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How Will the US Sanctions Affect the Lukanomics?

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How Will the US Sanctions Affect the Lukanomics?

The consequences this time will be serious.

In 2007, the administration of George W. Bush reacted to human rights violations in Belarus by imposing sanctions against the Belneftekhim concern and certain oil and chemical enterprises. Five years ago, under Barack Obama, after the release of political prisoners, the sanctions were suspended. Today, within the framework of coercion into dialogue and as a reaction to the total repression that opponents of the Lukashenka regime are again subjected to, the Joe Biden administration threatens to return sanctions. This time their consequences may turn out to be much more severe for the Belarusian economy.

The newspaper Belarusians and Market studied why the American restrictions are so serious and how they can affect the gross-forming sectors of the national economy

How Belarusian enterprises ended up on the American blacklist

The United States is one of the main initiators of sanctions programs in the world. American sanctions are the most severe in form and consequences, local authorities are consistent and resourceful in punishing those who do not correspond to American ideas about the world and, even more so, threaten America's national security.

For the first time, official Minsk and specific departments and enterprises felt the consequences of the US sanctions after the 2006 presidential elections. On the eve of the vote, US State Department spokesman Tom Casey warned the Belarusian authorities about their readiness to apply "restrictive measures" in case the presidential elections do not meet international standards.

This very "discrepancy" established by independent observers, the harsh dispersal of protesters who tried to set up a tent camp on October Square, the detention and trial of one of the opposition leaders Aliaksandr Kazulin forced the US authorities to react.

In November 2007, the administration of George W. Bush announced the imposition of sanctions against the largest and most important state concern, Belneftekhim.

"Today's action tightens our sanctions against Lukashenka and his cronies by imposing financial sanctions against a massive conglomerate under the regime's control," said Adam Szubin, Director of Treasury's Office of Foreign Assets Control (OFAC).

The concern itself with its representative offices in Germany, Latvia, Ukraine, China, and Russia, as well as its American subsidiary Belneftekhim USA Inc., became the first Belarusian defendants in the toughest American sanctions program - the so-called SDN-list (Specially Designated Nationals and Blocked Persons). The SDN list is a list of individuals and legal entities whose assets and property, if they are located in the United States or in the possession of an American person, are considered blocked. No person in the United States, whether natural or legal, is allowed to enter into any transaction with an SDN-listed person unless specifically authorized by OFAC to do so.

Expanding the list

In May 2008, the blacklist was expanded by Polotsk-Steklovolokna, Lakokraska in Lida, and the Belarusian Oil Trading House. However, in September 2008, sanctions were suspended against the Polatsk and Lida enterprises. But after the dispersal of performances held in Minsk after the presidential elections in December 2010, Belarusian petrochemical plants were returned to the SDN list. The level of brutality with which the authorities persecuted their opponents forced the Obama administration to extend sanctions to several new businesses. So, in 2011, there were already nine defendants on the blacklist: Naftan, Belshyna, Hrodna Azot, and Hrodna Khimvolokno were added to it.

On the eve of the next presidential elections, which were scheduled for October 2015, official Minsk hastened to withdraw from the "sanctioned" Belneftekhim "blue chip" and one of the main hopes for foreign exchange earnings - Belaruskali. The fact is that in the mid-2010s, the Salihorsk enterprise under the auspices of the by then reorganized trader, the Belarusian Potash Company (BPC), was preparing to return to the American potash fertilizer market. And it was necessary to exclude as many probabilities as possible for the regulator to raise questions, first of all, possible claims against Belaruskali as a structural unit of Belneftekhim.

The US Treasury, on the initiative of two senators, however, at the beginning of 2015, nevertheless began checking the legality of the work of BPC and Belaruskali in the American market. But by that time, the political situation had changed and the image of Belarus had changed: Minsk received serious dividends for its position in the Russian-Ukrainian conflict that began in 2014. For the first time, the West calmly reacted to the results of the presidential elections, and OFAC not only found no violations in the supply of Belaruskali fertilizers to America but even suspended the sanctions after the release of all political prisoners in October 2015.

It was suspended, not canceled. The "sanctions freeze" regime was renewed every year and a half, and the last time it happened in October 2019. The next date for extending the suspension of restrictive measures was to be April 26, 2021. But judging by how the flywheel of repression in Belarus continues to unfold, nine Belarusian enterprises have little chance that they will not return to the blacklist.

