2 June 2018

With CAATSA, the U.S. is Trying to Make Russia Hurt

Middling powers in Europe, Asia and the Middle East will face increasing pressure from Washington on their ties with Russia because of the United States' new sanctions legislation. Germany, Vietnam and Turkey are some of the major states most likely to defy U.S. pressure on their Russia relations. In Asia, India may struggle to cope with the U.S. sanctions, while Indonesia could go either way. Saudi Arabia, Qatar and the United Arab Emirates will find it easier to comply thanks to their limited links to Russia and deep defense relationships with Washington. Measures such as the Countering America's Adversaries Through Sanctions Act will encourage U.S. partners to adopt a more multilateral strategy in an emerging world of great power competition.

Yesterday was Tehran and today it's Moscow. As the United States, Russia and China engage in a great power competition, growing tensions between Washington and Moscow could soon have a major effect on U.S. relations with other countries. Upset by the Kremlin's actions around the world, U.S. lawmakers are hoping to hit Russia where it hurts most, its defense and energy business, through the Countering America's Adversaries Through Sanctions Act (CAATSA), which applies secondary sanctions to countries engaging in business with Moscow in these fields. CAATSA has faced some resistance — not least from the commander in chief himself — but its gradual implementation promises to have far-reaching effects on all concerned.

The Big Picture

In its second-quarter forecast for 2018, Stratfor noted that the United States would turn its attention toward its competition with Russia and China. Washington already has targeted Beijing with trade tariffs, and now it is finally starting to implement measures that could change Russia's strategic ties around the world under the Countering America's Adversaries Through Sanctions Act.

A Potent New Process

Secondary sanctions are hardly new to U.S. foreign policy. Washington used them extensively against Tehran in an effort to force the Islamic republic to modify its behavior before the Iranian nuclear deal's signing in 2015. But Russia occupies a different position from Iran in the international system as a great power that boasts robust energy relationships with Europe and China, as well as diverse defense ties with many states, particularly in Asia and the Middle East. CAATSA also targets Iran, along with North Korea, yet it is the secondary sanctions against Russia — especially those stipulated in sections 231 and 232 of the act — that could affect the United States' partnerships the most.

Under Section 231 of CAATSA, any third-country firm or individual that engages in a "significant transaction" with Russia's defense or intelligence sectors will face a penalty. Companies and individuals can apply for an exemption from the sanctions. Getting one, however, would require U.S. authorities to certify not only that the exemption would not harm the United States' national security interests but also that Russia had made "significant efforts to reduce the number and intensity of cyber intrusions."

Given that the Kremlin is unlikely to meet the second condition anytime soon, countries wishing to continue trade with Russia's defense or intelligence sectors could opt for a waiver under Section 231. The waiver, which has a maximum length of 180 days, requires U.S. officials to certify that the applicant is "substantially reducing the number of significant transactions" with targeted Russian interests. (The U.S. Congress is also currently considering the 2019 National Defense Authorization Bill, legislation that would replace the waiver process with an upfront certification that determines whether the entity in question is taking "significant and verifiable steps" or "has agreed to reduce reliance" on Russia over a "specified period.") But the waiver could draw unwanted attention to countries engaged in trade with Russia and give Washington leverage to try to exact concessions from them.

Section 232, meanwhile, focuses on energy, targeting investments of $1 million or more in Russian pipelines or support for building or operating pipelines — in goods, services, technology and information — worth an annual total of at least $5 million. Unlike those prescribed under Section 231, Section 232 sanctions are discretionary rather than mandatory.

The waiver could draw unwanted attention to countries engaged in trade with Russia and give Washington leverage to try to exact concessions from them.

Off to a Slow Start

U.S. President Donald Trump opposed CAATSA (the act largely stems from a unilateral initiative by Congress, which took action out of concern that the U.S. leader could become too conciliatory toward Russia). Nevertheless, it passed by veto-proof majorities in the Senate and House of Representatives alike. The president then delayed its implementation beyond the Jan. 29 congressional deadline, arguing that the date signified the start, rather than the end, of the process.

