Will Financial Sanctions Do Any Good? Trump Derisively Called Them "$2 Worth Of Sanctions"

No one seems very optimistic about them, but ceasefire talks have begun between Russia and Ukraine at a secret location in the Gomel region of Belarus near the border... and just as Belarus soldiers are about to go on the attack against Ukraine. Volodymyr Zelenskiy: "Let them try so that later not a single citizen of Ukraine has any doubt that I, as president, tried to stop the war."

More Western sanctions kicked in this morning forcing Russia's central bank to close the stock market-- after it fell by 40%-- and to double interest rates from 9.5% to 20%. Even Switzerland, "a favorite destination for Russian oligarchs and their money,"-- including Putin himself (as well as Prime Minister Mikhail Mishustin and Foreign Minister Sergey Lavrov)-- is freezing at least $11 billion in Russian financial assets! On Friday morning you could buy 83 rubles for a dollar. This morning it is 100 rubles for a dollar. (I wouldn't recommend currency speculation.)

Early this morning, the NY Times reported that "In new sanctions announced on Monday, the British government banned its country’s financial institutions from conducting transactions with the Russian central bank as well as with its foreign ministry and sovereign wealth fund. In a tweet, Prime Minister Boris Johnson said the measures were intended to further isolate Russia from the international financial system, adding, 'Putin must fail.' ...The European subsidiary of one of Russia’s biggest banks was on the verge of collapse Monday as punishing Western sanctions took a toll. Sberbank Europe AG, domiciled in Austria, and its subsidiaries in Croatia and Slovenia 'experienced significant outflows of deposits due to the impact of geopolitical tensions on their reputation,' and were 'failing or likely to fail,' the European Central Bank said. The bank, which held €13.6 billion in assets at the end of last year, was likely to go bankrupt imminently, the central bank added."

Yesterday, Noah Smith explained how the sanctions are meant to work, now that "Western countries are now pulling out all the stops in terms of sanctions. The latest round includes:

  • Cutting some Russian banks out of the SWIFT messaging system

  • Freezing the Russian central bank’s access to its foreign currency reserves held in the West

  • Increased sanctions on Russian banks in general

  • Establishing an international task force to hunt down and freeze the assets of Russian companies and Russian oligarchs

Just a couple of days ago, these sanctions were almost unthinkable, with SWIFT cutoff sometimes called the “nuclear option” (not a phrase I like to use in this particular situation). But the moral clarity of the unprovoked and brutal Russian assault has changed minds I’ll discuss each of these in turn, but first an overview. These sanctions are designed to do two things:

  1. To punish Russian oligarchs and Putin allies for supporting the war, and

  2. To make it harder for Russia to finance its war effort.

[M]any rich Russians, including key Putin allies in industry, government, and the security services, have become used to living lives of luxury as globetrotting rich guys. Sanctions make it harder to do this, hurting rich Russians’ freedom of mobility and their ability to splurge on travel expenses. This will hopefully cause them to put pressure on Putin to pull out of Ukraine.
So that’s the basic idea of sanctions at this point. Deterrence obviously failed, but enough pressure from Russian leaders and society might force Putin to call it a day. The question is how to do that without creating havoc in European economies at the same time.
...[T]he U.S. and Europe pulled out a potentially even more devastating financial weapon today-- central bank sanctions. The Central Bank of Russia is responsible for stabilizing the country’s currency; when the ruble plunges, as it almost certainly will given increasing sanctions, the central bank buys rubles in order to prop up its value and limit the fall. The way you buy rubles is to spend other assets-- dollars, euros, gold, yuan, whatever. Which means the central bank needs to keep some of that stuff on hand in order to spend. That’s called “foreign exchange reserves”, or just “reserves.”
For example, when the ruble plunged after Putin’s first attack on Ukraine in 2014, the central bank spent down almost 40% of its reserves in order to limit the drop:
This time, given the strength of sanctions and the promise of an open-ended war, the drop could be much deeper. So the central bank will need to spend a lot of its $640 billion in reserves.
Big problem, though: The central bank holds a substantial amount of those foreign exchange reserves-- perhaps $300 billion out of the total-- in foreign banks, mostly in the West. If the U.S. and Europe freeze those assets, Russia’s central bank won’t be able to use them to stop the ruble’s slide. Knowing that, currency traders will know that it’ll be that much easier to “break” the ruble-- short-selling rubles in order to run the central bank out of reserves, so the currency plunges and the traders make a profit. This might become a self-fulfilling prophecy-- speculators think the ruble is vulnerable to attack, so they attack it.
And the really ominous thing here is that there’s just not that much the Central Bank of Russia can do about this. We’ve become used to thinking of central banks as these all-powerful money printers, but the Central Bank of Russia can only print rubles. And printing rubles doesn’t help stabilize the currency-- in fact, it devalues it further. So there will be no “money printer go brrr” memes for Russia. If the ruble crashes and the central bank runs out of accessible forex reserves, it’s game over. The Russian economy will be in ruins, Russians will start using black markets to buy stuff, and everyone in Russia will be really really mad. Furthermore, Russian defense manufacturers will be basically unable to buy needed components and materials overseas, which will severely hamper the war effort in Ukraine.
But here’s the thing-- this isn’t really the kind of thing you can do in half measures. Either the Central Bank of Russia depletes its reserves or it doesn’t. And initial reports suggest that like SWIFT cutoff, the central bank asset freeze will be initially done in a surgical, limited way, as a threat and a proof of concept. But the problem with this is that if the Central Bank of Russia still has some channels with which to withdraw the $300 billion or so of reserves it keeps overseas, it will do so-- and then this particular financial doomsday weapon will be neutralized.
So it’ll be interesting to see where this policy goes.
Bringing the pain to Putin’s cronies
Finally, there’s the idea of going after Putin’s friends, allies, and supporters. No dictator actually has absolute power-- there is always a group of people, be they generals or spymasters or bodyguards or whoever-- who are able to remove the dictator from power if they choose. And if they get mad enough, they will. So there’s the idea that by making life hard enough on the Russians who have the ability to remove Putin from power, we can get them to either pressure Putin to end the war, or maybe just remove him from power.
This is the thinking behind Biden’s idea of a multilateral task force to hunt down and deprive rich Russians of their toys and their money:
The attraction of this method is that it doesn’t really hurt the average Russian. Impoverishing the average Russian has many drawbacks. It might simply cause Russians to rally around Putin and despise the West instead of questioning the Ukraine war, as some of them now are. Even if not, the only thing average Russians can really do against Putin is to overthrow him in a mass uprising. And the last time impoverished Russians got mad and overthrew their regime, they eventually replaced that regime with…Vladimir Putin.
So of all the extreme sanctions methods, hunting down Putin’s allies and depriving them of everything they know and love about the post-Soviet era has the fewest drawbacks. Unlike SWIFT cancellation, it doesn’t risk causing major economic pain in Europe. And unlike central bank asset freezing, it’s pretty easy to do. I should also mention that it’s highly amusing:
The only drawback here is that it’s more annoying than terrifying. Russian elites can live without their Italian villas, but they can’t live without a functioning Russian economy. The question remains: Are we willing to risk major economic damage to Europe and/or utter chaos in a huge country with 1,456 strategic nuclear weapons just in order to apply more pressure on Putin to stop a war that’s already not going that great for him?
Given the hedging, tentative way that we’ve started rolling out the “big gun” sanctions, I don’t think we’ve answered that question yet.