Biden Ponders the Sanctions Doomsday Device

Washington has created and tested a powerful toolkit of sanctions—but never applied them at scale.

Alden-Edward-foreign-policy-columnist
Edward Alden
By , a columnist at Foreign Policy, a visiting professor at Western Washington University, and a senior fellow at the Council on Foreign Relations.
U.S. President Joe Biden and Russian President Vladimir Putin meet during the U.S.-Russia summit in Geneva, Switzerland, on June 16, 2021.
U.S. President Joe Biden and Russian President Vladimir Putin meet during the U.S.-Russia summit in Geneva, Switzerland, on June 16, 2021.
U.S. President Joe Biden and Russian President Vladimir Putin meet during the U.S.-Russia summit in Geneva, Switzerland, on June 16, 2021. Peter Klaunzer/Keystone via Getty Images

Putin’s War

When the Soviet Union invaded Afghanistan in December 1979, the United States responded with the most sweeping economic sanctions it could think of at the time. There were so few commercial links between the two Cold War superpowers that an embargo on a mere $2.6 billion of U.S. wheat, corn, and soybean exports to Russia was the best that then-U.S. President Jimmy Carter could muster. The action hurt American farmers far more than it hurt the Soviets, and Carter’s successor Ronald Reagan lifted the sanctions as soon as he took office in 1981.

Fast forward to today, when the world is far more integrated in every possible dimension—financially, economically, and technologically. As Russian troops mass along the Ukrainian border in preparation for a possible invasion, the Biden administration hopes to deter the attack by threatening to deploy a powerful and highly effective set of sanctions that have been developed and tested in recent years—a kind of sanctions doomsday device that could do serious harm to the Russian economy. Key measures being discussed include broadly targeted financial restrictions that could cut Russia off from Western banks—which would cut off the country’s ability to receive payments for its oil and gas exports—and a ban on technology exports modeled after the sanctions that have badly wounded Huawei, China’s telecommunications giant.

But the same global interconnectedness that makes paralyzing sanctions possible creates a host of risks for the United States and the West. Sanctions could trigger retaliation, including Russian restrictions on natural gas exports to Europe, which depends on Russia for about 40 percent of its imported gas. Russia would likely step up cyberattacks on governments, companies, and infrastructure in the West. Going forward, U.S. sanctions would push Russia and China still closer, encouraging the two to accelerate their efforts to limit U.S. leverage over their economies and financial systems.

When the Soviet Union invaded Afghanistan in December 1979, the United States responded with the most sweeping economic sanctions it could think of at the time. There were so few commercial links between the two Cold War superpowers that an embargo on a mere $2.6 billion of U.S. wheat, corn, and soybean exports to Russia was the best that then-U.S. President Jimmy Carter could muster. The action hurt American farmers far more than it hurt the Soviets, and Carter’s successor Ronald Reagan lifted the sanctions as soon as he took office in 1981.

Fast forward to today, when the world is far more integrated in every possible dimension—financially, economically, and technologically. As Russian troops mass along the Ukrainian border in preparation for a possible invasion, the Biden administration hopes to deter the attack by threatening to deploy a powerful and highly effective set of sanctions that have been developed and tested in recent years—a kind of sanctions doomsday device that could do serious harm to the Russian economy. Key measures being discussed include broadly targeted financial restrictions that could cut Russia off from Western banks—which would cut off the country’s ability to receive payments for its oil and gas exports—and a ban on technology exports modeled after the sanctions that have badly wounded Huawei, China’s telecommunications giant.

But the same global interconnectedness that makes paralyzing sanctions possible creates a host of risks for the United States and the West. Sanctions could trigger retaliation, including Russian restrictions on natural gas exports to Europe, which depends on Russia for about 40 percent of its imported gas. Russia would likely step up cyberattacks on governments, companies, and infrastructure in the West. Going forward, U.S. sanctions would push Russia and China still closer, encouraging the two to accelerate their efforts to limit U.S. leverage over their economies and financial systems.

The Biden administration is hoping that talking openly about the economic weapons it is prepared to use will cause Russian President Vladimir Putin to stop short of launching a military invasion of Ukraine. It is a gamble that Washington’s economic weapons are big enough to back Putin down without risking direct military confrontation. Putin, in turn, may be prepared to run the risk that Biden is bluffing on sanctions—that concerns about global market mayhem and the potential harm to Europe’s energy supplies in the depths of winter will cause him to stop short of deploying the full sanctions arsenal. Partial sanctions are an even less likely deterrent; Russia was able to weather the more modest sanctions that followed its 2014 invasion of Crimea, and it is in a much stronger position today.

The U.S. government quickly realized that these new weapons were far more potent than trade sanctions and could be deployed against a broader range of targets.

The U.S. willingness to deploy this economic arsenal represents the culmination of two decades of experimentation that have produced a toolbox of sanctions that hurt adversaries more and the United States and its allies less. Both Democratic and Republican administrations have become increasingly comfortable with pursuing what international relations scholars call “weaponized interdependence.” For all the United States’ domestic and foreign challenges, the country remains the powerful financial and technological heart of the global economy. Weaponized interdependence involves using those advantages to punish rivals by cutting off access to U.S. dollar transactions that are needed for most international trade or choking off critical technologies like advanced semiconductors that are needed for everything from jets to smartphones. Such sanctions inflict more harm on the intended targets, and at much lower economic cost to the United States, than the trade sanctions often used in the past.

This is not how U.S. and other Western officials envisioned interdependence when they supported China’s accession to the World Trade Organization in 2001 and Russia’s in 2012. Instead, the United States had hoped that globalization would make conflict less likely, because even adversaries would fear disrupting the financial and material supply chains on which their prosperity depended. The U.S. and other Western governments encouraged deeper economic integration with both China and Russia as part of an engagement strategy that promised greater wealth for both in exchange for tacit acceptance of a U.S.-dominated economic and financial order.

