Treasury Secretary Janet Yellen has spent most of her life working to nurture economic growth. Now her department is tasked with finding ways to choke off parts of Russia’s economic development in response to President Vladimir Putin’s aggression against Ukraine.
One key question for the administration is how to measure the success of such an endeavor.
With inflation already at record highs, a global pandemic that keeps businesses struggling to reopen and an energy shortage throughout Europe, the mathematics on punishing one of the world’s biggest economies can be complex to tease out.
The first round of sanctions came before Putin on Thursday announced in a televised address a military operation in Ukraine and warned other countries that any attempt to interfere would lead to “consequences they have never seen.” As he spoke, big explosions were heard in Kyiv, Kharkiv and other areas of Ukraine.
Hours earlier, White House press secretary Jen Psaki on Wednesday ticked through a list of factors the administration is watching, describing recent trends of rising borrowing costs for the Russian government, falling foreign investment in the country, increasing weakness of the ruble and shrinking fortunes for the “super-rich.”
She added that all of this had transpired “before the bite even takes place” from the new sanctions that the U.S. and its allies started to roll out on Tuesday.
“’This is a vicious feedback loop that will get more severe” if Putin doesn’t pull back, she said, adding that if elites tried to use their bank cards for transactions on Tuesday, they “wouldn’t have been working.”
After Putin announced the launch of military operations against Ukraine, President Joe Biden promised that on Thursday the U.S. and allies would announce “further consequences” against Russia for its “needless act of aggression against Ukraine.”
Experts with knowledge of how the U.S. imposes sanctions say the biggest determinant of the success of such measures won’t be in the valuation of Russian markets, the ruble or other assets.
“To be honest, there aren’t any formalized systems, processes or procedures where Treasury actually makes that assessment, so that’s an interesting shortcoming but it’s a reality,” said Adam Smith, who served in the Obama administration as senior advisor in Treasury’s Office of Foreign Assets Control. “The bigger question is, are these going to change President Putin’s mind.”
The administration, in its first tranche of sanctions Tuesday, moved to cut off Russia’s government from Western finance, sanctioning two banks and blocking it from trading debt on U.S. and European markets. On Wednesday, President Joe Biden allowed sanctions to move forward against the company that built the Russia-to-Germany Nord Stream 2 gas pipeline and against the company’s CEO.
Nicholas Mulder, a professor of modern European history at Cornell University, says there are sometimes concrete measures of successful sanctions. He cited the restrictions on Iran’s growth, particularly from 2011 to 2015, when crude oil exports dropped by more than half.
In April 2015, then-Treasury Secretary Jack Lew said Iran’s economy had shrunk by 20 percent due to sanctions, according to a Congressional Research Service report.
But Mulder says that since Russia is a massive economy, the mathematics on sanctions enforcement and their success will look different, saying “it quickly becomes difficult in terms of repercussions on global markets.”
That’s why sanctions are often imposed on individuals, not an entire economy.
Psaki predicted that the initial round of sanctions “will have a significant impact on Russian leadership in the inner circle,” essentially cutting off their ability to tap into funds from state-owned banks that are being blocked from making transactions with the United States and Europe.
Those banks, she said, were “some of the glorified piggy banks for the Kremlin” and included one where military finances have been held. She added that “no financial institution is safe” from further sanctions if the Russian government continues movement into Ukrainian territory.
William C. Wohlforth, faculty director at the Dartmouth Institute for Global Security, said the most recent financial penalties should be viewed as a “warning shot across the bow about what could be done.”
“The only indicator that matters is whether it deters Putin from further moves in Ukraine. Sanctions on this or that oligarch will have zero effect,” he said.
Mulder said measuring success will also be difficult as Asian economies now take on a larger chunk of trading with Russia than they had in 2014, when sanctions were imposed when Russia annexed Crimea from Ukraine.
“There are ways of adjusting trade,” Mulder said, given that non-European countries will maintain commerce with Russia.
Smith stressed that the market costs of sanctions shouldn’t be the only measure of success, but should also include the possibilities of what sanctions serve to prevent.
Citing the 2014 sanctions issued on various individuals and entities, Smith said Putin “took Crimea, but theoretically without those 2014 sanctions they could’ve gone into Kyiv.”
He said Treasury and the administration juggle many challenges but, “the task of measuring success is somewhat of a fool’s errand.”