Richard Nephew, a former principal deputy coordinator for Sanctions Policy at the US Department of State who now teaches at Columbia University, visited Global Finance to discuss economic sanctions, their effectiveness, and why corporate finance leaders should care.
Global Finance: Why are economic sanctions so popular now?
Richard Nephew: Economic sanctions are on the rise and have been used in various conflicts, including by the European Union. They have been perceived as painless, consequences-free, and a good alternative to the use of military force. There are 27 separate sanctions regimes in the US alone, from North Korea and Iran to the rough diamonds trade, and they are strongly supported by both Democrats and Republicans.
GF: What are the relationships between government and the corporate sector when economic sanctions are considered?
Nephew: We find a limited interest in consequences to corporations and financial institutions among policy makers. They perceive national security and markets as separate issues. There is no industry-level conversation among US political institutions about the impact on US economic interests and corporate decision-making. For example, the debate on 2011 proposed US sanctions on Iranian oil, while Iran exported 2.4 million barrels a day, lacked any discussion of the potential impact on the price of oil in America. There must be a better process in order to assess if a proposed sanction is a net-positive or net-negative to the US, taking into account both national security and economic considerations.
Lobbying does in fact take place, and the final version of the Russian sanctions in June and July does show it, but eventually the US administration was willing to discount corporate interests as opposed to the perceived national security interests. In some other cases, such as Venezuela, the sanctions ignore corporate interests. Corporate government affairs professionals should work with policy makers to make sanctions more effective, and this dialogue should be regular and continuous and not a one-off request.
GF: How does corporate structure impact jurisdiction?
Nephew: US foreign-owned subsidiaries may also be subject to sanctions regimes and the policy approach has been case-by-case analysis. The US administration tries not to hurt foreign sovereignty, but target cases where US companies use subsidiaries for grave violations of the law with significant money at stake, such as HP sales to Iran a few years ago via a Gulf subsidiary.
GF: Should corporations be concerned about the fines?
Nephew: We should differentiate between primary and secondary sanctions. Secondary sanctions affect deals between foreigners. The main penalty is loss of business in the US and opportunity cost. If a US person does business with a sanctioned entity, the primary sanctions include fines, such as the one imposed on BNP Paribas following its dealings with Iran. While it is a French bank, it operated as a US person. Sometimes even sending an email in the US or via a US server could be a violation of a primary US embargo, although enforcement can be tough and selective. There are mitigating and aggravating factors, such as the size of the company and whether the actions are deliberate.
GF: What should CFOs and other executives take into account when looking at exposure to economic sanctions?
Nephew: Many CFOs think that sanctions will not impact their companies because they expect exceptions and carve-outs; they should assume applicability. They should also plan ahead and assume that the sanctions are here to stay. Many companies rushed to Iran following the removal of some sanctions. Including a force majeur clause with litigation in Iran under Iranian law would not necessarily reduce the legal exposure in the future if the US administration re-introduces the sanctions.
