Hard landing | "Big Killer" SWIFT Sanctions Russia? The cat-and-mouse game is not new [Issue 1]

Kyiv, the Russian army is approaching the city.

Sanctions by the United States, the United Kingdom and other countries officially include the exclusion of Russia from the SWIFT international settlement system. Once the sanctions are imposed, oil and gas exports, which account for 40% of Russia's total revenue, will be limited.

In the previous G7 leaders conference call, British Prime Minister Boris Johnson and Canadian Prime Minister Justin Trudeau both vigorously pushed for SWIFT sanctions, while German Chancellor Scholz had "reservations". Some member states believe that SWIFT sanctions will lead to higher international energy prices. Europe relies on Russia for 40% of its natural gas and 26% of its oil supplies; in addition, the move could also speed up efforts by Russia and China to establish non-dollar payment systems.

The U.S. has sanctioned several Russian banks, but "let go" Russia's third-largest bank, Gazprom. Because this bank is the main channel for foreign countries to pay their imported oil and gas bills.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is one of the world's most important financial infrastructures, with more than 10,000 financial institutions relying on its systems to secure cross-border payments, securities transactions and trade finance.

In this sense, SWIFT sanctions are also known as financial "nuclear weapons".

Sanctions are nothing new. For example, the story of Russian oligarch Oleg Deripaska, who is close to Russian President Putin, was sanctioned by the United States, has a certain representativeness.

rise of empires

Oleg Deripaska, 50, is in trouble. In the spring of 2018, U.S. President Donald Trump announced sanctions on the economic giants surrounding Russian President Vladimir Putin to punish Russia for interfering in the 2016 U.S. presidential election. The billionaire who owns the world's second-largest aluminum company, Deripaska seems to be heading for the winter of his life.

Not even Putin can solve this problem perfectly. On behalf of Deripaska, he personally mediated with former U.S. Presidents George W. Bush and former President Barack Obama. Lord Gregory Barker, a protégé of former British Prime Minister David Cameron, served as Deripaska's British lobbyist, and Trump's campaign chairman Paul Manafort used to be him advisor. A huge machine to "rescue" Deripaska is booming on both sides of the Atlantic.

All of this is to circumvent US sanctions.

Deripaska has a mixed reputation. In the 1990s, he triumphed over all rivals and partners and managed to gain control of state assets after the collapse of the Soviet Union. This competition is the "Aluminum War". In order to control the Siberian smelter, the tycoons and oligarchs have taken drastic measures. Mikhail Khodorkovsky, a former Russian oil magnate, recalled that at the time he was afraid to let his colleagues set up smelters, "it was better to be alive".

Deripaska, who studied physics at Moscow State University, gave the impression of being ruthless. Charges of alleged theft, intimidation, bribery and even murder have emerged against him in courts in both the UK and the US. Surrounded by the Mafia and armed thugs, Deripaska, who seized control of iron ore mining in the Ural Mountains in the 1990s, was told to transfer a large stake in a lawsuit in Delaware, one of those involved claimed. Partial stake, otherwise "don't come up with this gate".

After dominating the Russian metals market, Deripaska embarked on a 10-year overseas expansion in 2000 - buying a smelter in Montenegro, an aluminum plant in Ireland and bauxite in Africa. Then he set his sights on London. As an international business city full of high-class elites, London makes Deripaska like a duck to water.

British financier Nathaniel Rothschild was his guest, along with politicians George Osborne and Lord Peter Mandelson . The former later became Britain's Chancellor of the Exchequer, while the latter was the EU's trade commissioner at the time. Mandelson had asked Poland and other EU member states to cut tariffs on imports of Russian aluminum.

Undoubtedly, London has lawyers, bankers, advisers and politicians willing to work for Deripaska's generosity. His well-known firm EN+ hired a London-based PR firm run by Roland Rudd, whose sister Amber Rudd was then Britain's home secretary.

On the other side of the Atlantic, Deripaska was also full of friends. He first established business ties with Alcoa, the world's sixth-largest aluminum producer, but it wasn't enough. The U.S. Congress, concerned about his links to Russian criminal organizations, has restricted entry for years, literally limiting Deripaska's business ambitions. Finally, in 2005, Deripaska got a multiple-entry visa. Before that, he hired former presidential candidate Dole as a lobbyist for $570,000.

The good times didn't last long, the FBI intervened, and the visa became "invalid." Deripaska brought in Paul Manafort and signed a $10 million contract. Manafort sent people to lobby the Bush administration, but little progress was made. Before Obama was elected in 2008, Deripaska switched to the Democratic camp. He found Adam Waldman, who had served at the Justice Department during the Clinton administration. Waldman receives $40,000 a month to handle visa issues and aluminum trade talks for Deripaska.

