How to deploy economic tools against Putin’s aggression



Brian O’Toole | Daniel Fried | Atlantic Council

On February 22, the Biden administration took its first actions in response to Russian President Vladimir Putin’s long list of aggressive and repressive actions: imposing sanctions related to the Nord Stream 2 gas pipeline.

Critics observed that these were a mere reapplication of sanctions previously imposed by the Trump administration. In fact, the Biden administration is reportedly thinking through stronger options for pushing back against the Kremlin, and these initial measures were likely just the opening gambit ahead of sanctions in the coming weeks that will be more responsive to Russia’s most recent aggressions—in particular, the SolarWinds hack and the poisoning and subsequent arrest of Russian dissident Alexei Navalny.

That staging makes sense. The Nord Stream 2 sanctions, and the public signaling of more action to come, buy at least a little more time for the Biden administration to more fully evaluate what steps to take next. The Biden team probably wants to think through its Russia policy, which malign Kremlin behavior it wants to contest at which times, and what its best tools are; National Security Advisor Jake Sullivan, for example, was quick to notethat the US response to Russia will not consist solely of sanctions. The administration will also want to reestablish the transatlantic coordination on Russia policy, including economic statecraft, that prevailed after Putin’s 2014 attack on Ukraine.

Yet the Biden team won’t have as much time as it wants for a full policy review. Life doesn’t wait for any administration—and neither will Putin. Drawing on our experience helping design the US response to Putin’s invasion of Ukraine in 2014, we offer below ideas for how the US government can deploy sanctions and other tools of economic statecraft as part of a broader Russia policy.

Prepare a stronger sanctions response to Kremlin repression of Navalny

This is an urgent challenge. The Kremlin is escalating its attacks on Navalny—sentencing him on risible charges (like missing parole appointments because of his medical recovery from a suspected Kremlin poisoning with the chemical weapon Novichok) and repressing nationwide protests. And the US response is lagging behind that of the European Union, which sanctioned senior Russian officials last October for the attempted assassination of Navalny and agreed on February 22 to sanction four more senior Russian officials over Navalny’s latest conviction. The Trump administration took no action on these matters and further US inaction would indicate indifference, which is far from the message the Biden administration intends to send.

The United States should at least catch up to the European Union and sanction senior Russian officials responsible for the recent Navalny-related repression, such as the judges involved in his case and Kremlin apparatchiks involved in the decision-making on Navalny and repression of peaceful protests. It could do so by using the Magnitsky Act, a US sanctions authority that has galled Putin since its passage in 2012.

But the United States shouldn’t stop there. In their response to Putin’s invasion of Ukraine, the US and EU targeted senior members of the Russian president’s circle of business cronies and partners in corruption, including prominent Putin financiers. The thinking behind this big step was to target players in the Putinist system in addition to targeting individuals in the formal government. The same principle should apply to the US (and EU and UK) response to Putin’s vengeful attacks on Navalny. One of Navalny’s associates has publicized a list of eight potential targets—among them two oligarchs and two major bankers tied to Putin, and two “princelings,” or children of the Putin elite. That’s a good starting point for an expanded set of individual sanctions.

The Biden administration may have its own ideas about who to target and must do its due diligence. (Consider the cautionary tale of the Trump administration’s sanctions designation of the oligarch Oleg Deripaska and his companies, which, while merited, had unintended consequences that forced the administration to partially walk it back.) The US government should coordinate any larger target list with the United Kingdom, the European Union, Canada, and any other country interested in joining the sanctions effort. But it should also be prepared to act without the EU, whose criteria for sanctions do not include corruption. That criterion is included in the Magnitsky Act, and it will almost certainly be necessary to target the types of figures that Navalny’s team has put forward.

The United States should also consider responding to the repression of Navalny with restrictions on the issuance of Russian sovereign debt. The Trump administration took limited action against Russian sovereign issuance using the Chemical and Biological Weapons Control and Warfare and Elimination Act of 1991 (CBW Act) in response to the attempted assassination (also using the Novichok chemical weapon) on UK territory of former Russian intelligence officer Sergei Skripal and his daughter in 2018. But the Trump administration defined that sanction in ways that substantially limited its impact. The Biden administration should give it greater teeth by fully restricting participation or trading by US persons in any new Russian sovereign-debt issuance. The United States should attempt to get the United Kingdom on board with this effort as well, since many non-ruble offerings of Russian sovereign debt take place in London. Even without similar action by the UK, though, prohibiting US market participants from such offerings may be sufficient. Under such circumstances, European (UK or EU) banks are likely to have very little appetite to participate without US buyers willing to purchase such instruments on secondary markets. 

Nord Stream 2: Use sanctions to kill it or find a way to address its strategic risks?

Deciding how to proceed on Nord Stream 2, the fraught Russian-German gas-pipeline project, is a major early challenge for the Biden administration. The project is divisive within Europe, even within Germany, and a potential flashpoint in US-German relations at a moment in which that relationship is still in a touchy place. The project’s critics have a very strong case. Nord Stream 2 does not advance Europe’s declared energy goals. It would give the Kremlin additional energy leverage over Europe by allowing it to ship gas directly to Germany while potentially curtailing gas shipments to Ukraine, Poland, and other Central European countries. But the cost of sanctioning a critical ally—most of the remaining targets are German—over concerns with Moscow’s coercive energy policies may well be too high.

