Boost our economy and punish hostile states by making anyone who breaks sanctions invest in UK infrastructure projects, pay for public services, or invest in UK businesses, says leading economics think-tank

• In a foreword to a new paper by the Adam Smith Institute (ASI), former Chancellor Nadhim Zahawi calls for reforms to the UK’s sanctions regime;

• The UK’s sanctions framework is ineffective and is not achieving its intended outcomes;

• The most obvious example is our failure to effectively punish Russia or disrupt its invasion of Ukraine;

• Our sanctions may even be harming the UK and other Western economies more than Russia. This year, the Russian economy is forecast to grow at a faster rate than the UK’s;

• Individuals and businesses are getting around restrictions on investing in sanctioned states by trading via ‘third-party’ countries such as India and China;

• Even when offenders are caught, the penalties are not harsh enough to deter them from reoffending;

• In order to create a positive incentive to comply with our sanctions regime, the Adam Smith Institute (ASI) is proposing a new system of sanctions, under which anyone or any business caught breaking these sanctions is made to re-invest their capital in a way that benefits the British people;

• The level of profits that an entity would be allowed to receive would depend on how responsible they are for, for example, the ongoing war in Ukraine. The worst offenders would receive none at all.

Economic sanctions are measures that states or international organisations place on other states to make them change their behaviour. Some of these sanctions can be placed on entities- either people or businesses engaged in commercial activity- to stop them from transferring capital to the sanctioned state. Those that break these sanctions will face a penalty.

But the UK’s current sanctions framework is not helping it to achieve its aims, as the failure to punish or disrupt Russia has shown. In some ways the sanctions have even been self-defeating; Western markets have been continuing to struggle, whilst the Russian economy is not slowing. The IMF has upgraded its projections for the Russian economy’s growth this year to 3.2%, a much faster rate than the UK.

As a new paper from the Adam Smith Institute (ASI), entitled Market-Based Reforms to the UK Economic Sanctions Regime, highlights, one of the fundamental problems is that the penalties we are imposing on entities who are evading these sanctions, and are still doing business and investing in Russia are not strong enough to deterring them from doing it again. The maximum civil monetary penalty that can be imposed if they are caught is £1 million or 50% of the breach, whichever is higher. For some entities, this is a mere drop in the ocean.

Author Professor David Collins recommends that we should instead encourage sanctioned entities to divert their business to the UK by giving them the opportunity to profit here, in a way that benefits us at the expense of sanctioned states.

Under his ‘compelled re-investment’ proposal, if an individual or entity was found to have violated our sanctions regime, they would be given a choice to either face the normal penalty, or to re-invest its capital or any proceeds from an investment in a sanctioned country, back into the UK. The UK Government could decide that the most productive use of the funds is to maintain or even expand a current investment in the UK. Or it could invest the money in whatever would most benefit the British public such as an important infrastructure project, or it could take the money as a loan with a small interest rate to finance public spending.

Any profits from a successful investment project could be calibrated to the culpability of the sanctioned entity, with a zero-interest, no-profit category available for the very worst offenders such as those who are responsible for the continuing war, or human rights abuses in Ukraine. This would be considered on a case-by-case basis.

The Rt Hon Nadhim Zahawi , former Chancellor of the Exchequer, said:

“I was proud to have been a member of the government which supported Kyiv’s struggles against Putin’s regime from the very outset of the war. But he will only be defeated once we properly disrupt his war machine.

"It’s clear that our sanctions regime is still in need of substantive reform in order to make this happen. This proposal from the Adam Smith Institute shows how we can divert capital away from sanctioned states and towards the UK in a way that actively benefits the British people. They are right too to call for the details of any re-investment to be considered on a case-by-case basis.

"Improving our sanctions framework will better disrupt the activities of other sanctioned countries such as Iran and North Korea, as well as Russia, helping us to stand up for the Rule of Law across the world.

"I urge the new Government to actively consider the proposals in this report,”

Maxwell Marlow, Director of Research at the Adam Smith Institute said:

"The core aim of our sanctions regime- to disrupt the malign activities of hostile states such as Iran, Russia, and North Korea, is a noble one. But the evidence is clear- the effectiveness of the UK’s sanctions framework is being repeatedly undermined by sanctions evasions.

"Even when we catch individuals and businesses breaking our sanctions rules, we’re not effectively deterring them from doing it again.

"As every economist knows, in order to get commercial actors to change their behaviour, we need to give them a carrot as well as a stick. By compelling those who violate our sanctions regime to expand their investments in the UK or fund national infrastructure projects, we’ll be incentivising them to keep their capital and business here, boosting the UK economy at the expense of hostile states.”

-ENDS-

Notes to editors:

For further comments or to arrange an interview, contact emily@adamsmith.org | 0758 477 8207.

The paper will be available on the Adam Smith Institute website at 10pm Friday 9th August.

Professor David Collins is a recognised authority on World Trade Organization law and international investment law and international law. He leads the Digital Trade Research Group at City Law School and is the co-editor of the forthcoming Routledge Handbook on International Economic Law.

The Adam Smith Institute has recently published another research report on how to make sanctions more effective. This paper builds on the previous Government’s ‘Deter, Disrupt and Demonstrate’ Strategy and outlines what an ‘Economic Sanctions 2.0’ could look like. This focused on degrading the target’s ability to pursue its objectionable policies, and denying it the ability to get around any sanctions. This can be read on the ASI website.

The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.

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