A Blog by Jonathan Low


Apr 1, 2022

How Economic Sanctions On Russia Were Designed To Be the Most Severe Ever

By denying Russia access to the $630 billion in foreign currency reserves and gold that Putin had painstakingly assembled, in addition to prohibiting any nation in the world from doing business with Russia's Central Bank, US, EU, UK, Japanese and Canadian officials effectively eliminated that country's ability to function within the global economy on which, as a relatively small player financially, Russia is dependent. 

These actions are historically unprecedented. It is reported that Putin's economic advisors have warned him that Russia has three months before its economy collapses - and one month has already passed. The point was to send a message - not just to Russia but to China, India, Iran, Saudi Arabia, North Korea and any other nation that thinks of itself as above the law - that in this environment, the financial imperative is to adhere to rules of civilized behavior or face the consequences. JL

Benjamin Wallace-Wells reports in the New Yorker, image Pavel Golovkin, AP:

The surprises of the first month of the war have been the strength of the Ukrainian resistance and the severity of the Western sanctions to prevent Russia from accessing its currency reserves. Russia assembled an immense stockpile of foreign currency and gold: $630 billion, 13% of it in renminbi, 22% in gold, and the balance in the major currencies of the economic West. (And) in the global economy dollar’s share was between 60 and 80%. (Then) the US, EU. UK and Canada jointly prohibited banks, companies, and individuals from doing business with the Russian Central Bank. By inhibiting (that) Bank’s ability to navigate the economic crisis, sanctions will change Putin’s calculations. “We’ve made him stare into an economic abyss."

Vladimir Putin’s Russia, ancient in many ways, has been notably modern in the centralized management of money. Elvira Nabiullina, the longtime governor of the Russian Central Bank was Europe’s 2017 “Central Banker of the Year,” according to the Banker magazine. Russia’s treasury recoups about twenty per cent of its G.D.P. as tax revenue, a figure far exceeding most other petrostates and on par with the United States. Moscow enjoys both fiscal and trade surpluses, and its debt load is low. Every attempt to make sense of Putin’s ambitions in Ukraine has seemed obscured in an incense haze of past tsars, imperial designs, and Russian military history. But, to practitioners of economic statecraft, the situation is as clear as looking in a mirror. “It’s a pretty solid, talented group of technocrats there,” one senior Biden Administration official told me, of Russia’s central bankers. In any economic crisis, “we expected that they would respond smartly.”

What modern Russian economists have done is assemble an immense stockpile of foreign currency and gold: six hundred and thirty billion dollars, thirteen per cent of it in renminbi, twenty-two per cent of it in gold, and much of the balance in the major currencies of the economic West—euros, dollars, yen, pounds. The Russian currency stockpile eventually grew so vast that some Western financial analysts described it as “Fortress Russia”—if Russia were to be isolated in the event of a war, and the value of the ruble were to degrade, the foreign currencies could be used to stabilize the Russian economy and prevent a crisis. In the medium term, at least, these reserves seemed to provide an economic buffer for Putin. Even if Europe were to cut off all imports of Russian energy, depriving Moscow of its main source of revenue, one analyst at the Atlantic Council told the Times, the reserves would allow Moscow to fill the gap for “several years.”


The proficiency of the Russian bankers posed a particular challenge to their Western counterparts. Authoritarian regimes are supposed to have the advantage of long-term planning, since their policies do not need to change with elections. If Russia, like China, was managing its economy as expertly as we could, then where was the advantage? When the G-7 gathered in Cornwall, in June, 2021, for its first in-person summit since the pandemic, President Biden tried to summon a sense of renewed post-Trump urgency, of liberal democracies uniting against authoritarianism, but there were still more basic doubts about the efficacy of the Western system. “We’ve been reflecting a lot on this discussion in the G-7, on how strong are democracies,” a senior E.U. official told me. “Sometimes, the feeling is that democracies are having a bit more challenges—sometimes, they’re cumbersome, and slower.”

