WASHINGTON — The Biden administration’s strategy for economic sanctions against Russia should it invade Ukraine could be summed up as “no pain, no gain.”
With a military confrontation off the table, the United States is mainly relying on economic weapons to deter Russian President Vladimir Putin. President Biden last week said Putin has “never seen sanctions like the ones I promised will be imposed” if he launches the invasion. But to be truly effective given Russia’s efforts to insulate itself from tough new sanctions, the pain will have to be felt in the United States and Europe as well, experts said.
“It is not a sanction-proof economy, but it is a sanction-resistant economy,” Daniel Drezner, an international politics professor at the Fletcher School at Tufts University, said of the Russian economy. “The sanctions that would legitimately hurt the Russian economy would also legitimately hurt the global economy.”
The United States and its allies realize they need to significantly ratchet up the penalties compared to those put in place after Putin ordered the annexation of Ukraine’s Crimean Peninsula in 2014 if they are to have a deterrent effect. Officials have said they’re working with European allies on “high-impact” sanctions that would impose “severe economic costs” on Russia for a Ukraine invasion.
One target would be Russia’s financial system. Those measures could include freezing US assets of large Russian banks, blocking Russia’s ability to use the US dollar, the dominant currency for international trade, and cutting off the nation’s access to a specialized messaging service called SWIFT that is vital to global financial transactions. Putin and his inner circle also could be hit with personal sanctions, such as freezing their assets and travel bans.
Another set of sanctions might focus on Russia’s energy industry, such as expanding restrictions on foreign investment in its oil sector and stopping approval of the Nord Stream 2 pipeline to deliver Russian natural gas to Germany.
The Biden administration also is threatening to use US export controls to choke off Russia’s access to semiconductors — and potentially products containing them such as smartphones — denying the country technology crucial to developing advanced aerospace, defense, and computing systems.
But, all those actions risk economic ramifications on the United States and its allies.
“It’s going to be disruptive. We’re going to take a hit,” said Cynthia Roberts, a political science professor at Hunter College and senior research scholar at Columbia University’s Saltzman Institute of War and Peace Studies. “There’s a lot that won’t necessarily directly impact the American consumer right away because we’re not dependent on the Russians for energy resources like the Europeans are, but we won’t be immune from the secondary effects reverberating back upon ourselves.”
In the short term, global energy prices could jump, adding to already high US inflation and exacerbating turbulence in financial markets already roiled by looming interest rate hikes from the Federal Reserve that could risk a recession. And the International Monetary Fund warned this week that the geopolitical tensions in Eastern Europe are a downside risk to global economic growth.
In the longer term, sanctions could accelerate efforts by Russia and China to develop alternatives to the dollar for global financial transactions. That could weaken the dollar’s value, which would push up US interest rates and increase the cost of foreign goods for Americans.
Adding to the potential economic spillover is the risk of Russian retaliation for sanctions. Putin could withhold shipments of natural gas and oil to Europe in the dead of winter; Biden administration officials this week said they are working to find alternate suppliers. Russia also could launch cyberattacks, such as the ransomware strikes last year that forced the shutdown of the Colonial pipeline, a major supplier of gasoline to the Southeastern United States, and JBS meatpacking factories. Russia-based hackers were responsible for both, according to US officials.
But Russia would be hurt the most by economic sanctions, and the White House hopes that helps deter a Ukraine invasion.
“The serious imposition of sanctions relative to dollar transactions and other things are . . . going to have a negative impact on the United States, as well as a negative impact on the economies of Europe as well, and a devastating impact on Russia,” Biden said last week. “And so, I got to make sure everybody is on the same page as we move along.”
That consensus among the United States and its allies on a full package of sanctions could be difficult to reach.
Europe faces a much greater economic risk because of its closer ties to Russia. It is the fifth-largest trading partner for the European Union, but ranks only 26th with the United States. After the United States put more targeted sanctions on Russia in response to the annexation of Crimea, some European countries took significant trade hits, according to a 2017 study by the Kiel Institute for the World Economy, a German research institute.
Russia was hurt the most by those sanctions, losing about $36 billion in trade. But Germany lost $23 billion in trade, France $4.7 billion, and Poland $4.4 billion. The sanctions actually boosted US trade by $300 million, the study found.
Senator Jeanne Shaheen, a Democrat from New Hampshire and one of the key figures in Congress in crafting sanctions legislation, said they would strengthen Biden’s hand in dealing with Russia.
“The more we coordinate with our allies, the more effective we’re going to be in those sanctions and I think that’s why the administration is working so hard to try and get everyone on board and see what we can do in a unified way,” said Shaheen, who co-led a bipartisan congressional delegation to Ukraine last week that included meetings with President Volodymyr Zelenskyy and other top officials.
“There are some economic effects depending on what sanctions are invoked, both in the United States and in Europe, and so we’ve got to do the analysis and see how we can offset any kind of negative impact and what’s going to be acceptable,” she said.
European leaders have been talking tough on Russian sanctions as well and a senior Biden administration official said this week that there was a strong “convergence” on them between the United States and European Union.
European officials are weighing the spillover cost of sanctions on their economy compared to the costs “of an invasion in the heart of Europe, and the uncertainties that would cause, and the impact that would have to their business environment and their economic conditions more broadly,” the official, who spoke on the condition of anonymity to discuss internal strategy, told reporters in a conference call Tuesday.
The sanctions levied by the United States and its allies after the Crimea annexation built incrementally — in part because the military action came as a surprise — and focused on individuals and companies rather than the Russian economy as a whole. For example, they decided not to broadly sanction the state-controlled energy giant Gazprom, opting instead to target specific company projects, such as those in the Arctic, and some of its subsidiaries.
Compared to that set of sanctions, the United States has a “massive amount of room” to ramp up the financial penalties Russia would face, particularly if its oil industry is targeted, said Edward Fishman, an adjunct fellow at the Center for a New American Security, a Washington think tank, and a former State Department official during the Obama administration.
Those past “measured, modest” sanctions were designed to avoid spillover effects on the US and European economies. But “there’s no such thing as cost-free, significant sanctions against Russia,” he said.
“There’s no question that the United States unilaterally, at the stroke of a pen, can impose devastating economic effects on Russia,” Fishman said. “The question is, can they change Putin’s calculus?”