Part II
Anthony Luzzatto Gardner1
(1)
London, UK
Anthony Luzzatto Gardner
The United States and the European Union have cooperated on a broad range on foreign policy issues around the world. These issues have not just focused on specific countries but have also been cross-cutting, such as the promotion of human rights, democracy building and good governance. With respect to one specific foreign policy tool, sanctions, I really saw the power of what these two essential partners can do together.
Nearly every week during my diplomatic mission, a staff member would inform me that “We have another SVTC on sanctions against Russia in the SCIF.” The US government loves acronyms and I had to learn many of them, including these two, on the job. I would regularly participate in Secure Video Tele-Conferences on sanctions in the Sensitive Compartmented Information Facility of the US Embassy. The facility was a claustrophobic, windowless room in which highly classified information could be discussed without fear that others, including the Russians, were eavesdropping. To ensure secrecy, it was strictly prohibited to enter with any electronics, including mobile phones.
The split screen video would show SCIFs in different parts of the US government, including the National Security Council, the State Department, the Treasury Department, the Defense Department, our intelligence services, and our embassies in Ukraine and Russia. Some of the most important of these meetings were held at “deputies” level that deputy secretaries or their substitutes would attend. Ably chaired by my old friend and Deputy National Security Adviser Antony Blinken, the calls would start with briefings from two of the State Department’s most experienced career diplomats, Ambassador Geoff Pyatt in Kyiv and Ambassador John Tefft in Moscow. I would brief the group on whether the EU was likely to implement similar measures and at the same time as our own.
Russia’s annexation of Crimea in early March 2014 and its instigation of a separatist conflict in south-east Ukraine confronted the US and the EU with one of the most serious crises in Europe after World War II. Although it was clear that neither would elect a military response, it was far less clear whether they would be able to craft a joint non-military response that would convince Russia to change course. The US and the EU had already been cooperating on extensive sanctions against Iran since at least 2006; significantly enhanced in 2012 with an oil embargo and measures to cut off Iran’s banks from the global financial system, these sanctions were already showing their results by the time I took up my post.
The success of the United States and the European Union in implementing, renewing and enforcing nearly identical and extensive sanctions against Russia after its annexation of Crimea and against Iran to curb its nuclear weapons program is one of the most extraordinary (yet underappreciated) recent achievements of their relationship. Whereas each one acting alone would have likely failed to change the behavior of Russia and Iran, they magnified the effectiveness of their policies by cooperating intensively.
The predominant role of the US dollar in global trade and the centrality of the US financial system in facilitating global financial transactions have afforded Washington enormous power to sanction foreign companies and individuals. Specifically, the US government derives significant leverage from the fact that all dollar-denominated transactions, including most oil trading, must pass through dollar-clearing accounts in the United States.
In the case of both Russia and Iran, even Washington can’t carry out effective sanctions over the long term without the European Union. One key reason is that the EU has much deeper economic ties with Russia and Iran compared to the United States. EU-Russia trade was eleven times larger than US-Russia trade before the US and the EU began to impose sanctions in March 2014. Moreover, the EU imports roughly one third of its oil and 40% of its gas from Russia. Whereas the United States had largely terminated its trading relationship with Iran by 2011, the EU imported roughly €12 billion of goods from Iran, including 600,000 barrels of oil per day (18% of the country’s total oil exports) on the eve of tougher coordinated US-EU sanctions in 2012.
While unilateral US sanctions can certainly inflict significant pain in the short term, as has been the case with the additional Iran sanctions imposed by President Trump, they risk splitting the alliance and undermining their own objectives over the longer term. Yes, dealing with the EU on sanctions can be slow and sometimes painful because its deeper economic exposure to some countries (including Russia and Iran) makes it understandably more cautious than the United States. But when it finally does act, despite its burdensome bureaucratic procedures, it has an impact.
The United States and the European Union are the world’s first and second most prolific users of sanctions, respectively. If they were not to coordinate their sanctions, business and investment with the targeted country would flow to the one with the laxer policies. That would, of course, cause complaints among the companies losing business and create transatlantic friction. Efforts by the United States to force EU firms to adopt sanctions against a third country, including through extraterritorial “secondary sanctions” that threaten to withhold access to the US market or prevent the use of US-source goods and intellectual property, have often failed in the past.
History clearly demonstrates that sanctions are hard to implement successfully. It is hard to sustain political and popular support for economic penalties against a third country, especially one that carries weight in the international economy. While there is rarely a clearly identifiable “constituency” for the relatively intangible benefits of long-term sanctions, there will always be a vocal and motivated lobby of businesses affected by sanctions that will seek to remove them. The difficulty of transatlantic, let alone international, coordination on sanctions has often convinced leaders that the effort is simply not worth it.
The United States and the European Union have often disagreed about the utility of broad unilateral sanctions regimes, such as Washington’s decades-long embargo against Cuba and extraterritorial “secondary sanctions” that threaten to withhold access to the US market. But they largely agree that sanctions should seek to be non-punitive and targeted at changing the behavior of a country, entity, or individual responsible for violating international norms. Both the US and the EU seek to inflict minimal collateral damage on innocent people in the targeted country, on their own economic interests or on the global trading or financial system.
The complexity of coordinating international sanctions inevitably led to differences between the US and the EU about the timing, targets, and content of sanctions against Russia and Iran (Fig. 7.1). In both cases, Washington was repeatedly out in front calling for quicker, broader, and tougher action. In the case of sanctions on Russia, Vice President Biden stated:
Fig. 7.1
Secretary Kerry and Ambassador Gardner meet European Commission President Juncker in Brussels, Belgium to discuss sanctions and other matters
(© 506 collection/Alamy Image Bank, 25 March 2016)
It was America’s leadership and the president of the United States insisting, often times almost having to embarrass Europe to stand up and take economic hits to impose costs.1
I witnessed some of the US efforts to stiffen the spine of some wobbly EU member states, especially during the very frequent visits to Brussels of my friend Dan Fried, Sanctions Coordinator at the State Department and former colleague in the Clinton White House. Dan traveled indefatigably to the main European capitals to share information, build trust, and align sanctions. The United Kingdom played an important role in guiding us through the complexities of the EU sanctions process.
European Council President Donald Tusk was a critical ally in spine-stiffening exercises. His courage and moral compass, demonstrated ever since his activities with the Solidarity movement opposing authoritarian rule in Poland in the 1980s, proved to be important assets. While some member states thought he overstepped his brief on occasion, I thought that it takes a Pole to understand the Russians.
The Crimean crisis that erupted shortly before my diplomatic mission began was not just a professional focus of mine for three years. It was of intense personal interest. I had studied Russian for seven years at high school and at university and had spent significant time in the Soviet Union pre- and post-Gorbachev as a student at Leningrad State University and then as an intern in the US Embassy in Moscow and at the Institute of US and Canada Affairs of the Soviet Academy of Science. I had worked as a lawyer in an international law firm in Moscow and then helped GE Oil & Gas with its Russian projects. I felt I knew a little about the Russian psyche.
In the months leading up to my diplomatic mission, I had been fixated by the images of Ukrainians, from all walks of life, who were braving the freezing cold and risk of death by snipers to demonstrate in Kyiv’s Maidan Square. One of my proudest moments was when the US Mission to the EU sponsored the screening of “Winter on Fire,” a documentary about those events. The crisis had started with Russia’s refusal to accept the Ukrainian people’s right to choose their own destiny as part of the European family, including signing a free trade and association agreement with the European Union. I felt that they were fighting for the same inalienable rights as the American patriots during the Revolutionary War or as the Balts and the Central and Eastern Europeans during their struggle for liberation from the Soviet yoke. In my first July 4 celebration in Brussels, I told the crowd that: “Freedoms are not free. They need to be defended. And those who wish to be free deserve our support.”
A Conversation in the Kremlin
In order to appreciate fully the extent of the US-EU achievement in coordinating sanctions on Russia, it may be helpful to imagine a conversation between Vladimir Putin and Russian Foreign Minister Sergei Lavrov soon after the Kremlin’s decision to send special operations forces to occupy critical installations in Crimea in late February 2014.
The dialogue might have gone something like this:
LAVROV:
Mr. President, I am pleased to report that all is going according to plan. Crimea will soon be reunited with Mother Russia where she has always belonged. The useful idiots in the Western media are repeating disinformation that our forces are unknown militia operating autonomously and that the government in Kyiv is dominated by Fascists who are committing atrocities against the Russian-speaking population.
PUTIN:
Thank you, Sergei. It is time to undo Khrushchev’s criminal decision to cede Crimea to Ukraine in 1954. Yeltsin, that drunken fool, was also a criminal to allow Ukraine to become independent in 1991. It is absurd that Ukraine pretends to be an independent country. We must not only absorb Crimea but also take back south-east Ukraine and – who knows – even move on Kyiv itself? At a bare minimum, we must ensure that the entire country remains weak and divided, as well as outside NATO and the EU. We cannot tolerate an independent, stable, successful and democratic Ukraine on our borders! The hypocritical West will say that we are breaching international law, while conveniently forgetting that they grabbed Iraq for its oil reserves and NATO interfered in Kosovo. [Putin takes a long, reflective pause] Do you see any risks?
