Transcript: Q&A Do Sanctions Work? Director of Foreign Policy, Centre for European Reform Dr Francesco Giumelli Assistant Professor, Department of International Relations and International Organization, University of Groningen Peter Attard Montalto Executive Director, Emerging Markets Economist for Emerging Europe and Africa, Nomura Dr Sara Bazoobandi Assistant Fellow, Middle East and North Africa Programme, Chatham House Chair: Presenter, BBC World News 19 November 2014 The views expressed in this document are the sole responsibility of the speaker(s) and participants do not necessarily reflect the view of Chatham House, its staff, associates or Council. Chatham House is independent and owes no allegiance to any government or to any political body. It does not take institutional positions on policy issues. This document is issued on the understanding that if any extract is used, the author(s)/ speaker(s) and Chatham House should be credited, preferably with the date of the publication or details of the event. Where this document refers to or reports statements made by speakers at an event every effort has been made to provide a fair representation of their views and opinions. The published text of speeches and presentations may differ from delivery. 10 St James s Square, London SW1Y 4LE T +44 (0)20 7957 5700 F +44 (0)20 7957 5710 www.chathamhouse.org Patron: Her Majesty The Queen Chairman: Stuart Popham QC Director: Dr Robin Niblett Charity Registration Number: 208223
2 Q&A: Do Sanctions Work? Question 1 Sanctions hurt, for sure, but if you look at who has been sanctioned whether it's Cuba, Iraq, Iran, North Korea; a long time ago, China has it had any effect on the change of their policies? Has it resulted in any significant change? In my opinion, no. Sara Bazoobandi I think I already answered that question, because it's important who sits on the other end of the sanctions. If it's the North Korean government, you can feel free to sanction to your heart's content but nothing is going to change. But in the case of a country with 75 million people who have been living in an absolute state of isolation and under lots of sanctions for the past 36 years, and have seen one revolution and another social and political uprising not that long ago (2009, the controversial presidential election), you obviously will see a completely different result than you would see in the case of North Korea or China or Cuba. Francesco Giumelli One quick response, because otherwise I would have wasted the past 15 years of my life. I wouldn't be so blunt. If you say that they didn't change their behaviour, finding some of the cases not all the cases but some, yes then do you also imply that not imposing sanctions would have created a better world? Or it's more likely that Cuba would have changed their behaviour, or China would have changed their behaviour, without the sanctions? That is a big question we need to answer, if we want to say that sanctions didn't work. So it's more complicated than that, I would say. Question 2 I would like to ask whether or not you think the application of sanctions to misbehaving countries has become an international norm, and if so, would the anticipation of sanctions even before they've been mentioned by any world leaders have a significant economic impact? I think they have become a sort of international norm, in the sense they have been applied quite a number of times over the last few decades, starting maybe with some of the measures taken against South Africa. But the question is, what do you anticipate? If you look at the specific case of Russia, because the steps that were taken in 2008, when Russia invaded Georgia, were very limited and cancelled very quickly, that probably created an expectation that it would be just like that this time around. It's probably come as something of a surprise to President Putin and those around him that so far at least, the West has stuck together. Now obviously what I can't predict is whether they will continue to stick together, and it may be that President Putin thinks that he will be the last one to blink. So we'll see.
