"Refusal of gas from russia costs the EU less than the first year of covid." Andriy Pyshny, a member of the sanctions group

Friday, 6 May 2022, 13:31

A few weeks ago, the International Working Group on russian Sanctions, the so-called McFaul-Yermak Group, presented its action and measures plan to restrain russian aggression.

The work of the group is coordinated by the head of the President's Office Andriy Yermak and the well-known American diplomat Michael McFaul.

The group includes more than 50 experts. Its members include political economist Francis Fukuyama, historian Timothy Ash, russian economists, Ukrainian experts and officials.

The plan developed by them consists of ten main points. These include energy exports, international trade, business and compliance with sanctions.

The outlined measures in the plan could cause significant damage to the russian economy, but there are questions about the possibility of their implementation. It will depend on the decisions of the United States, the European Union, its members and other leading countries.

On the way to any good plan, there may be its own Hungary, which, for example, will stop the oil embargo.

What points may be in the announced sixth package of sanctions for russia, how to implement these initiatives in the face of resistance in the EU, and which of the proposed bans are not only spectacular but also effective?

The Economic Truth talked about this with one of the members of the group, the former chairman of Oshchadbank Andriy Pyshny.

- There is a package of sanctions from the so-called McFaul-Yermak group. What's next? What algorithm? How to implement all this?

- The very fact of uniting such authoritative and world-renowned experts around one goal is already a result and a strong message.

The group included half a hundred experts: diplomats, financiers and lawyers from Princeton, Oxford, Columbia, Stanford, Cambridge and other leading universities. The level of expertise is fantastic.

All of us together and each of us individually act as leaders of the plan developed by the group. We argue, communicate and defend concrete measures.

The main idea is that the sanctions pressure should be greater, much greater, it should be done immediately. That means, the maximum number of sanctions with the maximum short-term consequences to increase pressure on the putin’s regime now.

- How do we convey this to the countries that can impose these sanctions?

- Within three weeks, the group had been developing a comprehensive action plan. It is complex, one that sees not only the sectoral aspects of sanctions pressure, but considers sanctions as a set of interrelated and systemic solutions.

Volodymyr Zelenskyi formulated this task for the Ukrainian part of the expert group: the sanctions pressure should grow exponentially and be comprehensive and synergistic.

Evasions, loopholes, exceptions must be identified and eliminated. The plan should help the political leadership, the diplomatic corps, and public authorities to develop operational work plans and fill Ukraine's requirements with sufficient and authoritative expertise.

There are no random phrases in the text of the presented document, everything was actively discussed until the last moment. The president joined our "zooms", Andriy Yermak ensured the weekly dynamics of meetings.

Michael McFaul's leadership in forming and moderating the international part of the expert group is something incredible: a master class in psychology, diplomacy and deep knowledge of the material.

The action plan has now been presented to journalists, separately to G7 ambassadors and to a conference of 200 journalists and experts at Stanford Square.

- The plan was not approved by all members of the international working group, it is stated in the document. Where did the experts disagree?

- I do not know whether any of the participants opposed the sanctions plan in general or against specific measures. The introductory statement stated that the group did not intend to prepare a consensus document. The group had to prepare an extended list of possible measures of pressure, and a member of the group could have a different opinion than the position of others.

In my opinion, this is a manifestation of McFaul's diplomatic talent. Despite this statement, based on the results of our work, we reached a consensus document with high-quality details, and all discussion issues in the analysis of impacts and concrete actions were taken to the next stage, which is ongoing.

The discussion revolved around predictions, stages, finding the right tone and arguments. Why it should be done this way and right now. For example, in the financial sector, the problem of the diversity of sanctions pressure and the uneven coverage of them was discussed.

- What is the value of russian experts in the work of the sanctions group?

- The value of any expert is in his expertise and reputation. Serhiy Aleksashenko and Serhiy

Guriev were invited to join the group by Michael McFaul.

Their anti-putin stance is well known and felt. Their comments and expertise are obviously useful. In addition, we have every reason to fully trust Mr McFaul's choice.

Energy

- Some countries, in particular Hungary, have already stated the impossibility of imposing an embargo on the purchase of russian oil and gas. Discussions are ongoing in the EU. How can all this end?

