Argument

An expert's point of view on a current event.

Biden Isn’t Selling Out on Nord Stream 2. He’s Protecting U.S. Firms.

If Washington can sanction any company for legal activity it doesn’t like, China and others could do the same to U.S. businesses—making them uninsurable.

By , a columnist at Foreign Policy and a fellow at the American Enterprise Institute.
German Chancellor Angela Merkel and U.S. President Joe Biden stand in the White House with a view of the Washington Monument on July 15.
German Chancellor Angela Merkel and U.S. President Joe Biden stand in the White House with a view of the Washington Monument on July 15. Guido Bergmann/Bundesregierung via Getty Images

The Nord Stream 2 deal struck by U.S. President Joe Biden and German Chancellor Angela Merkel is big news of the worst kind in Central and Eastern Europe. In the conventional analysis of the news, the United States and Germany teamed up to please Russia, leaving Ukraine by the wayside. But there was another reason, connected to U.S. businesses rather than lacking sympathy for Ukraine, that likely forced Biden’s hand: U.S. sanctions on companies open the door for other countries to sanction U.S. companies too. What’s more, U.S. sanctions could convince companies to stop trading in dollars—and that would severely weaken the United States’ role in the world.

Under the Biden-Merkel deal, the United States and Germany commit to investing $50 million each in Ukrainian green energy. This is to help Ukraine get the $3 billion annual transit fees Russia has been paying to send gas through Ukrainian pipelines and to sanction Russia should it use Nord Stream 2 for coercion. To many, it sounds like Biden sold out.

I would argue, however, he realized unilateral U.S. sanctions on Nord Stream 2 and businesses connected to it risked boomeranging—crippling U.S. firms just as the sanctions were intended to cripple Nord Stream 2.

The Nord Stream 2 deal struck by U.S. President Joe Biden and German Chancellor Angela Merkel is big news of the worst kind in Central and Eastern Europe. In the conventional analysis of the news, the United States and Germany teamed up to please Russia, leaving Ukraine by the wayside. But there was another reason, connected to U.S. businesses rather than lacking sympathy for Ukraine, that likely forced Biden’s hand: U.S. sanctions on companies open the door for other countries to sanction U.S. companies too. What’s more, U.S. sanctions could convince companies to stop trading in dollars—and that would severely weaken the United States’ role in the world.

Under the Biden-Merkel deal, the United States and Germany commit to investing $50 million each in Ukrainian green energy. This is to help Ukraine get the $3 billion annual transit fees Russia has been paying to send gas through Ukrainian pipelines and to sanction Russia should it use Nord Stream 2 for coercion. To many, it sounds like Biden sold out.

I would argue, however, he realized unilateral U.S. sanctions on Nord Stream 2 and businesses connected to it risked boomeranging—crippling U.S. firms just as the sanctions were intended to cripple Nord Stream 2.

Unilateral U.S. sanctions on Nord Stream 2 and businesses connected to it risked boomeranging—crippling U.S. firms just as the sanctions were intended to cripple Nord Stream 2.

Consider this: The sanctions imposed by former U.S. President Donald Trump and U.S. Congress in 2019, known as the Protecting Europe’s Energy Security Act (PEESA), were directed against “foreign persons whom the President determines have sold, leased, provided, or facilitated the provision of vessels for the purpose of subsea pipe-laying activities related to the construction of Nord Stream 2 and TurkStream (another Russian pipeline that supplies natural gas to Europe), or any successor pipeline,” the Congressional Research Service explains. Then, in 2020, Congress amended PEESA to also include underwriters and insurers. Unsurprisingly, Zurich Insurance—one of the world’s largest insurers—swiftly announced it would no longer insure pipeline construction.

That matters far beyond Nord Stream 2. Insurers constantly monitor sanctions for the same reason farmers monitor weather forecasts: Failure to spot changes spells disaster because most sanctions legislation holds insurers accountable if they cover sanctioned companies. The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which administers U.S. sanctions, is particularly efficient: It even punishes insurers who have unintentionally insured sanctioned people or organizations.

Punishment for anyone caught violating U.S. sanctions includes up to 30 years’ imprisonment and fines of hundreds of millions of dollars. In 2019, for example, Standard Chartered Bank agreed to pay the OFAC more than $630 million for sanctions violations, and around the same time, UniCredit—the Italian investment bank—agreed to pay the OFAC $611 million while the insurer, Allianz, settled for $170,535. Among current entries in the OFAC’s database include 354 individuals, entities, and vessels in Venezuela and 735 individuals and entities in Ukraine.

But insurers’ compliance officers also scour commercial databases that exist purely to screen for sanctions exposure because U.S. sanctions apply around the world (or at least to those companies—and that’s the majority—that use dollars). Neil Roberts is head of marine and aviation at Lloyd’s Market Association, a nonprofit providing advice to insurers. “When I started in this sector years ago, companies had a compliance department of two people,” he said. “Today, they have entire compliance departments. The dollar is the currency of Western trade, so you can’t take the risk of violating U.S. sanctions. That’s why companies pay all these professionals trawling through sanctions lists all day.”