Among the American delegation in the room was a figure who surely flew below the radar of Russian intelligence: a forty-six-year-old North Carolinian named Daleep Singh, who had recently been appointed as Biden’s deputy national-security adviser for international economics. Singh, who spent part of his early career at Goldman Sachs, had made his name as a market technician, having joined the markets room in the Obama Treasury Department, and then spent part of the Trump years as the vice-president for markets at the New York Fed. Singh had watched, with some skepticism, the growing esteem in which Russia was held on Wall Street, which hinged on the idea of its economic foresight. “I grew up in financial markets. I often hear from people in financial markets,” Singh told me last week. “And one of the myths I felt like they held—and it was kind of perpetrated by the Russian government—was that it had built an economic fortress around its economy, and that it was due to years and years of genius planning by Putin himself.”

The two great surprises of the first month of the war have been the strength of the Ukrainian resistance and the severity of the Western sanctions, which seem likely to prevent Russia from accessing its currency reserves. The effects of economic sanctions are just now beginning to be seen, but Sergei Guriev, a professor of economics at Sciences Po, in Paris, told me that he foresaw “Soviet stagnation, Soviet decline.” (There was a slight Soviet ambience this week, as viral videos showed Russians fighting over sugar in grocery stores, and a Russian government minister appeared on television to urge the public not to panic-buy essentials such as buckwheat.) If Russia’s misestimation of the Ukrainians was psychological, then its misestimation of Western sanctions was political and technical. The sanctions have a complex architecture—based on rules, economic levers, and the responses of Western companies and investors—but they also have an architect, a former Obama official told me. “The architect of these sanctions was Daleep Singh.”

Singh’s generation of liberals—those who graduated college around the time of 9/11—have returned to power from a very tense, four-year hiatus with two entangled challenges: to embody a return to sober order, after the mania of Donald Trump, and to pursue a bolder and more expansive response to the pressures of inequality and authoritarianism, problems that have come to seem far more acute since the Obama years. Singh himself has a slight throwback quality, to the manner of late-twentieth-century American liberalism—the casual language and formal suits, the Sorkinesque quickness, the tendency to talk about human mechanisms with the simplicity of economic graphs. When it came to sanctions, he had a characteristic mission: to expand on an Obama-era project. Run that scene again, but different this time.

The precedent had taken place in 2014, in the debate about how to sanction Russia after its invasion of Crimea. Beyond freezing the assets of certain oligarchs close to Putin, the Obama Administration designed its sanctions to keep a few large and influential Russian corporations (mostly banks and energy companies) from accessing Western debt. The choice was designed to exploit a specific vulnerability, one that Singh helped identify: in 2014, many of the most important Russian entities were in the midst of a debt binge, and were overexposed. In terms of potential severity, Edward Fishman, a leading Obama Administration sanctions official, told me that the 2014 sanctions had been a “two out of ten.” Still, combined with a bigger bust in the oil market, they caused some trouble. The Russian economy, which had been growing for several years, contracted in 2015. The ruble crashed, and inflation surpassed twelve per cent in the year after the invasion. And yet Putin’s power was largely undisturbed. If anything, the sanctions’ larger effect was to convince the Kremlin that it needed to build its stockpile. “We saw Russia in economic and fiscal vulnerability,” the senior Biden Administration official said. “We saw Russia respond with the central-bank tool, really kind of building up their reserves with the idea that if the U.S. comes after us again, we’ll need an even stronger central-bank backstop.”

Singh started thinking seriously about potential sanctions on Russia in early November, when U.S. intelligence assessments began to warn of a likely invasion of Ukraine. “We put our heads together and figured out where do we have strengths and where do our strengths intersect with Russian vulnerability—where is there an asymmetry,” Singh told me. One area was Russia’s access to Western technologies, such as microchips and software. Another potential vulnerability was the dependence of Russian banks on capital from overseas. Each of these moves exploited certain American advantages, but they did nothing to undermine the reserves Putin had built to make the Russian economy “sanction-proof.” So Singh turned to another point of asymmetry: the currency trade. “It’s true that the global economy has gotten increasingly multipolar over time—you could see that just as a percentage of world G.D.P.,” Singh said. But, when it came to the currency in which countries bought and sold things, saved money, and borrowed money, the dollar’s share was between sixty and eighty per cent. In the world of global finance, Singh said, “the dollar is still the operating system.”

