America’s Sanctions on Russia Are Not a Slam Dunk

Why the West’s economic response is entirely unprecedented—and the effects are impossible to fully predict.

By , a deputy editor at Foreign Policy.
A saleswoman waits for customers in a tea shop in downtown Moscow on September 23, 2019.
A saleswoman waits for customers in a tea shop in downtown Moscow on September 23, 2019.
A saleswoman waits for customers in a tea shop in downtown Moscow on September 23, 2019. DIMITAR DILKOFF/AFP via Getty Images

Putin’s War

The sanctions imposed by the West on Russia in response to its invasion of Ukraine are already historic. They may also shape the future of international politics for decades to come—in ways that are impossible to predict.

Edward Fishman, a former Obama administration State Department official who worked on sanctions policy (currently a senior fellow at the Atlantic Council), has a deep understanding of the backstory to this unprecedented economic response—the diplomatic groundwork that went into crafting the sanctions, the political hopes invested in them, and the efforts made to vet them.

"Given the size of Russia’s central bank, and the unprecedented nature of this action, there’s only so much modeling can tell you," Fishman told Foreign Policy. "There are always unforeseen consequences, and even more so in this case."

The sanctions imposed by the West on Russia in response to its invasion of Ukraine are already historic. They may also shape the future of international politics for decades to come—in ways that are impossible to predict.

Edward Fishman, a former Obama administration State Department official who worked on sanctions policy (currently a senior fellow at the Atlantic Council), has a deep understanding of the backstory to this unprecedented economic response—the diplomatic groundwork that went into crafting the sanctions, the political hopes invested in them, and the efforts made to vet them.

“Given the size of Russia’s central bank, and the unprecedented nature of this action, there’s only so much modeling can tell you,” Fishman told Foreign Policy. “There are always unforeseen consequences, and even more so in this case.”

This interview has been edited for length and clarity.

Cameron Abadi: Even after the start of the war, experts didn’t seem to be predicting sanctions on Russia would go this far or this fast. How did it come to this?

Edward Fishman: These are sanctions without precedent—what I believe is the largest and probably most significant sanctions action in modern history, which is to block transactions with the Central Bank of Russia.

Why did it happen? I think it really was driven by good preparation. The United States, the EU, and the G7 have been coordinating very proactively over the last few months to build sanctions options, and I think there’s a high level of trust among the key officials in the government who came out with these sanctions.

But I think at the political level, there’s just been a tremendous shift in opinion, particularly in Europe, driven by just the horrific images of Russia’s aggression in Ukraine and Putin’s unprovoked war. Europe is waking up to the realities of the threat that Russia poses and, as a result, the European Commission felt empowered to put together these types of sanctions.

The other announcement that was made was that the West would be cutting off selected Russian banks from the SWIFT interbank messaging service. That was something the Ukrainian government had been calling for, and certainly a lot of people in the media have been calling for. But the real headline is the transaction ban on the Central Bank of Russia. Like I said, this is sanctions action without historical precedent.

CA: But strictly speaking, these aren’t unprecedented, right? Most recently, the Central Bank of Iran faced similar sanctions. What is the difference between imposing these kinds of central bank sanctions on a country like Russia versus Iran?

EF: You’re right. But to compare the sanctions imposed on the Central Bank of Iran with the sanctions on the Central Bank of Russia is to compare an ant with an elephant. The Central Bank of Russia has more assets than the entire Iranian economy had at its peak in the early 2010s. It’s a categorical difference in terms of how large the entity is.

I also want to stress that Putin had likely believed that the $650 billion pile of foreign exchange reserves that he had compiled with his central bank would be at his disposal and used throughout his war with Ukraine, that if Russian banks and companies would have been sanctioned that he could just deploy those foreign exchange reserves. I think what he didn’t anticipate is that the United States and Europe would come together and jointly block those assets from moving.

CA: Maybe we could spell those consequences out a bit. How are sanctions on the central bank affecting the broader Russian economy? What does this mean for everyday Russians and Russian businesses?

EF: Even before the sanctions were enacted on Monday, Russia began seeing a massive bank run with lines around the block and Russians doing whatever they can to withdraw dollars from Russian banks. Financial panic, right? As seen in previous financial crises, financial panic is more of a psychologically driven phenomenon. And I think what we’re seeing is that financial panic is running out in front of the specific actions that are being imposed on Russia.

