Feb 24, 2022 - Economy

Unprecedented sanctions are cold comfort to Ukrainians

Illustration collage of Russian Rubles strewn across a photo of firefighters working on a building fire after bombings on the Ukraine town of Chuguiv

Photo Illustration: Annelise Capossela. Photo: Aris Messinis/AFP via Getty Images

The sanctions against Russia announced today by President Biden are unprecedented. The move to cut off Russia's largest banks from Western financial systems, in particular, will inflict severe economic pain on Russia, possibly pushing it into a recession, experts tell Axios.

  • "I was part of the team that designed sanctions in 2014, and this is far beyond what we contemplated," says Edward Fishman, former Russia and Europe sanctions lead in the Obama administration's State Department. "The Russian financial sector is by and large isolated now from the global financial system."

Why it matters: Sanctions are the primary weapon wielded by the U.S. and its allies in this conflict. Previous rounds of economic punishment inflicted upon the country were criticized for being weak.

  • Whether the economic pain will translate politically this time around is an open question — Russia's been living with and maneuvering around sanctions for nearly a decade.
  • And certainly, severe financial punishments are "cold comfort for innocent Ukrainians under attack," Fishman said.

State of play: The Biden administration was trying to use sanctions as a threat to prevent war, Fishman said. "The threat failed."

  • The White House needed to follow through to set an example for other possible bad actors, and to reduce Russia's capacity to do harm over time.
  • "No one expects sanctions to have an effect this week," said Chris Miller, director of the Eurasia program at the Foreign Policy Research Institute.

Zoom out: Russia has lived with economic sanctions imposed by the U.S. and European allies since 2014, when it first invaded Ukraine, and their effects were relatively modest, according to studies cited in a January report from the Congressional Research Service.

  • Russian President Vladimir Putin has stashed a "mountain of cash to use as a financial shield," explained CNBC's Robert Frank. The country has $630 billion in cash reserves to cushion the impact of sanctions.
  • Meanwhile, the price of natural gas is going up — and with no real energy sanctions yet in place that's filling the country's coffers.
  • The drop in oil prices a few years ago and, more recently, the pandemic, hit the Russian economy harder than those sanctions, the report said.

What's next: There have been calls to cut Russia off from SWIFT, a messaging network used by banks that is key to the international financial system. That would be "the ultimate sanction," said Justine Walker, the global head of sanctions, compliance and risk at ACAMS.

Yes, but: Cutting off SWIFT would hurt the U.S. and other Western countries — not just Russia, Miller said. Others argue that banning Russia from SWIFT would just force the country to develop its own payment system, which it's been trying to do — those efforts are still in their infancy, however.

  • Sales of oil and gas could be the next big thing on the sanctions list, Miller said. That's more important than SWIFT because it's where Russia earns the bulk of its money.
  • A senior administration official emphasized today that sanctions have so far excluded energy because they're trying to mitigate the pain on U.S. allies in Europe.

The bottom line: These are strong sanctions. Back in 2014, the U.S. was taken by surprise by Russia's moves in Ukraine. The status quo policy then was to keep Russia in the global economy.

  • This time, the Biden administration was operating under no such illusions — and had months to prepare. "This has been a slow-moving trainwreck," said Fishman. "We've seen this coming for months."
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