- First, we should not talk about a categorical refusal. Quite the opposite. We see the break, the evolution of the position and the public awareness of the obvious: putin's gas is a weapon of mass destruction of prolonged action.

Secondly, in recent months, especially after the russian invasion and putin's military atrocities, we see categoricalness change polarity: 5,000 helmets are converted into Gepard anti-aircraft self-propelled guns, embargo impossibility talks - to a trade blockade and an accelerated search for a complete refusal, SWIFT - to de-SWIFT, non-acceptance of Ukraine's membership in the EU - to the accelerated movement to the candidate status. Thirdly, I trust the expertise of our colleagues from Naftogaz: Germany, Austria and Hungary could still completely abandon russian gas. It is estimated that the negative impact on their economies would be less than in the first year of the covid pandemic.

However, powerful players associated with russia do not want to lose profits, and this is an important factor. Therefore, the imposition of an embargo requires, on the one hand, to mitigate the negative impact on the economy and, on the other hand, to increase social and political pressure on stakeholders. This point is realistic, although not easy.

- What concrete steps should be taken to weaken russia in terms of energy exports?

- First of all, there is an awareness of the necessity and, most importantly, the inevitability of this step. Russia has defiantly demonstrated what Ukraine has been saying at every crossroads for years: putin's gas is not about money, it is about war and global danger.

Our energy cluster calls for measures to mitigate economic shocks for European countries and temporary exemptions for russian gas imports through gas pipelines, because there is still russian liquefied natural gas.

But this is only under certain conditions. For example, if the biggest share of gas payments is frozen in escrow accounts.

Other options include special tariffs on russian gas imports, increase gas supplies to the EU from other countries, reduce gas consumption in the EU, and reduce russian gas prices through reasonable economic incentives, political and regulatory decisions.

In fact, the next meeting of the group will be devoted to this topic. A roadmap is currently being developed. I hope to publish it this week.

- When can a duty or tax on russian oil imports be introduced? What is the procedure for such a decision in the EU?

- With political will, such measures can be implemented in a matter of weeks. This is an important decision, so the EU Council, the European Parliament, the European Commission and even the European Council must be involved in its approval.

- How will special escrow accounts work? Where will they open? Is there a risk that Russia will refuse to supply gas and oil itself when faced with such a payment mechanism?

- The simplest option is the introduction of so-called financial sanctions, which will limit the transfer of money from accounts to which russian gas buyers pay for gas.

This should be an exception to the embargo. That is, a ban is imposed on buying russian gas if payment is not made to accounts that are subject to financial sanctions.

There is a risk that russia will refuse to supply under such conditions. However, russia has no special alternatives to what to do with gas and oil that are already coming to the surface.

And here, though temporarily frozen, but a lot of money.

In addition, such restrictions do not relieve russian companies of the need to perform contracts. Finally, this mechanism may provide that part of the money goes immediately to russia, which means it is also an incentive not to stop deliveries.

It is worth emphasizing that the escrow account regime is, among other things, a tool and a source of payments in favor of Ukraine for the damage caused by the war, which must be recovered.

- Is russia's blackmail to pay for gas in rubles related to this? Can such a payment under the scheme announced by the russian federation prevent the introduction of targeted accounts?

- Directly connected, and it is really blackmail. That is why russia wants to introduce such a scheme. They want Western companies that buy russian gas to instruct banks that make transfers in favor of Gazprom to exchange euros for rubles.

It is difficult to block the West from transferring into rubles and impose sanctions on Western companies.

Finances

- What are the key risks for the West in disconnecting the entire russian banking system from the SWIFT system? Why the West does not dare to take this step, even in the face of a sharp decline in business activity of Western companies in russia?

- The disconnection from SWIFT of all russian banks has been on the table in all Western government offices since February 24, 2022. This would be an adequate and effective response to the invasion, and Ukraine continues to insist.

After the fifth wave of sanctions, the expansion of de-swift to all russian banks is not only possible, but also a natural and necessary step. Most of the risks that Western companies would have to face have been minimized or have already been realized.

russia's financial sector is not just toxic, it is poisonous. I do not see any obstacles to the introduction of a full blockade of sanctions against the

banking sector, including Oshchadbank and Gazprombank. In fact, this is what we recommend to do as soon as possible.