Facing growing pressure from Congress, Trump has signaled that he will begin applying the law. The State Department has tried to define "significant transaction" and is already engaged in conversations with many countries on their relationships with Russia. At the same time, U.S. diplomats also tried to entice countries to expand their defense ties with Washington to compensate for the loss of Russian supplies. The overtures suggest that CAATSA's aim is not simply to penalize Russia for its perceived bad behavior but also to expand U.S. arms sales wherever possible. Still, some prominent members of the U.S. Congress are dissatisfied with the progress toward implementing the act. Key Democrats, such as Sen. Robert Menendez, and some Republicans, in fact, recently requested a rare multiagency investigation into the delays in the law's application. But regardless of the snags in its implementation, CAATSA demonstrates that the United States is more strident than ever in pushing other countries to reduce their defense and energy ties with Russia.
Addressing Russia's Worldwide Influence

According to the Stockholm International Peace Research Institute, Russia is the world's second-largest arms exporter. From 2013 to 2017, the country accounted for 22 percent of the globe's weapons exports, lagging behind only the United States at 34 percent. (All other exporters' contributions, by contrast, are in the single digits.) Russia also has numerous clients in diverse fields that purchase its air defense systems, aircraft, missiles, ships, armored vehicles and aircraft engines. Nearly two-thirds of Russia's exports go to Asia, though the Middle East and Africa also receive a significant portion of the country's arms.

Regardless of the snags in its implementation, CAATSA demonstrates that the United States is more strident than ever in pushing other countries to reduce their defense and energy ties with Russia.

Russia's deepest defense relationships are with China, India and Vietnam, which together account for 58 percent of Russian exports. China has received top-of-the-lineRussian equipment of late, including the S-400 air defense system and Su-35 aircraft, while India and Vietnam have been purchasing and using Russian equipment since Soviet times. Farther afield, Russia has signed major arms deals with Indonesia and Turkey, and it's in talks with Saudi Arabia and Qatar over the sale of the S-400 system. The United Arab Emirates, too, is considering the purchase of Su-35 aircraft. Although these countries are some of Russia's biggest customers — or prospective customers — they aren't the only ones that could run afoul of CAATSA. States such as Algeria, Myanmar, Malaysia, Kazakhstan and Ethiopia also could soon find themselves in hot water with the United States because of their "significant" defense relationships with Russia.
Mulling a Response

As one of the biggest purchasers of Russian arms, China will likely have the most difficulty scaling down its ties with Russia — all the more so since Washington has already targeted Beijing in separate trade disputes. Its connections with Russia are so deep and strategic that China will be unlikely to make more than token concessions on its core defense purchases from Moscow. (But even without the threat of U.S. sanctions, China is destined to purchase less Russian military hardware as it develops technology that would allow it to manufacture its own arms.) Similarly, major energy projects such as the Power of Siberia gas pipeline from Russia to the Far East are more or less irreversible.

As one of the biggest purchasers of Russian arms, China will likely have the most difficulty scaling down its ties with Russia — all the more so since Washington has already targeted Beijing in separate trade disputes.


Russia also has deep relations with China's rival over the Himalayas, India. Moscow supplies most of the arms for the Indian military, including combat aircraft, naval destroyers, battle tanks and a lone nuclear submarine. The BrahMos missile — the product of Russian-Indian cooperation — is a signature success for New Delhi's defense establishment that also has great export potential. Furthermore, Russian arms deals offer generous terms, such as technology transfers and opportunities for joint production, that are important to India's strategic autonomy doctrine.

If push comes to shove, India will not sacrifice its relationship with Russia. Instead, it will try to compromise with the United States by purchasing more U.S. arms or by signing the two outstanding foundational defense agreements with the country. Despite its historical links with Moscow, New Delhi has expanded its security and economic relationship with the United States over the past two decades to try to increase its clout in the global system. Their ties are now strong, and India increasingly relies on the United States to balance China's rise in Asia. As a result, Washington has greater leverage over New Delhi, which, in turn, is more vulnerable to CAATSA's stipulations than Beijing is. In the longer run, however, the CAATSA process could rekindle anti-American sentiment in the Indian defense bureaucracy and the political class, two decades after a reset in U.S.-Indian relations consigned such nationalism to the margins.


