What the Hell is Going On with Russia Sanctions
We've got former USTreasury official Marshall Billingslea with the scoop
What’s happening in Ukraine is horrifying, a throwback to the days of World War II. In addition to numerous civilian casualties yesterday, Russia also targeted Babyn Yar, a Holocaust memorial and the site of the Nazi massacre of tens of thousands of Jews. We’ve got two podcasts for you this week — our first is on Russia sanctions. On Thursday, we’ll share another on the military situation (we’ve got Fred Kagan on tap).
In response to Russia’s brazen attack on Ukraine, the United States and Europe have come together in almost unprecedented fashion to sanction Vladimir Putin, his oligarch cronies, his government henchmen, Russian exports, Russian banks and the Russian Nordstream II pipeline we’ve been railing against. (The Russian-owned Swiss company that has been building the pipeline filed for bankruptcy yesterday.)
But did you notice something missing in that list? What earns Russia 60 percent of its foreign exchange? Yep, energy. Russian oil and gas exports and payments for them were exempted from the sanctions. Two reasons: One, because Joe Biden is looking at skyrocketing inflation and gas prices at home (gee, maybe the assault on production in the United States and those massive repeat covid “relief” bills weren’t the best idea…?); and two, because the Europeans have made themselves dependent on Russian oil and gas. The EU now gets fully 40 percent of its energy from Putin, a choice European leaders made as they ratcheted back their own energy production. (Remember, it doesn’t contribute to global warming if its done in Russia!)
As a result, the sanctions on Russia aren’t as effective — as “crippling” — as they might be. You know, it’s one thing to be taken hostage by a ruthless dictator, and wholly another to offer yourself up to him as Europe has done. Perhaps it’s time that we and our European friends make better choices about our trading partners? Just a thought.
HIGHLIGHTS
Marshall: … when you allow the oil trade to go forward, what you're doing is you're allowing the thing that keeps the Russian Government funded and the Central Bank flush with hard currency to continue unimpeded. So Russia's been running a big hefty surplus trade surplus, right? They make more money exporting than they spend money importing. And they've got a huge war chest built up of $640, maybe $680 billion that's sitting there that they're going to use to fight back against the inflation and the devaluing of the ruble that's now happening… And it's this that's funding the war machine. So really, if the goal is to cause a financial collapse, which it should be in order to get Putin to stop, then by allowing the oil sales to continue you're simply prolonging this pain and misery and process.
Marshall: They did put personal sanctions on Vladimir Putin. And on the one hand, that's pretty symbolic because the guy has been hiding his money under oligarchs around the world for decades. And I'll tell you, if we could have found his money in the Trump administration, we would've gone after it. He's just very, very... he's got good accountants and lawyers. But the symbolism of the sanction on Putin is significant because now he joins a very short list of other dictators of the likes of which are Nicolas Maduro in Venezuela and Assad in Syria. And then Mugabe from Zimbabwe days. So it's a pretty distinguished list of despots that Putin has now been added to. So that's good.
Marshall: In addition, they broadened the sanctions that we had already in place on how the Russian government, and now certain state-owned enterprises in Russia, (which is basically the Russian economy)…they can't access the US markets to raise money through bond sales. You no longer can not only not buy Russian debt, Russian bonds, you can't even trade in the secondary market with those bonds. So that's good because that is again, over time, going to cause some real problems for Russian companies raising capital to expand their business operations. Those are on the good side.
Marshall: And to just finish on Central Bank, I guess they should have sanctioned the whole thing. I mean, they should have left no ambiguity, no dealings, whatsoever with the Central Bank, full stop, period, that includes the oil and gas trade, but they didn't. Same on SWIFT. They should have de-SWIFTed, and I'm not talking about sanctions on SWIFT, because that would be catastrophic for the financial system, but basically going to SWIFT and saying, "You got to un-bank, you got to un-enroll all of these Russian banks." And what they did was they unenrolled a few of them.
Marshall: We also should be doing, Marc, as you talk about, the things we did very effectively against Iran, they should be implementing sectoral sanctions. In other words, broad sanctions against entire categories of commodity or business activity. You can impose sectoral sanctions on all Russian financial institutions. And they should. As to date, they've cherry picked. And while they have sanctioned some of the biggest banks, whether full blocking or not, when you look at it, what you see is that they've sanctioned five banks, okay? Four of those five are state owned. And in fact, the Russian government dominates the banking sector in Russia through state owned enterprises. You have Gazprombank, right? Owned by Gazprom, which is owned by the Russian government.
Marshall: The Russian government owns and controls all of these banks already. And when you only single out and sanction one particular bank, guess what? The Russian government, overnight, can move the assets... it becomes a shell game. They just restructure and reorganize to get around your sanctions. We saw them do that in the case of Venezuela sanctions, for instance … And the Biden administration is falling into the trap of being forced to play whack-a-mole, when they could simply just go after the entire sector.
Marshall: But again, back to that point on how the Central Bank raises hard currency to, now in this case, fight off the effect on the ruble, which is what will get the Russian people out into the streets, is when your life savings evaporates, because the ruble just took a nosedive. And outside of the oil and gas trade, there are a number of other sectors that should be sanctioned as well. Like what we did, for instance, to Iran by prohibiting trade in copper, as an example. Or prohibiting trade in automobiles. In the case of Russia, you would want to prohibit the minerals and metals trade. Now that'll bite us a little bit because our aircraft industry, for instance, needs titanium. And Russia's one of the big suppliers. But it's not the only supplier. So prices will go up if you do that. But you would have a real effect on Russia's balance of trade, which means you would really speed up the pace at which inflation spikes and the ruble drops. Which is what you've got to do here. If you're going to get the Russian people out in the street and if you're going to get the Russian leadership to potentially turn on Putin, or at least say to him flat, "You're taking us into the abyss here," you have to do these kinds of actions.