Here’s my best example of that. There was a lot of discussion in the last week about sanctions being imposed on Sberbank, which is Russia’s largest bank by far. It accounts for about 30 percent of the assets in the Russian banking sector, and about 60 percent of Russians are paid their wages to Sberbank. From an American perspective, imagine Wells Fargo, Bank of America, Capital One, all put together in ono. That’s the significance of Sberbank to Russia. And the United States imposed some sanctions on Sberbank earlier this week. These were not full blocking sanctions. They were a slightly more modest version of sanctions. They actually don’t even come into force until the end of March. So, currently, there are no restrictions on basic transactions. And still, the European Central Bank came out Monday and said that Sberbank’s European subsidiary is about to go bankrupt—to run out of money.

What that tells you is that the financial ripple effects of this sanctions action are going well beyond the specific targets that are in there. We’re seeing banks that aren’t even really targeted by sanctions yet fail. That is the beginning of a pretty substantial financial crisis.

CA: What’s the political strategy behind these sanctions? Is it to weaken the Russian economy as a whole and cause the kind of financial crisis that you’re describing, and thus put pressure on political leaders?

EF: I think it’s important to separate near-term and long-term goals. In the near term, the goal of these sanctions is quite clear. It’s to persuade Putin to stand down in Ukraine, to persuade Putin to sue for peace. And I would suspect, by the way, if Putin were to retreat from Ukraine that you would see the West quite willingly pull back some of the most draconian sanctions.

There’s also a long-term goal of sanctions. And I think what we’ve all come to realize, some of us sooner than others, is that so long as Putin is president of Russia, there can be no friendly relationship between Russia and the West. As a result, I do think that it is a legitimate goal of sanctions moving forward to degrade Russia’s capacity to do harm, what I call economic and technological attrition.

The Central Bank of Russia does not need to be sanctioned long term for that to happen. However, some of the other measures, like the export controls that were announced that are aimed at reducing Russia’s high-tech imports by more than half, I can’t see any rationale for lifting them so long as Putin says in the Kremlin.

CA: Given how unprecedented these sanctions are, how confident can we be in the outcomes? In your own previous role in the U.S. government, were these kinds of sanctions, these central bank sanctions on country the size of Russia, something modeled in detail? Or are we really just grasping in the dark here?

EF: We’ve definitely been thinking about using sanctions against Russia now for eight years, and so they’ve all been pretty well vetted. I think the thing that’s surprising is that the Europeans in particular would be willing to go this far.

I will add the one caveat, though: given the size of Russia’s central bank, and the unprecedented nature of this action, there’s only so much modeling can tell you. There are always unforeseen consequences, and even more so in this case.

CA: Is it possible that the political response in Russia might even end up being different than the one we’re expecting? Maybe the Russian public could blame the West rather than Putin or Putin might lash out in an even more destructive way?

EF: This was an action you don’t take lightly. It’s not one you can take without having some reservations, right? I think it would be cavalier to say, you know, it’s a slam dunk. I think certainly it’s the right thing to do. And I want to stress that no sanctions, no economic measures taken against Russia, are proportional to the violence it is inflicting upon Ukraine.

But in terms of how will this translate into political pressure, I think the most reasonable speculation would be that all of Russian society, from the mainstream Russian to the wealthiest oligarch, will feel the costs. This isn’t going to be some war where they sit around in their living room, eating popcorn, watching it on television, and praising Putin for being the tough guy. This is a war that they will feel, and soon. And I think that the best-case scenario is that that translates to pressure on him to change his calculus.

CA: How has the Central Bank of Russia has responded? It seems it’s been dealt a bad hand, but is it playing it well?

EF: The Central Bank of Russia started Monday by hiking interest rates of 20 percent, much like it did in responding to the economic fallout from invading Ukraine in 2014. And we’ve also seen a riskier move to prevent Russians from paying foreign debt, imposing capital controls in Russia, which could risk significant defaults. I think that’s a very risky game to play, but it seems to be driven by the Kremlin. That’s why I don’t foresee a way out for the Russian economy. These sanctions are just orders of magnitude stronger than what happened in 2014.

Cameron Abadi is a deputy editor at Foreign Policy. Twitter: @CameronAbadi

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