3 Q&A: Do Sanctions Work? Francesco, very interesting when you said earlier the threat of sanctions is often enough, and the most powerful. Francesco Giumelli Exactly. Two things on the international norm. We think so, because we are the sanctioners, but if you think of the UN experience, that is not the case at all. The sanctions experience for the UN, which I would say is the benchmark to say whether the norm has become international or not, the UN sanctioning experience is in reality an African experience. You see lots of UN sanctions in Africa. The sanctions in Syria? Not UN. The sanctions since 2010, even since 2007, the sanctions that you see on North Korea and Iran are quite light compared to what the Europeans and Americans added. And the others are not happy, the Russians, the Chinese they said, you are not supposed to go beyond the UN, because otherwise why do we need the UN, if you do whatever you want afterwards? So I would say no, it has not become an international norm, even if the use of the instrument was more frequent. The threat, yes. The threat works especially with countries that somehow are closer to us to us when we are the sanctioners. Then there is a very strong anticipated impact, especially going back to the point that she raised before moving capital is so easy that in the moment in which someone in a newspaper writes there might be sanctions, you already take the money away, especially if it's liquidity that you can easily move around. That's also why it's difficult to lift the sanctions very quickly, because in the moment you take away the ban, the money disappears. So it wouldn't be that smart to lift it that quickly, if that answers your question. Question 3 Why do the panel think that the EU imposed sanctions on Russia's state banks, such as Sberbank and BTB Bank, but not the state banks' EU subsidiaries? Sberbank in Cyprus, for example. Peter Attard Montalto This has been one of the big problems, where basically the financial market and banks, Western banks, have basically a bit like a gas expanded to fill the more constrained space that's been given to them. Using those carve-outs that were in sanctions, albeit were sort of clamped down in some of the subsequent advice the Commission gave to banks beyond the letter that was originally put in place, but there was a view that you basically want to minimize the impact on, in particular, euro zone GDP in a country like Cyprus, that was obviously going through very difficult economic times still since the banking troubles of two years ago. Very strong voices within the process of how sanctions are formed within the COPR committee of the European Union you had countries like Austria coming and saying, I have a bank that has a big subsidiary that is providing so much lending into my economy. That logistical process
4 Q&A: Do Sanctions Work? of sanctions-forming allowed all those opt-outs to come in and to lose sight, if you like, of the larger goal, whether that's the big-picture goal of handing back Crimea (which the EU still talks about) or more specifically about inflicting economic pain. So I think that very much came from the specific nature of how the EU imposes sanctions. Question 4 My question is to. You mentioned earlier that Europe refrains from imposing personal sanctions on members of the elite and VIPs because it's worried that they might turn to the European Court. Could you explain what exactly the case is? There are a couple of cases, one of which is known in shorthand as Kadi, which I think is an Iranian case, where the European Court of Justice has essentially ruled that sanctions were applied without due process and without the individual sanctioned having the opportunity to confront the evidence that led to their being put on the list. The practical impact has been very limited because actually what the EU tends to do is simply to re-list with better justification, and then if you want to challenge it you have to go back through the court system and say why the evidence that's been provided is incorrect and so on. But nonetheless, it has had a dampening effect on the willingness of the EU to target individuals that they can't specifically link, in the case of the Russia sanctions, to action intended to undermine the territorial integrity of Ukraine. When you mentioned that, you said you thought it was a mistake. I think that they should be more bold, and if they're challenged in court then they should be more willing to put up their evidence and say, this is why we believe that this individual is contributing materially to the separation of Crimea from Ukraine, or whatever. I'll take the concrete example of the railways minister, Yakunin. There was a recording which was leaked to a Russian newspaper, of him browbeating Russian football club owners into admitting Crimean teams to the Russian league, even though they knew that that would probably put them on the wrong side of international football authorities. That seems to me to be prima facie evidence that he was contributing to undermining the territorial integrity of Ukraine, seeing that these teams had previously been in the Ukrainian league.
5 Q&A: Do Sanctions Work? Question 5 Can I try a different tack, which is the effect that sanctions have on the sanctioners, and the possible benefits or dis-benefits of that? I think even the chair might have a view of this. You could take a cynical view that since you can no longer get a communique or a UN declaration into 140 characters, you can say, you know, the G20 apply more severe sanctions on Russia or Iran. But it does allow you to agree on something when you're trying to manage an international security event. It gives you something to say from the point of view of demonstrating that you've still got institutions that can talk about these things and reach some conclusions. That might have more benefit than it looks, because it shows that the apparatus is there, and in terms of the threat to come, if they can do it once, they might be able to do it again. I'm interested that you ask that question because it was the one I raised when we met before coming here. Everyone in the panel has an opinion, so let's hear from all of us on that, because it is an interesting one. Francesco Giumelli Again, generally speaking, and that's also something that I wanted to say connected to what I said before. Whenever you impose sanctions, you create winners and losers. You create winners and losers on both sides of the conflict, and also on the other sides. That is part of the analysis that has been missing on the academics but also I think on the understanding of the problem. Let's take, for example, the SWIFT sanctions. The idea was the European Union prevents SWIFT from allowing the communications between banks everywhere. They could do it because SWIFT is located in the EU, so applying EU regulations to SWIFT was basically, technically, an extraterritorial sanction. So a bank from Australia could not wire money anymore to Iran because they were talking through SWIFT. In a way, that worked. In another way, others have started to basically set up an alternative system. So at the end of the day, I would say if I understood correctly your point there are certain unintended effects in the medium and long term, that these types of sanctioning are going to have a cost also for the senders. That would be the first reaction that I have. I thought that was a very interesting point there, that you've got something that you can unite around. That can be quite important. If you look at it sort of counterfactually, as it were, if you'd had all of the European countries individually trying to work out what they ought to do about what had happened in Ukraine, then you would have had some that would have gone off the scale on sanctions and you would have had others that would have done nothing, and the overall impact would have been significantly less. There was certainly a lot of debate, and I still think myself that they ended up rather on the low side of what I would have thought was good. But nonetheless, they managed to unite around something and they have had their first review of the sanctions and stuck with it.