The only explanation for the delay is the attempt to maintain the gradualness and growing effect of the sanctions pressure, assuming that the progress of the pressure will stimulate the putin regime to come to its senses. In my opinion, to hope for this is a waste of time.

- What measures can the EU and the US take to get Raiffeisen Bank or Unicredit out of the russian market? When can this happen?

- I can't understand why such reputable European banks as Raiffeisen and Unicredit continue to work there after two months of war, after Bucha, Irpin, Melitopol, after even European political rhetoric has changed to unquestioning condemnation and active opposition to russia, and pretend it's "ok".

They will leave the bloody russian market, it will happen sooner or later. Either by themselves, or with shame and under pressure from shareholders, public condemnation and sanctions, which, incidentally, may be extended to them. Both banks are among the top 30 banks in russia.

It will be very interesting to read the quarterly reports of these banks, how they justify their decisions, and how they see the curtailment of their activities due to the risks of further stay in russia.

The general problem with sanctions pressure on russian banks is that it is not synchronized in all jurisdictions. The United States has imposed sanctions on 11 banks, Britain - 16, the EU - 7, Japan - 9. The largest list in Canada - 23.

All these sanctions are uneven, of various calibers, some harsh, some decorative. In particular, in the United States, Oshchadbank is under the strictest package of sanctions, unlike the EU. Someone thinks: may be suddenly it will pass away and one will be able to slip through. No, it will not work.

Sanctions are effective only if there is a coordinated sanctions policy in all jurisdictions and only if there are no loopholes in the sanctions mechanisms.

Therefore, the exit of Raiffeisen Bank and Unicredit is only a matter of time, as well as morale and the pain threshold of reputational losses. russia is a graveyard for any civilized business.

- What is known about russia's gold and foreign exchange reserves?

- According to statistics and Elvira Nabiulin (head of the Central Bank of russia), russia's international reserves over the past week fell by $ 4 billion to $ 607.1 billion.

Prior to that, reserves lost $ 38.8 billion. Frozen - immobilized assets - account for about half of this amount. Nabiulina admitted that the Central Bank has been preparing to freeze reserves since 2013.

From the end of 2013 to the end of 2021, the share of the dollar in reserves decreased by almost four times. The share of gold increased 2.5 times: from 8.3% to 21.5%. The share of the yuan rose from 0 to 17%.

By January 1, 2022, stocks grew the most in Germany (from 9.5% to 15.7%) and China (from 13.8% to 16.8%), in six months.

- Can russia be banned from using the balances of its gold and foreign exchange reserves denominated in monetary gold and yuan?

- The full blocking sanctions imposed by the United States on the Central Bank of russia will prohibit any transactions or any relationship with the Central Bank, its property or its share in any property within the jurisdiction of the United States.

That is, in the event of full blocking sanctions against russia's central bank, all its assets in the United States in dollars or monetary gold will be blocked. Accordingly, russia will not be able to use them.

However, reserves outside US jurisdiction denominated in yuan or other currency will not be blocked unless the countries concerned impose full sanctions. Non-US residents will be able to transact with such reserves.

The United States may extend sanctions beyond its jurisdiction by imposing secondary sanctions on relations with the Central Bank of russia. This will mean that anyone who transactions with the Central Bank, even outside the United States, can be subject to such sanctions.

The effect of US sanctions will be much stronger if the same full blocking sanctions are imposed by the EU, Britain and our other allies.

If these countries imposed full blocking sanctions against the central bank, it would be impossible for anyone to conduct transactions through the CBR or with CBR property.

The wide range of blocking sanctions (in the US) and blocking of assets (in the EU and the UK) of the Central Bank of russia will make any transactions with the Central Bank or its reserves impossible, even for non-residents of the US, EU and UK.

Transport

- After the fifth package of EU sanctions, russian ships are allowed to enter ports if they carry oil, petroleum products, gas, nuclear fuel, titanium, aluminum, copper, nickel, palladium, iron ore, food, pharmaceuticals, humanitarian goods and coal up to 10 August 2022. All this is about 80% of russia's maritime exports. What are the exceptions to your proposed package of sanctions? Did you calculate the effect?