The human rights situation in the country and the actions of the authorities against dissidents, according to US State Department spokesman Ned Price, are the main reasons for the possible renewal of sanctions. “We still want to see Belarus as an independent, prosperous, democratic country. However, the events related to the rigged presidential elections in 2020, violence and tactics of repression, as well as the presence of more than 300 political prisoners cannot be ignored,” he said in early April this year.

The release of all political prisoners by April 26 is the main condition of the American authorities to extend the suspension of sanctions. Otherwise, restrictive measures will begin to operate again.

“The State Department is not in a position to recommend another extension, especially in light of the congressional opinion expressed in the 2020 Belarusian sovereignty and democracy law. The term of the current extensions expires on April 26,” the diplomat stated the intentions of the American authorities.

Why are American sanctions dangerous?

From the point of view of exports, which usually primarily concern the Belarusian authorities, the American market and contacts with counterparties on it are of great importance today, perhaps, only for Belaruskali. For example, by the end of 2020, the United States became the sixth-largest buyer of Belarusian potash in the world.

But in 2014, Belaruskali was safely removed from the blow. And in the commercial interests of nine potential returnees to the blacklist (or rather, eight, since Hrodna Khimvolokno during this time managed to become a branch of Hrodna Azot), the American market is of no strategic importance.

So maybe we shouldn't be afraid of these sanctions?

No, we should.

Getting on the SDN list presupposes the application of so-called blocking sanctions to its defendants, and not only access to the commodity market is completely blocked but also any transactions in the US jurisdiction. The problem is that the concept of American jurisdiction is interpreted by regulators very broadly. It is a common practice that foreign companies are subject to fines that, for example, use US dollars in transactions and make payments through American banks. Therefore, blocking sanctions actually affect not only US citizens and companies, but also any company that conducts dollar transactions with individuals and legal entities on the SDN list. For any economic contacts, financial, trade, investment, they can be ostracized by one of the most powerful states in the world.

Thus, the persons involved in the SDN list start having problems with finding not only buyers of goods from a risky seller but also freight forwarding and insurance companies accompanying risky contracts. And in general, these are global problems with financing, procurement of technologies and equipment, and provision of production with raw materials and consumables. It is also realistic to stop production due to the impossibility of supplying critical imports.

Dollar nominees

Belarus, as you know, belongs to the dollar zone, and contracts in dollars are widely used here, including with companies that may soon return to the sanctions list. This is confirmed by the results of tenders and contracts concluded on their basis, published on the website of the state information system Tenders (icetrade.by/).

Judging by the information posted on it, in 2019 Belshyna paid for the Malaysian natural rubber supplied by the Emirati trader in dollars (10 million). Dollars also appear in the invitation to tender for the supply of rubber in 2020-2021 (but it did not take place, however). The US currency was used in settlements even with the Russian manufacturer - the winner of the auction for the supply of zinc whitewash to Babruisk in 2018 and 2020.

The dollar-denominated contract was signed this year by the Belarusian Oil Trading House with a supplier of Russian caustic soda. The Belarusian Petroleum Trading House centrally purchases it for many enterprises that are part of the Belneftekhim concern. For the largest volume of this raw material, contracts were in dollars, and among the suppliers over the past three years, both Belarusian companies with a Russian resource and a producer of caustic soda from Ukraine have appeared.

Mainly, suppliers of British and German pigment titanium dioxide for the needs of Lida Lakokraska and Czech, German, and Chinese titanium dioxide for the synthesis of PET, which is necessary for Mogilevkhimvolokno, worked under dollar contracts. The organizer of the tender for the supply of this raw material in 2018-2021 was the same "sub-sanctioned" Belarusian oil trading House.

In dollars, invitations to tenders and contracts concluded with the trading house for 2018-2020 for the supply of terephthalic acid for Mogilevkhimvolokno by Korean and Russian manufacturers were nominated.

All suppliers using dollars in settlements with sanctioned enterprises from Belarus, in theory, may also fall under US sanctions. The minimum that awaits them is a fine. The way out of this situation seems simple: the transfer of settlements into Belarusian and Russian rubles (the euro is risky since the EU also threatens with sanctions). But in the current economic situation, will it suit counterparties, say, from South Korea or Poland? And would they even want to deal with those who are closely monitored by the mighty OFAC?