As a technical matter, sanctioning a central bank was within the scope of American expertise: the U.S. developed central-bank sanctions as a centerpiece of its economic war with Iran, and there had been some preliminary discussions of sanctioning the Russian Central Bank in 2014. The real obstacle was diplomatic. The more countries that coöperated, the more comprehensive the sanction—if Moscow could simply sell its assets to German, Swiss, or Japanese banks, a U.S. embargo on Putin’s foreign-exchange fortress would lose much of its impact. Historically, European leaders, more dependent on Russian energy and more entangled with the Russian economy, had little appetite for sanctioning Moscow. “It was important to float this at the right moment,” a senior Biden Administration official told me. “We almost had to wait until there was an emotional valence.”

In the meantime, coöperation with overseas allies had begun. Singh spoke each week with his G-7 counterparts, and his conversations with Bjoern Seibert, the head of the cabinet for European Commission President Ursula von der Leyen, eventually increased to several times each day. A team from the U.S., which included officials from the Department of Commerce, spent a week in Brussels, the senior E.U. official said, to work through the details on the control of high-tech exports. U.S. intelligence had also made the strategic decision to speed up the process through which it shared intelligence with nato so that the Western allies were “operating from a similar set of facts,” a U.S. official told The New Yorker, in February. In Europe, this caught attention. “We’ve worked with the U.S. on isis and other things, and we’ve seen intelligence-sharing,” the senior E.U. official told me. “But never to this extent.”

If U.S. intelligence seemed especially sure that Russia would invade Ukraine, Moscow’s businessmen seemed less convinced. In prior crises, the senior Biden Administration official told me, Russian individuals and companies pulled back assets, investing in gold or foreign currency, bracing. “That was not something that happened in the immediate run-up to this,” the Administration official said. “Big state banks, big oligarchs—we weren’t seeing a lot of pullback. Frankly, I think there was this kind of disbelief, including by much of the Moscow business community, that this could actually come to materialize.”

On February 24th, the Russian invasion of Ukraine began—columns moving ominously across the border, rockets firing into central Kharkiv, a phalanx of helicopters and paratroopers occupying Hostomel Airport just northwest of the capital, only to be repelled. Within hours, Washington and its allies announced the package of sanctions that they had long prepared. Four large Russian banks were made subject to “blocking sanctions,” which froze any assets that touched the U.S. financial system, and several others, including the largest, Sberbank, were made subject to a somewhat less severe suite of sanctions. Export controls were imposed, by the U.S. and many other Western countries, to degrade the high-tech parts of the Russian economy, and a day later came a round of personal sanctions on Putin and several of his senior foreign-policy aides. But the oil and gas sector, which supplies forty per cent of the Russian budget, was left largely untouched, and there was no effort to move against the Russian Central Bank.


A. Wess Mitchell, who was the Assistant Secretary of State for European and Eurasian Affairs in the Trump Administration, told me, “A lot of people asked ‘Is that it?’ when they heard the President’s February 24th press conference,” Mitchell said. “After all the Administration’s warnings of catastrophic sanctions in the lead-up to the war, the opening tranche of sanctions was astonishingly weak. The markets moved on the news of the sanctions, but they did not entirely collapse. Something like this had already been priced in.

War moves politics quickly. In Europe and the U.S., the press had picked up on a demand that was appearing in protests on both sides of the Atlantic, for Russian banks to be excised from the swift financial messaging system, which would make it harder for them to conduct transactions with the West. (The Italian and German governments, which had previously voiced reservations, quickly signalled that they were ready to consider such a step.) That was a technical measure, but the emotional intensity was rising. On the first night of the invasion, President Volodymyr Zelensky appeared on a video call with European leaders, during which he said, “This might be the last time you see me alive.” From Washington’s point of view, the change in perspective from Europe was immediate. The Biden Administration official told me, “Politics in Europe just did a one-eighty. There was this level of horror and outrage nightly on the news in Europe about Russia bombing a European city. And so the politics in Europe flipped from what I think of as standard European sanctions politics, where there’s sort of a nervousness about costs, to what I think is much more of an American politics on sanctions—like, you know, the S.O.B.s have it coming and we really need to stick it to them.”

The following day, nato held an impromptu virtual summit. Before formalities began, President Biden and European Commission President von der Leyen had a conference call on which they agreed to direct their teams to work on further sanctions. Seibert and Singh started talking “the moment Daleep was awake,” as the senior E.U. official put it to me. The political will seemed to exist for cutting off Russia’s access to swift. Singh and Seibert saw an opening for a less discussed—and more severe—action. “What if we just say that none of Russia’s counterparts can transact with them?” Singh said.