6 Q&A: Do Sanctions Work? More importantly, were seen to be doing something as well. Peter Attard Montalto I think the EU mechanism isn't really fully seen through yet. We have to remember, we have a review in March next year of the whole setup. You're going to have countries like Finland, Hungary, Bulgaria, Austria, who will probably be arguing to some degree that there are additional carve-outs or maybe even some reversal, if there's no deterioration or marked deterioration in the situation. So whilst they've been, as the questioner said, there's been a need to show that the EU is doing something, we haven't fully seen through this key point in time. There are other interesting, unintended consequences that have fed through in America. One wouldn't normally expect the gun lobby to be interested in sanctions but we saw a big debate there about imports of Russian Kalashnikovs, things like that. It shows how difficult that political space is to find, where you can really put sanctions in place. I mentioned McDonalds. Sara? Sara Bazoobandi I think it's interesting that you mentioned this question, in the sense that I've been one of those people who always argued that the Asianization of the Middle East or the pivot to Asia, Middle East version as a result of the Chinese rise of energy consumption, the reliance of the Persian Gulf oil-exporting countries on doing more and more trade with Asian partners while the OECD consumers are slowly drifting off the demand side, especially in the energy sense. I think this has been a great loss for the Iranian economy, specifically in the sense that other counterparts in the region have had their own pivot to Asia, Middle East version, by choice when they wanted to and when they saw profit and benefit in eastward-looking strategies, whereas the Iranians have always been forced and had to do that out of desperation. So in a sense, if Iranians had had the opportunity of doing trade and business with European counterparts or American counterparts, they would have definitely chosen those partners rather than some of the Asian partners who, by the way, are exporters of cheapest-quality consumer products and the worst and least quality, most delayed construction projects and all sorts of other cooperations that they have in Iran. So I think in a sense it could have been interpreted as a loss for the American and European businesses, while on the other side of the planet the Chinese are the winner of the situation.
7 Q&A: Do Sanctions Work? Question 6 I must say, this has been a rather depressing presentation, because I expected to be told that yes, sanctions are working and there are prospects for the future. But it seems, and I put it to the panel, they are not effective. The threat is much more effective obviously but the key is not to have to use them, because it does seem that while the Russian economy may be affected, the fact is Putin and his ability to run the country seems, if anything, to be enhanced. If corruption strengthens the system around him, people suffer but the political dynamics in Russia, with nationalism and so forth, may help him. And in Iran, and you didn't mention the way the Revolutionary Guard has gone into business in a big way and corruption has really been reinforced. So you even wonder now, despite the shale revolution in the United States, given the Americans' ability to run sanctions against Iran for quite a while now, and we all know about the flood of oil we have now, there's quite a risk that it may not work out the way it appears to be working out. That the forces that should be undermined by sanctions, because of corruption and the political dynamics around that process, may if anything have strengthened the more extreme forces. It was very depressing to be told that even the budget in Russia is not going to be too badly damaged thanks to the collapse of the ruble. So bad news all around. Thank you. That is the summary that perhaps I was about to give of the past hour. It's interesting, I think the decision by the EU not to strengthen sanctions on Moscow on Monday was probably seen as a victory by President Putin and Russia. Then we have people saying the economy will be on its knees in a few years so we'll have to see. And we are, of course, watching very closely to see November 24th is the deadline for any kind of agreement to be reached on Iran's nuclear programme. So maybe when that happens you will remember some of the things that you heard here this evening. I'd like to thank you all very much for coming. Thank you, everyone.