- From this point of view, I liked the typology of sanctions, which was announced by Yermak at one of the meetings. Sanctions are divided into both effective and efficient; effective but not spectacular; spectacular but ineffective; ineffective and not spectacular.

The last two categories should not interest us. In its plan, the group recommends minimizing the list of exceptions, ideally leaving only those related to food security and humanitarian needs.

It is also proposed to tighten restrictions on all russian-flagged vessels, with a russian final beneficiary and a russian team.

It would also be good to ban ships flying EU flags from entering russian ports. The effect we expect is simple: the maximum restriction of trade or the rise in price of any russian goods.

- Foreign observers record cases when tankers with russian oil do not have a specific destination. They are likely to reload raw materials to smaller vessels on the high seas to circumvent sanctions. Have you discussed mechanisms that make this way of evading sanctions impossible?

- Yes, there are reports of an increase in the number of such tankers. In the relevant tracking information, tankers are marked "to order", and sometimes even after they have already gone to a specific destination.

Of course, this is used to circumvent sanctions, but at the same time it shows the effectiveness of sanctions.

In essence, the ship on the way must find a port that will take him and his cargo. There are fewer and fewer of them due to secondary sanctions and self-sanctions. For example, one tanker refused to be unloaded alternately in several ports in the Netherlands.

Another option is for the ship to transship oil to another ship on the high seas, after which a blend of oil of unknown origin is formed. I think the group will work out advice on further complicating logistics for russian oil.

Let the killers haul their smuggled oil through petrol trucks and canisters on donkeys across the Upper Ulhun.

Military-industrial complex

- In the document we did not see measures concerning the military-industrial complex. Meanwhile, European arms manufacturers are using anti-sanctions loopholes.

The second package of EU sanctions of 25 February contains a broader ban, but again, with exception. Export restrictions did not affect pre-war contracts. In addition, the EU has left a short list of conditions under which dual-use goods can be delivered to russia.

- Yes, this problem exists, it is not silenced. Vice versa! Imports into russia of military-industrial complex products and dual-use goods are savagery. The loopholes are

known, but until recently there were not loopholes, but whole streets with two-way traffic. In the action plan, this issue and our proposals are outlined in several sections. Section 7, "Expand Export Control Measures and Prohibit Imports", for example, lists measures in the context of the MIC and dual-use items.

In addition, the group came up with a proposal to designate russia as a sponsor of terrorism (SST), to recognize the russian armed forces as a foreign terrorist organization (FTO) and specially designated global terrorists (Specially Designated Global Terrorists, SDGT).

It is also planned to exclude the russian federation from the Financial Action Task Force (FATF). Understanding: Iran, which has been under sanctions for the past 40 years, was included in the FATF "black list" only in February 2020.

The four main categories of sanctions that will be imposed on russia after it is recognized as a sponsor of terrorism include restrictions on US foreign aid, a ban on exports and sales of defense products, certain controls on exports of dual-use goods, and financial and other restrictions.

Granting the status of a sponsor state to terrorism also entails imposing liability on countries and persons who trade with such states.

- Often russian "peaceful" companies act as "gaskets" and buy products for sanctioned military-industrial complex companies. How to deal with it?

- If the sixth package of sanctions does not resolve this issue, and the recognition of russia as a sponsor of terrorism is delayed, we must conduct a separate in-depth study and preparation of proposals, focusing on this issue. We expect that the sixth package will contain a qualitatively different approach to many sanctions issues and will take into account the proposals of the Yermak-McFaul Group's plan.

Namely: export control without loopholes, comprehensive blocking of cooperation with russia in the field of military-industrial complex and dual-use goods, extension of sanctions on the banking sector and their synchronization in terms of coverage and measures of influence.

If not, we will help the political leadership work on the seventh, eighth and ninth waves until sanctions are what they should be.

- Do you know which countries are smuggled through to deliver products for the russian military sector? The Kremlin has made no secret of its creative plans to rethink smuggling and parallel imports.

- Yes, of course, but the NSDC, GUR (Ukrainian CIA) and SZR can give a comprehensive answer to this question better than me.

The direct answer to your question is based on three things: secondary sanctions, the recognition of russia as a sponsor of terrorism, and a complete blocking package of sanctions on the banking sector.

Dmytro Denkov