Such optimism did not last long, however. Following the 9/11 terrorist attacks, the U.S. Treasury launched a novel effort to cut off the financial support that al Qaeda and other radical groups needed to carry out their attacks. Traditional economic sanctions such as trade embargoes would have been useless; at best, such measures would have punished ordinary citizens in Pakistan or other countries that sheltered al Qaeda without degrading the organization. Instead, for the first time, the United States forced the world’s bankers into the fight. Taking advantage of their dependence on the U.S. dollar for their international transactions, Washington ordered banks and other financial institutions around the world to freeze assets and identify and stop all transactions that might benefit terrorist groups. Those that failed to comply risked severe U.S. penalties.

The U.S. government quickly realized that these new weapons were far more potent than trade sanctions and could be deployed against a broader range of targets. Sanctions against North Korea, for example, had been historically ineffective because of support for the regime from China and Russia. In 2003, the United States targeted banks doing business with North Korea, sanctioning Banco Delta in Macao as a “primary money laundering concern” under the U.S. Patriot Act. The move paralyzed the bank and dissuaded others from doing business with North Korea, cutting off significant financial resources from the regime. Such sanctions have grown more complex and more targeted, going after both individuals and specific countries. U.S. actions against Iran and Venezuela have effectively cut them off from most global financial transactions, severely damaging their economies even as they often have found various workarounds.

The Trump administration launched a second sanctions revolution by expanding the extraterritorial use of export controls targeted at specific companies. Export controls were a central feature of the Cold War effort to contain the Soviet Union; the United States and its Western allies imposed a comprehensive set of restrictions designed to keep advanced Western technologies out of Soviet hands. But effective export controls required something close to unity in the Western alliance. As the Cold War waned, the United States and its European allies, for example, found themselves at loggerheads over the sale of fiber-optic cables to the Soviet Union. Today, the United States might find it difficult to keep a country like Germany—which tends to see Russia and China as mere trade partners—in line.

With China, however, the United States has found ways to act alone. The Trump administration believed that Huawei, China’s giant telecoms equipment producer, posed a growing threat to Western security. Huawei’s key role in the development of new 5G mobile systems around the world, Washington feared, would give Beijing a new platform for both espionage and sabotage. In addition to encouraging allies to block purchases from Huawei, the United States expanded its own export restrictions to curb sales of advanced semiconductors to Huawei. While most advanced chips are made in Taiwan and South Korea—not the United States—the Trump administration barred any chip supplier using U.S. fabrication technologies, which they all do, from selling semiconductors to Huawei. Despite efforts by Huawei to stockpile chips, the company has seen its smartphone business collapse and its revenues plunge.

But no administration has contemplated using these economic weapons on the scale that Biden is now threatening. The United States is reportedly in discussion with European allies to deploy this full array of sanctions against Russia should it launch an invasion of Ukraine—including cutting Russia off SWIFT, the international payments system jointly administered by the United States and Europe. Administration officials have told reporters they are considering actions that go well beyond the limited sanctions the United States and other countries imposed after the Russian invasion of Crimea in 2014, though even those did significant damage to the Russian economy.

Whether or not Washington pulls the trigger, the mere threat will accelerate efforts by Moscow and Beijing to reduce their dependence on the U.S. dollar and Western technology.

There is no question the United States and its allies could do massive harm to the Russian economy. Cutting major Russian banks off from the dollar-based transaction system would sharply reduce oil and other resource exports, the major source of government revenue. Huawei-style export controls could halt Russia’s technological development and even cut off access to ordinary consumer goods like smartphones. Freezing the assets of prominent Russian individuals would harm Putin’s close allies.

But Russia is far from powerless. Its foreign reserves, estimated at $400 billion to $600 billion, are among the largest in the world after China, Japan, and Switzerland. Since it invaded Ukraine in 2014, Russia has increased these reserves, while Russian companies have reduced their dollar-based external debt. That means Putin could weather even the toughest Western sanctions for some time with minimal disruption to the Russian economy. China is also likely to come to Putin’s aid, serving as an alternative market for some Russian exports; trade between Russia and China hit a record in 2021, up nearly 36 percent from the previous year. The two countries have also been developing alternative payments systems to bypass Western banks.

Russian countermeasures, such as restrictions on gas exports, could lead prices to soar in Europe, though the Biden administration has been telling allies that it will work to secure alternative supplies—which would presumably include a flotilla of tankers delivering liquefied natural gas from the U.S. Gulf Coast and the Middle East. Making it impossible for Russia’s international customers to pay for deliveries could see them scramble for alternative supplies not just of natural gas but also of oil, fertilizer, industrial metals, and various other crucial commodities at a time when markets are already tight, likely setting off another burst of inflation.

The administration’s clear hope is that threats alone will be sufficient to deter a Russian attack. Pulling the trigger on a set of sanctions that has never been applied at this scale could have a host of unintended consequences, rebounding on the West in unpredictable ways. Putin, in turn, may be persuaded that the unprecedented nature of such an action will cause the United States and its European allies to pull their punches. Whether or not Washington ends up pulling the trigger, the mere threat will further accelerate efforts by both Moscow and Beijing to reduce their dependence on the U.S. dollar and on Western technology. Whatever happens in the current standoff over Ukraine, the United States may soon find itself nostalgic for the days of ineffective grain embargoes.

Edward Alden is a columnist at Foreign Policy, the Ross distinguished visiting professor at Western Washington University, a senior fellow at the Council on Foreign Relations, and the author of Failure to Adjust: How Americans Got Left Behind in the Global Economy. Twitter: @edwardalden

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