RWR Report: The Dawn of Capital Markets Sanctions

On July 13, RWR Advi­so­ry Group pub­lished its lat­est report, enti­tled, “The Dawn of Cap­i­tal Mar­kets Sanc­tions.”  This report high­lights the emer­gence over the past few years of the U.S. cap­i­tal mar­kets as an asset wor­thy of being pro­tect­ed on nation­al secu­ri­ty and human rights grounds, but also as a crit­i­cal source of for­eign pol­i­cy lever­age, sim­i­lar to the way export con­trols and trade sanc­tions have been employed with­in eco­nom­ic and finan­cial state­craft cir­cles for decades.

This real­i­ty was ush­ered in due espe­cial­ly to a series of actions that took place dur­ing the lat­ter half of the Trump Admin­is­tra­tion and that were rein­forced and strength­ened dur­ing the first six months of the Biden Admin­is­tra­tion (notably via the impo­si­tion of Exec­u­tive Orders 13959 and 14032).  These two Orders placed unprece­dent­ed pro­hi­bi­tions on the abil­i­ty of U.S. per­sons world­wide to invest in pub­licly trad­ed Chi­nese cor­po­ra­tions that were deter­mined — and offi­cial­ly des­ig­nat­ed — to be affil­i­at­ed with the Chi­nese mil­i­tary-indus­tri­al com­plex.  The actions of the Biden Admin­is­tra­tion expand­ed the scope of the pro­hi­bi­tions to include com­pa­nies impli­cat­ed in human rights abus­es due to their involve­ment in sur­veil­lance tech­nol­o­gy.

It is often a sur­prise, even to those who fol­low these issues close­ly, that the cap­i­tal mar­kets have been total­ly absent as an area where pro­hi­bi­tions are placed on U.S. per­sons and their abil­i­ty to con­duct busi­ness as usu­al with sanc­tioned or offi­cial­ly des­ig­nat­ed com­pa­nies.  Nev­er­the­less, it has been true for years that com­pa­nies that U.S. per­sons are banned from trad­ing with (or export­ing to) are often open to Amer­i­can invest­ment, as demon­strat­ed by their inclu­sion in major index­es and Exchange-Trad­ed Funds and, in some cas­es, even main­tain­ing list­ings on U.S. exchanges.  This incon­sis­ten­cy has become a tar­get for the U.S. secu­ri­ty com­mu­ni­ty.

Although we are still in the ear­ly days of the U.S. lever­ag­ing the cap­i­tal mar­kets as a source of nation­al pow­er and influ­ence – while also pro­tect­ing them (and U.S. share­hold­ers) from exploita­tion, non-trans­paren­cy and serv­ing to fund var­i­ous author­i­tar­i­an pur­suits — the bipar­ti­san actions of the past two years have estab­lished new prece­dents of his­toric impor­tance.  The sig­nif­i­cance of these actions bears under­stand­ing, includ­ing what makes them unique com­pared to oth­er, estab­lished forms of eco­nom­ic and finan­cial state­craft.

The sequence of events that has unfold­ed over the past few years, expand­ing the reach of eco­nom­ic and finan­cial state­craft into the cap­i­tal mar­kets, is explained in the attached report.