New sanctions on Russia would have serious adverse effects on the US

New sanctions on Russia would have serious adverse effects on the US
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“Do something!” is a perennial Beltway imperative. In the current context, that “something” is to impose economic sanctions on the Russians as a penalty for their interference in our elections.

Would such sanctions actually prove effective at reducing such interference? It is clear that those Russian efforts – comprising voter influence on social media, cyberattacks on political parties and attempted hacking into state election systems – were extensive and had important political effects in the U.S.

But it remains the case that a new round of sanctions would have little effect on the Russians, but serious adverse effects on the U.S., a perverse outcome about which proponents of a new round of sanctions seem not to be very curious.

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This latest effort to “Do something!” comes in the form of the Defending American Security From Kremlin Aggression Act (DASKAA), sponsored by Sens. Lindsey GrahamLindsey Olin GrahamMcConnell locks down key GOP votes in Supreme Court fight Will Republicans' rank hypocrisy hinder their rush to replace Ginsburg? Momentum growing among Republicans for Supreme Court vote before Election Day MORE (R-S.C.) and Bob MenendezRobert (Bob) MenendezKasie Hunt to host lead-in show for MSNBC's 'Morning Joe' Senators ask for removal of tariffs on EU food, wine, spirits: report VOA visa decision could hobble Venezuela coverage MORE (D-N.J.). It would prohibit U.S. firms from participating in any energy project anywhere in the world if a Russian firm is involved in any way, however minor. 

The proscriptions would apply to any goods and services, incorporation of intellectual or technological property, financing, or any other participation in such energy projects. U.S. firms would be forced to disinvest in hundreds of such projects around the world in order to avoid legal sanctions. It is clear that such disinvestment would yield many billions of dollars of losses, as the fact of existing U.S. participation in a given project is evidence of the efficiency of that participation relative to that of a given foreign firm.

To the extent that existing participation by U.S. firms in a given project takes the form of illiquid assets – say, physical investments in pipeline infrastructure – the U.S. firms simply would lose their investments, enriching others generally and perhaps, ironically, Russian firms in particular. Such overseas competitors as Chinese and European firms, and Russian ones, would benefit from the exit by U.S. firms; and precisely why should European governments cooperate in a U.S. effort to protect its elections? Were the European governments induced to participate in these sanctions – a rather doubtful proposition – it would become more difficult to preserve their cooperation on sanctions and other international efforts that really matter — say, sanctions imposed to slow the Iranian drive toward a nuclear missile force. 

Sanctions are difficult to enforce, as the tools with which they can be circumvented are extensive. U.S. participation in projects in which there is no Russian involvement can be used surreptitiously to route financing and perhaps other project components to proscribed ones, without any illicit behavior at all by U.S. firms. After all, dollars are fungible. Complex networks of shell companies can be established in order to obscure the participation of Russian interests in a given project in which U.S. participation is deemed important. On the other side of that coin, if the Russian or Chinese or European goal is to preclude U.S. participation in a project, all that is needed is a minority stake, however, small, by a Russian interest.

For complex reasons, the dollar is the currency used for most international transactions in the energy sector. But there is no reason in principle that, say, the Euro could not be used for payment or settlement purposes for a given project. Accordingly, one consequence of DASKAA is a reduction in the use of U.S. financial systems, with a corresponding decline in the exchange value of the dollar, an outcome that would reduce the aggregate size of the U.S. economy, whether by a magnitude large or small. The adverse effects obviously would not be limited to the financial sector: Major U.S. suppliers of energy-related goods and services are at the top of large and complex supply chains in which there are hundreds of firms, many of which are small, supplying specialized goods and services. 

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It is not as if nothing has been done over the past few years in the face of Russian interference in U.S. elections. The Countering America’s Adversaries Through Sanctions Act (CAATSA) was enacted in 2017; it imposes sanctions on U.S. or foreign firms that do business with a subset of Russian, North Korean and Iranian interests. The Department of Homeland Security has engaged in extensive efforts over the past two years to strengthen election security. The Consolidated Appropriations Act of 2018 included $380 million in election security grants under the Help America Vote Act (HAVA) of 2002.

It would be vastly better were these efforts implemented aggressively, as opposed to yet another round of sanctions that are very unlikely to achieve their stated goals even as they impose substantial costs upon U.S. interests.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.