Even proponents of sanctions against Russia (and I count myself among them) have to admit that they have failed to change the Kremlin’s aggressive behavior. Russia continues to wage a brutal war in eastern Ukraine. It continues its military campaign to obliterate the opposition to the Assad regime in Syria. And it continues to subvert Western democracies with cyberattacks, disinformation, and dark money. On none of these fronts is the Kremlin seeking to scale back its ambitions or moderate its behavior. Russia’s unprovoked attack on Ukrainian ships in the Black Sea in late November underscores this fact and belies the notion that the Putin regime is worn down by sanctions and looking for an “off ramp.” If anything, President Putin seems to be doubling down on confrontation with the West. Why else, after more than four years of mounting sanctions, would the Kremlin authorize an assassination in the heart of a major NATO country using a signature chemical agent that can be traced back to Russia?
Some have argued that while sanctions have not reversed Putin’s aggressive policies, they have at least deterred him from pursuing more ambitious aims, such as the creation of a new state of “Novorossiya” in eastern Ukraine or a land bridge between Crimea and Russian troops stationed in eastern Moldova. This too is wishful thinking. During the peak fighting in Ukraine in the summer of 2014, Russian forces certainly could have tried to occupy more territory, but it seems highly unlikely that the threat of sanctions stopped them cold in their tracks and no hard evidence supports this view.
A far more compelling argument is that the Russian advance was stopped when Ukrainian society mobilized against it by helping law enforcement root out Russian provocateurs and by forming volunteer battalions to fight back against invading Russian forces. This organic resistance movement guaranteed that any foray deeper into Ukraine would be met with a bloody insurgency, and Russian intelligence agents in Ukraine surely communicated this back to Moscow. Although counterfactual scenarios are inherently unprovable, it seems far more likely that mass casualties and body bags, not restrictions on debt and equity financing, are what ultimately deterred the Kremlin’s maximalist ambitions from being realized.
This is not to argue that sanctions have had no effect on Russia, only that they have been ineffective at changing Russian behavior. In 2015, the International Monetary Fund estimated that sanctions shaved between 1.0 to 1.5 percent off Russia’s GDP, and the Kremlin has certainly reacted angrily to their imposition. Over time, it is even possible that the Kremlin might come to see the cost of sanctions as greater than the perceived benefits of its aggressive policies. But we have not reached that tipping point yet, and with current sanctions alone we may never reach it.
This is because Western governments have consistently confused symbolic measures with the types of significant costs that would compel the Kremlin to re-evaluate its policies. To make sanctions against Russia work, the United States and its allies need to dispense with symbolic gestures and impose stronger sanctions that will have an immediate economic impact. At the same time, they must avoid the temptation to look to sanctions as the answer to every problem emanating from Russia and embed their sanctions policy within a broader cost-imposition strategy that makes better use of diplomatic, military, economic, and communications tools. Such a strategy would focus on trying to change the Kremlin’s behavior in one or two discreet areas (such as its aggression in Ukraine and/or its attacks on Western democracies), but not across the board.
This strategy also has to be consistent. The West’s current approach to Russia is schizophrenic: some of the countries most vocal about imposing sanctions have also pursued economic development projects with the Russian state, rendering their policies incoherent and ineffective. If a more consistent strategy were implemented to push back on Russian aggression across multiple domains, economic sanctions could be harnessed to provide enormous asymmetric leverage to that end. For that to work, however, we need to overhaul our current sanctions policy.
Packing a Stronger Punch
To be effective, sanctions need to have a serious impact. Over the past several years, the United States and other Western countries have repeatedly conflated symbolic measures against Russia with impactful ones. For example, in 2016 when options were considered in response to the Kremlin’s interference in the U.S. presidential election, some senior officials referred informally to the planned expulsion of 35 Russian intelligence officers as a “nuclear option”—as if this measure were so incredibly powerful that it would cow Moscow and bring it immediately to heel. In reality, intelligence billets are easily backfilled and declarations of persona non grata almost always result in tit-for-tat expulsions by the other side. It should have been easy to foresee therefore that the net effect of such diplomatic expulsions would be negligible.
