The war in Ukraine will change the world in many ways. A change that deserves more attention is its impact on trade policy and therefore altering trade flows and creating trade opportunities.
The evolution of Western sanctions content is tracked on our Sanctions Notes pages. In this note, we will look at the legal issues these sanctions create and how this may affect future trade policy.
Some features of the sanctions against Russia
Economic sanctions are traditionally seen as coercive measures intended to bring about behavioral change. It is not a question of punishing but of changing behavior. They are also normally designed to maximize the economic pain on the target while minimizing that on the parties imposing the measures.
For this reason, trade measures are traditionally designed to be temporary with built-in expiry dates and sanctioned assets are normally frozen and not confiscated. The motivation and design of the current sanctions against Russia are more complex. Sanctions on energy products, for example, are being phased in and appear to be intended to be permanent. Additionally, there are moves to use sanctioned assets to serve the purposes of the sanctions – i.e. moving towards confiscation rather than freezing.
The strong retributive or moral element of these sanctions may lead to the acceptance of more harm to sanctioning states than would otherwise be the case. Normally, commodities such as diamonds, precious metals or oil are not subject to sanctions imposed by certain countries only, because this trade is easily embezzled and the sanctions will mainly serve to enrich traders from other parts of the world. world. However, commodities are an important feature of Western sanctions against Russia and the logic seems to be that Western money should not flow into Russia (even if other funds do).
Another feature of the current wave of sanctions is the ban on exports to Russia. Non-military export bans typically feature less in sanctions regimes than import bans because they may harm the sanctioning country more than the sanctioned country. The moral component of the motivation for sanctions against Russia has led, for example, to the UK’s banning of the provision of a wide range of financial services to Russian individuals.
The result is that sanctions regimes are constantly evolving and ground-breaking innovations are being introduced.
Sanctions are always a relatively brutal instrument that causes collateral damage to innocent parties. One of the consequences of ongoing innovation is that collateral damage is unpredictable and could be widespread. It is likely to give rise to more litigation than in the case of previous regimes.
The impact of counter-sanctions
Sanctions against Russia lead to counter-sanctions imposed by Russia on Western interests. The freezing of central bank assets has led to the obligation to pay in rubles for imports of oil and gas from Russia, resulting in the cutting off of gas supplies to countries that refuse to pay in rubles. The prohibition of certain other transactions by Western governments has led to the blocking of planes and ships and the threat of seizing business customers and intellectual property rights.
Sanctions and counter-sanctions are mutually reinforcing. The West wants to reduce energy imports from Russia and Russia is responding by cutting off energy supplies to some countries itself. The West wants to cut Russia off from the financial system and Russia responds by resorting to measures that isolate it from the Western financial system.
Circumvention of Sanctions and Secondary and Tertiary Sanctions
Trade sanctions are more effective when they are universal. Unilateral sanctions can be avoided by diverting trade, especially in the case of raw materials and other fungible goods. For this reason, many sanctions regimes are applied extraterritorially, although there are often legal and practical limits to this.
The United States has been the most enthusiastic user of extraterritorial sanctions, which has been facilitated by the use of the US dollar in international trade and the widespread presence of American companies through subsidiaries and licensed worldwide. In the past, the EU has opposed this practice and has a blocking regulation that prohibits EU persons from complying with certain US sanctions. The EU has even initiated a dispute settlement procedure at the WTO against the United States in order to oppose the application to EU nationals of the American Helms-Burton Act against Cuba.
The EU has now converted to the need to apply sanctions extraterritorially. As trade diversion unfolds, the EU will be faced with the question of whether it should seek to apply so-called secondary sanctions to countries or entities that too enthusiastically circumvent EU sanctions. .
The impact on trade agreements
- The suspension of Russia’s MFN status and its impact on the WTO
Most-Favoured-Nation (“MFN”) treatment is the foundation of the GATT/WTO system and the exceptions are limited and well-defined. There is no WTO mechanism to suspend or withdraw MFN status or even to exclude a member from the organization. There are security exceptions that allow trade-restrictive measures on trade in goods and services to be taken against a WTO Member, including “in time of war or other emergency in the relations international”. A number of countries, including the G7 and the EU, have announced that they have suspended MFN treatment of Russia. What they mean by that is that they consider the restrictive goods and services measures they take against Russia to be justified by the national security exceptions.
WTO members have long struggled with the limits of national security exceptions, which are framed to some extent in terms of self-assessment (measures that “they deem necessary”). As described in our article on the national security exception, recent dispute settlement cases have shown that the constraints exist even if they are not severe. There must be a rational connection between the measure and the urgency. A delicate question will arise once the war is over and restrictive and discriminatory measures are maintained against Russia in order to reduce dependence on Russia or as a punishment for actions in Ukraine or even as an example for others.
- The granting of preferences to Ukraine
The main exception to MFN treatment at the WTO is the authorization of trade preferences necessary for the creation of a free trade area or a customs union. The EU and UK have free trade agreements with Ukraine, but have now gone further and removed all duties and restrictions in trade with Ukraine. This obviously goes further than what was necessary for the creation of a free trade area since the additional preferences are not provided for in the agreements creating it and are therefore not necessary for its creation. The MFN principle of the WTO would therefore require that this removal of duties and other restrictions be extended to all WTO members. The statement from the G7, EU and others mentioned above includes a suggestion that “actions in support of Ukraine” are also covered by their invocation of the national security exception.
- The impact on other countries
Trade with other countries will also be impacted by the measures taken vis-à-vis Russia and Ukraine. On the one hand, they will have the possibility of supplying countries imposing sanctions with products and services that no longer come from Russia. There is also the possibility for countries that do not impose similar sanctions to buy goods and possibly services from Russia at lower prices and accordingly reduce their purchases elsewhere. However, this runs the risk of being perceived as circumvention and may lead to some restraint.
A concrete example of indirect impacts on third countries concerns the steel safeguards imposed by the EU and the UK to guard against trade diversion as a result of US Section 232 measures. Here the EU has announced that it will redistribute the quotas that can no longer be used by Russia as a result of EU sanctions to other countries so as not to increase the protective effect of these safeguard measures on the EU. The United Kingdom is also redistributing the quotas it had allocated to Russia.
- Overall effect on trade agreements
An unforeseen event such as the invasion of Ukraine is not something that is foreseen or regulated in trade agreements. It therefore leads to the adoption of autonomous or unilateral measures. Efforts are being made among like-minded Western nations to adopt measures that do not conflict with or undermine those of their allies. The measures, however, remain autonomous and there is no prospect of them being adopted by the UN Security Council due to Russia’s permanent membership and veto power.
These measures therefore give new impetus to the trend that has been evident for some time in the United States and the EU to favor stand-alone measures over those that require a multilateral agreement.
The WTO is due to hold its twice-postponed ministerial conference from June 12-15, which it was hoped would make progress on a new subsidy deal. This is now in danger as the EU, UK and US in particular would refuse to participate if Russia were allowed to speak.
The structure of trade is seriously disrupted by the war in Ukraine and the various sanctions regimes. While not surprising, the real danger is of lasting damage to the global trading system. The sanctions that the West imposes on Russia seem designed to last and lead to the permanent isolation of Russia. It may be intended as a punishment and to serve as an example to others; it may also be the consequence of a realization that increased economic interdependence does not necessarily lead to lasting peace as has been widely argued, but may also create obstacles to taking the necessary steps to try to preserve the peace.