The Western sanction on the Russian Central Bank came together in a matter of hours. On February 26th, the United States, the European Union, the United Kingdom, and Canada jointly prohibited any banks, companies, and individuals from doing business with the Russian Central Bank, and threatened anyone who violated the order with further sanctions. To those paying close attention, the formal announcement of the sanctions carried a hint of how quickly the effort had been organized: Japan, a member of the G-7, was not among the initial signatories, though it joined the pact later that day. The issue, according to the senior Biden Administration official, was that Tokyo had “the disadvantage of this happening overnight.” European regulations often have the paperweight of Bibles, but the senior E.U. official pointed out to me, marvelling slightly, that this one fit on a single page. “Democracies, if they act together and they are determined, they can be very powerful,” he said. “To me, this was the core lesson of this.”

No entity as large as the Russian Central Bank, nor so important to the global economy, had been sanctioned in modern times. (Its foreign-exchange stockpile exceeds the G.D.P. of Iran.) “That’s just unheard-of stuff,” Nicholas Mulder, a historian of sanctions at Cornell, said. To try to isolate an economy of this scale, sophistication, and entanglements, Mulder said, raised the question of whether “the consequences of an action like this can be predicted or foreseen.” Ever since 9/11, the trend in sanctions had been toward pinpoint deployments to isolate a single terrorist financier, or oligarch—freeze assets, impound a yacht, have a son leave Eton in disgrace. They had come to operate almost as alternative means to criminal justice. But a maximal sanction like this was targeting much more fundamental operations. “It basically hits an economic structure that ties together the public and private sectors of Russia,” Mulder said. It operates a bit less like criminal justice and a bit more like an act of war.

It quickly became clear that Moscow had not anticipated anything like this. Guriev, the Russian economic expert at Sciences Po in Paris, who had himself been the rector of the New Economic School, in Moscow, and a board member of Sberbank before fleeing to the West, in 2013, told me, “The leaks, the rumors that we hear, suggest that the worst-case scenario that Russian policymakers expected was a switching off of swift. That would be a problem, but the actual sanctions went much, much farther.” That assessment was confirmed on March 23rd, when Sergei Lavrov, the Russian Foreign Minister, told a group of students and faculty at the Moscow State Institute of International Relations, “When they [froze] the central-bank reserves, nobody who was predicting what sanctions the West would pass could have pictured that. It’s just thievery.” Bloomberg reported that Nabiullina, the Russian Central Bank’s governor, offered her resignation to Putin, but was ultimately appointed to a third term. According to the same report, other central bank officials have felt a sense of “hopelessness,” given that the current situation leaves “little use for their market-oriented skills and experience.”

The U.S. government’s assessment, a senior Biden Administration official told me, is that the sanctions will plunge Russia into something between a deep recession and a depression. (Mitchell, the former Trump State official, praised the sanctions as “a lot tougher” than Biden’s initial effort.) “None of us take pride or joy from the hardship that will be imposed on the Russian people as a result of these sanctions,” Singh told me last week. “It’s sobering and it’s tragic.” According to a source involved, there had been little diplomatic discussion of the conditions under which the sanction would be lifted. The theory is that by inhibiting the Russian Central Bank’s ability to navigate the economic crisis, the sanctions will change Putin’s calculations. Of course, no one is sure if that will really work. In Iran, for example, the sanctions devastated the livelihoods of many Iranians but did not shake the regime, as the sanctions expert Esfandyar Batmanghelidj pointed out to me. Singh said, “We’ve made him stare into an economic abyss. But he could choose to pull back.”

The sanctions were a signal, in a conflict whose central actors are each in flux. Russia means to forge an authoritarian axis with China, in which illiberalism is no barrier to prosperity. Biden intends to revive the patterns of diplomacy and technocracy that had defined late twentieth-century liberalism, and had been thought to have lost their potency. The markets are where these two systems touch—the supply of buckwheat, the joint energy ventures, the price of the ruble—and within this arena the sanctions were a demonstration that Washington still had levers to pull. “You know, we can play chess, too,” Singh said. “It was important for us to show that the fortress could come crumbling down.”


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