LAVROV:
Mr. President, our enemies are good at playing a strong hand poorly, while we know how to play a weak hand well. The United States will push for sanctions, but Europe will come up with excuses for not acting. They were unable to take coordinated action against us after we thrashed the Georgians in 2008. If Washington pushes for extraterritorial secondary sanctions against Europe, as President Reagan did in 1982 to prevent European firms from participating in the construction of the Siberian oil pipeline, or as the US Congress did in 1996 to force Europe to adopt sanctions against Cuba and Iran, the EU would likely respond with counter-sanctions and “blocking statutes” that prohibit European courts and companies from complying with US law. We would benefit hugely from a split in the transatlantic alliance.
PUTIN:
But what is the risk that the EU will actually get its act together and cooperate with Washington?
LAVROV:
I can put your mind at ease. Remember that the 28 members of the EU must act unanimously to implement sanctions. Just think how easy it will be to pressure the Cypriots whose banks depend on the money of our oligarchs, or to influence the Greeks, our orthodox brothers, who are furious with EU-imposed austerity measures, or to convince our Hungarian friend Viktor Orban who sees you as a role model? The Italians will not want to endanger their sales of luxury fashion, or the French their sales of cheese and wine, or the Germans their sales of cars and machine tools. Unlike in the United States, where the president has significant powers to set sanctions policy and the executive branch executes, the European Commission must consult extensively with the member states. The member states’ national administrations are responsible for interpreting the sanctions. They can do that sometimes rather flexibly. They are tasked with spotting and punishing violations, but they can also turn a blind eye.
PUTIN:
But what if the EU 28 do agree unanimously on sanctions?
LAVROV:
Even if they do, Mr. President, remember that they would be of limited impact if they are not followed by similar sanctions imposed by Canada, Japan, Switzerland, Norway, South Korea, Australia and others. Even if those countries do participate, the EU 28 must renew the sanctions every six months, each time by unanimity! That gives us numerous opportunities to divide and conquer. A few days before each renewal date we can dangle the carrot of a “negotiated solution” and a truce in front of their noses. Once the US and Europe start believing in a diplomatic process, they will be hooked. The public and the press will demand that no diplomatic stone is left unturned. Europe and the US will bend over backwards, thinking that you are a rational chess player. They will telegraph their intentions in an open debate, allowing us to plan well ahead of time. You should play a different game – blackjack perhaps – and double down at every turn. You should be unpredictable. They do not have an appetite for risk.
PUTIN:
What if they do impose sanctions? Is there any risk that these could be problematic?
LAVROV:
Even if they do so, they will focus on visa bans, asset freezes and an arms embargo that are minor inconveniences. The wives of some oligarchs won’t be able to shop at Harrods, visit their houses in Knightsbridge and send their little Sashas to private schools in the UK and the US, but this is not a significant issue. Designations of people and companies in EU sanctions lists can easily be challenged before the EU’s highest court for lack of evidence, just as the Iranians have done successfully. Sanctions against our broader economy are unlikely; even if implemented, the measures will be targeted and will not pinch us where it really hurts – exports of natural resources, especially oil and gas, and our need to raise money in Western capital markets. They will never, ever resort to the “nuclear option” of forcing SWIFT to cut Russian banks from the international financial messaging system.
PUTIN:
You are right. The US and the EU can successfully pressure a country of minor importance, like Iran, but Russia is a different story. Our economy is more than three times the size of Iran’s and it is far more integrated with the world economy. Russia sells vastly more energy to the world than Iran does. We can’t be isolated like Iran.
LAVROV:
Of course. But the United States will push the EU and its allies to punish us.
PUTIN:
If they have the balls to implement broad sanctions against our energy companies and banks, I can intimidate them. We can flood the separatist militia in Ukraine with weapons and provide them with training. We can annihilate Ukrainian Army positions with our long-range artillery from just inside our borders. The US and Europe will never equip Ukraine with military hardware, even of the defensive kind. Our military will prevail. But, Sergei, we must be careful to prevent information about deaths and injuries of our troops from becoming public.
LAVROV:
Of course. Mr. President, you can propose a new law making the deaths of Russian soldiers in special operations during peacetime a state secret. The soldiers shall receive no military honors and shall be buried in unmarked graves.
PUTIN:
Excellent. We can also crater the Ukrainian economy by forcing enormous costs of conflict on Kyiv; Gazprom can raise prices for the supply of natural gas to Ukraine or we can simply shut off all supply and make the Ukrainians freeze in their beds. There is no way that the IMF, the US and Europe will step into save the Ukrainian economy. But, Sergei, what is the risk of sanctions against our key economic sectors?
LAVROV:
Mr. President, I can put your mind at ease. Such sweeping sanctions are highly unlikely, especially in Europe. The cost of lost exports, and of our own counter-sanctions, will have to be evenly distributed across all EU 28 member states. There will be endless controversy about which member states are bearing a disproportionate burden. We will, of course, seek to promote a transatlantic split by encouraging the narrative that Europe is paying the price for sanctions while the United States is getting off without a scratch.
PUTIN:
So all I need to do, as the ancient Chinese philosopher Sun Tzu observed, is to wait by the river long enough to see the bodies of my enemies float by. The best part of this plan is that the Russian people will shower me with praise for being a strong leader and making Russia respected once again on the world stage.
So just how clever were Putin and Lavrov when we look back on what occurred? While they did get some bets right, on the whole they were proven disastrously wrong. The United States and the European Union did remain unified during a lengthy period of implementing and renewing increasingly restrictive sanctions. The EU was galvanized into following US so-called sectoral sanctions against the Russian economy’s energy, financial, and arms sectors after Russian-backed separatists shot down a Malaysian Airline plane filled with European nationals on July 17, 2014. When European Commission President Juncker had warned Putin at the G-8 meeting in Brisbane, Australia, in November 2014 not to attempt to split the transatlantic alliance because he would surely fail, Putin had confidently replied: “I won’t fail.” Well, he did.
What Russia Guessed Right
Putin and Lavrov were certainly correct in guessing that the immediate reaction to the annexation of Crimea would be tepid at best. President Obama and EU leaders issued the ritual condemnations, of course. I was seated in the front row of the packed press conference following the US-EU Summit at the end of March 2014 during which European Council President Herman van Rompuy stated that the annexation was “a disgrace in the 21st century and we will not recognize it.”2 Leaders on both sides of the Atlantic called for a de-escalation and a peaceful resolution of the crisis. They announced their support for the territorial integrity, sovereignty, and independence of Ukraine and called on Russia to immediately withdraw its troops to areas where they had been stationed. As of early March, they instituted and quickly implemented some visa bans and asset freezes of limited impact. They threatened unspecified “additional and far reaching consequences” if Russia took further steps to destabilize the situation in Ukraine, essentially writing off Crimea’s annexation as a fait accompli.
The meeting of the G-8 leaders scheduled for mid-June in Sochi was canceled, substituted with a G-7 only meeting in Brussels. The EU-Russia summit and bilateral meetings between EU member states and Russia were also canceled. But importantly, Russia’s participation in the G-8 was only suspended temporarily, not terminated. My suggestion to the NSC staff that the G-7 be held in Kyiv was rejected as being too aggressive. To my amazement, Putin was invited to participate in the commemoration of the World War II Allied landings in Normandy on June 6. Putin also hobnobbed with world leaders at the G-20 meeting in Brisbane as if business had returned to normal. When I had called on Van Rompuy during my “letters of credential” ceremony at the beginning of my diplomatic mission, he had aptly observed that Europeans “are not in a fighting mood” and wanted stability with its Russian neighbor above all else. While the United States is lucky not to have Russia as a neighbor, it was also not in a fighting mood. The stark reality was that the US and Europe would never care about Ukraine as much as Russia, and therefore would not go to war over it.
Putin and Lavrov were also right that EU member states would have very different views of Russia and that sustaining unanimity would be very challenging. The United Kingdom was the member state most philosophically aligned with our position. I was on the phone several times per week, sometimes several times per day, with the UK’s permanent representative to the EU Sir Ivan Rogers during the crisis in order to understand the EU’s position and to plot next steps. Sweden, the Baltic states, Poland, and Romania were also dependably aligned with the US desire to toughen sanctions.
On the other side of the spectrum, Greece repeatedly opposed sanctions, perpetually arguing for a soft approach and watering down communiqués and proposed sanctions lists. Prime Minister Tsipras visited Putin in Moscow May 2014 and again in April 2015, breaking the EU consensus not to hold bilateral discussions. Foreign Minister Nikos Kotzias repeatedly argued that EU sanctions were counter-productive. Panos Kammenos, a leading figure in the governing coalition, said that Western NGOs provoked the crisis in Ukraine and that a coup d’état overthrew the legitimate government. Energy Minister Panagiotis Lafanazis, leader of the hard-left faction of the governing coalition, described EU sanctions as “totally unacceptable” and repeated that Greece “had no differences with Russia.”3 (One of the ironies of Greek affinity for Russia is that Russia nonetheless tried in early 2019 to scupper Greece’s ultimately successful efforts to resolve a highly contentious dispute with Macedonia about its name.)
