What remains to be punished in Russia? Portfolios, shares and foreign investments.
The US and EU sanctions imposed on the Kremlin so far have exceeded many expectations, including likely those of Russian President Vladimir Putin. Their impact has been to flatten the Russian financial system, crash the rouble, spur a likely sovereign default, and likely plunge the Russian economy into a depression. “Fortress Russia” is no more.
The impact on industrial production and critical imports, due to restrictions on semiconductor exports, can be profound. The Kremlin’s reaction has exacerbated Russia’s long-term isolation (and hence stagnation) by imposing capital controls on businesses and individuals, requiring Russian businesses to hand over much of their foreign currency to central authorities and by paying creditors in rubles (probably leading to default).
More recently, the United States and the United Kingdom announced they would ban imports of Russian oil – the first major move against the Kremlin’s engine – while the European Union plans to restrict its purchases of Russian natural gas. In less than two weeks, Putin’s war brought Russia back to Soviet levels of economic isolation in a deeply more integrated world. It will be a disaster for the Russian people.
While the Biden administration had prepared its sanctions well, it had exhausted its initial set of options by Feb. 25 — and a day later escalated faster than anyone anticipated by locking down nearly two third of Russia’s pre-war foreign exchange reserves. (about $630 billion). The remaining reserves (cash, gold, bonds held by the Chinese) are insufficient to fill the huge holes already dug by Western sanctions.
Yet Putin’s forces continue their attack, including targeting civilians and non-military infrastructure, as outrage escalates in the United States, Europe and beyond. This is why the West must continue to develop sanctions escalation options to keep pace with Putin’s growing violence. There is still room for more targeting before these sanctions reach a level comparable to those against Iran or North Korea.
So what’s left on the escalation options menu? We propose several in roughly increasing order of magnitude (although apart from potential European restrictions on Russian energy, their impact is unlikely to be as dramatic as the measures already taken). The administration could more quickly choose a higher-impact option in response to a particularly egregious Russian attack on civilians, such as Wednesday’s reported bombing of a maternity hospital in Mariupol:
- Target oligarchs, cronies, wallets and Putinassets. So far, the West has entered the sanctions on cronies/oligarchs targeting only a few tycoons, perhaps in hopes of eventually separating the billionaires from Putin’s orbit. The idea that the oligarch class in Russia will step up and by itself force better behavior out of the Kremlin, never likely, is increasingly dubious. Nonetheless, these billionaires, especially those closest to Putin and the Kremlin, present attractive targets for sanctions because of their involvement in the Russian economy and Putin’s peculiar kleptocracy. Seeing a six hundred million dollar yacht seized by customs officials may seem somewhat symbolic, in the face of the devastation in Ukraine, but symbols can help sow uncertainty and panic in Russian markets and further diminish confidence in the Russian economy. These sanctions will show Putin’s cronies and subordinates that Putin is harming their interests and those of their families.
- Extend sanctions to companies. Although they have hit Russia’s financial and defense sectors hard since 2014, the West can still target many other entities that are either close to the Kremlin or otherwise vulnerable without causing unmanageable risk of contagion. State property Gazprombank and Russian Agricultural Bankas well as the private AlfaBank, are already subject to funding restrictions but could be the next to face full blocking sanctions, which would effectively exclude them from the international financial system. The same goes for transport companies. Sovcomflot and Russian Railwaysand diamond company Alrosa. Meanwhile, the big Russian insurer Sogaz was sanctioned by the European Union but not by the United States. Exceptions might be needed to manage the ripple effects, but a large part of Russia’s private and state-controlled economy remains an attractive target.
- Sanction Russian stock markets. If the West seeks to further undermine domestic capital markets – having already largely cut off Russia’s access to external markets – sanctions targeting key markets, such as the Moscow Stock Exchange, may pave the way for further turbulence in the market. It would also address the possibility that some Western or Chinese companies could buy Russian assets at rock bottom prices and hold onto them for years. While such purchases may not provide much capital for Russian companies (or dramatically change the landscape), they would send an unseemly signal of corporate profit just as many Western companies are pulling out of Russia.
- Block the Russian government. This would amount to sanctioning all Russian state-owned companies. While many are already sanctioned, a full lockdown would further isolate Putin and his sources of power from the global economy and effectively put the Russian government on a par with those of Cuba, Iran, North Korea and Syria. This action would likely require liquidations or other exclusions so as not to disrupt energy markets – since oil and gas giants Rosneft and Gazprom, respectively, are both state-owned – but it could still be effective. even with such accommodations.
- Ban new investment in Russia. With the White House banning new investment in Russian energy projects on Tuesday, the logical option for escalation could be to extend that ban to the entire Russian economy. The economy is relatively concentrated in a small number of key companies in major revenue sectors, and if those targets are exhausted, a new investment ban could provide common ground for Western policymakers seeking a broad impact of the chilling effect a ban would have on all US companies operating in Russia while stopping before a full financial embargo. With the reduction in energy purchases by the West and the ban on Russian commodity exports already affecting key areas of Western trade with Russia, the new investment restrictions may not have much impact on the economy. ‘West.
- Enact a total financial embargo. This is at the end of the sanctions spectrum and would ban all transactions, exports and imports with Russia. It would be the last major step for the West to pull Russia out of the global economy and place the country under what are commonly referred to as “Iran-style sanctions,” hampering just about all business. A few weeks ago, this would have been almost unthinkable, but given the almost frantic escalation of sanctions, it seems the West is approaching it faster than anyone could anticipate if Putin continues his ultraviolent extraterritorial ambitions. .
- Hit penalties fraudsters. The application of all these measures is essential to the maintenance of a sanctions regime. The United States, the United Kingdom and the European Union must assume that the Russians will try to evade sanctions, including by setting up shell companies to conceal sanctioned ownership. This will be an ongoing challenge, even with secondary sanctions in place for all Russians sanctioned through the Countering American Adversaries through Sanctions Act of 2017, and the Biden administration will need to maintain intensive and timely consultations. real with its allies and others on compliance and common rules. approaches, possibly by creating a permanent consultation group on sanctions. The US Senate must also confirm the administration’s nominee for State Department sanctions coordinator, James O’Brien, who is inexplicably still in the confirmation process despite the urgency of the matter. O’Brien is a seasoned political operator, the kind of skilled and respected figure in Washington who knows how to get things done in the world of foreign policy while being unknown to the general public.
If Putin decides to seriously consider a diplomatic way out of his war, which he has yet to do, sanctions relief should be the carrot. Under Secretary of State Victoria Nuland recently set out the conditions for the lifting of sanctions: a Russian withdrawal from Ukraine and aid for the reconstruction effort. The issue of lifting or suspending sanctions would be complex, especially since Putin’s promises to adhere to any agreement with Ukraine are simply not to be trusted.
Putin regretted the collapse of the Soviet Union. But he might find that Russians, long accustomed to the fruits of globalization, won’t appreciate having him back.
Brian O.‘Toole is a Nonresident Senior Fellow at the Atlantic Council‘s Center for Geoeconomics. He is a former senior adviser to the director of the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury. Follow him on Twitter @brianoftoole.
Daniel Fried is a distinguished member of the Weiser family at the Atlantic Council. He was Sanctions Policy Coordinator during the Obama administration, Assistant Secretary of State for Europe and Eurasia during the Bush administration, and Senior Director of the National Security Council for the Clinton and Bush administrations. He was also ambassador to Poland during the Clinton administration. Follow him on Twitter @AmbDanFried.