Waldman arranged various itineraries for Deripaska. That included attending the Wall Street Journal-sponsored "Top Washington Executives Summit" and a meeting with Democratic donor George Soros to discuss the effectiveness of Guinea's mining industry's fight against corruption. In order to prove his ability, Deripaska also used his contacts to help Washington bring back former FBI agent Robert Levinson, who had been held in Iran for many years as a hostage.

However, sanctions still came.

hands and eyes

In the past, the US sanctions were more "traditional", one was "restriction of market access" and the other was "embargo". But traditional methods do not necessarily solve the problem. For example, North Korea, Cuba, and Iran, despite decades of economic sanctions, still insist on political systems and systems that are disgusting to the United States. Thus, in the 1990s, borrowing the concept of "decapitation tactics", the United States began to target individuals with sanctions and freeze personal property.

After "911", the United States' monitoring of global capital flows and traffic information has reached a new level. At the same time, thanks to Internet technology and big data technology, as well as the dominance of the US financial industry, new economic sanctions have begun to be widely used - personal property freezing and travel restrictions; or direct sanctions on banks.

Sanctions against Deripaska fall into the former category. Deripaska's business is too big. As a Russian oligarch, he leads a metal empire that has close contacts with Iran. Even if he can help Washington settle matters big and small in Iran, Washington is still deeply afraid of his identity and status. At the beginning of the sanctions, traders in the market were silent, and no one dared to trade with Rusal. Rusal shares fell 50%.

Deripaska, who is used to the days of licking blood on the edge of a knife, is naturally indispensable for "transcending the sky". Lord Buckle made a high profile appearance. He is chairman of the board of Deripaska holding company EN+ and a former UK minister for energy and climate change. The imposition of sanctions against EN+ and Russia, he and his team said, would trigger turmoil in global metals markets and hurt U.S. manufacturers. They proposed a "Baker plan" for Deripaska to sell EN+'s stake below 50% and stay away from EN+ and Rusal's management.

The Buckle Plan also includes the creation of an escrow account into which Deripaska's stock and other income will be deposited. Before being removed from the personal sanctions list, he could not get a cent of the money in the account. The move was so impressive that former British lawmaker and Buckle's friend David Ruffley called it "Saving Deripaska by getting rid of Deripaska".

In Washington, Buckle turned to Mercury Public Affairs. Bryan Lanza, who worked on the Trump campaign and is now a Mercury lobbyist, has been texting, emailing, calling, and occasionally meeting with influential White House figures such as public Liaison Office Director Justin Clark, Strategic Communications Director Mercedes Schlapp, Acting Secretary of State David Meale, Treasury Adviser on Sanctions Policy Seth Booth Ritchie (Seth Bridge).

The scale of lobbying is not limited to this. The three major law firms also entered the battle. Latham & Watkins, Dentons, and Steptoe & Johnson are all working for Deripaska. Another Mercury lobbyist, former senator David Vitter of Louisiana, is leading foreign ambassadors in Washington to boycott the sanctions. He told the ambassadors that damaging Deripaska's business would damage the global aluminum supply chain and, ultimately, the manufacturing industry in the ambassador's home country.

Deripaska is following the "Baker plan" step by step. He released a statement saying he chose to "give up management and control of his company in order to protect the company's dedicated employees and protect the company's global stakeholders."

U.S. Treasury Secretary Steven Mnuchin had declared that the sanctions were intended to "change the behavior of the oligarchs," not punish Deripaska's aluminum business. In fact, they have eased sanctions against Deripaska and Rusal under the pretext of "taking care of the livelihoods of Rusal workers".

Aside from Deripaska's generous hiring and efficient lobbying team, the real reason for "bypassing" sanctions is deep bundling of interests. Wall Street financial giants have long-term cooperation with Rusal. The warehouses of the London Metal Futures Exchange are filled with ingots of Rusal, the basis for futures trading on Wall Street. Once the sanctions take effect, these metal ingots will be sealed, and "our own" - several Wall Street banks will face defaults and huge losses.

cat and mouse game

The United States has discovered that there are always loopholes that can be exploited in sanctioning individuals or companies. As soon as the ban on sanctions against Iran came out, many Fortune 500 companies silently "falled down". But in Qatar, Turkey, the United Arab Emirates and Hong Kong, countless leather bag companies silently "stand up". On the surface, these leather bag companies seem to have nothing to do with Iran, and they have no plans to enter the US market. They just concentrate on being "white gloves" and reselling.

If a large company does not go through these middlemen and trades directly with Iran, once it is caught by the United States, it "can't eat and walk away". The tricks of fines, dismissal of management, and account freezing have to be repeated again and again, and no company can afford such a toss. And the leather bag company "boat is small and easy to turn around", once it is found, it will be cancelled immediately, and it will be a hero if it changes its name.