Greece was not alone. Cypriot President Nicos Anastasiades said Cyprus had “grave doubts” about Europe’s policy toward Russia. Cyprus allowed Russia to use its ports and won improved terms for a $2.5 billion Russian loan.4 Prime Minister Victor Orban said the EU was shooting itself in the foot and signed an agreement with Putin for Russian companies to supply two nuclear reactors, including a Russian state loan of up to €10 billion to finance nearly all of the project. The Bulgarian, Slovak, and Czech governments were scarcely more supportive.5 These countries’ total dependency on Russian gas was only a partial factor; Poland and Lithuania were sanctions hawks despite being in the same position.
In between this group of sanctions sceptics and the group of sanctions supporters stood other states that were unpredictable. Germany and France slowly took a tougher line against Moscow over time. Italy was keen to protect the export success of Italian business (including fashion and food) in the Russian market and seemed especially protective of ENI, its oil major that had significant agreements with Rosneft to explore oil fields in the Barents and Black Seas. Prime Minister Renzi repeatedly attacked German Chancellor Merkel for invoking European solidarity to approve sanctions that would hurt Italy, while approving the Nord Stream Two pipeline that would benefit German business and exacerbate European gas dependency on Russia. The Netherlands were supportive of sanctions, but Prime Minister Rutte seemed to be mindful of Dutch business interests, especially those of Shell Oil headquartered in The Hague.
Putin and Lavrov were correct that many Europeans, encouraged by ample Russian disinformation, considered that only Europe, not the United States, had a “dog in the fight” because of its geographic position and economic ties with Russia. Why should the United States shape the response to Russian annexation in Crimea when it was so far away?
There were many answers to that question. It was not just the case that the United States cares about the ability of people to determine their destiny, the importance of international law and the sanctity of internationally recognized frontiers. The United States (along with Russia and the United Kingdom) had given security assurances to Ukraine under the Budapest Memorandum of 1994 under which Ukraine had agreed to give up its nuclear weapons stockpile. As the leading world power, the United States also had a unique interest in ensuring that its credibility and power not be questioned by others, especially the Iranians, the North Koreans, and the Chinese, who were probing Washington’s willingness to stop their destabilizing actions.
Many Europeans believed that Europe was paying the price of the sanctions while the United States was getting away cost-free, if not even benefiting from them. It is true that the EU was more exposed than the United States to a reduction in trade with Russia: The EU and the US were Russia’s fourth and 23rd largest trading partner, respectively, before sanctions were imposed. EU exports to Russia during 2014–2016 dropped by 21%, but this was due, perhaps in large part, to an economic downturn in Russia caused by a slump in the international oil price and the devaluation of the rouble, neither of which was due to sanctions or counter-sanctions. The sanctions-induced export losses for the EU have been estimated at 11% during the three years.6
The burden on EU member states was very unevenly distributed, with some (including those complaining most loudly) not suffering much real pain and others, including many of the sanctions hawks, suffering relatively more seriously. Roughly one fifth of the EU’s exports of fruits and vegetables went to Russia, with some sectors (such as Polish apple exports) particularly badly hit. But the EU budget softened the blow and many of these exporters successfully redirected their exports to other markets. In 2017, the European Commission estimated the damage to the European economy of the sanctions and countersanctions at a very modest 0.3% and 0.4% of GDP in 2014 and 2015, respectively.
The United States also took an economic hit, suffering a drop in US exports to Russia of 17% during 2014–2016, only slightly less than the drop in EU exports. Although the impact on the EU was greater in the first two years, the impact on the US was significant in 2016. Moreover, some large and politically influential firms took big hits. Exxon Mobil, for example, was forced to terminate its partnerships with Rosneft to drill in the Arctic, Western Siberia, Russia’s Far East, and the Black Sea at a cost of $1 billion. US energy firms complained bitterly that the EU “grandfathered” its oil companies’ existing contracts in existence at the time the sanctions were announced to allow them to continue, whereas the US had insisted on immediate termination. Significant US exports of oil and gas extraction and maintenance equipment to Russia were also hit.
Putin and Lavrov were also right in believing that the United States and Europe would not (at least during the Obama administration) arm Ukraine to help it defend itself. At the Munich Security Conference in February 2015, Chancellor Merkel had voiced a view shared by many European leaders: “I cannot envisage any situation in which improved equipment of the Ukrainian army will lead to a situation in which Putin is so impressed that he will lose militarily.”7 That was true, but it wasn’t really the point. Arming the Ukrainians could have changed Putin’s risk calculus and it certainly would have cost him the ability to deny that the body bags coming out of south-east Ukraine contained Russian soldiers. Taking the option of arming Ukraine with lethal weapons off the table made Putin’s decisions much simpler.
President Obama never formally took the option off the table, but it was pretty clear even from the earliest days of the conflict that it just wasn’t going to happen. I participated in many video conference calls in which our key policy-makers debated and rejected the option of sending lethal arms, such as anti-tank missiles, to Ukraine. At an address before the joint houses of Congress in September 2014, Ukrainian President Petro Poroshenko had pointed out that “Blankets and night vision goggles are also important but one cannot win the war with blankets.”8 By the fall, Washington had finally started sending modest amounts of non-lethal aid, such as short-range counter-mortar equipment, patrol vehicles, boats, and surveillance equipment. But the refusal to send more sophisticated equipment, such as long-range radar and tactical surveillance drones, had already proven to have devastating consequences. When Ukrainian government forces reversed some earlier losses of territory to Russian-backed separatists in early July 2014, Russian forces operating just inside the Russian border conducted sustained and intensive artillery attacks that turned the tide once again.
Under rising Congressional pressure, President Obama signed the Ukraine Freedom Support Act in December 2014 that authorized, but did not require, the president to provide increased military assistance, including of the “lethal” kind, to Ukraine. But the president was not inclined to do so, partly under significant pressure from European leaders who believed that this would worsen the conflict and destroy efforts by Germany, France, and the EU to broker a settlement. In repeated meetings at the European Commission and the European Council, I was warned that any US unilateral decision to arm Ukraine with lethal weapons would risk splitting the transatlantic alliance and would fracture Europe internally, even if it might be welcomed secretly in several member states.
That fear was overstated. The decision of the Trump administration in 2018 to give significant military assistance, including the sale of lethal weaponry, to Ukraine strained but did not split the alliance. Nonetheless, in 2014–2015 it was clear that the European public had no desire to resolve the conflict militarily. A 2015 opinion poll by the Pew Research Center had indicated that most Europeans opposed sending arms to Ukraine and that they would not fight for it; shockingly, the poll demonstrated that a majority would not even come to the defense of a fellow European NATO member if attacked.9 In light of that reality, US-EU agreement to ratchet up pressure with sanctions was even more important.
Putin and Lavrov were right that Europe was enamored with process. I wish I had a euro for every time I heard an EU official, and the permanent representatives of the EU member states, speak about the need for “caution,” “restraint,” and “dialogue.” When I heard one of them say with an earnest expression that “we need to move from a logic of confrontation to a logic of cooperation,” I felt like reaching for an air sickness bag. It was certainly true that we needed to keep the diplomatic track open as there was no military solution to the conflict and in order to keep the public on both sides of the Atlantic on side as we increased the pressure on Moscow. But I sometimes felt that many Europeans were engaging in dangerous self-delusion about the likelihood that diplomacy alone would yield results. Innumerable meetings were held among representatives from France, Germany, Ukraine and Russia (the “Normandy Format”); from the EU, the US, Ukraine and Russia (the “Geneva Format”); and from Ukraine, Russia, the Organisation of Security and Cooperation in Europe and the breakaway separatist “People’s Republic” of Donetsk and Luhansk (the “Minsk Format”).
The Minsk Protocol signed in mid-September 2014 set forth a detailed twelve-point plan, including an immediate cease-fire in the Donbas region of Ukraine and critical provisions that heavy weaponry had to be withdrawn from the “line of contact” and that “illegal armed groups and military equipment as well as fighters and mercenaries” had to be withdrawn from Ukrainian territory. But the protocol was almost instantly violated, mostly by the Russian side. After the complete collapse of the protocol by January 2015, Germany and France helped to broker a new package of measures (called “Minsk II”) that were meant to stop the fighting on terms acceptable to both sides. Little of this arrangement has been implemented, principally because Russia has refused to exert its clear influence over separatist forces. While the United States supported these efforts at a peace process, many of the officials in the Obama administration were convinced that Russia actually wanted to keep the conflict simmering in order to exert the maximum destabilizing influence over the future of Ukraine.
The reality was that on both sides of the Atlantic we were bending over backward to appease Moscow. For example, European Commission President Jean-Claude Juncker sent an extraordinary letter to Putin in November 2015 in which he expressed his “regret” that closer EU-Russia ties had not been able to develop over the past year. “I can assure you that the European Commission will be a helpful partner in this process,” he wrote. Moscow rejected his proposal of closer trade ties between the EU and the Eurasian Economic Union, a grouping for former Soviet states dominated by Moscow.10 Juncker also observed that “One doesn’t provoke a bully” and that “We must make efforts towards a practical relationship with Russia…we can’t go on like this.” I thought that language very unfortunate because it neglected how it would be heard as a sign of weakness in Moscow.
