Jack McBreen

Associate Editor

Loyola University Chicago School of Law, JD 2023

As the pace of Russia’s incursion into neighboring Ukraine escalated three weeks ago, starting with a massing of troops on Ukraine’s eastern Donbas border and expanding quickly into a full-fledged military invasion, so too did the response of the United States and its Western allies. Initially, the Biden Administration proceeded cautiously, deciding against levying its harshest sanctions over concerns of how they would impact European and global economies and that a stepped approach offered the best chance for de-escalation of tensions. The government began by blacklisting two major state-owned banks that are tied to the country’s defense sector and five Russian nationals with close links to the Kremlin. The U.S. and its European allies also banned the Kremlin from raising new money in the U.S. and Europe and trading new sovereign debt in U.S or European markets. In addition, Germany unilaterally halted certification of the Nord Stream 2 natural gas pipeline which was set to go ahead sometime later this year, an action applauded by the U.S. who had long argued against the project fearing that it would increase Europe’s dependence on Russian fuel.

As Russian tanks rolled westward, the U.S. stepped up the pressure by implementing a broad range of export controls. The U.S. Commerce Department targeted Russia’s defense, aerospace and maritime industries and restricted the export of semiconductors, computers, information security equipment, telecommunications, lasers and sensors. Included in the ban are all foreign-made products that use American blueprints, software and technology. Several allies and partners, including the EU, Japan, the U.K., Australia and Canada, promised to join in the export restrictions, displaying a momentous show of unity in the face of Russia’s unbridled aggression.

Targeting foreign reserves held by Russia’s central bank

Then, on February 28, after Russian missiles rained down on Ukraine’s capital, Kyiv, and more than a dozen other cities, the U.S., Europe and Canada unveiled a series of economic sanctions of historic proportion. In a coordinated effort designed to isolate the Russian economy, the Western allies agreed to block Russia’s central bank from accessing and selling dollars, euros and other foreign monies currently held in its emergency reserves stockpile. Russia has spent years amassing a $630 billion war chest by converting revenue generated from its oil and gas companies into a trove of securities, bank deposits and gold. Foreign reserves are by definition held abroad, frequently in government bonds of other nations or at accounts with commercial banks or other nations’ central banks. It is believed that upwards of forty percent of Russia’s foreign reserves are held in the U.S., Canada and Europe. The lack of access to these funds limits the Russian government’s ability to stabilize and defend the ruble in currency markets, make foreign purchases, internally backstop its own commercial banks that have been handicapped by international sanctions, and manage the country’s financial system.

Western banks and businesses, wary of the looming instability and of running afoul of the sanctions, exacerbated the situation by ceasing local operations and halting sales to Russian companies. Anticipating a selloff, the central bank responded by closing the Russian stock market and more than doubling interest rates from 9.5% to 20%. In addition, the ruble experienced its largest one-day drop since 1998 and fell more than twenty percent against the U.S. dollar.

Ratcheting up the pain with other sanctions

The U.S. Department of the Treasury’s Office of Foreign Assets Control also blacklisted Russia’s two largest banks, VTB and Sberbank, and added dozens of other financial institutions to the rolls of sanctioned parties. The Treasury Department estimates that its actions target almost of all banking assets in Russia and, believes these measures, coupled with the severing of Russian banks from the Swift financial messaging system, will severely hamper the country’s access to the global financial system.

The U.S. government announced that it will be closing off American airspace to all Russian aircraft, including scheduled and charter passenger and cargo flights and any plane owned, certified, operated, registered, leased or controlled by or for the benefit of a Russian citizen. In addition, Attorney General Merrick Garland said on March 2 that the Justice Department was assembling an interagency task force that will focus on enforcing U.S. sanctions, export restrictions and other economic penalties levied against Russia. The KleptoCapture task force will also target the use of cryptocurrency in evading U.S. sanctions and will use asset forfeiture tools to seize property – luxury real estate, private jets, yachts and other high-value assets – belonging to sanctioned individuals, including those on a recently expanded list of pro-Putin oligarchs and their families.

Even without sanctions or export controls, companies are retreating from Russia

Although the Western allies’ aggressive sanctions are supposed to carve out exemptions for Russia’s oil and gas supplies, on which Europe and other parts of the world are so heavily dependent, in fact, many businesses are going beyond what the sanctions require and steering clear of anything to do with Russia. Insurers have stopped issuing political-risk and lack of trade-credit insurance which will negatively impact Russia’s cross-border trade with other countries. The technology export controls are so broad and complex that many U.S. companies have simply paused all Russian-related sales until they can figure out what is and is not permitted. The logistics of delivering goods has been complicated by the suspension of air freight services from FedEx and UPS. And some companies have decided to cease operations and withdraw from Russia if only to stand in solidarity with the Ukrainian people. Although sanctions have not proven to be an effective tool against authoritarian regimes in the past, we are in uncharted territory here. Our nations are more tightly connected than ever before – through technology, trade and intertwined financial systems. It remains to be seen how long the Russian economy can survive being unplugged from the rest of the world.