New sanctions would hurt Russia — but hurt American industry more

The urge to confront Russia for interfering in American elections is understandable, laudable, and well-intentioned. Sponsors of additional legislative sanctions on Russia purport to do just that. Their proposals, however, illustrate the law of unintended consequences.

The Defending Elections from Threats by Establishing Redlines (DETER) Act bill, introduced by Sens. Marco Rubio (R-Fla.) and Chris Van Hollen (D-Md.), would automatically slap sanctions on a broad swath of Russian companies and industries if the U.S. director of National Intelligence finds that interference occurs in future elections.

{mosads}Given Kremlin conduct, it’s no surprise that the DETER Act is gaining traction in Congress. But if enacted and implemented, the sanctions it contains would damage the U.S. economy and the legitimate interests of U.S. allies, while leaving the Kremlin unscathed.

The DETER Act would threaten to drive a wedge into an already-fragile U.S.-EU consensus on sanctions, destabilize the energy and financial markets and essentially ban American companies from Russia while leaving the door open to our Chinese or European competitors.

Worst of all, it’s probable the self-inflicted damage to U.S. interests would eclipse the harm done to Russian interests complicit with the Kremlin. Russian firms would suffer little more than they do under current sanctions while American companies would be forced to dismantle joint ventures, pull back on new projects, and take heavy financial losses.

Provisions of the bill would target almost every Russian state-owned company, including some of the world’s largest banks and energy companies, and impose a lower threshold for “state-ownership” than previous sanctions. Heavy sanctions would target Gazprom — the energy supplier to a large swath of Europe and the threat of Russian retaliation could make it politically toxic for European leaders to continue their united front with the U.S. on sanctions.

Meanwhile, U.S. companies would be legally forced out of most joint ventures in Russia or with Russian partners. That means a Russian company buying a stake in a project anywhere in the world would effectively kick American companies out. Instead of helping the U.S., that gives Russian energy companies more control over projects and more political leverage.

U.S. oil companies would find themselves sitting on the sidelines as some of the world’s most important oil regions are explored and exploited by Russian firms and their willing Chinese partners. Even critical U.S.-supported projects to help Europe escape Russian energy domination like the Trans-Adriatic Pipeline (TAP) would paradoxically not escape U.S. sanctions since a Russian company is a minority stakeholder.

This effect would be felt across industries — American companies would be unable to transport goods on Russian railroads, Boeing would be unable to partner with Russian airlines, and AT&T would be banned from making use of Russian telephone wires — just to name a few.

American index funds and financial markets would also face a shock as ruble-denominated bonds from the Russian government and banks instantly became illegal assets to hold on a balance sheet. American companies selling goods in Russia would find that they were locked out of Russian banks by American law.  

Industry and think tanks have sounded the alarm already on these impacts and others. But the response from Congress has not been moderation and careful reflection. Instead, DETER now has a competitor that would double down on these negative impacts.

The Defending American Security from Kremlin Aggression Act, introduced by Sens. Lindsey Graham (R-S.C.) and Bob Menendez (D-N.J.) threatens even more draconian sanctions — lowering the bar further on Russian state participation to effectively ban U.S. energy companies from participating in an energy project anywhere in the world if a Russian energy company is involved in any way. For example, if a Russian company owns a single percent of the pipelines that support an oil rig in Brazil, American companies could be legally forced out and Russian firms would have the buying opportunity of the century on a silver platter.

This bill takes the DETER Act’s damaging ideas to their logical extreme and would force American companies to divest from hundreds of energy projects across the globe while slapping unilateral sanctions on our own companies if they didn’t dump tens of billions of investments at a loss.

This doesn’t mean that the U.S. should not retaliate against Russian interference. The Countering America’s Adversaries Through Sanctions Act (CAATSA) was passed last summer with overwhelming bipartisan support, healthy input from industry and think tanks, and buy-in from European allies.

Congress should focus on updating and enforcing these sanctions while incorporating new ideas from the Atlantic Council and others that would crack down on Russian money laundering and shell corporations, expose the financial crimes of Putin cronies, and prevent U.S. real estate from being a haven for kleptocrat money, all without measurably hurting the U.S. economy.

If sanctions are to be effective, the collateral damage to U.S. companies should not eclipse the pressure brought to bear on their Russian targets. The sanctions should continue to be multilateral if that pressure is to be realized, not eroded. And the sanctions must be part of an allied strategy to achieve a reasonable change in conduct.

Richard Sawaya is vice president of the National Foreign Trade Council.