Some high-level officials in the Obama administration also repeatedly urged that we express to Putin a desire to de-escalate and offer him “off-ramps” that would offer him a face-saving way out of the crisis. I thought the concept of an “off-ramp” completely ignored the realities we faced with Putin. During the regular SVTCs on Russia sanctions, I regularly agreed with my friends, Toria Nuland, the Assistant Secretary of State, and Dan Fried, the State Department’s coordinator for sanctions, both of whom had significant experience dealing with Russia and were sanctions hawks. They argued that only sustained pressure, increased if necessary and combined with continued Ukrainian resistance, would ever convince the Russians to settle the conflict in the Donbas. Vice President Biden was refreshingly clear-minded, repeating in the US and to European counterparts that the threat had to be faced up front; the real choice was “paying now or paying double later.”
Putin and Lavrov were also right that the US and the EU would focus their initial response on travel bans and asset freezes. In March 2014, both sides imposed these measures on a relatively small number of individuals. The sanctions lists included officials who were either Crimean separatist leaders or Russians who had taken a direct role in the annexation of Ukrainian territory. During the month of March, both the US and the EU added individuals, including prominent targets like the former Ukrainian President Viktor Yanukovych and Dmitry Rogozin, the Deputy Prime Minister of the Russian Federation, to their lists. Of course, none of this deterred Putin from orchestrating a referendum in Crimea that unsurprisingly resulted in an overwhelming show of support for independence and Russian recognition of Crimea as an independent state.
The one sentence in the US executive order that might have raised some concern in Moscow related to the intention of targeting individuals wielding influence in the Russian government, including their personal assets. That warning might have led some Russian oligarchs to move their assets to places less exposed to subsequent sanctions.
At the US-EU Summit on March 26, President Obama urged the EU to pick up the speed and intensity of its sanctions, observing that the United States was ready to impose tighter sanctions. He urged the EU to act imminently, not in the multi-week timeframe the EU side had in mind. However, the EU’s next round of sanctions announced one month later didn’t go much further than the prior one. Although the EU list included 15 more individuals, including most significantly the Chief of the General Staff of the Russian armed forces and the head of the GRU, Russia’s largest foreign intelligence agency, the EU failed to follow the United States’ example of sanctioning any Putin “cronies” or Russian entities. The US administration used the term “cronies” to denote confidantes and supporters of Putin who had amassed their wealth through opaque dealings and with his support.
This was primarily due to heightened concern in the EU institutions about the vulnerability of such sanctions to legal challenges before the European Court of Justice. The concern was well-founded because numerous targets of EU sanctions, including Ukrainians and Russians, were successfully challenging their inclusion. The core of the EU’s difficulty was that, having no intelligence-gathering capabilities of its own, it needed to rely on information provided by the member states. Neither the US government nor key member states with the relevant intelligence, especially the United Kingdom, were keen to share classified information with the EU. There was no way, moreover, to introduce such information before the EU courts in a restrictive manner to persons with security clearance. The result was that some of the “designations” amounted to little more than Internet search results and second-hand information. After suffering some embarrassing defeats before the courts, the EU changed the rules of procedure to allow restricted access to confidential information. It also started basing its “designations” on the status of the targets rather than their conduct because the former required less evidentiary support.
The EU kept adding more separatist leaders to its lists in mid-May and mid-July and banned the import of goods from Crimea at the end of June. When the EU finally got around to imposing sanctions on entities in mid-May, it was to target two expropriated Crimean energy companies of minor significance. The signing at the end of June of the EU-Ukraine Association Agreement, including a free trade agreement, was a far more significant event. Even though the agreement did not guarantee eventual EU membership, it was hugely significant because the Kremlin’s pressure on the Yanukovich regime not to sign it had precipitated the demonstrations in Kyiv that led to the end of his regime and because it was an important step westwards both economically and politically.
There were two highly significant measures, short of sanctions, that the US and the EU regrettably failed to take. The first was to release damning information about corruption at the highest levels of the Russian government. According to some estimates, including one by the CIA in 2007 (and subsequently revealed by officials who had read them), Putin’s fortune amounts to around $40 billion. Some lawmakers in Congress discussed requiring the Obama administration to make these estimates public, but that never happened.11 Putin’s oligarch supporters would have been very annoyed at having their dirty laundry displayed in public. The second measure the US regrettably failed to take was to reveal information about the identities of Russian soldiers dying in combat. The Russian State had gone to extraordinary lengths to keep this information a secret in order to prevent an erosion of public trust.
What Russia Guessed Wrong
Fortunately, Putin and Lavrov got much more wrong than they got right. While making some tactical gains, they committed strategic blunders that will set back Russian interests for many years. Russian aggression made my job of promoting US-EU relations so much easier. By seizing Crimea, he rekindled the love lost during the transatlantic discord over data privacy in the wake of the Snowden revelations.
Russian threats proved to be counterproductive. In a phone call in late August 2014, Putin had told then European Commission President José Manuel Barroso that Russia could occupy Kyiv in two weeks if he wanted. In November 2014, he defended the Molotov-Ribbentrop non-aggression pact that carved up Poland between Nazi Germany and the Soviet Union.12 The annexation of Crimea and the frequent incursions into Scandinavian and Baltic airspace by Russian jets convinced some European states to increase their defense spending, reinvigorated NATO and led the United States and its allies to move troops and weapons closer to the Russian border. Moreover, Gazprom’s threats to turn off the natural gas spigot promoted progress toward a European Energy Union, including the diversification of energy supplies and improved energy infrastructure permitting the free flow of gas. That diminished Russia’s ability to use energy supplies as a weapon against Europe. As a result of Russian actions in Crimea and south-east Ukraine, the number of Ukrainians having positive views of Russia declined precipitously. Like Ukraine, Moldova and Georgia wanted to move ever closer toward Europe. And that is just a short list.
Although very well-funded Russian media outlets, such as the international television station RT (Russia Today) and the Sputnik news agency did enjoy a broad following, even in the US and Europe, Russia’s grotesque disinformation at home undermined the credibility of Russia’s entire public relations campaign. Russian state-owned media reported that the Ukrainian government planned to put Hitler’s face on its paper money and that Ukrainian nationalists had crucified a Russian child in Slovyansk, south-east Ukraine, after the Ukrainian Army expelled Russian-backed separatists from the town.
Putin and Lavrov were also wrong that unanimity among the EU 28 would fracture. Greece, Cyprus, Hungary, and some other member states complained bitterly about the sanctions but never risked shattering EU solidarity in the knowledge that they benefited so much more from the EU than from close ties with Russia. During the fraught negotiations between Greece and the EU over a debt bailout, Moscow must have been tempted to offer Athens with cheap loans in return, perhaps, for a Greek veto of sanctions against Russia or a naval base in Greece. But that never happened. Hungary could cozy up with Moscow in return for cheap energy and financing for its nuclear power plant, but it would never endanger its EU membership because 6% of its GDP stemmed from EU transfers.
There inevitably were tensions among the EU 28 before the expiration of each six-month period sanctions period. A minority of member states argued for longer periods or in favor of pre-emptively rolling over the sanctions before their expiration. The majority argued that the six-month periods gave the EU flexibility to respond to events on the ground. But the reality was that the periods gave Moscow numerous opportunities to fracture EU solidarity. One repeated debate within the EU, encouraged by Moscow, was whether sanctions should partially be lifted in return for partial compliance with the Minsk Protocol. Washington and the majority of the EU 28 fortunately nipped in the bud each effort to pursue this à la carte approach. The sanctions were regularly rolled over.
EU solidarity did come into question in an area few would have anticipated: the EU-Ukraine free trade agreement. In September 2014, Putin nearly convinced several EU member states to remove all tariff preferences for Ukraine in the agreement in return for a ceasefire. Not only did this put the lie to Russia’s claim that it was a non-combatant and had no influence over the separatists, there was no evidence that trade preferences or regulatory requirements in the agreement would seriously impact the modest amount of Russia’s non-energy exports to Ukraine.
Although the free trade agreement entered into “provisional application” in January 2016 pending ratification by all EU member states, it was once again threatened by the results of a Dutch referendum on the agreement in April. The referendum had been called because the opponents had barely cleared the low 300,000 signature threshold and then had managed to gain 61% of the votes among the one third of the Dutch electorate that voted. The result was that two and a half million voters, often voting for reasons entirely unrelated to the free trade agreement, endangered an agreement that had been ratified by every other member state. It was a huge propaganda win for Russia that portrayed the vote as a rejection of Ukraine. Fortunately, the Dutch Senate finally ratified the agreement in May 2017 after the EU heads of government had clarified that it would not have any impact on Ukraine’s aspirations to join the EU, access EU labor markets or receive financial or military support.
Putin and Lavrov were wrong in believing that the US and the EU would not help Ukraine meet its energy and financial needs. As described further in Chapter 9, in April 2014 Gazprom canceled Ukraine’s natural gas discount agreed the previous December, jacked up prospective prices and cut off gas supplies to Ukraine in June after trilateral talks (including the EU) had failed. US and EU energy experts reported from their technical meetings in Kyiv that there might not be sufficient gas supply during the coming winter, despite price hikes and lower demand in the Donbas industrial region affected by the conflict. But the experts helped develop an emergency plan, including the provision of mobile power generators for schools and hospitals, technical assistance to improve the exploitation of existing Ukrainian oil and gas resources, and support for enabling the “reverse flow” of gas from Slovakia, Poland, and Hungary to Ukraine. At the end of October 2014, EU Energy Commissioner Günther Oettinger brokered a gas supply deal between Kyiv and Moscow that depended in part on EU financial guarantees.
