Finally, and perhaps most importantly, the United States and a number of allies issued a joint statement on Feb. 26 announcing that they were taking dramatic steps to prevent Russia’s central bank from accessing its substantial foreign exchange reserves. Analysts had posited that these reserves, sometimes referred to as “Fortress Russia,” might allow Russia to withstand the effects of economic sanctions for an extended period. But on Feb. 28, OFAC issued a new Directive 4 under Executive Order 14024 that prohibits any transactions with the Central Bank of Russia, Russia’s Ministry of Finance, or its National Wealth Fund, including foreign exchange transactions, involving U.S. persons, U.S. institutions or the U.S. dollar.
This is by far the most dramatic step the United States and its allies have taken. The effective blocking of central bank assets is a severe measure that has previously been applied only to hostile foreign regimes, such as Iran, North Korea and Syria. Doing so prevents Russia from accessing most if not all of its substantial foreign exchange reserves, severely reducing its ability to stabilize its currency, compensate for its lack of access to global debt markets or otherwise take steps to stabilize its economy. Among other economic effects, this ensures that the broader sanctions imposed by the international community have their maximum effect.
Notably, OFAC has put in place a number of exceptions to these sanctions th
Notably, OFAC has put in place a number of exceptions to these sanctions through a series of licenses. Most appear to be aimed at mitigating some of the impact of the sanctions on non-Russian entities and the broader global economy. Some permit certain routine financial interactions, like the servicing of debt obligations, while others permit a wind-down or divestment period for entities holding Russian debt or other investments that fall under the new sanctions. Others permit transactions relating to certain official functions, emergency services, or the export of agricultural commodities, medical devices, software updates, and other goods and services on which outsiders might disproportionately rely. Perhaps the most important exception applies to Russia’s substantial energy exports and permits transactions with many sanctioned entities, including Russia’s central bank, so long as they relate to nearly any aspect of the energy sector, ranging from coal and petroleum to nuclear fuel, through at least June 24. While these transactions will no doubt provide a lifeline to the Russian economy, they also prevent a supply shock to energy markets.
Among the G-20 countries representing the world’s largest economies, nine governments—Argentina, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa and Turkey—have thus far declined to implement any sanctions measures against Russia. Neither have Russian client states, like Cuba, Nicaragua, Syria and Venezuela; other common strategic rivals of the United States and its allies, like Iran and North Korea; or states with strong cultural and economic ties to
Russia, including Israel and most former Soviet states outside of Europe. Still, there are few outlets for Russia to alleviate the sanctions pressure. Only China seems like it might have the ability to aid Russia in evading the worst consequences of the current sanctions regimes by increasing their trade ties and allowing Russian banks to continue to use its SWIFT alternative, its Cross-Border Interbank Payment System (CIPS). But it is not yet clear whether China is willing and able to do so, despite the recent strengthening of bilateral ties between the two nations.
EU legislation enacted on Feb. 28 targets Russia’s central bank, prohibiting any transaction with the bank or any representative thereof and freezes the reserves of the central bank held within the EU. These measures were imposed, according to a Feb. 26 statement, to “prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of [the EU’s] sanctions.” These measures, however, do not freeze the assets of Russia’s three largest banks: Sberbank, VTB, and Gazprombank.
Economists have estimated that the Russian economy could shrink a full 7 percent by the end of 2022, introducing the greatest recession in recent memory and severely undermining the quality of
life for nearly every Russian citizen. Meanwhile, export controls and debt limitations promise to seriously hinder strategic sectors of Russia’s economy. These moves could slow development in these sectors in a way that could endure well past the end of any sanctions.
Some experts, however, have argued that the focus may need to shift from implementing new sanctions to planning for how to roll back those already in place. Given that the sanctions were originally intended to motivate a change in Russia’s political behavior, the United States and its allies need to figure out what sanctions they are willing to rescind if Russia does prove willing to enter negotiations or otherwise take steps toward ending its operations in Ukraine. Some calibration may also be needed if the sanctions have unforeseen or unintentionally severe consequences for the general population of Russia, such as shortages in food and medicine or other potential humanitarian crises—or if the consequences of Russia’s impending economic collapse begin to ripple more broadly throughout the global economy. In other words, to send the strongest possible message to Putin, the Biden administration and its allies chose to jump straight to the top of the escalation ladder. Now they may need to spend some time thinking about the best way to climb back down.
Doing so, however, may ultimately be easier said than done. While some of the consequences of these economic sanctions are likely to go away when they are lifted, others may not. The stigma that has suddenly surrounded economic entanglement with Russia may well linger among investors and corporations with ties to the United States and other sanctioning economies. After all, even if sanctions are lifted, there is always the risk they will be reimposed over some other dispute down the line. Nor is Russia likely to be enthusiastic about re-creating the economic ties that the United States and its allies are now using against it. This may lead Russia to turn even further inward and to further strengthen ties with China and other countries that are unwilling to cooperate with U.S.-led sanctions efforts. Hence, even if the United States and its allies are successful in bringing peace to Ukraine, the steps they have had to take to do so may deepen cleavages in the global system of economic interdependence that has helped to promote stability for much of the past century.
https://www.lawfareblog.com/what-sanctions-has-world-put-russia
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