Their work also includes checking sanctions on a variety of spellings of names. “Imagine how much time companies spent searching for Muammar al-Qaddafi, given how many different ways his first and last names are spelled,” Roberts said. With Nord Stream 2, there has also been confusion as Nord Stream 2 (the pipeline) is not the same thing as Nord Stream AG, its parent company.

Had U.S. sanctions against Nord Stream 2 continued, the pipeline would likely have become uninsurable because companies err on the side of caution.

Had U.S. sanctions against Nord Stream 2 continued, the pipeline would likely have become uninsurable—also because companies err on the side of caution. Fantastic, Sen. Ted Cruz might say: Good riddance to a pipeline that’s causing a rift in Europe. But think one step further. The U.S. government can impose unilateral sanctions because it’s powerful. Sure, the European Union imposes sanctions too—as do other blocs and indeed the United States—but their sanctions try to remedy egregious behavior.

The United States sanctioned Nord Stream 2 because it disliked the pipeline. There are many reasons not to like it, and back in 1982, then-U.S. President Ronald Reagan imposed sanctions on a Soviet-West German pipeline construction project for the same reason. (He quickly reversed them.) Today, though, there’s another hugely powerful country that could decide to impose unilateral sanctions on companies whose activities it dislikes: China.

China has already demonstrated it doesn’t mind using its pivotal role in the globalized economy to mete out punishment at its pleasure. It has imposed punitive tariffs on Australian wine (after the Australian government dared to ask for an independent COVID-19 investigation). It has slashed imports of Norwegian fish (after the Norwegian Nobel Committee awarded the 2010 Nobel Peace Prize to Chinese dissident Liu Xiaobo). Earlier this year, it emerged China might ban exports of rare-earth refining technology to countries or companies it considers a national security threat. And this spring, H&M, Burberry, and Nike were targeted by consumer and smartphone boycotts in China.

Imagine if, say, U.S. companies won a contract to build infrastructure in Taiwan or if they got a contract from the Philippine government for new naval patrol vessels that could have a better chance of getting Chinese fishing fleets squatting in the Philippines’s exclusive economic zone to depart. Such contracts would be legal under national laws, but if China didn’t like them, it could impose sanctions—and the U.S. government wouldn’t have a leg to stand on because Nord Stream 2 is legal under Russian and German laws. The contracts would become uninsurable because what insurer wants to pick a fight with Beijing?’

The Chinese government could decide to randomly put sanctions on sundry U.S. companies simply to prove it rules the world.

In fact, the Chinese government could decide to randomly put sanctions on sundry U.S. companies simply to prove it rules the world. Sure, such sanctions would be less potent than U.S. ones because far fewer companies trade in yuan than in dollars. But if China began imposing U.S.-style sanctions, companies would likely be so concerned about exposure to sanctioned firms and people at points in their supply chain where they trade in yuan that they could decide to err on the side of caution. As Roberts noted, “in insurers’ experience, you don’t tend to win commercial disputes against the Chinese.”

This past January, I predicted China would start using sanctions to punish or threaten other countries. Last month, it took a step in that direction. The Standing Committee of China’s National People’s Congress passed a counter-sanctions law, effective immediately, under which China can impose sanctions, import prohibitions, and export control restrictions in response to sanctions imposed by other governments. On July 16, it imposed sanctions on former U.S. Commerce Secretary Wilbur Ross and five other Americans.

Who’s next? Nobody knows, but China is increasing the pressure by planning new laws that ban foreign companies and individuals based in Hong Kong and Macau from complying with sanctions against China. Sure, Washington can launch blocking statutes. But all those compliance officers will soon be scouring the Chinese government’s sanctions database, too.

If China begins using sanctions the same way the United States has been using them, U.S. companies may discover some of their international activities risk becoming uninsurable. As the yuan gains prominence, so does its spread throughout the commercial supply chain. And to operate, businesses need insurance. This, too, is part of the rules-based international order. What’s more, the United States’ frequent use of its powerful sanctions could convince countries and companies they should limit their trade with the United States and with the dollar. And once again, China wins.

It’s safe to say many thoughts crossed Biden’s mind before he agreed to the Nord Stream 2 deal with Merkel. Ukraine was certainly one of them. The need for good relations with Germany certainly mattered too—because Biden’s decision to “end the war” in Afghanistan is likely to trigger another refugee crisis, with Germany once again a key destination. Washington’s NATO allies in the region certainly entered into the equation too. But insurance may have mattered even more. Without it, the United States can kiss a globally operating private sector goodbye. And in case Biden failed to consider insurance, he should do so before imposing any new unilateral sanctions.

Elisabeth Braw is a columnist at Foreign Policy and a fellow at the American Enterprise Institute, where she focuses on defense against emerging national security challenges, such as hybrid and gray-zone threats. She is also a member of the U.K. National Preparedness Commission. Twitter: @elisabethbraw

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