Similarly, sanctions against the Russian military intelligence agency (GRU) and Federal Security Service (FSB) have been touted as tough measures aimed at the key perpetrators of Russia’s aggressive policies. In reality, these sanctions do next to nothing. Russian intelligence organizations have virtually no tangible assets in the West and sanctions have had almost no impact on these agencies’ finances or operations.
Finally, sanctions on individuals—oligarchs, government officials, and so-called “cronies” of President Putin—have had much less impact than is often claimed. Because Russia is a patronage state in which economic resources are distributed through a system of patron-client ties, sanctioned individuals are easily compensated with insider contracts, subsidies, and other forms of economic rents. Sanctioned “cronies” and senior officials are in fact the last people who would ever put pressure on the regime because their wealth and power depend entirely on demonstrated loyalty to the Kremlin. This does not mean Russian kleptocrats and human rights abusers should be allowed to invest their wealth in the West or be given visas to travel to Western countries. Taking away such access is both morally responsible and a necessary prophylactic against the corrupt influence of foreign dark money. Nevertheless, the policy impact of individual sanctions on Kremlin decision-making is grossly exaggerated.
To have real impact, sanctions must target the Russian economy. While current sanctions have impacted economic growth, the Kremlin has been able to manage the economy without experiencing an acute crisis. With approximately $460 billion in financial reserves, Russia can easily afford to bail out sanctioned companies and oligarchs for the foreseeable future. As a reference point, it is worth recalling that Mr. Putin was willing to spend $50 billion on the Sochi Winter Olympics, a Kremlin vanity project. He is almost certainly willing to spend a much larger sum to bail out his closest friends and trusted lieutenants.
Targeting the Russian economy obviously has consequences for Russian society. This is one of the central challenges of trying to deter or halt Russia’s unconventional war against Ukraine and its subversive attacks on Western democracies. Narrowly targeted measures that focus only on the perpetrators—Russia’s intelligence services and the top political elite—have less impact, while broader measures impact Russian society. But in other cases where the United States has wanted to compel a change in behavior for reasons of national security, it has not shied away from imposing tough measures that affect the target country’s population.
Consider the difference between sanctions on Russia and Iran. To bring Iran to the negotiating table, the Obama Administration imposed powerful economic sanctions. During their peak strength from 2012-2015, Iran’s GDP declined by 9 percent annually, crude oil exports shrank from 2.5 to 1.1 million barrels per day, and $120 billion in Iranian reserves were frozen abroad. This was accomplished by sanctioning Iran’s oil exports and by freezing transactions by Iranian financial institutions.
With Russia, the United States has adopted a far more timid approach. In the energy sector, only upstream and unconventional energy projects—deepwater, Arctic offshore, and shale—were sanctioned. Unlike sanctions on Iranian oil exports, these measures affect revenue streams that are only years, if not decades, away. Furthermore, they lead to deferred investments and unrealized opportunities, which rarely motivate political leaders to act. To force leaders to rethink policy, sanctions need to have an immediate impact, not one that will be felt five to ten years into the future.
In Russia’s financial sector, the United States has steered clear of asset freezes—in sharp contrast to Iran. To date, only one small Russian bank—the 26th largest at the time it was sanctioned—has had its assets frozen. All other Russian banks are restricted only in terms of financing new equity or debt with a maturity of more than 30 days. These anemic measures have had only a minor effect on Russia’s financial sector, particularly given Moscow’s sizable cushion of hard currency reserves.
In the defense sector, while the U.S. government has sanctioned a number of Russian companies, it has failed to put in place secondary sanctions on major third-party buyers of Russian equipment, like China, Egypt, or India. While there are legitimate reasons why the United States might not want to pick a fight with some of these countries, the result is that sanctions have done little to hamper Russia’s growing defense exports, which last year stood at a record $15 billion.
In short, the U.S. government’s much-ballyhooed “sectoral sanctions” policy against Russia is highly circumscribed and packs a weak punch. It is weak not because the administration lacks the authorities to impose impactful sanctions, but because it has chosen not to do so.
