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Nuclear tensions rise after symbolic US sanctions

Americas / 09-08-17 / by
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US sanctions

A new raft of US sanctions against Iran, North Korea and Russia are largely symbolic in terms of their impact on trade, but have led to a huge increase in geopolitical tensions.

US President Donald Trump signed a new act into law that received overwhelming bipartisan support in both the US Congress and Senate. These will, in effect, water down the Trump administration’s ability to ease sanctions on Russia, as any repeal must be approved by Russia.

However, the act provides significant changes to current US sanctions on the three nations, which will have little impact on US companies, but which will disproportionately affect Russian banks and companies.

US companies, banks and citizens are already virtually excluded from doing business or transacting with Iranian or North Korean entities. However, companies from outside the US that do business in certain sectors with these countries (such as providing arms to Iran, or transacting with the Iranian Revolutionary Guard, or providing crude oil to North Korea), can expect to receive onerous punishment.

In the case of Russia, the sanctions will further increase its isolation from global financial markets and could deter international companies from participating in Russia-led projects, particularly pipeline projects.

In a note, US law firm Akim Gump explains that the act “provides discretionary authority to the president to impose extraterritorial sanctions on non-US companies and individuals who knowingly make significant investments or provide certain high-valued goods, technology, information or support for the construction of Russian energy export pipelines”.

The very ambiguity of this statement – the fact that no company is named, but that the threat is open to all – could have a big impact on the Russian economy, which is already reeling from the sanctions regime of 2014.

It also tightens conditions for Russian banks, which were effectively excluded from certain fundraising mechanisms three years ago, by shortening the maximum maturity window on new debt US entities can engage in.

“It will continue to have a significant impact. The 2014 sanctions targeted large Russian energy and financial companies primarily and also one or two defence companies. US sanctions are traditionally blunt instruments, once you’re subject to them, US persons can’t do anything with you,” Darshak Dholakia, an associate in law firm Dechert’s international trade and compliance practice tells GTR.

“The 2014 sanctions were a more novel concept, they stopped these companies raising finance on the international markets. It prohibited US persons from buying new shares in certain Russian companies, in other cases from extending financing beyond a certain maturity date.

“The global banks, even if they weren’t headquartered in the US, had significant US operations. It had a significant impact on the ability of these banks and companies to use international markets in the manner they’d been accustomed to. The new bill authorises additional restrictions on equity and debt against SOEs in the Russian railway or in the metals and mining sectors. That will almost certainly result in some sort of specifically designation, but no companies are named.”

Nuclear tensions

Meanwhile, tensions continue to rise between the US and North Korea. Undeterred by the latest batch of US sanctions, North Korea continues testing and advancing its weapons capabilities.

An inflammatory outburst by Trump, in which he threatened “fire and fury” the world has never seen if Pyongyang continues to provoke the US, was met with an equally belligerent response, with North Korea threatening to launch a nuclear weapon at the US army base on the Pacific island of Guam. This escalation makes a diplomatic settlement less likely and raises the spectre, once more, of armed conflict in Asia Pacific.

“Brinkmanship is highly psychological and the potential for miscalculation is high, particularly as so little is known about North Korea’s true preferences and threat perceptions. If this rhetoric continues, both sides may find themselves trapped into conducting a military response that could be devastating for the region. For North Korea, the threat against Guam is very specific and sets a bar to be measured against. Not following through could be seen as a lack of resolve,” says Karl Dewer, an analyst at IHS Markit.

Others are already looking to the cost of a potential war, as well as attempting to quantify the impact it would have on global supply chains. In a recent special report examining the possible scenarios, Capital Economics’ Gareth Leather and Krystal Tan wrote: “The biggest impact on the global economy would likely be felt through the disruption to global trade flows. South Korea is heavily integrated into regional and global manufacturing supply chains, which would be severely disrupted in the event of a major military conflict. The introduction of just-in-time delivery systems has made companies especially vulnerable to supply chain disruptions.”

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