At this time, the United States will use the ultimate weapon in the sanctions clause-sanctioning banks. This trick is mainly achieved through SWIFT. Founded in the 1970s and headquartered in Belgium, SWIFT controls the electronic information exchange system of banks in most countries and regions in the world.

Financial institutions and enterprises in various countries highly rely on the SWIFT system for fast, secure and standardized financial information transmission to facilitate and secure cross-border payments, securities transactions and trade financing. In 2021, the SWIFT system will process 42 million pieces of financial information every day.

SWIFT sanctions refer to cutting off the connection between a financial institution, enterprise or a financial institution or enterprise in a certain country and the SWIFT system, so that it cannot transmit financial information through the SWIFT system.

For example, importers and exporters in international trade settle payments through their own country's banks, and the information required for the flow of payments between bank accounts in different countries, such as the amount, remitter, payee, etc., All are delivered via SWIFT. If a bank is blocked on SWIFT, it is cut off from the rest of the world - customers who open accounts with that bank can neither send money to other banks nor receive money through that bank.

In 2012, the United States and Europe imposed sanctions on Iran. At that time, the biggest blow to Iran was to expel four Iranian banks from SWIFT, forcing Iran to conduct nuclear negotiations with the United States, and thus the "Iran Nuclear Agreement". In May 2018, Trump unilaterally withdrew from the agreement, Washington is doing everything in its power to impose sanctions, and Tehran is ingeniously circumventing sanctions — like a game of cat and mouse.

Iran has been sanctioned by the US for nearly 40 years and has certainly learned how to survive brutal repression. Businessmen in Iran will find ways to make small transactions, such as buying food from neighboring Turkey. To circumvent banking restrictions, Iran trades in gold or local currency, allowing foreign companies to buy oil and gas in their own currency instead of dollars. Bag companies also exist in abundance, "operating in the dark" under a bunch of odd names.

confrontation

The United States is still the leader in the global financial system, and it is technologically pervasive. In recent years, it has become increasingly difficult for U.S. officials to keep their eyes peeled for sophisticated financial records and intelligence. After all, sanctioned countries are not as easy as sanctioned individuals, and they have too little room for manoeuvre, so they must also choose a deep bond of interests, but not with the United States.

France and Germany have invested heavily in Iran, with CMA CGM, Citroën, Total and airlines in the former, and Volvo, Deutsche Telekom and Mercedes-Benz in the latter - thus firmly opposing U.S. sanctions on Iran. At EU meetings, they joined European allies to find ways to deal with US sanctions in order to protect their own investment interests. After all, the EU has "a large number of people", and it has two weapons at the first shot: the left-hand financial tool and the right-hand political tool.

The financial vehicle is called SPV (Special Purpose Vehicle), which was unveiled on September 24, 2018. EU foreign policy chief Federica Mogherini said the SPV "will allow European companies to continue to trade with Iran under EU law and be open to other partners around the world". The essence of SPV is a clearing tool used to process the round-trip payments between European companies and Iran, while bypassing SWIFT and avoiding US sanctions.

For example, a European energy company that wants to buy oil and gas from Iran can pay directly using SPV. In turn, Iran can use the money from the SPV account to buy licensed items from Europe.

In addition to this, Iran is investing heavily in cryptocurrencies. A cryptocurrency is a digital currency that uses encryption to secure transactions, based on cryptography from World War II. Cryptocurrencies have the benefit of being untraceable and have huge appeal for sanctioned countries and banks. Of course, cryptocurrencies were originally invented to circumvent existing financial and regulatory systems.

The debut of the financial instruments comes a month after European Commission President Jean-Claude Juncker announced the reinstatement of the 1996 "Blocking Statute" aimed at preventing European companies from complying with U.S. sanctions on Iran . Juncker also added at the time that European leaders had decided to allow the European Investment Bank to facilitate European companies' investments in Iran.

The Confrontation Act, born in 1996, protects EU countries "from extraterritorial application of laws adopted by third countries". It was originally created to address the U.S. trade embargo on Cuba and U.S. sanctions on Iran and Libya. Among its terms, it prohibits European companies from complying with U.S. sanctions and does not recognize any court ruling on U.S. sanctions.

However, even during Cuba's blockade, the law was never really implemented. It is more of a political tool designed to exert moral pressure on the United States and induce it to abandon punitive economic instruments.

The earliest trade and economic sanctions imposed by the United States probably date back to the Anglo-American War and the Civil War in the 19th century. Two centuries on, sanctions and the struggle to bypass them continue.

In the world of sanctions, there is never a single fatal blow, and there is no waiting for death.