The US and the EU, moreover, stood by Ukraine financially as its economy reeled from the cost of the conflict, the loss of industrial production, reduced trade and investment, and runaway inflation. The economy contracted 7% in 2014 and even more in 2015. With a widening budget shortfall, dwindling international currency reserves, a worsening public debt to GDP ratio, and difficulty to raise capital, Kyiv was facing a real crisis. But the IMF stepped in quickly at the end of April 2014 to approve a $17 billion two-year package of support, including immediate disbursement of $3 billion that unlocked further credits from other donors of $15 billion. That package was replaced in March 2015 by another $17.5 billion credit line, giving immediate access to $5 billion. The United States provided $2 billion in loan guarantees, while the EU disbursed €1.6 billion under its “macro-financial assistance” program, during 2014–2015. All the programs were conditioned on Ukraine continuing on its path of economic reform.
Putin and Lavrov were wrong that sanctions on individuals would be minor nuisances. Already in late March, the US started targeting members of Putin’s inner circle, including not only high-level government officials but also Putin “cronies”. These included some very wealthy and powerful people: Vladimir Yakunin, the Chairman of the state-owned Russian Railways; the Rotenberg brothers who had amassed a multi-billion fortune through significant state contracts; and Gennady Timchenko, one of Russia’s richest oligarchs, a confidante of Putin and a founder of Gunvor, one of the world’s largest independent commodity trading firms involved in the oil and energy markets.
The sanctions notice released by the US Treasury contained a highly significant sentence: “Putin has investments in Gunvor and may have access to Gunvor funds.” The message to Putin was clear: We know where you hold your wealth and we may go after it. In late March, the US also sanctioned Bank Rossiya, one of the country’s largest banks and the personal bank for senior officials, including members of Putin’s inner circle.
In late April, the US went further by sanctioning more Putin “cronies,” including Igor Sechin, the head of Rosneft, Russia’s leading state-owned oil company, and Sergei Chemezov, the head of Rostec, the Russian state-owned company overseeing high-tech industries. The US also sanctioned many companies belonging to the Rotenberg brothers and Timchenko. By the end of July, the EU not only added more senior Russian officials to its sanctions list, including the head of the FSB security service, the main successor agency to the KGB, and Putin’s first deputy chief of staff, but finally added three Putin “cronies,” including Arkady Rotenberg and two main shareholders of Bank Rossiya, whom the United States had targeted earlier.
These measures against Putin’s cronies were not mere pinpricks that prevented oligarchs from yachting in St. Tropez and skiing in Courchevel with their well-paid escorts. They created serious complications for the targeted individuals in accessing their assets and in using international financial institutions to manage them.
Putin and Lavrov were wrong to think that the US and the EU would not impose sectoral sanctions. They did so and were successful in coordinating similar sanctions by the key developed economies and allies of the EU and the US, including Japan, Canada, Norway, Switzerland, and Australia. That was an extraordinarily time-consuming and technically challenging feat in light of the varied interests of the countries involved and the time pressure of responding to rapidly unfolding events.
The US imposed the first round of sectoral sanctions on July 16, 2014. These sanctions, by far the most significant to date, prohibited “US persons and persons within the United States” from providing medium and long-term financing for some of Russia’s largest companies in the financial and energy sectors. These companies included Gazprombank, a financial institution and subsidiary of the behemoth Gazprom, the largest natural gas company in the world; VEB, a development bank and payment agent for the Russian government; Novatek, Russia’s largest independent natural gas producer; and Rosneft. Eight Russian arms firms were also on the list. But Gazprom itself would not be named as it was considered a “nuclear option” that Europe would never support. Most EU member states, as of July 16, were very hesitant to engage in sectoral sanctions out of concern that they might hinder a peaceful resolution to the conflict and have serious consequences for the EU’s trading and investment relations with Russia. Events on the following day changed everything.
On July 17, Russian-backed and Russian-trained separatists in south-east Ukraine fired a Russian-made surface to air missile at an aircraft that they thought was a Ukrainian military aircraft but was instead a Malaysian Airline flight from Amsterdam bound for Kuala Lumpur. The tragedy cost the lives of 298 people, including 193 Dutch, 10 Britons, and 4 Belgians. The separatists prevented international monitors, including from the OSCE, from promptly accessing the site. According to eyewitness accounts of the immediately subsequent events, some of the debris was removed and the bodies were stripped of their wallets and personal effects, before being left to rot in the fields. A joint investigative team established by the Netherlands and Australia (that lost 28 citizens) formally held Russia accountable in May 2018 after a lengthy inquiry. I remember seeing extremely convincing evidence of Russia’s culpability in the early months after the disaster. Some of this was shared with the EU and the member states.
As always, a change in Germany’s position, specifically that of Chancellor Merkel, was pivotal to a change in the EU’s policies. As her spokesman argued, “a completely new situation has emerged which makes further measures necessary…only…a substantial package would enable the German government and the EU to send a clear, strong signal to Russia.”13 Once Berlin decided to overrule the concerns of German industry that had the most to lose from tough sanctions, the group of EU sanctions hawks clearly had significant weight and clear momentum. France and even Italy agreed that much tougher actions were required.
The EU immediately announced that the EIB would suspend funding for projects in Russia. The European Bank for Reconstruction and Development, majority-controlled by the EU, the EU member states and the EIB, similarly announced the end of Russian investments a few days later. Both institutions had significant lending operations in the country.
Although the EU was more reluctant than the US to consider broad sanctions, US officials had worked closely for months with their counterparts in Brussels and European capitals to design targeted sectoral sanctions. This allowed the EU to move relatively quickly (for EU standards) to align with US sectoral sanctions in the financial, armaments, and energy sectors by the end of July. The sanctions restricted the ability of Russian state-owned banks to issue new medium and long-term debt or new equity in the EU’s capital markets; the former was particularly impactful as those banks had relied on the EU to raise billions in initial public offerings and roughly half of their bond issuances.14 The sanctions also prohibited the import or export of arms from or to Russia, banned the export of dual-use goods and technology for military use in Russia and restricted the export of certain energy-related equipment and technology to Russia. Specifically, export licenses of energy-related equipment and technology destined for deep water oil exploration and production, arctic oil exploration or production, and shale oil projects in Russia were banned. The EU measures steered clear of the natural gas sector because of the EU’s high dependency on Russian gas supplies.
The United States took similar measures in the financial, energy, and armaments sectors in late July and early August. It restricted the ability of three major Russian financial institutions, including VTB, Russia’s second-largest banking group, to raise new medium and long-term debt or new equity in the US capital markets. In addition, it blocked the assets of Russia’s largest shipbuilding company. Most significantly, it imposed controls on the export of certain items for use in Russia’s energy sector intended for energy exploration or production from deep water, Arctic offshore or shale projects that have the potential to produce oil or gas.
The US and the EU took their most dramatic coordinated action on sanctions of the entire crisis in mid-September. Washington now prohibited all new debt financing over fourteen days to the five Russian banks it had already targeted and added Sberbank, Russia’s largest bank to the sanctions list. The EU announced similar measures against the five banks, except that it imposed a thirty-day threshold for new debt financing. The US also prohibited the provision of any goods, services (not including financial services), and technology for unconventional energy exploration to Gazprom as well as its subsidiary Gazpromneft, Lukoil, Surgutneftegas, and Rosneft which already had restricted access to the US capital market. The EU announced similar measures against the first three.
In addition to the sectoral sanctions against the Russian financial sector, the combined impact of the sanctions applying to debt capital raising and the sale of oil and gas equipment in the Russian energy sector was highly significant. Russia is the third largest producer of oil after Saudi Arabia and the United States. Sales from oil and gas accounted for roughly two thirds of total Russian exports and around half of the Russian federal budget in 2014–2015. The energy sanctions limited Russia’s ability to compensate for depleting onshore Siberian deposits by developing offshore unconventional oil and gas exploration.
The subsequent sanctions announced by the US and the EU over the following months and even years of the crisis involved extensions and tightening of the pre-existing sectoral sanctions, additions of some firms and individuals (especially “cronies”) to whom visa bans and asset freezes would apply, and more restrictive provisions regarding trade and investment in Crimea. But the bulk of the meaningful sectoral sanctions were already in place.
While US sanctions could have gone much farther, that would have risked a split in US-EU unity and therefore a huge victory for Russia. More severe US sanctions could have also resulted in a financial crisis in Russia, imposing pain especially on the most vulnerable members of its society, including pensioners and the poor. One of the key lessons of the transatlantic cooperation on Russia sanctions is that it is far better to moderate the sanctions than to risk such a split. Congressional legislation in 2019 that requires the Trump administration to sanction companies (including European ones) that help Gazprom complete the Nord Stream 2 natural gas pipeline has aggravated the transatlantic split.
