Amy Mackinnon and Robbie Gramer
At a congressional hearing on Tuesday, the chairperson of the Senate Foreign Relations Committee fired a shot across the bow at Russia as it amassed forces near Ukraine’s borders: Invade Ukraine, and we’ll destroy your economy.
“I want to be crystal clear to those listening to this hearing in Moscow, Kyiv, and other capitals around the world: A Russian invasion will trigger devastating economic sanctions, the likes of which we have never seen before,” Sen. Bob Menendez said.
The warning reflected growing alarm in Washington that Russia was staging its forces for a second invasion of Ukraine—one that could be far bloodier and more drawn out than in 2014. But with U.S. President Joe Biden ruling out the possibility of a U.S. military deployment to Ukraine, it also underscored how sanctions have become the primary weapon of choice in Washington’s response to Russian aggression.
After Biden and his Russian counterpart, Vladimir Putin, spoke on Tuesday, U.S. National Security Advisor Jake Sullivan said the United States was willing to go further than it did in 2014. U.S. officials have said they’re considering a wide variety of options, including potentially kicking Russia off of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the bank messaging cooperative that underpins much of the global financial system.
Russian individuals and companies are already subject to a wide variety of sanctions over the 2014 invasion of Ukraine and annexation of Crimea as well as for election interference, cyberattacks, human rights abuses, the use of chemical weapons, and dealings with regimes in North Korea, Syria, and Venezuela. What more can the United States do, and would any of it actually work?
Just what options are on the table?
This is not Washington’s first rodeo with Russia sanctions. Although the Biden administration is keeping its cards close to its chest about specific steps, experts and former sanctions officials said potential targets include Russian banks, state-owned companies, the Russian Direct Investment Fund, and Kremlin-linked oligarchs. Other options are cutting the country off from SWIFT and expanding sanctions on the trade of Russian sovereign debt in the secondary market.
Brian O’Toole, a former U.S. Treasury Department official and expert on economic issues with the Atlantic Council, believes the United States and its European allies will target Russian banks that service Russia’s government elite, including Russian development bank VEB, as an early step before targeting larger commercial banks, such as Sberbank of Russia.
“Sberbank has some 50 percent of the consumer market in Russia, so [sanctions] would have a big impact on ordinary Russians,” O’Toole said. “Whereas if you go after VEB, which is essentially like a glorified piggy bank for the Kremlin … you essentially target the cronies, the power center around Putin first.” (VEB has been linked to Russian spy rings in the United States in the past.)
Target selection is a delicate process, made all the more difficult by Russia’s deep integration in the world economy. In the wake of Russia’s 2014 invasion of Ukraine, the United States rolled out limited sectoral sanctions that banned certain financial interactions with the Russian defense, finance, and energy sectors.
Given the dominance of the U.S. dollar and American markets, imposing full sanctions on those companies—essentially walling them off from the dollar and the U.S. financial system—would send Putin a powerful message.
“In essence, telling Putin that if you’re going to wage a war militarily, we’re going to wage a war economically,” said John Smith, former director of the U.S. Treasury Department’s Office of Foreign Assets Control.
Another potential option would be to sanction Russian oligarchs, who benefit from and help prop up the Putin system, in a bid to pile pressure on the Kremlin. “You want to peel off those supporters one by one,” Smith said, now a partner with law firm Morrison & Foerster. “You want to increasingly pressure a regime to change its behavior by picking off those people who support the regime.”
Sanctions are also not the only response being considered. During their call on Tuesday, Biden warned Putin that the United States would boost military aid to Ukraine in the event of an invasion and bolster the capabilities of NATO allies in Eastern Europe, something Putin has long railed against.
What impact would sanctions have on the Russian economy?
In short, it’s hard to say exactly how much pain further sanctions would cause the Russian economy. “If you want to get into a fight, ask economists to try and measure it,” said Daniel Fried, who helped craft the West’s response to Russian aggression toward Ukraine in 2014 as the U.S. State Department’s coordinator for sanctions policy.
In 2019, the International Monetary Fund estimated that sanctions had curbed Russian growth by 0.2 percentage points between 2014 and 2018. Maria Shagina, a sanctions expert and visiting fellow at the Finnish Institute of International Affairs, said sanctions were never intended to torpedo the Russian economy. Rather, it’s about “adding costs here and there and then potentially tipping the scale overall. This is how it works,” Shagina said.
The Russian government has sought to shield the economy from the shock of sanctions, developing an alternative to SWIFT, reducing dependence on the dollar, and building up its national wealth fund for a rainy day. In addition, the depreciation of the Russian ruble after the 2014 sanctions actually helped take some of the sting out: Moscow earns hard dollars by exporting energy but pays its domestic bills in a cheaper fashion.
But all this comes at a cost to growth. “In the medium and long term, it is very bad news for the Russian economy,” Fried said. “Their future looks narrow and darker the further you look ahead.”
What is the so-called nuclear option?
In 2019, then-Russian Prime Minister Dmitry Medvedev described cutting Russia off from SWIFT as tantamount to a “declaration of war.” But experts and former officials caution sanctions are not the silver bullet they are often made out to be. “Everybody falls prey to it because it’s such an easy talking point and it sounds so important and it sounds really tough,” O’Toole said.
The move would cause significant chaos in the short term, both within Russia and for international companies that do business there, as it would halt almost all international transactions. But other options for financial messaging exist, and since 2014, Russia has been developing its own, the System for Transfer of Financial Messages, which now accounts for some 20 percent of all domestic transfers.
Cutting Russia out of SWIFT may not by itself be a nuclear option, but spooked markets could turn it into one. “It will not be this technicality that will undermine the Russian economy, but it will be how the market will overreact,” Shagina said. “The Russian ruble will tumble, and a lot of investors will withdraw from the Russian economy.”
As happened with sanctions escalation in Iran, any move to cut Russia off from SWIFT would likely be used as a twist of the knife after other, more impactful measures have been enacted. “Cutting off banks, that’s what has the effect,” O’Toole said.
Are sanctions enough to deter Putin from invading Ukraine (again)?
Many Obama administration officials believed Western sanctions deterred Russia from plowing deeper into Ukraine and pushed Moscow to the negotiating table with Kyiv on de-escalation talks in Minsk, Belarus. But as the Kremlin has worked to sanction-proof the economy, it has likely factored in the threat of further penalties into any decisions on military action.
“I think it’s whether you think the people in the Kremlin are fully rational and there’s no emotional attachment to what’s happening in Ukraine,” Shagina said. “This fear of NATO expansion … somehow toppled all other rationalities here.”
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