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Why This is Different

When I interviewed with the U.S. Treasury in 2005, the Department was undergoing a major restructuring, having shipped a number of law enforcement functions to other agencies.  And in the midst of this, the United States and its allies were coming to grips with the challenges of the global war-on-terrorism and nuclear proflieration from Iran to North Korea was causing concerns at the highest levels.

At the center of Treasury’s new approach was the recently constituted Office of Terrorism and Financial Intelligence, which oversaw a myriad of other component pieces like the financial intelligence unit (FinCEN), the Office of Foreign Asset Control (OFAC) and other intelligence and policy-related functions.  In 2005, interestingly enough, there was still debate about the effectiveness of sanctions and the Treasury Department’s role in national security in general (hard to imagine when reading the paper today of course).  

While I cannot recall the interview questions and broad conversation in their entirety, I do remember it all really centering around two themes: 

Fast forward to today, almost 20 years later, and these themes remain the core questions that the Biden Administration must wrestle with, alongside European allies in the wake of the Russian incursion into Ukraine.  The risk landscape is changing fast, and with it, so is our approach at Sigma, including work to understand how Russian companies and leaders are linked with the world, as well as helping clients generally leverage Sigma risk intelligence to screen for both direct and associated risks (e.g., is this company related to others that exhibit core risk attributes).

Like 1940, we have one major military attacking another nation with overwhelming force.  For historical perspective, in 1940 then Treasury Secretary Henry Morganthau instructed the Federal Reserve to ‘freeze assets’ that may fall into the hands of Hitler as he rolled across Europe - a move that certainly contributed to slowing down his war machine.  And now, building on that precedent, along with everything that has been learned since 2005, the United States and allies are in position to create a meaningful impact on Russia by targeting its lifeblood: energy, financial, military manufacturing sectors.  But will it work or cause a course change?

The truth is, sanctions take time, particularly when they are levied against a nation and its assets (Russia has some $600 billion in reserves).  In the case of North Korea, Iran, Venezuela and others, sanctions have certainly had an impact, including in the case of Iran, creating conditions for a negotiated settlement.  However, Russia is a different animal economically and financially.  What’s more, Russia counts a number of critically important allies it can rely on for energy and military support, and unlike previous targets, Russia possesses a formidable military and cyber attack capability. 

*Comparison of GDPs Russia, Iran, Venezuela, and DPRK

In sum, sanctions are the tool of choice between military conflict and diplomacy - and increasingly so since 2005.  However, sanctions take time and they work best when other nations  join in - meaning, the United States and Europe alone cannot contain Russia.  

As the Russia/Ukraine conflict plays out, China and others who may choose to not enforce any penalties on Russia will come further into focus.  Increasingly, they may become the ‘escape hatch’ Russia needs to continue to maneuver and keep their economy and financial system connected.  How this plays out is too early to know, but it does further set the table for alternative forms of value transfer, alliances and challenges to the world order that was agreed following the last major conflict on the continent.    

Sanctions Risk Management
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