Focus on Results
To provide real leverage over Russia, sanctions have to be tied to concrete behavior. It also helps to tie sanctions to a single issue and not muddy the waters by imposing multiple sets of sanctions for different reasons. The U.S. approach to date, however, has been to slap sanctions on Russia for every conceivable offense. U.S. sanctions have been applied under a patchwork of different authorities relating to the invasion of Ukraine, support for the Assad regime in Syria, assistance to North Korea, interference in U.S. elections, use of chemical weapons, nonproliferation infractions, human rights violations, and several other reasons.
This profusion of justifications does not create an incentive structure for Russia to change its behavior. U.S. sanctions policy should therefore be overhauled to focus on only one or two priority areas where the U.S. most wants to change Russia’s behavior. Russia’s aggression against Ukraine and its election interference in the United States are good candidates for sanctions because both can be assessed or measured by the U.S. intelligence community and are reversible. On the other hand, sanctions imposed for Russia’s use of chemical weapons (a one-off event that cannot be reversed) or its previous assistance to the North Korean regime (which cannot be reversed) are less appropriate justifications that only muddy the waters and make it less likely the Kremlin will change its behavior.
Sanctions should also be reversible if they are to serve as an incentive for behavioral change. In the event that the Kremlin did change its policies (as Iran did by agreeing to put checks on its nuclear program), then the United States should be prepared to waive or remove the relevant sanctions. If there is no clear pathway to sanctions relief, then sanctions risk entrenching the behavior we seek to change.
Part of a Broader Toolkit
To be effective, sanctions should also be part of a broader toolkit of measures that are applied consistently. In the case of Iran, economic sanctions and diplomatic isolation were combined to great effect. In the Russian case, by contrast, Western states have been remarkably inconsistent, often applying sanctions on Russia and seeking to expand economic ties at the same time.
German Chancellor Angela Merkel, who is one of the European Union’s most ardent supporters of sanctions against Russia, has for example supported the construction of a massive natural gas pipeline, Nord Stream 2, whose key aim is to bypass Ukraine as a transit country for Russian natural gas exports. Similarly, French President Emmanuel Macron has cultivated trade and investment with Russia even as he has called for tough sanctions for Russia’s aggression in Ukraine. Finally, U.S. President Donald Trump has called for Russia to be readmitted to the G8 and invited President Putin to visit Washington at the same time as his administration has imposed new sanctions. It is little wonder that this schizophrenic approach by all three Western leaders has been unsuccessful.
To be effective, sanctions must be coordinated with other foreign policy instruments—diplomatic, trade, military, and strategic communications. In the economic arena, sanctions should be buttressed with a “no business as usual” approach that, at a minimum, refrains from promoting new trade and investment with Russia. In the energy domain, European leaders should invest in infrastructure that will diversify European sources of energy, for example by promoting the Southern Gas Corridor and more north-south energy interconnectors, and steer clear of Kremlin projects designed to create greater dependence on Russia.
Diplomatically, Western countries should impose stiffer consequences on Moscow for its egregious violations of international norms, including its use of chemical weapons, and stop attending sporting or business events in Russia. Militarily, Western leaders should continue to build up NATO’s defensive capabilities and strengthen the resilience of Russia’s neighbors both because these are necessary defensive precautions but also because they impose consequences on Russia for its malign behavior. Finally, in terms of strategic communications, Western leaders must make clear that the Kremlin is forgoing opportunities for a mutually beneficial relationship with the West as a result of its aggressive actions. Until Western countries align military, economic, energy, diplomatic and communications policies, they will be undercutting the effectiveness of their own sanctions and all but guaranteeing that they fail to achieve their stated goals.
The Goldilocks Dilemma
Sanctions are usually most effective when they are coordinated with other countries. This helps address the collective action problem that comes from spoilers “backfilling” contracts and exploiting sanctions loopholes. The Obama Administration’s approach to both Iran and Russia made an imperative of coordinating sanctions with our European allies and likeminded Asian partners. Unfortunately, however, this sometimes leads to a “least common denominator” policy that reduces the impact of the agreed measures. For this reason, it is sometimes necessary to apply unilateral measures that are coordinated with, but not necessarily matched by, our partners and allies.