Marshall: …secondary sanctions are, they're essential if this is going to work because you have to be able to go, you don't even go to the government in Beijing, you go to the individual bank and you say to them, as I did in the case, in the context of both Iran and Venezuela, "Look, you're free to continue to transact with this sanctioned entity over here, whether it's a bank or it's a company or a commodity, you're free to do it, but you should make an informed business decision. Because if you trade with them, you will not trade with the United States. We will put sanctions on you and you will be cut out of the US financial system." And that is an incredibly powerful tool for dissuasion that the Treasury can use when it's allowed to.
Marshall: Unfortunately, I just don't see the leadership being exhibited here. And as a result, China is going to step in and blunt some of the effects, they don't have an unlimited capacity to, for instance, buy up all the Russian debt that nobody can trade in now, but they do have the capacity to blunt some of what we're doing. And they certainly will help. And we've not put the loaded gun on the table as a deterrent.
Marshall: … every … agreement that has ever had a limitation on the Russians, they violated. They violated the Helsinki Final Act when they attack Georgia, and are occupying the Republic of Georgia, they did it again in Moldova. They've done it again now in Crimea and they're doing it again with the rest of Ukraine. The UN Charter, they violated. The Vienna Documents, they violated. They violated the Open Skies Treaty by prohibiting over flight of their military exercises. They violated the INF Treaty, the seat, the conventional armed forces. It's a laundry list. The nuclear test ban, a promise they made, they're doing nuclear testing, clandestine testing. The Russians are habitual, congenital liars when it comes to this stuff and you should never pin the security of your country on a deal with Vladimir Putin.
Find the whole transcript of our conversation here.
SHOWNOTES
“Biden’s Russia sanctions may let Moscow profit from oil, gas,” (AP News, 2/27/22)
“In the world’s first crypto war, uncertainty about who will benefit,” (WaPo, 2/25/22)
“Could Putin strike America with a nuclear weapon?” (Jewish News Syndicate, 2/25/22)
“A Call to Buck Russian Banks,” by Michael Reneau (The Dispatch, 2/25/22)
“Biden: 'I am convinced' Putin has decided to invade Ukraine,” (Politico, 2/18/22)
“US Lawmakers Push Sanctions to Cripple Russia Amid Ukraine Crisis,” (CBN News, 2/7/22)
“Iran, China, Russia Cement Anti-US Axis Against Democracy,” by John Rossomando (The Epoch Times, 2/4/22, updated 2/5/22)
“Biden’s Sanctions Plan Targets Russian Banks, Companies and Imports if Ukraine Is Attacked,” (WSJ, updated 1/28/22)
“U.S. and Europe take aim at Russian central bank reserves, threatening blow to economy,” (The Washington Post, 2/26/22)
“What Is Swift and Why Is It Being Used to Sanction Russia?” (WSJ, 2/26/22)
“US sanctions on Russian oligarchs miss richest of rich,” (AP News, 2/26/22)
“China State Banks Restrict Financing for Russian Commodities,” (Bloomberg, 2/25/22, updated 2/27/22)
“Russian Stocks’ 33% Crash Is Fifth-Worst in Market History,” (Bloomberg, 2/24/22)
“Explainer: How Western sanctions will target Russia,” (Reuters, 2/22/22)
“Statement by Press Secretary Jen Psaki on Japan’s Announcement to Hold Russia Accountable,” (The White House, 2/27/22)
“Joint Statement on Further Restrictive Economic Measures,” (The White House, 2/26/22)
“Background Press Call by a Senior Administration Official on Imposing Additional Severe Costs on Russia,” (The White House, 2/26/22)
“Statement of the President on the NATO Summit and Call with President Zelenskyy,” (The White House, 2/25/22)
“Remarks by President Biden on Russia’s Unprovoked and Unjustified Attack on Ukraine,” (The White House, 2/24/22)
“FACT SHEET: Joined by Allies and Partners, the United States Imposes Devastating Costs on Russia,” (The White House, 2/24/22)
“Statement by Press Secretary Jen Psaki on President Biden’s Meeting with G7 Leaders,” (The White House, 2/24/22)
“Statement by President Joe Biden on Phone Call with President Volodymyr Zelenskyy of Ukraine,” (The White House, 2/24/22)
“Statement by President Biden on Nord Stream 2,” (The White House, 2/23/22)
“Fact Sheet: United States Imposes First Tranche of Swift and Severe Costs on Russia,” (The White House, 2/22/22)
“Seize the Oligarchs’ Wealth,” by Faith Hillis (The Atlantic, 2/26/22)
“Putin’s Ukraine Slaughterhouse,” by The Editorial Board (Wall Street Journal, 2/25/22)
Oil, Gas and Commodities Aren’t Being Weaponized — for Now,” by Javier Blas (Bloomberg, 2/23/22)
“The Russia Sanctions That Could Actually Stop Putin,” by Edward Fishman and Chris Miller (Politico, 1/21/22)