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What to know about economic sanctions and how they will affect Russia

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(NEW YORK) — In response to Russian President Vladimir Putin’s decision to recognize the separatist-controlled Donetsk and Luhansk regions in Ukraine as “independent” states, President Joe Biden announced sanctions against Russia in an effort to deter it from launching a full-scale invasion into Ukraine.

Biden on Tuesday called Putin’s decision “the beginning of a Russian invasion of Ukraine” and warned that the sanctions could grow more severe.

“As Russia contemplates its next move, we have our next move prepared as well,” Biden said. “Russia will pay an even steeper price if it continues its aggression, including additional sanctions.”

Russia’s foreign minister Sergey Lavrov told Russian state TV that Russia was already “used to” sanctions and that it believes more sanctions would be imposed on Moscow regardless of what it does.

“That our [Western] colleagues are trying to push the blame on Russia for the failure of the Minsk agreements, we also understand,” he said, referring to a truce Ukraine and separatists signed in 2014. “Our European, American, British colleagues won’t stop and won’t calm down as long as they haven’t exhausted their possibilities for the so-called punishment of Russia.”

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What are economic sanctions?

Economic sanctions are defined by the Council on Foreign Relations as the withdrawal of customary trade and financial relations for foreign and security policy purposes. The sanctions can be comprehensive, which prohibit economic activity with an entire country, or targeted, which block transactions by and with specific individuals, businesses or groups.

These restrictions are placed on individuals or entities and prevent them from doing business with the country imposing those sanctions. Sanctions put in place by the U.S. government cut off an individual or entities from the American financial system, meaning they can no longer do business in the U.S. and all their assets under U.S. jurisdiction are frozen.

Americans and American businesses are also prohibited from doing business with these institutions, unless authorized by the U.S. Department of Treasury’s Office of Foreign Assets Control.

Sanctions aim to impair the ability of the person or entity from being able to perform basic functions in the international financial system. They are used by the U.S. government depending on foreign policy and national security goals.

What sanctions did the US impose on Russia?

Sanctions were placed on two Russian state-owned financial institutions and five Kremlin-connected elite.

The financial institutions targeted are the Bank for Development and Foreign Economic Affairs, which is known as Vnesheconombank (VEB), and Promsvyazbank Public Joint Stock Company (PSB), along with 42 of their subsidiaries.

According to the U.S. Treasury Department, VEB is crucial to Russia’s ability to raise funds, and PSB is critical to Russia’s defense sector. The two institutions and their subsidiaries hold combined assets worth tens of billions of dollars.

“Today’s action constrains Russia’s ability to finance defense-related contracts and raise new funds to finance its campaign against Ukraine,” the Department of Treasury said in a statement Tuesday.

VEB has an asset portfolio of $53 billion, making it one of Russia’s top five financial institutions, according to the Treasury Department. Some of VEB’s sanctioned subsidiaries include banks and other financial firms, electronic component producers and a coal mining group in Russia and three other countries.

It is a servicer of Russia’s sovereign debt, a financier for exports and a funding source for investment projects with a loan portfolio of over $20 billion.

VEB finances Russia’s national economic development, including large-scale projects to develop domestic infrastructure and other industries critical to Russia’s generation of revenue.

PSB, Russia’s eighth-largest bank, was designated by the government to finance the Russian Ministry of Defense and defense sector, according to the U.S. Department of Treasury. It services nearly 70% of Russia’s defense contracts and provides banking and personal finance to Russian military personnel.

Seventeen of PSB’s subsidiaries were also sanctioned, including financial, technology and real estate-related entities.

Influential Russians and their family members who are in Putin’s inner circle and believed to be participating in the Russian regime’s “kleptocracy” — including the chairman and CEO of PSB — were also sanctioned, the Department of Treasury said.

“Today’s actions, taken in coordination with our partners and allies, begin the process of dismantling the Kremlin’s financial network and its ability to fund destabilizing activity in Ukraine and around the world,” Secretary of the Treasury Janet Yellen said.

“We continue to monitor Russia’s actions and if it further invades Ukraine, the United States will swiftly impose expansive economic sanctions that will have a severe and lasting impact on Russia’s economy,” she said.

Will the sanctions have an effect?

The sanctions put in place were not the most severe option available. They targeted institutions specific to raising funds and Russia’s defense sector, instead of institutions that ordinary Russians use.

“The measures today will have a measured impact on the Russian financial system. VEB is a significant bank, but it’s not the bank that banks everyday Russians. It’s a little more niche,” said Julia Friedlander, a former Treasury Department official who worked on sanctions policy.

She said not putting in place the most severe sanctions right away serve as a tactic.

“The idea is that you can’t blow all your options at once,” Friedlander, who is now a fellow at the Atlantic Council, said. “If you blow all your fire now, then what is Russia’s incentive to hold back?”

Sanctions that could be the most impactful would target Russia’s largest banks — like the state-owned banks that cover more than half of the Russian financial system — and the energy sector, Maria Shagina, a sanctions expert who specializes in Russia and Eastern Europe, told ABC News.

Sanctions on major banks could impact ordinary Russians, Shagina said. Sanctions on the current production of oil and gas could also have an impact, but the U.S. and Europe could also see spikes in prices. If future production is sanctioned, it would be less impactful, Shagina said.

White House officials have said they are considering targeting Russia’s largest banks. Experts told ABC News that hitting those big state-owned banks — Sberbank, VTB, Gazprombank and Rosselkhozbank — would mark a major escalation in the United States’ response.

“There’s a lot more banks out there that have a much larger role in the economy,” said Andrew Lohsen, a former officer with the Organization for Security and Cooperation in Europe (OSCE) Special Monitoring Mission to Ukraine.

Russia has been preparing for sanctions, he said. Sberbank has reportedly been testing its ability to survive without access to Western software. It also has hundreds of billions in foreign currency reserves and in a national wealth fund.

“The Russian economy has worked to sanction-proof itself since 2014,” Lohsen, a fellow at the Center for Strategic and International Studies, told ABC News. “But at the end of the day, my concern is that Russia will just force its citizens to tighten its belts and will just proceed with this empire building project that it’s set for itself in Ukraine.”

He questioned whether the sanctions put in place will be enough to deter Russia.

“Can anything deter Putin,” he said, “short of return fire?”

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