The threat of sanctions has already caused major delays to Nord Stream 2, but it is unclear whether those threats will prevent the completion of the project. Richard Morningstar, Daniel Stein, and Dan Fried have described a potential alternative approach that would seek to reduce Nord Stream 2’s risks through the development of energy infrastructure and LNG facilities in Poland and the Baltics, enforcement of the anti-monopoly provisions of the EU’s Third Energy Package, and “snapback” contingency sanctions against Russian targets should it violate its gas-transit agreement with Ukraine or reduce without good cause gas shipments to any EU member. Facing pressure from sanctions mandated by the US Congress and continued opposition to Nord Stream 2 from the Biden administration, the German government may be considering its own options.

There thus may be a basis for discussions among the key stakeholders—the United States, Germany, Poland, Ukraine, and the European Union—to avoid a blow-up while addressing the real problems that Nord Stream 2 creates. In fact, Congress’s 2020 legislation on Nord Stream 2 sanctions includes a requirement for the US government to consult with Europe before imposing sanctions and includes a waiver provision that the Biden team could rely on if stakeholders reach a suitable agreement on the pipeline project and controls to mitigate its risks.

Launch a broader review of Russia sanctions

As part of its broader review of Russia policy, the Biden administration should consider the role of sanctions in responding to the breadth of malign Kremlin behavior. That behavior includes the SolarWinds hack; bounties offered by Russian military intelligence for the killing of US soldiers in Afghanistan; election interference in US (and European) elections; increased violence in Ukraine (and ideas recently floated by the Kremlin about seizing the Donbas region of Ukraine like it did Crimea); human-rights abuses in Syria, partnership in Alyaksandr Lukashenka’s repression in Belarus; the export of instability via state-adjacent mercenaries; and cheating on UN-mandated sanctions on North Korea. That’s a lot. And Putin shows no sign of letting up.

These considerations could include the following options:

Deploy individual sanctions more sharply: Some Russia policy hands and many Russian dissidents striving for democracy argue that the United States and Europe should impose individual sanctions on culpable Russian officials and especially Putin’s cronies, bagmen, informal agents, and princelings—a strategy that boils down to targeting the money in what is arguably the world’s largest kleptocracy.

Dissidents argue that such sanctions will generate more support among Russians, who will appreciate that action is being taken against the corrupt and super-rich oligarchic kleptocrats who run Putin’s system and have an impact on Putin himself. Indeed, the sanctions against Putin’s closest cronies since 2014 seem to have grabbed the Kremlin’s attention more than just about any other sanctions measures. The consternation with which many prominent Russians in the Kremlin’s orbit awaited the Trump administration’s publication of the “Kremlin Report,” a list of Putin’s circle mandated by Section 241 of the 2017 Countering America’s Adversaries Through Sanctions Act (CAATSA), suggests that this tool does have power. The Trump administration bungled its handling of the Kremlin Report and vitiated its impact, but the concept remains valid.

According to some Russian dissidents, going after Putin’s people and depriving them of the ability to travel to Europe and the United States (and park their ill-gotten wealth there) also sends a message to these figures that they are known to US and European officials, that they cannot hide, and that Putin cannot protect them. Depriving wealthy Russians of their ability to visit the West and send their children to school there has far greater impact than depriving Americans and Europeans of the opportunity to visit Moscow.

The Biden administration can draw on its own resources as well as input from independent researchers in and outside Russia to map out the Putinist system and apply sanctions to it. A note of caution, though: It is exceedingly difficult to find the (already sanctioned) Bank Rossiyas of the world where Putin and his bagmen hide their money. The Biden team should put these targets at the top of any sanctions list, but uncovering dark financial actors may prove to be a challenging task.

Develop additional sectoral sanctions: Broader economic sanctions do hurt the economy of the country against which they are targeted. As was the case with the Soviet Union in the 1980s, Russia’s economic stagnation is due mainly to its own weakness but has been exacerbated by outside economic pressure. While intensified and targeted individual sanctions may be the sanctions tool of first choice for the United States, sectoral sanctions should remain part of the tool kit as well—especially for those areas of the Russian economy that are most in Putin’s pocket and correspondingly affecting ordinary Russians less.

The Biden administration will have to fill out the list of potential escalatory economic sanctions. Several have been discussed by sanctions specialists for some time: additional financial-sector designations and restrictions (as in full blocking sanctions against the government development institution VEB and potentially other international Russian banks); complete blocking of Russian sovereign-debt issuance (as noted above); energy-sector sanctions targeting Gazprom’s access to Western capital markets, perhaps as contingency sanctions. The US Treasury, Commerce, and State departments should be tasked with expanding the current list of potential targets, working with Russia specialists in the Intelligence Community and possibly outside experts.