It is hard to isolate the impact of the US and EU sanctions from other phenomena weighing on the Russian economy, especially the steep decline in oil prices during the crisis. But most estimates conclude that there was a significant impact and that it contributed to Russia’s longest recession in decades. In 2016, the IMF estimated that US and EU sanctions were costing Russia 1.5% of its GDP per year, potentially rising to 9% over the long term. The sanctions certainly did contribute to rising inflation and government bond yields, significant capital outflows, and the inability of major state-owned firms to finance their operations. Sanctions also contributed to a steep fall in foreign direct investment, a worsening budget deficit that required running down reserves to finance government spending, the downgrading of Russian sovereign debt to barely over junk status and massive Russian Central Bank intervention in the currency markets to defend the depreciating rouble. Moreover, the sanctions may have set back Russia’s efforts to modernize its military and its energy sector. According to an in-depth study conducted by the State Department’s Office of the Chief Economist, moreover, the averaged sanctioned company lost about one-third of its operating revenue, over one-half of its asset value, and about one-third of its employees relative to their non-sanctioned peers.15
Putin and Lavrov must have been taken by surprise by the extent of the sanctions that were imposed. By the fall of 2014, their risk calculus must surely have changed. Sanctions on Russia clearly didn’t lead Russia to withdraw from Crimea or to stop supporting the separatists in south-east Ukraine. But those were never realistic expectations to begin with. The sanctions may well have deterred more aggressive actions that would have broadened the conflict and caused far more destruction, injuries, and deaths. Russia did not use the 20,000 troops assembled near the Ukrainian border to press an overwhelming military advantage. Instead, following the imposition of the sectoral sanctions by the US and EU, Russia bowed to the increasing economic and diplomatic pressure by returning to the negotiating table. While falling far short of its objectives, the resulting Minsk I and II agreements helped to ensure that the armed conflict in Ukraine did not escalate further. The sanctions also had an important signaling effect, both for Russia and more widely for other autocratic regimes around the world, that the violation of basic norms of international law has consequences.
Sanctions on Iran
The United States and the European Union not only cooperated on Russian sanctions; their coordinated and extensive sanctions brought Teheran to the negotiating table to restrict Iran’s nuclear program after many years of weaker US, United Nations and international sanctions had failed to do so. One can imagine a conversation, similar to the one above, between Mahmoud Ahmadinejad and a senior adviser on the eve of tougher US-EU sanctions in early 2012, when he was still President of Iran and the US and EU were starting to tighten their Iranian sanctions.
They might have thought that a united front between the US, EU, and key allies would be hard to put into place and nearly impossible to maintain over time. They might have doubted that the EU would agree to sanctions not authorized at the United Nations, where Russia would always wield a veto. They might have taken comfort, for example, from the fact that the EU and Iran had a strong trading relationship: the EU was Iran’s largest trading partner, accounting for almost one third of its total exports and around one quarter of its oil exports, with several EU member states (including Greece, Italy, and Spain) sourcing a significant percentage of their total oil imports from Iran.16 Significant European commercial interests were also at stake. France’s Total had defied US sanctions in 1997 when it signed a $2 billion contract with Iran’s national oil company to develop the giant South Pars field in the Persian Gulf that holds the world’s largest natural gas reserves. Iran owed Italy’s ENI $2 billion for prior oil deliveries in early 2012.17
Ahmadinejad and his senior adviser might have hoped that Greece would be the Achilles heel of the EU’s sanctions regime because of its economic weakness and reliance on very favorable financial terms for its oil purchases from Iran. They might have considered that history is littered with examples of failed oil embargoes. They might have reasoned that the international oil market is so large, so complex and features so many major purchasers (including China, India, and Turkey) and so many means of payment, including barter, that Iran would have options to sell its oil, either publicly or secretly outside the traditional banking system, even if the EU, Japan, and South Korea stopped buying (as the US had already done). And they might have believed that the EU and the US would not be willing to increase their dependency on Russia and Saudi oil or risk higher prices at the pump.
For these and other reasons, Ahmadinejad and his senior adviser might have concluded that there was little risk of continuing with Iran’s covert nuclear weapons program and that it could perpetually procrastinate and pontificate rather than sit down at the negotiating table with the US and the EU. In 2012, Iran’s Supreme Leader Grand Ayatollah Ali Khamenei confidently predicted that:
other countries [aside from the US and Israel] have either been forced to go along with sanctions or they are just doing it as a ceremonial gesture…these conditions will not continue.18
This proved to be a serious miscalculation: The US and EU implemented and renewed crippling sanctions during 2012–2015 that succeeded in bringing Teheran to the negotiating table. The negotiating process culminated in the so-called Joint Comprehensive Plan of Action (JCPOA) in July 2015 that subjected Iran’s nuclear program to strict controls in return for a partial lifting of sanctions.
The coordinated US-EU sanctions program accomplished what US-led sanctions were unable to achieve on their own. While the three decades of US sanctions against Iran during 1979–2008 constrained Iranian growth and created inconveniences, the effects were hardly catastrophic and even partly beneficial to Iran as they had created transatlantic tensions and had led to import substitution, the development of domestic industries, and alternative trade relationships.
Starting in 2003, France, Germany, and the United Kingdom (the so-called P3) started negotiating with Iran on behalf of the European Union following the revelation that Iran had been secretly constructing a uranium enrichment facility and a heavy water production plant. Both of these were clear signs of an intention to develop the nuclear weapons capability that Teheran had long denied. The P3 offered numerous incentives to Iran, such as strengthened commercial ties, technical support in the energy sector (including for the civilian use of nuclear power), and EU support for Iran’s accession to the WTO.
The negotiations appeared to be making headway in 2004 when Iran agreed to freeze nuclear fuel enrichment and reprocessing, as well as nuclear research and development, and to accept intrusive verification by the International Atomic Energy Agency (IAEA). But the negotiations collapsed in 2005 following the election of Ahmadinejad as President of Iran when it became clear that he would not accept any restrictions on Iran’s nuclear program. His threats and offensive language, especially his denial of the Holocaust and threats to annihilate Israel, reinforced the widely held view that Iran posed a serious danger to world peace. In late 2005, the IAEA found Iran to have breached its non-proliferation obligations and submitted a full report to the UN Security Council to consider further action.
During 2006–2010, the Security Council became the most visible actor in the international efforts to curb Iran’s nuclear program. By combining sanctions (including against Iranian banks for supporting terrorism) with diplomatic efforts, the United States put pressure on France, the United Kingdom, Russia, and China, the other four permanent members of the Security Council, and Germany (the “P5+1”) to get tough. During 2006–2010, the Security Council passed six resolutions, including four that applied sanctions, to curb Iran’s nuclear program, especially fuel enrichment and reprocessing. Ahmedinejad’s dubious re-election victory and violent suppression of pro-democracy protests in 2009 increased the pressure on the United Nations to act. The UN resolutions were critical, not only because of their content but especially because they provided international legal cover for the EU to implement its own sanctions.
While Russia cooperated in approving Security Council measures against Iran, it did so hesitantly and after extracting concessions. The cooperation may be explained in part by the “reset” of the strained US-Russian diplomatic relations sought by President Obama at the beginning of his term in 2009. New evidence that Iran’s government had falsely denied the existence of secret uranium enrichment facilities in Iran, including one in a heavily fortified underground facility, may have also raised concerns in Moscow about the imminent specter of a nuclear-armed Iran and conflict in the Middle East. Most importantly, Iran’s cheating on its IAEA commitments convinced the European members of the P5+1 that they must implement their own sanctions against Iran.
The Europeans’ stronger stance contributed to the passage of a UN Security Council resolution on sanctions in 2010 that was more restrictive than the prior three: It subjected Iran’s financial sector to international sanctions on the grounds that Iranian financial institutions handled oil profits that the government used for proliferation efforts. Although the four Security Council resolutions fell short of sweeping economic sanctions because of Russian and Chinese opposition, and therefore had little dissuasive effect, they did provide international legal justification for subsequent action. By 2011, the “reset” was already in trouble and Russia now openly questioned the intelligence assessments about Iran’s nuclear capability, as well as the need for further sanctions. Once again, Moscow seemed more interested in supporting Iran as a counter-weight to US regional influence in the Middle East and the Caspian Sea.
Both the US and the EU made the UN a key focus of their Iran sanctions efforts during 2006–2010. They regularly added to the UN sanctions, including lists of sanctioned entities and individuals, as well as descriptions of goods, services, and technologies that could not be provided to Iran on the ground that they might promote its program to develop weapons of mass destruction. Both the US and the EU moved well beyond UN sanctions starting in 2010 after roughly a decade of failed negotiations with Iran to stop its nuclear weapons program.
Over the next few years, President Obama worked with Congress to pass sweeping legislation that tightened existing sanctions on Iran and implemented new ones. The legislation and related presidential executive orders restricted the importation of Iranian goods, targeted the Iranian shipping, shipbuilding, port, and automotive sectors, expanded the list of “dual use” goods with potential military or security applications subject to an export ban, and added many names to the list of sanctioned individuals. Over the next few years, the president issued executive orders that sanctioned Iranian entities and individuals for engaging in serious human rights abuses and punished firms for helping Iran evade US sanctions. The EU passed very similar legislation.
