A Look at the Potential Sanctions Toolkit Against Russia and China

Russia’s military attacked land-based air defenses in Ukraine’s capital city on Thursday, prompting a call for toughest-ever sanctions against the Russian economy.

When thinking of sanctions, Washington must consider the primary and retaliatory impacts, and what that means for American supply chains. Going forward, sanctions action needs to be coupled with protections of American industry, and investment, in order to start the process of near-shoring and reshoring goods critical to the U.S. economy. If anything, the need for sanctions against bad-actor nations should be a wake up call for the importance of domestic supply chains. Russia is a key supplier of nickel in the U.S., for example. Palladium, a rare metal used in electronics, is also imported from Russia.

The U.S. needs to immediately and massively rebuild its industrial capacity. The big business lobby’s argument about the importance of maintaining tight commercial ties are no longer credible. This always weakens sanctions policy because Washington does not want to get in the way of American companies, or impose more economic strife on the American taxpayer.

Washington would not have to worry about stepping on Corporate America’s toes if those items were also readily available elsewhere, preferably at home.

To build up that supply quickly, the U.S has the Defense Production Act Title III Program as an available tool to order production and guarantee purchases. Under Title III, the Federal Government can authorize financing for critical goods that can be wielded against us in retaliatory actions – this needs to include investment in semiconductor manufacturing, almost entirely made in Asia today; fertilizers (of which Russia is a big supplier); critical minerals like cobalt and nickel; and essential medicines.

Under TItle III, the President invests in industrial capacity in order to create, maintain, protect, expand, or restore a domestic industrial base deemed essential for national security. 

As Washington considers sanctions, another stand out is Russia’s status as having Permanent Normal Trade Relations (PNTR), granted roughly 10 years ago. This gives Russia full, nearly duty free access to the U.S. economy. The same is not granted for the U.S. in Russia. Russia could be moved into Column II tariffs, along with Cuba and North Korea. This requires an act of Congress, though the President can immediately take action using the International Emergency Economic Powers Act (IEEPA) that can have a similar effect, but it would not be as long lasting as legislation. 

China also enjoys PNTR status. Beijing and Moscow have signed a pact recently that will make China a resting ground for Russian exports that might be hit with Western sanctions.

Tougher sanctions against Russia will undoubtedly be met with opposition from U.S. business interests there, and Wall Street. Existing sanctions ban the trading of certain Russian bonds, namely those owned by Sberbank and Gazprom in the secondary market. And the Biden administration announced additional sanctions this week on Nord Stream II and its CEO Matthis Warnig. But what if Washington banned purchasing Russian securities outright? 

Russia, like China, knows the power the markets have over Washington and do not believe the White House would pull the trigger on the securities market. But, it is worth noting that until two years ago, banning Wall Street from owning publicly traded Chinese stocks was unheard of.

NYSE-listed China Mobile and China Unicom, for example, were regular holdings in any global stock portfolio and they are now delisted. Defense industry stocks listed in China are slowly becoming off limits to Wall Street. That only happened in August. 

These are the types of measures that can lead to the end of Wall Street, and American corporate giants, financing America’s biggest rivals. Just as important, such measures can lessen our dependence on countries that can also hurt the U.S. by prohibiting export of critical products and materials we need for our own security.

Lastly, another tool in the toolkit – doing away with the Foreign Tax Credit loophole in certain countries like Russia, which allows companies to reduce their tax burden owed in the U.S. by writing off a certain amount of what they have paid there.

Sanctions need to come with an important sidebar: protecting Americans (such as farmers) from hostage-like retaliatory tariffs, and a renewed focus on long-term investing in regional/local supply chains.