What Secondary Sanctions Mean, for Russia and World

(Bloomberg) -- As the war in Ukraine drags on, lawmakers in the U.S. are seeking ways to ratchet up the economic pressure on Russian President Vladimir Putin. The hundreds of sanctions imposed so far on Russian industries, companies and individuals by the U.S., U.K. and European Union apply only to the extent that sanctioned banks, companies and people fall under the legal jurisdiction of those areas -- by holding money in American bank accounts, for instance. With the Ukrainian government pleading for more action, some in Washington are discussing so-called secondary sanctions. The idea appeals to those who want to close loopholes Russia can use to continue doing business with the world. But it's controversial because of what it could mean for U.S. allies who rely on Russian energy and other resources.

1. What are secondary sanctions?

Secondary sanctions target commercial activity involving a party under primary sanctions but occurring outside U.S. legal jurisdiction. The imposition of secondary sanctions is meant to force companies, banks and individuals to make a tough choice: continue doing business with the sanctioned entity or with the U.S., but not both. Because of the primacy of the U.S. dollar as a store of value, most companies prioritize keeping good relations with the U.S.

2. How are they enforced?

Unlike primary sanctions, which can be enforced by fines and the seizure of U.S.-held assets, secondary sanctions rely on the centrality of the U.S. financial system to the world economy and the widespread use of the U.S. dollar as the global reserve currency to work. A company or individual that violates a secondary sanction could be hit by U.S. export controls or be placed on the Treasury Department's Specially Designated Nationals and Blocked Persons List, which would prevent Americans from doing business with it.

3. Why are they being discussed now?

The measures taken against Russia by the U.S., the U.K. and the EU have had considerable impact, causing Russian inflation to spike, closing its stock market and causing the collapse of some of its banks. But a carve-out in the sanctions regime that allows Russia to continue selling oil and gas into the European market has tempered some of the effect, helping the ruble recover much of the value it lost in the weeks following the start of the invasion. Ukrainian President Volodymyr Zelenskiy and members of his government have encouraged the U.S. and its allies to impose additional sanctions, and members of Congress have pressed the administration to consider secondary sanctions.

4. How have secondary sanctions been used in the past?

Two-thirds of all U.S. secondary sanctions apply to entities linked to Iran; much of the rest applies to entities linked to North Korea. Secondary sanctions were part of the U.S.-led pressure campaign to keep Iran from developing a nuclear weapon. The sanctions have made it difficult for Iran to sell its oil into the global market. China and Russia have also been subject to secondary sanctions over the years.

5. Why are they controversial?

The use of secondary sanctions has been called an extraterritorial application of U.S. law. Opponents of the practice say they're a U.S. tool to influence the policies and decision-making processes of other countries who would not otherwise be in violation of U.S. sanctions. There's a risk that an imposition of secondary sanctions by the U.S. would fracture the united transatlantic front against Russia. Justine Walker, the head of sanctions compliance and risk at ACAMS, a global membership group focused on preventing financial crimes, said that while secondary sanctions would be “very, very impactful,” they would be a “reluctant last resort” for that reason.

6. In what way could secondary sanctions hurt the alliance?

If Germany continues buying oil and gas from Russia, for example, it could find itself on the wrong side of U.S. sanctions. Secondary sanctions also can create confusion about what activities are banned, leading to over-compliance, which could cause an overall slowdown in global business and the loss of political support for the penalties imposed on Russia.

The Reference Shelf

A 2021 report by the Center for a New American Security on secondary sanctions.
Bloomberg News stories on Russia passing Iran to become the world's most sanctioned nation and on how the sanctions have not yet hit half of Russia's richest billionaires.
A statement by the U.S. Treasury Department on initial sanctions concerning Russian debt and the Treasury's 2021 global sanctions review.
QuickTake explainers on the history of sanctions aimed at Putin's Russia, Russia-Ukraine tensions and sanctions as financial warfare.