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Writer's pictureMichael Julien

Russia outsmarts Western sanctions—and China is paying attention - The Economist - 21.03.24

How the rise of middle powers helps America’s enemies.


Nazem Ahmad, an art collector and financier, who owns work by Andy Warhol and Pablo Picasso, has been under American sanctions since 2019. That may sound like a problem, but it has not stopped him from smuggling half a billion or so dollars for Hizbullah, a Lebanese militant group, according to America’s Treasury. He moves art, cash and gems across borders via galleries in the Ivory Coast, family offices in the UAE and portfolio firms in Hong Kong. His financial tapestry is underpinned by bank accounts in America.


All of this displeases Western policymakers, who are trying to make sanctions more stringent. Mr Ahmad is one of several magnates on whom sanctions have been adjusted. The EU’s 13th wave of measures against Russia, agreed on February 21st, will punish some Chinese firms for supplying Vladimir Putin with weaponry and other banned goods. President Joe Biden has announced that foreign banks settling payments for such goods could be next, and is planning more sanctions on Russia after the death of Alexei Navalny, an opposition politician, on February 16th.


In recent years measures have been applied to everyone from Houthis holding up Red Sea traffic to Israeli settlers building illegally in the West Bank and companies helping strengthen China’s armed forces.


Thus the world is witnessing an unprecedented surge in financial warfare. But just as the West ratchets up sanctions, ways to circumvent them are becoming more sophisticated. Visit any country that courts the West’s business without buying into its principles, and you will find companies and people—hailing from China, Russia and the Middle East—under sanction and getting things done. Since the West first retaliated against Russia’s invasion of Ukraine, it is in places such as India, Indonesia and the UAE, which have access to the dollar, that America’s and Europe’s aims are being thwarted.

 

Any enemy of the West faces a mixture of measures. Most common are trade embargoes, under which Iran and Russia labour. American companies are banned from exporting anything that could be repurposed by Russia’s army, which ranges from drones to ball-bearings. Import restrictions on commodities, such as the $60-a-barrel price cap imposed on Russian oil by America and Europe, are meant to weaken hostile powers. Bans on doing business with governments, as also apply to Iran’s and Russia’s, are supposed to further cripple their ability to fight.


On top of these are financial sanctions. Western officials keep blacklists, which apply varying restrictions on how their citizens may deal with designated firms and people. Ships that carry Iranian oil are on America’s list, as are Hamas’s leaders and financiers for Latin American drug empires. Sometimes individuals’ assets are frozen; sometimes entire banks are banned. Russia’s central-bank reserves in Europe (half its total) have been frozen, 80% of its banks are subject to sanctions and seven are locked out of SWIFT, a messaging service used to make transactions.

Yet all these measures must contend with the growing prosperity and financial sophistication of “third countries”—ones that neither impose American and European sanctions, nor are under sanctions themselves.


The 120 members of the “non-aligned movement”, which include Brazil and India, produced 38% of global GDP in 2022, up from 15% in 1990. They are home to five of the world’s 20 most important financial hubs, measured by the number and variety of banks, and churn out lots that a modern army might need. Whereas financial crises in the 1980s and 1990s drove entire continents to borrow from the IMF, today these countries have robust financial systems.

With international firms trying to avoid tensions between America and China, sitting on the fence is not only possible, but often profitable.


Brazil, India and Mexico all declined to participate in the West’s economic war soon after Russia invaded Ukraine. Indonesia’s foreign-affairs spokesman explained that his country would “not blindly follow the steps taken by another country”. Yet neutrality is a delicate game. Although, for instance, America can do little about Russia importing more tech from China, it can make life difficult for some financial institutions that might help the trade. Among third countries, hostility to America’s actions combines with reliance on the superpower’s financial system to produce a strange patchwork: in places sanctions are insurmountable; in others they may as well be non-existent.

 

Commodity-import bans are the measure most obviously ignored by non-aligned countries. Although the purchase of Iran’s oil is restricted by America, its exports are at an all-time high. Countries that are not party to the West’s price cap on Russian oil—together home to half the world’s population—are willing to pay more than $60 a barrel. Brazil, China and India have all bought more of the stuff since the war in Ukraine began. Many of the country’s biggest customers, including the UAE and Turkey, import its cheap fuel for domestic use at the same time as exporting their own more expensive non-embargoed oil. In 2022 China, India, Singapore, Turkey and the UAE together imported $50bn more oil from Russia than in 2021. Meanwhile, the value of the EU’s oil imports from these countries increased by $20bn.


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This article appeared in the Finance & economics section of the print edition under the headline "Sanctions, what sanctions?"





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