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.