The policy problem is the breadth of malign Kremlin behavior for which these sanctions could potentially be applied. Sanctions have become crossed among the many programs under which Russians have been designated, including sanctions provisions under CAATSA. Even options for expanded sectoral sanctions are finite, with no guidance on criteria for their use (e.g., in response to which bad Kremlin action) and no clear criteria for whether to lift sanctions that were imposed on many grounds should progress be made in one area (e.g., Ukraine). The Kremlin may believe (and certainly argues) that sanctions relief is unlikely to occur under any circumstances, regardless of what actions it takes. The lack of a clear path to the lifting of sanctions weakens their impact, since Putin can adopt a “sanctioned if I do, sanctioned if I don’t” approach. Such a construct could, perversely, encourage Putin’s predilection toward risky gambles abroad.

Draw up an omnibus executive order on Russia sanctions: To address this problem and clean up authorities for Russia sanctions more generally, we recommend that the United States issue an omnibus executive order on Russia sanctions that folds under one umbrella the many designation criteria scattered among many executive orders related to Ukraine, chemical and biological weapons, cyberattacks, human-rights abuses, enforcement of existing legislation like CAATSA or Nord Stream 2, corruption, electoral interference, and external support for undermining democracy. Such an authority could also include new sanctions criteria to better target malign Russian activity globally, such as the actions of the Wagner mercenary group, rather than relying on individual country programs.

Neither the policy review nor a new executive order should attempt to link particular sanctions options to particular bad acts by the Kremlin. It should instead provide flexibility of application. A new executive order would remove the hurdles inherent in imposing sanctions under the expansive Ukraine-related sectoral authorities for non-Ukraine problems (like targeting Deripaska for electoral interference) and allow for more policy clarity since officials would not have to use the flexible Ukraine-related sanctions authorities for all major escalations.

Make off-ramps useable: Sanctions cannot be a one-way street toward ever greater escalation. A Russia sanctions executive order should also provide explicit authority and strong messaging for unwinding sanctions in the event of positive action by the Kremlin in an area of concern. To its credit, the Trump administration used such messaging language in Venezuela executive orders, and that concept can be carried forward here.

This approach would, for example, allow for removing sanctions on the St. Petersburg-based Internet Research Agency (IRA), the Kremlin-financed troll farm that led disinformation during the 2016 US elections, should Russia reach an agreement with the United States over electoral-interference issues—notwithstanding the original designation of IRA funder Yevgeny Prigozhin under Ukraine authorities (which was also merited). The executive order or accompanying rollout materials should make clear that, pursuant to an earlier understanding reached with the European Union, a settlement in the Donbas would trigger removal of Ukraine-related sectoral and individual sanctions, though Crimea-related sanctions would remain until the territory’s status is settled between Moscow and Kyiv.

Use the full economic tool kit to deal with Kremlin aggression and repression: Sanctions should not be the sole tool of economic statecraft, and the Biden administration should guard against using them reflexively because of their ease of use. Consistent with the Biden team’s emphasis during the campaign and since taking office, the United States and key allies should develop new tools to promote financial transparency and anti-corruption—and deploy them for ends such as countering Putin’s assault on democracy. Shining a light on the dark corners of the financial system reduces the space in which Putin and other autocrats can operate. It deprives them of the key levers of power (easy and anonymous use of the global financial system, for instance) that they require to continue to subjugate their people and create havoc around the world.

The details of how to do this are laid out more comprehensively in the work of the Atlantic Council’s Anders Åslund and Julia Friedlander, but include steps like pushing for greater corporate transparency, an end to corporate anonymity, the identification of beneficial owners of high-end real-estate deals and other means of money laundering. They also involve extending anti-money laundering rules to non-bank financial intermediaries (attorneys, art dealers, real-estate agents), and establishing a system that imposes real costs (in terms of both exclusion and confiscation) on those who flout the rules. Russia has made financial-transparency commitments within the intergovernmental Financial Action Task Force’s global and regional frameworks, and it should be held to account under those commitments. Western democracies in the Kremlin’s crosshairs can also share information on Russian dark money and disrupt Putin’s coercive efforts by impeding those flows.

The Biden team highlighted these tasks during the 2020 presidential campaign, and Joe Biden himself raised them in his February 19 speech at the Munich Security Conference. Given that there may be a lack of political will within the European Union and among other US partners to impose truly costly sanctions on Russia, it is entirely possible that these transparency measures will ultimately be the best method to combat Putin’s assault on democracy.

The application of sanctions and other tools of economic statecraft generate debate, as they should. They can be well or badly applied. They can be used in the service of sound or questionable policy objectives. But one principle is worth noting: The world’s aggressive autocracies should not be able to enjoy the fruits of democracies’ economic and financial systems while disregarding the rules and norms that created such wealth and liquidity in the first place. 

Brian O’Toole is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Program. He is a former senior adviser to the director of the Office of Foreign Assets Control (OFAC) at the US Department of the Treasury. Follow him on Twitter @brianoftoole.

Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. He was the coordinator for sanctions policy during the Obama administration, assistant secretary of State for Europe and Eurasia during the Bush administration, and senior director at the National Security Council for the Clinton and Bush administrations. He also served as ambassador to Poland during the Clinton administration. Follow him on Twitter @AmbDanFried.

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