Variations on a theme

Another possible threat stems from the fact that OFAC may apply sanctions not only to those who are directly included in the SDN list or other sanctions lists. Based on the powers of the American regulator, it can be expected that those companies, in which persons from blacklists are directly or indirectly involved, are at risk of being sanctioned. This will happen if the sanctioned companies, individually or jointly, are found to own half or more of the other business (the 50% Rule).

For example, according to the 50% Rule, the main state oil trader, the Belarusian Oil Company, could fall under the sanctions if two of its shareholders from the sanctions list (Naftan and the Belarusian Oil Trading House) had the same or more shares than two "clean" companies (Belorusneft and Mozyr Oil Refinery).

However, the fact that BNK may be on the blacklist cannot be ruled out. In recent years, against the backdrop of deteriorating relations with Russia, the American authorities have begun to very ingeniously "interpret" their sanctions measures, expanding them to new subjects "unpleasant" to them. In this regard, is it any wonder if it is announced that the Belneftekhim concern exercises so-called indirect control over all of its more than 50 enterprises? In this “interpretation,” the sanctions will include Belorusneft, the Mozyr Oil Refinery, the Belarusian Oil Company, and Gomeltransneft Druzhba, and the Homel Chemical Plant - almost all oil refining, petrochemicals, and chemistry of the country. By the way, European officials have already mentioned the possible introduction of such sectoral sanctions against gross-generating enterprises and industries in the event of an escalation of the situation in Belarus. And the Americans have experience of using them in relation to Russia, several dozen banks and enterprises of which were included in the so-called SSI list (Sectoral Sanctions Identifications). By the way, the SSI list also includes some Belarusian "subsidiaries" of banks from Russia.

The timely withdrawal of the same Belaruskali from Belneftekhim looked like Minsk’s reaction to the implementation of the 50% Rule, so the concern may have even fewer enterprises on the eve of April 26.

Will this save them from sanctions?

US approach

It depends on how consistent the US authorities will be and are categorically disposed to force Minsk to release political prisoners, start negotiations with the opposition and hold new, fair elections. To achieve this goal, the United States has enough arguments in the form of the same free interpretation of the sanctions programs that it has been actively using lately. And through "interpretation" they are quite capable of achieving complete economic isolation of Belarus from the West and the overwhelming majority of states in the world.

Counterparties from these countries can be discouraged from any contact with Minsk by the so-called secondary sanctions, one of the principles of which is extraterritoriality. Secondary sanctions apply to any non-US resident who is found to be cooperating with the persons involved in the sanctions lists. The perpetrators can be placed on that SDN list themselves, and most importantly, they do not have to be US citizens or American companies.

The United States is ready to punish anyone who tries to circumvent their sanctions. This was demonstrated by the example of several non-American individuals and companies that tried to cooperate with Cuba and Iran and, in 2018, for the first time, under the anti-Russian sanctions program CAATSA (the 2017 US Law on Countering America's Adversaries with the Consequence of Sanctions). In 2018, for the first time, foreign entities were included in the SND list with all the ensuing consequences for them - the Department of Equipment Development of the Chinese Army and its director Li Shanfu. They were blacklisted for "material deals" with sanctioned Russian arms manufacturers and exporters.

The construction of the Nord Stream 2 gas pipeline, which has been paralyzed since the end of 2019, speaks of how effective even the threat of secondary sanctions can be. The pipelayer, the Swiss company Allseas, almost immediately stopped working with the Russian customer. At the end of 2020, the United States expanded its "interpretation" against Nord Stream 2, and now not only companies directly involved in the construction of the gas pipeline can be blacklisted but also those that provide them with various services. For example, they are engaged in retrofitting ships or insuring them.

One can, of course, say that, at present, the US authorities do not have a corresponding legislative act that would allow the application of such measures in relation to the counterparties of Belneftekhim and its enterprises. But if the US authorities really intend to help the Belarusians find a consensus, then nothing will prevent them, say, from adopting a new law or making appropriate amendments to the “Act on Democracy, Human Rights and Sovereignty of Belarus” adopted in 2020.

And if the secondary sanctions of America scared away contractors and subcontractors from the generously paying Russians and their European partners and lobbyists, then what can we say about the real threat of getting on the SDN list for the supply or purchase of goods and services from the “secondary economy,” which is Belarus on a global scale...