The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions programs to accomplish foreign policy and national security goals. OFAC oversees a number of different sanctions programs that target specific countries, regimes, terrorists, narcotics traffickers, and other threats. Sanctions can be comprehensive or selective, using blocking of assets and trade restrictions. One type of selective sanction administered by OFAC is sectoral sanctions, which target key sectors of a foreign economy.

What are Sectoral Sanctions?

Sectoral sanctions are intended to apply pressure on a foreign government by limiting access to U.S. financing in key sectors of that country's economy. For example, in response to Russia's actions in Ukraine in 2014, OFAC imposed sectoral sanctions targeting Russia's financial services, energy, and defense sectors. Sectoral sanctions prohibit U.S. persons and companies from providing financing to or engaging in certain transactions with individuals and entities operating in the targeted sectors. The goal is to restrict access to U.S. capital, technology, and markets for key sectors in order to increase pressure on the foreign government.

Key Features of OFAC Sectoral Sanctions

There are several key features of OFAC's sectoral sanctions programs:

• Targeted sectors - OFAC identifies specific sectors like finance, energy, or defense.
• List-based approach - OFAC publishes a Sectoral Sanctions Identifications (SSI) List of entities determined to be operating in the targeted sectors.
• Limited prohibitions - The sanctions restrict certain dealings like extending credit or transacting in debt/equity, but do not block all dealings.
• Directive-based restrictions - OFAC issues directives that outline the specific prohibited transactions for each targeted sector.

Russia/Ukraine-Related Sectoral Sanctions

In response to Russia's annexation of Crimea and destabilizing activities in Ukraine in 2014, OFAC imposed sectoral sanctions targeting Russia's financial services, energy, and defense sectors. The goal was to impose costs on Russia, constrain access to financing, and pressure the government to change course. OFAC issued four directives outlining prohibited transactions with entities on the SSI list:

• Directive 1 - Financial services sector
• Directive 2 - Energy sector
• Directive 3 - Defense sector
• Directive 4 - Additional prohibitions

For example, Directive 1 prohibits U.S. persons from transacting in new debt of greater than 90 days maturity or new equity for entities on the SSI list operating in Russia's financial sector. Over time, OFAC has amended the directives to adjust the prohibitions. As of September 2022, OFAC's SSI list includes over 200 entities linked to Russia's financial services, energy, and defense sectors. U.S. persons must screen transactions against the SSI list to ensure compliance.

Challenges and Criticisms

While sectoral sanctions provide a more targeted approach than comprehensive sanctions, there are some challenges and criticisms:

• Difficulty avoiding spillover effects into untargeted sectors of the economy.
• Entities may adjust business practices to circumvent the prohibitions.
• Hard to craft directives that are not too broad or narrow.
• Can still have unintended humanitarian costs by restricting financing.
• Limited effectiveness in achieving policy goals in some cases.

Policymakers have to weigh these potential downsides against the benefits when determining whether to utilize sectoral sanctions.

Conclusion

OFAC's sectoral sanctions programs aim to provide a middle ground between comprehensive sanctions and no sanctions. By targeting key sectors of a foreign economy, sectoral sanctions attempt to impose economic costs while minimizing unintended effects. However, crafting effective directives and preventing circumvention remains a challenge. The Russia/Ukraine sectoral sanctions demonstrate both the potential benefits and limitations of this approach to sanctions.

References

Office of Foreign Assets Control OFAC Sanctions Programs OFAC FAQ CRS Report Ukraine/Russia Sanctions CRS In Focus SSI List Ukraine/Russia Sanctions CRS In Focus