Fire & Ice

This week, the outgoing U.S. administration has continued its “aggressive use of sanctions” with a flurry of designations in its final days. In addition to designating Cuba as a “state sponsor of terrorism,” the United States has imposed new sanctions on Iranian and Ukrainian  entities along with counterterrorism designations on individuals from Iraq, Morocco and Saudi Arabia. The designations come in the same week that the U.S. State Department warned European companies that they may risk sanctions for their continued involvement in Russia’s Nord Stream 2 pipeline.  According to  Foreign Policy magazine, the Trump administration’s “aggressive use of sanctions, however, has given rise to a growing geopolitical backlash that brings new risks to their effectiveness over the long-term.”

As Sigma highlighted in its 2021 Reflections & Predictions, how exactly might the backlash manifest itself following four years of increasing geopolitical tensions?

For one, the New York Times reported that China has “fired back at the Trump administration [in the last week] with new rules that would punish global companies for complying with Washington’s tightening restrictions on doing business with Chinese companies.”  China’s statement is a dramatic escalation of retaliatory threats levied against the U.S.’ Hong Kong Autonomy Act, which itself was in response to China’s national security law imposed on Hong Kong. China’s forceful statement also came a week following the finalization of the EU-China Comprehensive Agreement on Investment (CAI), a 7 year negotiation in which at the “eleventh hour” China attempted to include a clause “that would have frozen some of the benefits for EU states that restricted access for Huawei Technologies Co. and other Chinese telecoms firms.” The agreement, according to The Hill, would “constrain the 46th president's room for maneuver.”

As the abovementioned Foreign Policy piece highlighted in 2019, the “European Union, China, and other major countries are increasing their efforts to develop financial and trade channels insulated from U.S. economic pressure,” using the bloc’s “much-publicized INSTEX mechanism for trade with Iran'' as an example. As we highlighted in a prior piece titled ‘From Macro to Micro’, which covered both the escalating tensions with respect to US-China sanctions and entities caught up in Russia’s Nord Stream 2 pipeline, the complexities continue to highlight the increasingly sensitive and consequential nature of geopolitical struggles and the imperativeness of a more holistic view of non-financial risk.

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