H.AVING ALL But it denies military involvement with Russia, at least if Ukraine is attacked, the West’s main weapon is the economy. This week, the United States and Britain pledged to take action at a level never seen before. Bob Menendez, the “mother of all sanctions”, was the chairman Us The Senate Foreign Relations Committee described the package as being assembled by the Chamber. President Joe Biden says his Russian counterpart, Vladimir Putin, “has never seen sanctions like the one I promised.” In order for the sanctions to take effect, however, Western allies must show unity, and be willing to shoulder some of the economic pain themselves. History has shown that this can be their biggest challenge.
The Senate is now expected to approve its package any day. Some of the sanctions drafted before any attack could be enforced in response to the actions already taken by Russia, such as cyber-attacks. The administration’s sanctions target individuals and entities in or around Mr Putin’s inner circle, as well as relatives, who they sometimes use as property ownership proxies. The goal will be to eliminate targets from the global financial system and go after the money they have parked in the West.
Britain is working closely with the United States. On January 31, Foreign Secretary Liz Truss announced a new sanctions law. The goal is to expand the ranks of Putin’s friends who can be punished. Since Russia’s annexation of Crimea in 2014, Britain has ratified 180 Russians and 48 entities. Ms Truss promised that anyone who “provided strategic support” to Mr Putin’s regime could be given new punishments. Britain’s position is closely monitored because rich Russians have strong financial ties with the country. London is a major fundraiser for Oligarch and their companies.
The measures are expected to form part of a broader package of sanctions, focusing on money, energy and technology. The United States could target Russian state-owned banks, including a savings giant Sberbank. Mr Biden also wants to keep the option of excluding Russian banks open, which was opposed by some European countries. SwiftInterbank messaging systems are used for cross-border transfers.
In terms of energy, the talks in Washington are aimed at expanding sanctions, not just current production, but investment. One way is to limit the accumulation of capital by Russian oil-and-gas giants in New York and London. The United States has also threatened to block the opening of the Nord Stream 2, a pipeline that would send Russian gas to Europe.
Technology is arguably America’s most powerful lever. For example, it could block further exports of high-tech gear to the Commerce Department’s “entity list”. This would limit Russia’s access not only to the items used in its defense sector, but also to the components used in many phones and devices, leaving Russian consumers at a disadvantage as well as its arms manufacturers.
Iran was the last economy of any size to be hit with a wide-ranging embargo, which was targeted in 2018 with “maximum pressure” sanctions for its nuclear ambitions. Punishing Russia has become even more daunting because its economy is more internationally connected than that of the Islamic Republic. In order for the sanctions to take effect, they must suffer the consequences.
The most obvious would be the pushing force. Europe depends on Russia for one-third of its imported natural gas. Some major European lenders also have close ties with Russia. Society General in France and Unicred in Italy are the most open. The European Central Bank said it was the most exposed of the so-called 115 major euro-zone banks, overseeing the provision of details on how to navigate various sanctions situations.
These risks make some of America’s European allies uncomfortable. Germany gets more than half of its imported gas from Russia, and Nord Stream 2 has been reluctant to approve (although many think it will eventually agree to do so). Even Britain’s promise is uncertain. Campaigners say it has failed to use its leverage as a major financial center. The 2014-15 Crimea-related sanctions put slight restrictions on Russians raising capital in London.
The other big question is how much the sanctions will hurt Russia’s economy. Mr Putin’s officials have tried hard to justify it. Central-bank reserves have been raised to more than 600 billion; Dollar shares have fallen steadily in recent years, at 16%. Only one-fifth of Russia’s sovereign bonds are in foreign hands.
Nevertheless, it is impossible to completely contain the economy. Russian officials are proud to have lifted sanctions on Crimea relatively easily. Yet a survey suggests that sanctions took more than 2.5 percentage points from the average Russian GDP Growth since they were imposed. The sanctions that Mr Biden is considering could be a source of intense pain if he can bring his allies to the board. 3
All of our recent coverage of the Ukraine Crisis can be found here.
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This article is published in the print version of Finance and Economics under the heading “Targeting”