Biden touts ‘first tranche’ of sanctions against Russia as toughest measures yet. How effective are they?

When the U.S. government rolled out sanctions on Russia this week, the White House promoted the measures as far tougher than any previously enacted.

But these penalties, announced in concert with other Western allies, including Canada, are relatively mild. They are narrowly targeted at Russian banks and bond issues that don’t have much foreign exposure, as well as a handful of powerful individuals.

President Joe Biden described the measures as a “first tranche” of sanctions, in response to Russian President Vladimir Putin recognizing the independence of two breakaway regions in eastern Ukraine and openly sending Russian troops there. The idea, Mr. Biden suggested, was to steadily ramp up the pressure the further Mr. Putin moved into Ukraine.

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So far, the West is simply firing a shot across Russia’s bow rather than giving it a full broadside.

“These measures are clearly not meant to cause significant harm to the Russian economy,” said Laura Solanko, an economist at Bank of Finland who specializes in the Russian financial system. “They are intended to send a clear message that the United States and the European Union can co-ordinate and act together and impose something.”

One U.S. move, for instance, blocks two Russian financial institutions that fund development and military projects from doing business with Americans and freezes their assets in the U.S. But Ms. Solanko said those banks, VEB and PSB, don’t do much foreign business in any case.

The Russian government also has a fairly low debt-to-GDP ratio of 18 per cent (Canada’s, for comparison, is 43 per cent) and most of its bonds are owned by Russian banks. This means that cutting the Kremlin out of U.S. and European sovereign debt markets, another part of the sanctions, won’t have much effect.

Moscow also has nearly US$200-billion in a sovereign wealth fund it could use to backstop its own budget or bail out companies subject to sanctions. And it has spent the past decade, since the first U.S. sanctions under the 2012 Magnitsky Act, decreasing its dependence on Western markets to cushion the blow from such moves.

Still, Ms. Solanko said, there is utility to these moves, in that they demonstrate unity among Western governments.

“The beauty of not taking more drastic measures right now is that the current measures could be agreed together with the allies,” she said. “Only time will tell what the best strategic choice would be.”

The U.S. is also levying individual sanctions on five powerful Russians and their families, including PSB chief executive officer Petr Fradkov and Aleksander Bortnikov, the head of the FSB, Russia’s spy agency. Britain is doing the same to three oligarchs, including Kontinental Hockey League chairman Gennadiy Timchenko.

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The EU revealed new sanctions Wednesday on Russian Defence Minister Sergei Shoigu; Anton Vaino, Mr. Putin’s chief of staff; and several other powerful Russians, including from the media world.

German Chancellor Olaf Scholz is stopping the opening of the new Nord Stream 2 gas pipeline, an US$11-billion project meant to bring Russian natural gas to Germany. Mr. Biden on Wednesday added sanctions against the company running the pipeline and its executives. The moves are meant to curb growth in Russia’s crucial oil and gas industry.

None of the Western sanctions included cutting Russia out of the SWIFT system for international banking transactions, a frequently discussed move, or personal sanctions on Mr. Putin.

Igor Logvinenko, an expert in Russian finance, said more severe sanctions could include targeting Sberbank, Russia’s main retail bank, which could cause a run on deposits, or curbing Western business transactions in Russia.

California’s teachers’ pension fund, for instance, holds shares in Gazprom, the enormous natural gas company majority-owned by the Russian government. British Petroleum operates a joint venture with Rosneft, the Kremlin-owned oil company.

“To me, the most consequential sanctions would be changes in some kind of policy toward Western companies that do business with the Russian government,” said Prof. Logvinenko, author of the book Global Finance, Local Control: Corruption and Wealth in Contemporary Russia, who teaches world affairs at Occidental College in Los Angeles. “Should we have a conversation about how acceptable that is, given the fact that Russia is effectively occupying part of a sovereign country?”

Held by pro-Russian separatists

Claimed by separatists, held by Ukraine

Annexed by Russia in 2014

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MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE:

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Held by pro-Russian separatists

Claimed by separatists, held by Ukraine

Annexed by Russia in 2014

BELARUS

RUSSIA

POLAND

Kyiv

Luhansk

UKRAINE

Donetsk

MOLDOVA

ROMANIA

Crimea

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MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE:

TILEZEN; OPENSTREETMAP CONTRIBUTORS

Claimed by separatists,

held by Ukraine

Held by pro-Russian

separatists

Annexed by Russia in 2014

BELARUS

RUSSIA

POLAND

Kyiv

Luhansk

UKRAINE

Donetsk

MOLDOVA

ROMANIA

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Black Sea

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MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE: TILEZEN; OPENSTREETMAP CONTRIBUTORS; REUTERS

Western leaders are already facing pressure to go much further.

Nebraska Republican Senator Ben Sasse described the moves this week as “too little, too late.”

“These sanctions should have happened before Putin further invaded Ukraine – not after,” he said in a statement. “We shouldn’t fool ourselves into thinking that today’s incremental sanctions will deter Putin.”

In Britain, both the opposition Labour Party and backbenchers in Prime Minister Boris Johnson’s Conservative caucus called on the government to get tougher before Mr. Putin presses further, rather than waiting to see what he would do.

“If we do not respond with a full set of sanctions now, Putin will once again take away the message that the benefits of aggression outweigh the costs,” Labour Leader Keir Starmer said.

Russian markets, meanwhile, rallied, with the ruble gaining in value after the sanctions turned out to be less severe than investors had anticipated.

Prof. Logvinenko said that imposing tougher sanctions would come with costs for the West, particularly Germany, France and other European countries that do significant amounts of trade with Russia and rely on the country for natural gas. There is also the possibility that Russia could respond to harsher measures by escalating its cyberattacks.

“In order for sanctions to be effective, we have to be willing to feel a bit of the pain, and our willingness to feel the pain is a bit of a question,” he said. “I think there’s reluctance in the West to do the more severe sanctions: in Europe for economic reasons, and in the U.S. and Britain, maybe, for fear of potential retaliation.”

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