in the United States and the sustainability of our debt burden.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is a nonresident Senior Fellow at the Chicago Council on Global Affairs and an adjunct fellow with CSIS. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught International Trade for the last fourteen years as an Adjunct Associate Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

U.S. Issues Second Round of Chemical Weapons Sanctions Against Russia