The last time Russian President Vladimir Putin sent troops into Ukraine, U.S. sanctions tipped the Russian economy into recession. This time, the Americans and their European allies have leveled penalties that could lead to a full-on economic collapse.
While the blows against Russia by Western governments following last week’s invasion of Ukraine are potentially crippling, the seeds of the response were planted in 2014 after Moscow’s seizure of Crimea, when those who are today driving U.S. sanctions policy held more junior roles in the Obama administration.
The 2014 penalties were narrower in scope and failed to deter Putin from further land grabs. Now, administration officials say they learned key lessons. Among them: They needed to share more information with the Europeans in advance and to work together on aligning their reaction for maximum impact.
“We were more resistant to doing that in the [Obama] administration, for all the obvious reasons of trying to protect sources and methods,” a senior Treasury official said about intelligence sharing. “But being able to do that, to find a way to get the information to our friends and allies, was critical.”
That strategy was made easier by the fact that Biden administration officials now overseeing sanctions became thoroughly familiar with the nuance of sanctions policy during Russia’s last military campaign and developed extensive relationships with their European counterparts.
Daleep Singh, deputy national security adviser and deputy director of the National Economic Council, and Peter Harrell, senior director for international economics and competitiveness at the National Security Council, were at the center of the U.S. reaction in 2014. Deputy Treasury Secretary Wally Adeyemo became President Barack Obama’s deputy national security adviser for international economics that year. And Treasury assistant secretary for terrorist financing Elizabeth Rosenberg, a former senior adviser to the Obama Treasury for sanctions, is now a prime architect of the economic response to Russia’s military actions.
“That we have those relationships, frankly, just means that we have a reservoir of trust with each other, and we know each other and we can speak in shorthand in ways that you can’t when you’re just building a new relationship,” the senior Treasury official said. “And it’s made us more nimble in terms of being able to react quickly.”
Success is far from assured, however, and Russian troops show no sign of letting up in their onslaught against Ukraine. China is not on board with sanctions and may yet provide significant help to Moscow. And Putin’s government also learned lessons from the past and has spent the past seven years building up a war chest of foreign reserves that it hopes will cushion the impact from sanctions.
Yet former Obama administration officials who have followed Russia’s response closely in the years since the Crimea invasion knew that preventing Putin from accessing those reserves would be critical to ensuring that the latest penalties were more effective. That’s where the sanctions on Russia’s central bank — an extraordinary move — come in.
The U.S. has unveiled a raft of measures over the past several days aimed at knee-capping Russia’s economy and undermining Putin’s ability to tap Western financing sources, including restrictions on the country’s biggest financial institutions, oligarchs and their family members, as well as export controls that limit Russia’s access to critical technology.
The actions were taken in near-lockstep with European allies, the result of months of work.
One of Adeyemo’s first major tasks at Treasury was completing a top-to-bottom review last year of U.S. sanctions policy, which involved detailed conversations with European allies about what worked and didn’t work before and how to make them more effective.
When President Joe Biden directed officials to begin putting a sanctions package together in November, much of the work was already done.
Intense consultations followed, with U.S. officials including Rosenberg traveling to Europe last month to finalize potential sanctions packages. Also greasing the wheels was that Treasury Secretary Janet Yellen had already forged ties with her European counterparts in negotiating an international tax treaty.
Though the threat of coordinated action was telegraphed publicly, Russia moved ahead with its plan to invade Ukraine, having taken steps to reduce its dependence on the U.S. dollar and foreign imports.
“Nobody can say what’s happening in Putin’s brain, but he obviously felt the confidence to move ahead regardless of the economic blowback,” said Heidi Crebo-Rediker, a chief economist at the State Department during the Obama administration. "Sanctions did not deter."
But, she added: “I also think he significantly underestimated what the dialing up of sanctions would mean. I think he significantly underestimated the degree to which allies would collaborate, really across the board.” She credited the fact that officials had a playbook “ready to go.”
The U.S. took pains to carve out Russian energy as much as possible from the punishment, in part because any direct actions focusing on oil could result in higher global prices — and thereby even help the Russians, but also in recognition of Europe’s dependency on Russian oil and gas. U.S. officials also worked with allies and major natural gas producers to ensure that Europe would have adequate energy supplies if Putin decided to cut off shipments that flow through Ukraine.
Before taking on their current roles, Harrell and Rosenberg spearheaded a December 2020 paper published by the Center for a New American Security that underscored the importance of this approach. “U.S. policymakers will have to keep in mind that many allies and partners have critical economic relations with both China and Russia that they will be wary of disrupting,” they wrote.
Former Treasury Secretary Jacob Lew, who oversaw sanctions policy during the 2014 annexation of Crimea, said keeping European allies on board then was a careful balancing act.
“You couldn’t actually be tougher by doing more than your European allies would go along with," Lew said at an October panel discussion on Treasury’s sanctions review. "They had ways to undermine what you were doing, whether it was to maintain their energy supply or to deal with other issues that are domestically very important to them, in terms of potential retaliatory actions that they might face.”
The coordination ultimately produced aggressive action on the part of the Europeans, such as cutting off some Russian banks from the SWIFT bank messaging system, with pains taken to shield energy trade transactions as much as possible.
As Russian forces closed in on Kyiv last weekend, the U.S. and other Group of Seven nations took the extraordinary step of cutting off the Russian central bank’s ability to tap its emergency reserves — a move that tanked Russia’s currency and threatened to cause widespread panic among its citizens.
“President Putin has underestimated our resolve to hold him to account for his premeditated, unprovoked war against Ukraine,” a State Department spokesperson said.
The key objectives, the senior Treasury official said: Maximize the impact on Russia while minimizing the impact on the U.S. and Europe; have an immediate, significant impact on the Russian economy; and degrade Putin’s ability to project power over the long term.
The moves go far beyond steps taken in response to Russia’s invasion of Crimea.
“From the first tranche, we started at a place that was more significant than what we did in 2014, and then we escalated from there,” the official said.
Adam Posen, president of the Peterson Institute for International Economics, said the moves, while effective, raise important questions about the extent to which policymakers should weaponize macroeconomic policy.
He said it’s also remarkable how quickly the G-7 countries seemed to coalesce around the idea of cutting off Russia’s access to its reserves given the potential downsides.
“You’re almost certainly going to lose assets” if Russia retaliates, Posen said. “You’re almost certainly going to make some other regimes decide they should be dumping dollar reserves, and making sure they have gold reserves or yuan reserves instead.
“You raise the probability of more countries trying to orient into the Chinese system rather than the American system of finance.”
Meanwhile, though the measures have sent shockwaves through Russia’s economy, it’s not yet clear what short-term relief they might bring to Ukraine.
“At this point, it’s not saving lives in Ukraine, but it is a huge show of unity across the world with the exception of a few important countries, especially China," said Crebo-Rediker, now an adjunct senior fellow at the Council on Foreign Relations. "It shows that behavior like this is not acceptable, and there are consequences.”