A New Direction for EU Sanctions: The New Commission and the Use of Sanctions

The EU sanctions portfolio has traditionally been the prerogative of the EU High Representative for Foreign Affairs and Security, who oversees both the European External Action Service (EEAS) – the EU’s foreign policy unit – and the Foreign Policy Instruments Service (FPI), tasked with ‘transposing into EU law sanctions decisions prepared by the EEAS’.

Decisions on imposing new sanctions are made collectively in Brussels by all 28 member states, but their implementation (such as issuing guidance to the private sector, providing licenses for humanitarian exemptions and enforcing breaches of sanctions) are done by member states individually. While some member states have departments dedicated to this (such as the UK’s Office of Financial Sanctions Implementation), other countries do not have the same resources or political will to implement and enforce sanctions stringently. At best, this has led to an uneven implementation, and at worst, opportunities for sanctions evasion, or a sanctions regime that is less effective than it could be.

According to the new commissioner portfolios, the FPI’s sanctions unit (formally referred to as Unit FPI.5) has been moved from the new EU High Representative, Josep Borrell, into the auspices of the Director General for Financial Stability, Financial Services and Capital Markets Union (FISMA), Valdis Dombrovskis. Ursula von der Leyen, the new Commission President-elect, made it clear in her mission letter to Dombrovskis that his role is to ‘ensure that the sanctions imposed by the EU are properly enforced’.

Moving the sanctions portfolio to FISMA could achieve this objective for von der Leyen. FISMA’s mission in the past has been to ensure that ‘EU legislation is fully implemented’ and ‘properly enforced’ throughout member states, and FISMA has the ability to launch cases against those member states who fail to implement regulations properly.

The EU will hope that by more stringently monitoring how member states are implementing EU sanctions measures, any loopholes that provide opportunities for circumventing EU sanctions are closed. This move will also be welcomed by private sector actors who operate across multiple jurisdictions in the Union and have been calling for a more consistent approach on sanctions implementation across the EU.

Strengthening the EU’s Sanctions Posture

The portfolio switch takes place amidst a wider ambition to strengthen the EU’s economic posture, and this is likely to affect sanctions in two ways.

First is an ambition to reduce the extraterritorial impact of US sanctions on Europe. The US, through the Office of Foreign Assets Control (OFAC), its globally reaching sanctions enforcement arm, is the sanctions regime that companies around the world pay attention to, even if they do not agree with it. This is due to the primacy of the US dollar in global trade and Washington’s linkage of the usage of the dollar to its sanctions regime, as well as the use of secondary sanctions which seek to impose obligations on non-US businesses even when there is no direct nexus to the US market.

These two factors have contributed to an environment where European businesses wishing to engage with actors not sanctioned by the EU, but subject to US sanctions, need to disentangle those transactions from any US connection. Often, given the significant US footprint for large businesses, the headache is not worth it. For example, EU businesses have largely chosen not to re-engage with Iran after EU sanctions were lifted against the country following the negotiation of the nuclear deal, rather than potentially violating US sanctions and jeopardising their future access to US markets.

The EU’s attempts to protect European companies from these effects, including the use of blocking statutes seeking to nullify the effects of secondary sanctions or special transaction vehicles to circumvent the US dollar, have largely been ineffective.

Von der Leyen has explicitly stated that she wishes to see new proposals that ‘ensure Europe is more resilient to extraterritorial sanctions by third countries’, including increasing the use of the Euro in global trade. The desire behind this ambition is clear: by increasing the role of the Euro in global trade, the EU aims to reduce the scope for US sanctions to disrupt European interests and economic activities.

The Commission’s other priority – to strengthen the Euro as a ‘strategic asset’ – could, perhaps ironically given the EU’s own objections to extraterritorial sanctions, offer an opportunity for the EU to increase the impact of its own sanctions beyond the external market.

The Impact of EU Sanctions

The second way the EU’s renewed focus on economic sovereignty may affect EU sanctions concerns their potential impact. By bringing sanctions implementation under the umbrella of FISMA, the regulator of financial services and use of the Euro, the EU will have an opportunity to extend the current reach of its own sanctions.

In contrast to the US, EU sanctions typically apply to ‘a fairly narrowly defined cadre of actors with clear links – via jurisdiction, nationality or incorporation – to the European Union’. The move to FISMA may allow the EU to more readily extend the reach of EU sanctions to non-EU businesses, and control usage of the Euro and access to EU markets, in transactions with EU-sanctioned entities. Such a move would bring the EU closer to the US style of sanctions implementation.

Of course, to make non-EU businesses care about the implementation of EU sanctions, any action must be backed by proper enforcement by the EU. Otherwise, the EU runs the risk of designing a sanctions regime with global reach in name only.

Exactly how far the new Commission wishes to extend its powers on sanctions remains to be seen, but the move to FISMA offers the potential for a significant rework of the way the EU implements and enforces sanctions.

Achieving Sanctions Consensus

While Brussels might be keen to strengthen its stance on sanctions to an external audience, the consensus on sanctions within the EU is still a fragile one. Sanctions will still be designed by consensus within EU decision-making structures, and this is where the role of Josep Borrell will remain critical to sanctions design, by managing the different views of member states on the foreign and security implications of such activities.

In the past, this consensus requirement has restricted the EU’s sanctions ambition, and critics often point out that the EU remains a reluctant sanctions actor. This was seen both in the case of Iran, where it took months for the EU to agree to impose a full oil embargo in 2012 due to alleged objections from Greece (then a significant importer of Iranian oil), and more recently in the case of Russia, where reliance of some member states on the country’s natural gas impacted the ultimate design of sanctions.

However, in his recent confirmation hearing before the EU Parliament, Borrell argued that the EU could move to a method of qualified majority voting, as opposed to consensus, on a number of policy areas, including sanctions on Russia, which are reviewed every 6 to 12 months depending on the sanctions package, and requires consensus every time to renew the existing measures or add new ones. While it is unclear whether such a change in the decision-making process can easily be achieved, Borrell has acknowledged the often-fragile consensus that exists within the EU to design sanctions.

An added complication to this is Brexit, as the UK has traditionally been a more enthusiastic advocate of the use of sanctions compared to other member states, and the country’s departure from the decision-making process could therefore move the consensus point on sanctions among the remaining member states.

All these considerations point to a Commission that is aware of the limitations of when it can use sanctions as a foreign policy tool, while at the same time working to ensure that when imposed, sanctions are implemented uniformly throughout the EU, and perhaps even enforced beyond the EU’s borders.

Thus, the foundation has been laid to pursue a much more aggressive approach to sanctions implementation. Sanctions watchers will be closely observing how the move to FISMA works in practice.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other organisation.