Until 2010, the EU refrained from imposing punitive sanctions on Iran that diverged from those of the UN. The collapse of the P3 talks, Ahmedinejad’s rhetoric, the persistent evidence of Iranian lying to UN inspectors and the inadequate nature of UN sanctions changed that policy. Six major EU decisions followed in the next two years that implemented sweeping sanctions against Iran, many of them similar to what the United States was doing.
Targeting Iran’s Financial and Energy Sectors
The two areas of focus for the US and the EU were Iran’s financial and energy sectors. The first objective was to isolate Iran from the international financial system, something that the United States was uniquely well qualified to achieve because of its predominant role in the global financial system. US legislation and executive orders prohibited any US firm or individual from conducting business with Iranian banks, including the Central Bank of Iran, and enabled the Treasury Department to block any foreign financial institution from accessing the US financial system if it processed a wide range of illicit transactions with Iran, such as facilitating Iranian petroleum exports. The Treasury Department designated Iran’s entire financial sector as a “money laundering” operation and President Obama froze all the assets of the Iranian government and financial institutions in the United States. All US banks and most foreign banks stopped dealing with Iranian financial institutions altogether because the risk of being frozen out of the United States market was too high. In order to squeeze Iranian oil-related operations that sought to skirt the US financial system, new US legislation sanctioned any entity transacting in Iranian Rials or providing precious metals to Iran.
A key part of US success in applying financial sanctions against Iran (and other countries) has been to convince private financial institutions to “self-censor,” that is to overcomply with sanctions rather than run any risk of regulatory cost or reputational harm.
Although the US carries greater weight than the EU in the international financial system, the EU took a critically important financial measure in March 2012. The EU prohibited the Brussels-based SWIFT to continue providing specialized financial messaging services to EU-sanctioned Iranian banks. This step was highly significant as Iranian banks suddenly found themselves shut out of the world economy. At the time it took this step, SWIFT was handling daily payments estimated at more than $6 trillion. Nineteen banks and 25 affiliated institutions from Iran were exchanging millions of cross-border payments using SWIFT.
SWIFT’s action to disconnect Iranian banks from its system was one of the biggest points of contention between the US and the EU. Initially, both EU member states and SWIFT’s board of directors were wary of turning the financial messaging service into a sanctions tool. EU member states understood that disconnecting Iranian banks would deliver a serious blow to the lucrative business ties that many small and medium-sized enterprises had with their Iranian counterparts. Recognizing that such a step would be a major pressure point for Iran, however, the EU ultimately agreed to the US request.
The second target of US-EU sanctions was to squeeze Iran’s energy sector that provided Teheran with 80% of export earnings and two thirds of government revenues. US and EU measures further restricted investments in Iran’s petroleum, petrochemical, and natural gas industries, including the supply to Iran of related goods, services, or technology. The measures also penalized any individual or firm providing underwriting, insurance, and reinsurance for goods, services, or projects related to those industries. South Korean and Indian refineries of Iranian crude that relied heavily on European and US insurance were impacted especially hard. As a result of these measures, Iran’s energy sector was starved of funds for modernization. Few companies were prepared to insure, lease, or sell tankers to Iran and the Iranian tanker fleet became very expensive to operate. In order to exploit Iran’s insufficient refinery capacity, the sanctions also targeted the sale of gasoline and refined petroleum products to Iran.
But one major area of EU-Iranian commercial relations remained untouched: the EU was still permitting the importation of Iranian oil and gas into the EU. On the eve of 2012, Iran was exporting 2.5 million barrels of crude oil per day, making Iran the world’s third largest exporter, and was earning around $95 billion per year. These exports represented more than three quarters of Iran’s total export earnings and most of its government revenues. Europe was Iran’s second largest customer, buying about one quarter of its oil exports.
Perhaps the most important moment in US-EU cooperation on Iran sanctions came in January 2012 when the EU agreed to ban the purchase, import, and transport of Iranian crude oil, petroleum products, and related finance and insurance. In order to provide struggling European economies reliant on Iranian oil imports, such as Greece, enough time to find alternative suppliers, the sanctions provided for a six-month grace period. The EU sanctions were subsequently tightened to include an embargo on importing Iranian natural gas and a prohibition on EU nationals and firms to transport or store Iranian oil or participate in the construction of Iranian oil tankers and cargo vessels. US-EU restrictions on the provision of any financial transactions related to Iran’s oil exports, such as letters of credit, left the remaining importers with no choice but to use local currencies, gold, or other commodities.
Among the key reasons why the US and the EU were able to take coordinated action to squeeze Iran’s oil exports is that Saudi Arabia agreed to replace the lost Iranian oil export volume, oil production from Iraq had increased substantially, and the United States was beginning to experience a massive expansion in oil production thanks in part to hydraulic fracturing and other technological advances.
The EU’s oil embargo imposed severe economic pain on Iran. EU oil imports shrank from around 600,000 barrels per day in 2011 to essentially zero by the second half of 2012. At $95 per barrel, that equated to a loss of $21 billion per year for Iran. Moreover, the policy of the US to provide countries six-month renewable waivers from sanctions only if they steadily decreased oil imports from Iran was having an effect: Major non-EU importers of Iranian oil, especially China, India, South Korea, Japan, and Turkey decreased their imports over the course of 2012 by 550,000 barrels per day. The total impact of these measures was to deny Iran access to over $150 billion over the 2012–2015 period.19 Even the proceeds of continuing sales to non-EU importers were locked up in offshore escrow accounts and could only be accessed for limited (humanitarian) purposes.
Not only were Iran’s current oil export revenues impacted, but so were the future prospects of its oil industry. At the end of 2011, Iran’s Oil Minister stated that Iran needed $300 billion in order to stem or reverse the steep decline in production rates in Iran’s aging fields. Starved of export proceeds for maintenance and renewal of oil fields, as well as advanced technology to access more challenging deposits, Iran was unable to maintain oil production. In theory, Iran could have sought to substantially increase its natural gas production as it had barely started to do, despite having the second largest proven deposits in the world. But it lacked the means to do that as well. In short, Iran faced the prospect that sanctions would severely mortgage its energy future.
The economic impact of the joint US-EU sanctions on Iran became clear by the end of 2012. With its oil revenues diminished and its banks largely cut off from the global banking system, Iran’s economy suffered. Central bank reserves plummeted, with holdings of foreign currency declining by about $100 billion. The economy shrank in 2012 (for the first time in two decades) by 7.4%, after modest growth in the preceding two years. By the spring of 2014, its economy was estimated to be 15–20% smaller than it would have been had it remained on its pre-2012 growth trajectory. The value of the Rial declined by over half against the dollar and inflation rose significantly, peaking at 40%, between January 2012 and January 2014. With the value of many assets diminishing so quickly, Iranians began to purchase and hoard dollars, gold, and even cars. By the fall of 2012, food prices for key staples had risen so much that they had become unaffordable for many Iranians. Public discontent with rising inflation and the inability of many companies to pay workers’ wages boiled over into unusual public riots.
Even as the EU moved to tighten its sanction regime against Iran in 2012, the strength of that regime came under pressure in EU courts as sanctioned Iranian individuals and entities brought lawsuits before the EU courts in Luxembourg. The concern of the United States was so great that I decided to attend oral arguments at the European Court of Justice (ECJ), the supreme court of the EU on matters of EU law, on September 10, 2014, in joined cases involving two Iranian banks on the sanctions list. The EU was appealing a decision by the lower EU General Court that had upheld the banks’ challenge to their listings and the EU’s freezing of their assets. Not only did I want to judge for myself the risks that the EU sanctions regime might buckle, but I also wanted to send a signal that Washington was keenly interested in the outcome.
The advocates of the EU withered under questioning from the judges who appeared unconvinced that the unclassified evidence put before the court proved the banks’ involvement in Iran’s nuclear and ballistic missile program. In my meetings with the President and Vice President of the Court that same day, I learned that there was no EU doctrine of broad deference to executive discretion in foreign policy matters, as in the United States. In those limited areas of the EU’s common foreign and security policy where the EU courts had jurisdiction, such as sanctions policy, judicial review must ensure that EU fundamental rights (such as the right to a proper defense at trial) are observed. The Iranian banks subsequently won their appeals at the ECJ.
The EU sanctions regime against Iran did survive most of the legal challenges, however, for the same reasons noted above with regard to the sanctions regime against Russia, including a change in the EU courts’ rules of procedure to allow the introduction of confidential information in court and a shift to designating individuals and entities based on their status rather than their actions.
Because of the accumulated and intensifying effects of the US and EU sanctions, Iran eventually bowed to the pressure and sat down with the P5+1 and the EU to sketch out an interim agreement limiting its nuclear program in return for a partial lifting of sanctions. In July 2015, that agreement took its final shape in the form of a Joint Comprehensive Plan of Action requiring Iran to accept international monitoring of its pledge never to “seek, develop or acquire” nuclear weapons. After the IAEA verified that Iran had fulfilled certain key promises, such as reducing its stockpiles of fissile material and centrifuges, the JCPOA entered into effect in January 2016.
