Instead of an overt military response to Russia’s invasion of Ukraine, the West is attempting to weaponize its control over global financial systems to isolate Vladimir Putin’s regime.
On Thursday, the G7 countries coordinated a series of sanctions that are designed to hamper Russian oligarchs, politicians, major companies — but which stopped short of sanctioning Vladimir Putin personally, or grinding the country’s entire economy to a halt. President Biden announced that he was sanctioning four additional banks — including VTB and Sberbank, the country’s largest — as well as stopping Russian state companies from raising debt and targeting more individuals. This was an escalation in intensity from the first round of sanctions Tuesday, when the White House had targeted two Russian banks, several oligarchs, Russian legislators who approved the invasion of Ukraine, and — in a move led by Germany — the Nord Stream II pipeline project. The U.S. also banned institutions from buying Russia’s sovereign debt. In the U.K, Prime Minister Boris Johnson announced asset freezes on 100 news Russian institutions, and said he would seize Russian oligarchs’ assets there and ban the Russian airline Aeroflot.
“Putin is the aggressor. Putin chose this war. And now he and his country will bear the consequences,” Biden said Thursday.
But if there’s one thing his speech showed, it’s that the West has precious few good options. Russia has been preparing for economic isolation for years, stashing away hundreds of billions of dollars worth of cash and gold. Whatever punishment Biden and Europe come up with will have little immediate effect on Russia’s ability to execute Putin’s war. Such measures also have the potential to backfire. “Sanctions, in my view, have a very spotty track record,” Steven L. Hall, the former Moscow station chief for the CIA, told me. “The key thing is whether there are any sanctions that would keep Putin off the path he has chosen? I doubt it. I doubt any sanction will work.”
Conspicuous in their absence were sanctions against Putin himself. During his press conference, Biden avoided multiple questions about whether the Russian leader would be hit with financial penalties. So the man who conceived and ordered the Ukraine invasion is still free to interact with the U.S. financial system, while a few hundred oligarchs who are loyal to him are shut out? Biden later said that sanctions against Putin would be “on the table,” but it’s unclear at this point what he’s waiting for.
In any case, economic punishment alone will only go so far. Putin has stashed $630 billion in Russia’s reserves, giving him the ability to withstand economic isolation, perhaps for more than a year. And then there’s the matter of interdependence. As Matthew C. Klein writes in his newsletter The Overshoot, Europe has squandered its chance to cut itself off from Russia’s economy and is now even more reliant on Russian energy than it was during Russia’s 2014 annexation of Crimea. The surging price of oil, a direct result of the new war, actually strengthens Russia’s position. Remember, it’s winter. A country like Germany, one of Russia’s biggest energy customers, has no choice but to keep handing over money to the country they are trying to isolate just to keep their citizens from freezing and their cars from stalling.
Still on the table, beyond the sanctioning of Putin, are measures so extreme that they have the potential to backfire. At the most severe end of the spectrum is the U.S. Treasury’s blacklist, officially known as the Specially Designated Nationals List. It has been used to isolate Iran, North Korea, terrorist organizations, and individual Russian oligarchs and state-affiliated companies. If the Treasury added Russia to the list, Americans would be barred from buying Russian products, goods, and services, either with dollars or through transactions with banks that do business in the U.S.
The effects of such a move could be severe. It could tank the Russian economy and its stock market but also hurt everyday Russians — who, Biden has said, are not the target of U.S. sanctions. “The concern is the collateral consequences to average Russians, which Biden wanted to be very clear that they’re not the target,” said Adam M. Smith, a former senior adviser to the Obama administration’s Office of Foreign Asset Controls at the Treasury who helped craft sanctions against Russia after the 2014 annexation of Crimea.
It also might not work on a basic level. Europe has had a history of ignoring the SDN list: In 1996, when the U.S. isolated Iran, Cuba, and Libya, the European Union passed a law that undermined the SDN listings, giving member states and their businesses the ability to trade with them. “As a technical legal matter, Germany could, for example, still pay for purchases of natural gas from Russia in euros using non-U.S. financial institutions, and there wouldn’t be any breach of the U.S. sanctions regime there,” said David M. Stetson, a former senior lawyer at OFAC who later co-led Goldman Sachs’s office of sanctions compliance. The fact that Russia is much more intertwined with western Europe than it is with countries like Iran or North Korea makes enforcement that much more difficult.
The other “big red button” option for the West to push: kicking Russia off SWIFT, which is essentially a special, parallel internet for the global financial system — a way for banks and other institutions to send messages that move money around the globe. (As with the SDN list, Iran and North Korea have been excluded from SWIFT.) This could, theoretically, squeeze Russia even harder than being blacklisted. On Thursday, Biden said such a move was unnecessary but hinted that he would have done so if not for his allies. “The sanctions that we proposed on all their banks have equal consequence, maybe more consequence, than SWIFT,” Biden said. “It is always an option, but right now, that’s not the position the rest of Europe wishes to take.” In his speech before Parliament, Prime Minister Johnson said that “nothing is off the table” when it comes to kicking Russia off SWIFT but didn’t commit to it. The idea has support from Ukraine’s minister of foreign affairs:
“The consequences of a SWIFT cutoff would make it hard for them to transact anywhere because SWIFT is the beating heart of the global financial system,” Stetson said.
But would it work? China — which recently put out a statement with Russia to say their partnership has “no limit” — also has its own alternative to the information system, meaning that Putin would have access to a very wealthy and willing state partner. “The tech behind SWIFT is not nothing, but it’s also not brain surgery,” Smith said. “If there’s one thing the Russians have, it’s a huge amount of sophisticated IT talent.”