In Southeast Asia, Vietnam — whose military gets nearly all its equipment from Russia — also has been more open to U.S. defense ties since the United States lifted an embargoon lethal arms sales to Hanoi in 2016. The United States has sold patrol boats to Vietnam, and a U.S. aircraft carrier even docked at the country's Cam Ranh naval base. Even so, Vietnam's connections to the United States remain limited at this nascent stage of their rapprochement. That means Vietnam will be in a stronger position than India in negotiations with Washington over CAATSA — even though it has deeper ties with Russia. In fact, the CAATSA process could discourage Vietnam from further building its defense relationship with the United States, if only to avoid future compromises to its strategic autonomy.

Indonesia could go either way in its ties with Russia. Its military has long relied on suppliers from multiple countries, including Russia, with which it is drafting a strategic partnership agreement. Indonesia reportedly defied U.S. pressure in February when it proceeded with a new order for 11 Su-35 jets in a deal with Moscow. At the same time, though, the Southeast Asian country counts the United States as a major export destination and tends to be less assertive than Vietnam.

Toward the other end of Eurasia, Turkey would seem to be an unexpected target for CAATSA as a member of NATO, the gold standard for U.S. alliances. But Ankara has been moving to engage in more transactional relationships with all powers, including putative ally the United States. In a symbolic departure from the practices of alliance behavior, Turkey inked an agreement to acquire the S-400 air defense system from Russia, a NATO adversary.

The Trump administration has demanded that Ankara scuttle the deal, only to trigger a hostile response from the Turkish government. Now the U.S. Congress appears to be upping the ante with a draft defense bill that would include provisions to suspend the sale of 100 F-35s to Turkey until U.S. authorities provide a report assessing the effects of Washington and Ankara's strained relations on U.S. operations in Turkey. And as in military matters, so in energy: Ankara is expected to defy Washington on the Turk Stream natural gas pipeline between Russia and Turkey, which could become a target of sanctions. If the United States becomes insistent in its demands, Ankara could use its cooperation in Syria as further leverage against Washington.
The Gulf States

Saudi Arabia, Qatar and the United Arab Emirates, meanwhile, have far fewer defense ties with Russia than with the United States, meaning they will find it easier to demonstrate a reduction in defense transactions with Moscow.

In terms of energy, another of the United States' most enduring allies, Germany, will find itself in the CAATSA crosshairs. Large European energy firms such as Royal Dutch/Shell, Uniper, OMV and Engie could all suffer U.S. sanctions because of their financial involvement in Nord Stream 2, a controversial pipeline that will bring natural gas directly to Germany from Russia. Germany, which has publicly condemned CAATSA's provision regarding Nord Stream 2, is well-placed to resist U.S. demands, thanks to its position as a major global player. Yet its strong economic ties with the United States will also make it vulnerable to punitive U.S. action.
Risks and Rewards

Secondary sanctions are part of the United States' broader strategy to achieve a set of objectives with regard to an adversary by imposing its laws on other countries. Washington has applied extraterritoriality in this way several times in the post-Cold War era, to Cuba, Iran and Libya in the 1990s, and once again to Iran in the 2000s. 

If CATSAA succeeds, the rewards for Washington will be nothing less than altering Russia's behavior or curtailing its influence in the international system.

Most countries view energy and defense as delicate areas in which market dynamics compete with strategic considerations. Defense relations, however, naturally involve sensitivities that exceed those of energy ties. Price negotiations are often protracted, and it might take years to complete an order. Any major weapons system, moreover, requires contracts for maintenance, spare parts and potential upgrades. Supplier reliability is a huge concern — as are technology transfers and joint production, which importers value. Consequently, reorienting core defense relationships can be quite disruptive for the importer.

The CAATSA process is full of lofty ambitions. If it succeeds, the rewards for Washington will be nothing less than altering Russia's behavior or curtailing its influence in the international system. But it also carries risks. In today's world, middle powers are increasingly assertive and refuse to tie themselves to any single great power. The United States' reliance on the blunt tool of extraterritoriality could eventually backfire if it's not careful.

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