Although US and EU sanctions unrelated to Iran’s nuclear program (such as those related to its human rights violations) remained in place, the most punishing sanctions imposed on Iran were lifted as a result of the agreement: roughly half of Iran’s $115 billion in foreign held reserves were unfrozen; Iran was now able to export oil once again and trade, including with Europe; foreign firms were free to invest in Iran’s oil and gas industry; and Iran was reconnected to the global banking system, including to SWIFT.
The hard-fought transatlantic unity that was maintained during the sanctions program against Iran has been under strain because of the radically different policy of the Trump administration toward the JCPOA. President Trump has called it the “worse deal ever” despite the fact that the IAEA and even the State Department repeatedly confirmed that Iran was living up to its obligations. After unilaterally withdrawing the United States from the agreement in May 2018, the administration re-imposed all the nuclear proliferation-related sanctions that had been previously lifted and pressured SWIFT into disconnecting Iranian banks once again from the global banking system. European firms and individuals now face the threat of US secondary sanctions for engaging in business transactions with Iranian companies. The Trump administration also withdrew all waivers from previous sanctions on Iranian crude oil imports granted to Iran’s largest customers. On its face, this strategy has borne fruit: Iran is shut off from world financial flows and is struggling to sell its oil (even if China appears prepared to keep buying in secret).
But there is no evidence that undermining the JCPOA is succeeding at making Iran into a more responsible international actor. On the contrary, it seems that Iran is determined to play even more of a spoiling role as it comes under pressure. Furthermore, US unilateralism regarding Iran sanctions has a long-term cost to the transatlantic alliance. The EU has dusted off its “blocking statute,” first introduced to prevent secondary sanctions under the Clinton administration, that threatens European businesses with legal action if they comply with US sanctions. The statute is likely to have modest practical effect because most European companies, especially larger ones, will naturally privilege their continued access to the US market over access to the Iranian market. But it nonetheless serves a political purpose in signaling to Washington the EU’s profound resentment at extraterritorial policies and in signaling to Teheran the EU’s good-faith efforts to keep the JCPOA alive.
More seriously, the US decision to leverage its dominant role in international financial markets to unilaterally pressure SWIFT into disconnecting Iranian banks, despite EU objections, will fuel efforts by certain countries to find alternatives to SWIFT that are independent from the US banking system and are therefore immune to US sanctions. While such a system may well take time to implement, there can be little doubt that such an alternative will eventually be found.20 Similarly, US threats against foreign banks that handle any payments related to transactions that are permissible under the JCPOA are predictably encouraging France, Germany, and the United Kingdom, the three signatories to the nuclear deal, to join forces with Russia and China to find a new channel for non-dollar trade that would allow entities to do business with Iran while bypassing US sanctions. The existing channel, called the “Instrument in Support of Trade Exchanges” may be largely symbolic as it will only facilitate trade between the EU and Iran that is already exempted from US sanctions, but it may evolve into something more substantial.
It is worth noting that the new president of the European Commission, Ursula von der Leyen, has instructed Valdis Dombrovskis, commissioner in charge of deepening Economic and Monetary Union, as well as financial services, that he should work toward strengthening the role of the euro as a “strategic asset” and that he should help ensure Europe is “more resilient to extraterritorial sanctions” (especially from the United States).21
The Trump administration’s approach of maximizing US short-term leverage, no matter what the cost to the transatlantic alliance and the long-term consequences for US foreign policy leverage, stands in stark contrast to the sanctions policies pursued under the Obama administration and prior administrations. One of the lessons from prior experience that guided the Obama administration’s approach toward both the Russia and Iranian sanctions is that sanctions will only succeed long term if key allies are on board. The EU may not be the easiest ally to deal with because of its complexity, slow decision-making, and predilection for compromise, even in the face of aggression. Unlike the United States, it will never be willing to engage in secondary sanctions, even when it would have the power to do so. But its economic importance gives it unique assets that must not be overlooked.
The influence of the United States will only persist if it wisely husbands, but does not abuse, its unique power. As the Financial Times rightly put it:
global banking is [not] a US fiefdom that Mr Trump can control without incurring significant costs. Imposing his will on Swift will increase the chances that alternative communication systems will gather support around the world…The US, by bulldozing its allies, will have weakened a key element in its own strategic arsenal.22
A related lesson from the sanctions against Russia and Iran is that transatlantic efforts can only be successful if they are rooted in mutual trust. If either the US or the EU believes that the other is not negotiating in good faith, then the chances of success are minimal. Trust must be carefully nurtured, and it can disappear in a flash. The United States should be playing the long game. As the old Zulu adage goes, “If you want to go quickly, go alone; if you want to go far, go together.”
Acknowledgements
The author would like to acknowledge the assistance of Ole Moehr in the preparation of this chapter.
Footnotes
1
Remarks at the John F. Kennedy Forum, October 3, 2014. https://obamawhitehouse.archives.gov/the-press-office/2014/10/03/remarks-vice-president-john-f-kennedy-forum.
2
Remarks by President of the European Council Herman van Rompuy Following the US-EU Summit, March 26, 2014. https://www.consilium.europa.eu/media/23895/141919.pdf.
3
Sam Jones and Courtney Weaver, “Alarm Bells Ring over Syriza’s Russian Links,” Financial Times, January 28, 2015. https://www.ft.com/content/a87747de-a713-11e4-b6bd-00144feab7de.
4
Andrew Higgins, “Waving Cash, Putin Sows EU Divisions in an Effort to Break Sanctions,” The New York Times, April 6, 2015. https://www.nytimes.com/2015/04/07/world/europe/using-cash-and-charm-putin-targets-europes-weakest-links.html.
5
Gergely Szakacs, “Europe ‘Shot Itself in Foot’ with Russia Sanctions: Hungary PM,” Reuters, August 15, 2014. https://www.reuters.com/article/us-ukraine-crisis-sanctions-hungary/europe-shot-itself-in-foot-with-russia-sanctions-hungary-pm-idUSKBN0GF0ES20140815.
6
“Russia’s and the EU’s Sanctions: Economic and Trade Effects, Compliance and the Way Forward,” European Parliament Research Service, 2017. http://www.europarl.europa.eu/RegData/etudes/STUD/2017/603847/EXPO_STU(2017)603847_EN.pdf.
7
Bret Stephens, “From Munich to Munich,” The Wall Street Journal, February 9, 2015.
8
Dan Roberts, “Ukrainian President Makes Emotional Plea to Congress for Greater Military Aid,” The Guardian, September 18, 2014.
9
https://www.pewresearch.org/global/2015/06/10/nato-publics-blame-russia-for-ukrainian-crisis-but-reluctant-to-provide-military-aid/.
10
Andries Sytas, “EU’s Juncker Dangles Trade Ties with Russia-Led Bloc to Putin,” Reuters, November 12, 2015.
11
Peter Baker, “Sanctions Revive Search for Secret Putin Fortune,” The New York Times, April 27, 2014.
12
Andrew Roth, “Putin Tells European Official That He Could ‘Take Kiev in Two Weeks’,” The New York Times, September 2, 2014. Tom Parfitt, “Vladimir Putin Says There Was Nothing Wrong with Soviet Union’s Pact with Adolf Hitler’s Nazi Germany,” Telegraph, November 6, 2014. https://www.telegraph.co.uk/news/worldnews/vladimir-putin/11213255/Vladimir-Putin-says-there-was-nothing-wrong-with-Soviet-Unions-pact-with-Adolf-Hitlers-Nazi-Germany.html.
13
Jack Ewing and Peter Baker, “US and Europe Set to Toughen Russia Sanctions,” The New York Times, July 28, 2014.
14
According to a European Commission assessment, Russian state-owned financial institutions raised $16.4 billion through IPOs in EU markets between 2004 and 2012, and in 2013 alone raised €7.5 billion in bonds.
15
Daniel Ahn and Rodney Ludema, “Measuring Smartness: Understanding the Economic Impact of Targeted Sanctions,” US Department of State Working Paper 2017-01, December 2016. https://www.state.gov/documents/organization/267590.pdf.
16
Greece, Italy, and Spain sourced 30%, 14%, and 12% of their oil imports from Iran, respectively.
17
https://www.ilsole24ore.com/art/finanza-e-mercati/2012-01-07/liran-nega-miliardi-embargo-130448_PRN.shtml.
18
http://english.khamenei.ir/news/1654/Leader-Meets-Government-Officials.
19
Anthony Cordesman, Bryan Gold, and Chloe Coughlin-Schulte, “Iran—Sanctions, Energy, Arms Control, and Regime Change,” Center for Strategic & International Studies, January 2014. https://csis-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/publication/140122_Cordesman_IranSanctions_Web.pdf.
20
According to one of the key architects of the financial sanctions against Iran, “With SWIFT’s messaging format available for free, the system can be replicated outside the system that SWIFT manages. These imitations are not as efficient or secure as SWIFT’s system, but they are workarounds that will no doubt evolve and improve over time.” Juan Zarate, Treasury’s War: The Unleashing of a New Era of Financial Warfare (Public Affairs, 2013).
21
https://ec.europa.eu/commission/sites/beta-political/files/mission-letter-valdis-dombrovskis-2019_en.pdf.
22
“Global Banking Is Not an American Fiefdom,” Financial Times, May 18, 2018.