Secondary Sanctions & Countermeasures
The recent escalation of United States (“US”) sanctions against Russia seems to have significant consequences for the Indian market. India has strong economic relationships with both the countries. At the moment, however, India seems to be caught between a ‘rock and a hard place’.[1] The country finds itself in a tricky minefield and it has to now balance its financial interests, along with its obligations to the international community.
Sanctions are used as a mechanism to express disapproval towards the actions of a country. These can be issued collectively, when adopted by international organisations (such as the United Nations (“UN”)) and are considered a legitimate means to deter states from engaging in illegal behavior. Conversely, individual countries can impose unilateral sanctions against another. The US has used its position in the international community to use such a tool (both primary and secondary) to disincentivize countries from engaging in activities that go against international community standards. Primary sanctions restrict certain actions (sector specific) of entities of the sanctioning country from interacting with the target country. Secondary sanctions, functioning indirectly, deter third-party countries from transacting with the target country.
Secondary US sanctions have received strong disapproval from the international community for its imposition on national sovereignty.[2] Hence, third-party countries have been allowed to develop countermeasures to check against the detrimental effects of such limitations.[3]
This essay will explore how these countermeasures have been used by India, amid the current sanctions, to provide an avenue of insulation for India’s fiscal priorities and market interests.
Forms of Countermeasures
Bilateral Negotiations & Conditional Waivers
The US government can authorise a waiver against the sanctions to allow third-party countries and targeted countries to transact if found to be in America’s national interest[4]. These waivers are conditional, given for a limited period and leave the future of such collaborations up to the discretion of the US.[5] Conditional waivers are developed through bilateral negotiations between the affected country and the US.
India, during the US sanctions imposed on Iran in 2012, was given a waiver that allowed it to continue its investments in Iran’s petroleum and gas industry.[6] With regard to the on-going sanctions against Russia, India is yet to receive such a waiver. The non-granting of this waiver will have a detrimental impact on India’s defense position.
Decreasing Dependency on the US Dollar
US sanctions currently bar the country’s financial system and persons (defined as both corporations and individuals in and outside America) from participating in any transaction with Russia. International trade transactions are hence becoming challenging since these are typically executed in US dollars or through American financial institutions.
India has successfully employed alternative currency mechanisms to prevent violation of these sanctions. Alternative currencies such as Ruble/ Euros or Dirhams have been used to execute these agreements and continue lucrative financial relationships.
India and Iran have developed a ‘rupee-rial’ mechanism to allow India to continue payments for Iran’s crude oil supply.[7] This may, reportedly, evolve into a more established banking relationship as Iran, amid talks of renewing this agreement, plans to set up national bank branches in India to facilitate bilateral trade.[8] The Brazil, Russia, India, China, and South Africa (“BRICS”) alliance has long supported the call to scale back dependency on the US dollar for international transactions and promote the use of local currency.[9]
Countermeasures for Companies
Secondary sanctions pose a unique challenge for multi-national corporations (“MNC”). An MNC could find itself caught in a web of conflicting directives based on the location of its incorporation and where various branches of the company function. Private international law engages with the key question of jurisdiction, as investigated by domestic courts, to see if such sanctions and countermeasures would apply.
For example, ONGC Videsh Ltd. (“OVL”), when incorporated as a subsidiary in the Gujarat International Finance Tec-City (“GIFT”) International Financial Services Centre (“IFSC”), would be allowed to retain its Russian oil assets.[10] The corporate structuring of these entities allows management of assets overseas due to its status as a foreign jurisdiction for taxation purposes and therefore, does not attract the application of India’s sanction compliance requirements.
The Future
India prioritises its relationship with both Russia and the US, as both are critical for its own economic development. India has adopted various countermeasures and come up with creative solutions to fulfill its trade obligations while respecting its sanction compliance liabilities.
The nation has been successful so far in navigating this complex international situation, which paints an optimistic picture for the future. India’s best strategy would be to dissuade further application of such sanctions and enter into negotiations to become ‘unstuck’.
[1] John Ellicott, “Between a Rock and a Hard Place: How Multinational Companies address conflicts between US sanctions and Foreign Blocking measures,” Stetson Law Review27, (1998): 1365.
[2] Unilateral and Secondary Sanctions: An International Law Perspective, Asian–African Legal Consultative Organization, accessed 1 November 2018, http://www.aalco.int/52ndsession/ EXECUTIVE%20SUMMARY.pdf
[3] Human rights and unilateral coercive measures, Resolution of the United Nations General Assembly, A/RES/61/170, 27 February 2007, https://documents-dds-ny.un.org/doc/ UNDOC/GEN/N06/504/63/PDF/N0650463.pdf?OpenElement.
[4] Laxman K. Behera and G. Balachandran, “Implications of CAATSA for India’s Defence Relations with Russia and America,” Institute for Defence Studies and Analyses, 26 April 2018, https://idsa.in/issuebrief/caatsa-for-india-defence-relations-with-russia-america-lbeherabalachandran-260418.
[5] “No country-specific waiver under CAATSA: U.S.,” The Hindu, 31 August 2018, https://www.thehindu.com/news/international/no-country-specific-waiver-under-caatsaus/article24827501.ece
[6] Timothy Gardner and Susan Cornwell, “U.S. exempts India, not China, from Iran sanctions,” Reuters, 12 June 2012, https://www.reuters.com/article/us-usa-iran-sanctions/u-s-exempts india-not-china-from-iran-sanctions-idUSBRE85A19E20120612.
[7] Elizabeth Roche, “India, Iran work out payment mechanism,” LiveMint, 7 February 2012, https://www.livemint.com/Politics/1lSA22mllt8zvcIz8wnhtO/India-Iran-work-out payment-mechanism.html
[8] Sunny Verma, “Govt gives nod to Iran bank in Mumbai before US sanctions,” The Indian Express, 14 July 2018, https://indianexpress.com/article/india/govt-oks-iran-bank-in-mumbaibefore-us-sanctions-5258864
[9] Nils Adler, CAN BRICS create a new world order? Can BRICS create a new world order? (2023), https://www.aljazeera.com/features/2023/8/22/can-brics-create-a-new-world-order (last visited Dec 8, 2023).
[10] Prasanta Sahu, OVL may hold Russia assets via new arm in GIFT City, Financial Express, October 27, 2023. https://www.financialexpress.com/business/industry-ovl-may-hold-russia-assets-via-new-arm-in-gift-city-3287691/