the money game

The Seize of Moscow

Illustration: Michael Houtz; Photo: Getty Images

When President Biden addressed the nation on February 24 from the White House, Russian soldiers were already well on the way to Ukraine’s largest cities and scores of people were being killed on both sides. The response from the U.S. and the other G7 countries was to fashion the global financial system they control into a weapon and unleash it on Moscow. “Some of the most powerful impacts of our actions will come over time, as we squeeze Russia’s access to finances and technology for strategic sectors of its economy and degrade its industrial capacity for years to come,” Biden said, using the tough but bloodless language of war by other means.

Finance has long been a way to control states, particularly in the post–Cold War era. Limiting access to loans and trade has been one of the most effective tools of change in the global political system, getting Thailand to cut its public expenditures and allow more foreign investment in 1997, precipitating the ouster of the Indonesian government the next year, and generally paving the way for manufacturing to stream into Asia and Latin America. Before Russia ran afoul of the West, that western money gave its richest people Premier League teams, luxury real estate, and superyachts. “Sanctions are not just those technical, money-related things,” says Nina Khrushcheva, a professor of international affairs at the New School and a great-granddaughter of the late Soviet leader Nikita Khrushchev. “They’re also part of the social, political, and cultural.”

The thing about international sanctions is that they show not only what the target country needs to survive but what the sanctioners can — and cannot — live without. Russia’s financial sector, never a major powerhouse, was the prime loser. Four of Russia’s largest banks, including Sberbank and VTB, were targeted by the U.S. following Russia’s invasion, with the Treasury blocking the ability of some to access transactions made in the dollar and freezing the assets of others. The U.S. limited the ability of state-run enterprises to raise money in the debt markets, making it much more expensive for them to borrow and harder to sustain the financial siege. Germany halted progress on the Nord Stream 2 pipeline carrying natural gas from Russia, and the U.K. banned Aeroflot, the country’s largest airline, from British airspace. Oligarchs have been individually targeted: Money held by oligarchs in the U.S. was frozen, and British prime minister Boris Johnson vowed to go after assets held by certain Russians in London, a notorious playground for Russia’s wealthiest. Before the week was over, the U.S., Britain, and the European Union had directly sanctioned Putin and his foreign minister.

But there are limits to a weapon that doesn’t kill. For starters, the harm goes both ways. Once you remove a seller of a resource that’s needed throughout the world, it weakens the buyers who rely on it — Russia sells more natural gas to Europe than any other country, and no one has considered actually cutting off Russia’s energy sector. Indeed, as sanctions rolled out over a series of days, it was apparent that the measures negotiated by the G7 did little to isolate the Kremlin. Russian energy companies were still able to sell their oil and gas, which makes up about 40 percent of the country’s federal revenue. Access to SWIFT, a system for banks and other institutions to send messages that move money around the globe, was not revoked. Italy callously carved out an exception that allows its manufacturers to sell luxury goods to Russians.

In his speech, Biden called the sanctions “profound” and said that they “exceed anything that’s ever been done.” That’s true, but the examples he’s referring to are paltry: Iran, Cuba, North Korea. Russia is a $1.5 trillion economy. “Russia is twice the size of every other economy that has ever been sanctioned combined,” says Adam M. Smith, a former senior adviser to the Treasury Department’s Office of Foreign Assets Control, who helped craft sanctions against Russia after it annexed Crimea in 2014. It’s clear that Putin has prepared for this moment, stashing away $630 billion in Russia’s reserves, aiding his ability to withstand economic isolation, perhaps for more than a year. An even greater asset is the West’s reliance on his country’s resources, money, and markets. The U.S. has tried to take some of that market by shipping liquefied natural gas, but it’s an expensive process, and the shipments could slow if the price falls and it becomes less lucrative. Anticipating that things might get worse for him, Putin has forged a closer relationship with Xi Jinping, his counterpart in China, which historically has bought liquefied natural gas from Australia and Qatar.

If the inconsistent sanctions that have come down already prove to be not enough, there are steps the U.S. can take to get extreme fast. However, as Biden made clear in his speech, there has been disagreement among G7 nations on some of the most severe measures, such as banning Russia from SWIFT, which would make it much harder for Russia to actually use the vast amount of money it has stored up in its reserves. Biden left that measure on the table — and even argued that banning the four largest Russian banks essentially did that anyway. (To remove Russia from SWIFT wouldn’t exactly be the same thing as removing it from the financial system. Russia could rebuild its connections with the outside financial world, though that would likely take years. “The tech behind SWIFT is not nothing, but it’s also not brain surgery,” Smith says. “If there’s one thing the Russians have, it’s a huge amount of sophisticated IT talent.”)

At the most severe end of possible sanctions is a full embargo. Individuals and companies could be put on the Treasury’s blacklist, officially known as the Specially Designated Nationals List. It has been used to isolate terrorist organizations, individual Russian oligarchs, and state-affiliated companies. But if the U.S. embargoes Russia as a whole, Americans would be barred from buying Russian products, goods, and services either with dollars or through transactions with banks that do business in the U.S. “The concern is the collateral consequences to average Russians, which Biden wanted to be very clear that they’re not the target,” Smith says.

Even blacklists aren’t foolproof, though. Europe has had a history of ignoring sanctions: In 1996, when the U.S. attempted to isolate Iran, Libya, and Cuba by sanctioning foreign firms that did business there, the E.U. passed a law allowing member states and their businesses to trade with them. “As a technical legal matter, Germany could, for example, still pay for purchases of natural gas from Russia in euros using non-U.S. financial institutions, and there wouldn’t be any breach of the U.S. sanctions regime there,” says David M. Stetson, a former senior lawyer at Treasury’s OFAC, which oversees financial sanctions, who later co-led Goldman Sachs’s office of sanctions compliance.

After the new sanctions were announced and investors realized they were not as draconian as feared, the Dow Jones went on a tear, giving the stock market its best day of the year. In Russia, there was no such good news, with stock markets losing billions and the ruble falling to historically weak levels. The next day, Russian troops breached Kyiv.

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The Seize of Moscow