In the energy and defense sectors, unilateral measures against Russia would be largely counter-productive because European or Asian companies could simply backfill contracts voided by their U.S. competitors. Secondary sanctions could help address this problem but would have significant geopolitical consequences. The financial sector, however, is another matter. Because of the unparalleled reach of U.S. financial markets, U.S. asset freezes—so-called “blocking sanctions” that freeze all transactions via the U.S. financial system—pack an enormously powerful punch.
The danger with financial sanctions is that they can have second- or third-order effects on our European allies, whose economies are more closely integrated with Russia’s than our own. This is why the suggestion that Russia be cut off entirely from the international financial clearinghouse known as “SWIFT” is impractical and dangerous. Cutting Russia off from SWIFT would be tantamount to forcing Russia to default on its loans to European creditors, which would hurt our European allies as much as it would hurt Russia.
Any sanction so powerful that it would create a significant risk of financial contagion would not only be opposed by EU member states but would go against U.S. strategic interests. The aim of any sanctions policy, therefore, should be to avoid the “Goldilocks extremes”: it should pack enough of a punch to force the Kremlin to re-evaluate its policies but without creating a recession in Europe.
Crafting More Effective Sanctions
An effective sanctions policy against Russia would start by answering the question of what we are trying to achieve. If the goal is to have Russian troops withdraw from Ukraine, an objective measure of this goal would need to be written into any new sanctions legislation or executive order. One possibility would be to tie sanctions relief to a certification by the Director of National Intelligence (DNI) that Russian troops were no longer present on the territory of Ukraine (perhaps with separate requirements for the Donbas and Crimea to incentivize a near-term withdrawal from the Donbas). If an additional goal was for Russia to stop interfering in our elections, then a separate tranche of sanctions could be tied to a certification by the DNI that no significant interference had occurred or been attempted over, say, a six-month period.
Next, an incentive structure would need to be created to compel the Kremlin to re-evaluate its policy. One option would be to prohibit financing of Russia’s sovereign debt. An even better option that allows for calibrating costs would impose asset freezes on Russian banks. Freezing bank assets allows for calibration because it can be done iteratively, starting with some of the smaller banks and moving towards progressively larger targets (e.g. VTB, Gazprombank, Sberbank) over a period of time. Every set period—for example, every three or six months—a new bank would be designated by the Treasury Department until Russia was finally compelled to negotiate in good faith or cease and desist from its aggressive behavior.
To be sure, freezing the assets of all of Russia’s banks would carry significant risks of financial spillover. However, an iterative approach helps mitigate against this risk because the initial asset freezes on smaller banks would be unlikely to roil European financial markets on their own. This would put the ball squarely in Russia’s court and all stakeholders would understand what would happen and when it would happen.
One of the advantages of financial sanctions is that the Kremlin lacks a symmetric countermove. Certainly, Russia could respond by freezing the assets of U.S. companies in Russia, but this would likely hurt Russia as much as it would hurt the United States. Russia is the 30th-largest trading partner of the United States, and Russia depends on U.S. foreign investments to sustain jobs. Shutting down U.S. companies would also be a surefire way to kill off any future Western investment in Russia for a long time to come.
In terms of asymmetric retaliation, Russia could of course do any number of things. Few would have predicted that in response to the Magnitsky Act the Kremlin would halt the adoption of Russian orphans by American citizens. There is obviously little the United States can do if Russia decides on a course of action that hurts its own citizens. However, it is important to remember that the sanctions outlined here are a response to Russia’s invasion of Ukraine and its subversion of our democracy. If we do not react to this aggression for fear of unknown counter-reactions, we will forever be paralyzed and only invite more aggression in the future.
A policy to compel the Kremlin to curtail its aggression against Western democracies needs to pack a powerful punch, and financial sector sanctions provide an asymmetric tool to achieve that end. To be effective, these sanctions also have to backed up with more consistent diplomatic, military, and economic policies—and messaged as part of a broader strategy of countering Russian aggression. This might not immediately change the Kremlin behavior, but it would finally start the ball rolling on a re-evaluation of its current collision course with the West.