How to Hit Russia Where It Hurts

A Long-Term Strategy to Ramp Up Economic Pressure

Russia’s 2014 annexation of Crimea, its war in eastern Ukraine, its interference in the 2016 U.S. presidential election, and other aggressive acts against the United States and its allies demand a strong Western response. For the past four years, that response has been dominated by sanctions and other coercive economic measures. U.S. and European officials have hoped that the economic measures would not only exact a cost for such actions but also deter the Kremlin from escalating its assault on American and European interests.

The economic pressure has certainly had an effect. The IMF estimated that the sanctions linked to the 2014 invasion of Ukraine cost Russia 1 to 1.5 percent of its GDP by mid-2015. The sanctions also hurt the Russian treasury’s bottom line, since Russia had to make up for lost Western capital by spending billions of dollars to prop up large companies that depended on Western funds. The more recent sanctions announced in April 2018 in response to Russia’s interference in the U.S. election rattled Russian financial markets and put pressure on the value of the ruble. Specific people and companies have also felt the squeeze: the net worth of Oleg Deripaska, the pro-Putin oligarch, for example, has tumbled because of U.S. sanctions.

And yet sanctions have done little to change Moscow’s ways. Not only has Russia refused to make concessions on its military intervention in Ukraine but, in November 2018, it seized three Ukrainian naval ships transiting the Kerch Strait. According to a recent report by U.S. Director of National Intelligence Dan Coats, sanctions did not stop Russia from interfering in the U.S. midterm elections in 2018, and, indeed, Coats said that China and Iran tried to interfere as well. Nor have they dissuaded Moscow from abetting North Korea’s efforts to bypass international sanctions, propping up Syrian President Bashar al-Assad, or using a military-grade nerve agent in the Salisbury attack on Sergei Skripal, a Russian exile living in the United Kingdom.

The United States and Europe need a tough, coherent strategy to contain Russia’s economy and to have a meaningful chance of affecting Russian decision-making. Targeted sanctions remain useful in punishing individual officials, oligarchs, and companies when they attack Western interests. But simply imposing such measures from time to time in response to Russian provocations will never change Russia’s behavior. Instead, a more ambitious long-term approach is needed that focuses not only on specific officials and oligarchs but on Russian government revenues and the Russian economy as a whole. In a best-case scenario, a more ambitious economic strategy could raise political tensions in Russia and convince Putin to curb his aggression. But even in the more likely scenario where economic pressure fails to alter Putin’s strategic calculus, an ambitious strategy is key to undercutting Russia’s ability to achieve Putin’s objectives.

For an example of an effective program of economic pressure, policymakers need look no further than the end of the Cold War. In 1983, U.S. President Ronald Reagan signed National Security Decision Directive 75 (NSDD 75), stating that U.S. policy was to “contain and over time reverse Soviet expansionism.” The directive identified four intermediate economic goals: to ensure that Western relations with the Soviet Union did not facilitate Soviet military power; to avoid subsidizing the Soviet Union so as to increase internal economic stresses over time; to minimize Soviet economic leverage over U.S. allies in Europe and around the world; and to permit some trade, such as grain trade, that was mutually beneficial and offered no strategic advantage.

For all that has changed over the past 35 years, Reagan’s economic campaign against the Soviet Union still provides a useful template for a modern approach to containing Russia.

A BETTER STRATEGY

Any economic pressure campaign likely to affect Russia’s outlook has to starve the country’s military-industrial complex. The United States and Europe know this: they adopted export controls against Russian defense industries in 2014, and in 2017 the U.S. Congress passed a law sanctioning foreign companies and governments that engage in “significant transactions” with the Russian defense sector. These sanctions threaten Russia’s ability to export military equipment, a trade that is worth billions of dollars to Russia annually and helps extend the country’s global influence. In September of this year, the Trump administration sanctioned a senior Chinese military official and the Chinese military’s Equipment Development Department for purchasing Russian combat aircraft and a Russian air defense system.

Washington should press this advantage further still, persuading U.S. partner countries, such as India and Turkey, to cancel planned purchases of major Russian defense systems. In doing so, the Trump administration should rely not only on the threat of sanctions but also on positive inducements such as the potential for greater U.S. military cooperation. Washington’s decision late last month to authorize the sale of Patriot missiles to Turkey, for example, allows a U.S. ally to use U.S. military equipment instead of Russian technology.

At the same time, the United States can put pressure on Russia’s military supply chains. Although Russia produces most of its defense equipment domestically, it still imports component parts and dual-use equipment (technology that has both military and non-military uses). Technological innovations with major military applications, such as autonomous vehicles, are dominated by U.S. firms and will likely increase U.S. and European leverage in this area. Any measures Western governments can take to constrain Russia’s access to such emerging technologies are worth pursuing.

Western policymakers are already aware of the need to withhold resources from Russia’s military. But military sanctions are only one piece of a larger and more complex effort to diminish Russia’s economy and state revenues. On this score, since 2014, policymakers in Washington and Brussels have been reluctant to impose the most severe sanctions on Russia, such as blacklisting the largest Russian banks or kicking Russia out of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) international payments network, out of concern for the effect such sanctions might have on global financial and energy markets.

With Russian-European trade alone amounting to nearly 200 billion euros (approximately $230 billion) each year and Russia remaining one of the world’s dominant energy producers, the collateral costs of suddenly unwinding trade and financial relationships could be very high. Indeed, the U.S. Treasury Department was forced to partly roll back the sanctions it imposed on Deripaska, who made his fortune in global metals markets, after the sanctions caused global aluminum prices to rise 20 percent in the weeks after they were announced. Indeed, in late December, the Treasury Departmentannounced that it would remove several of Deripaska’s companies from U.S. sanctions lists in exchange for Deripaska divesting a part of his shares.

U.S. and European officials are right to be concerned about how sanctions could affect market stability, but there are still viable options. Sanctions and tough diplomacy could be used to deter new large-scale investments in key Russian export sectors such as energy, which in 2018 reached a post-Soviet record level of production and which continues to attract significant new Western investment. The goal of new sanctions should not be to cause a near-term disruption in this and other commodity exports, which could raise global prices and have significant adverse consequences. Instead, they should be designed to deter new investments in Russia with the goal of reducing the long-term volume and value of these exports and other major sources of Russian revenue over time. This gradual decline would give alternative suppliers time to enter the breach. In addition, Russia’s leverage over major global energy companies would gradually weaken as the companies refrain from making new investments in Russia. Restrictions on Moscow’s access to international capital markets, including its sovereign borrowing, are another useful tool and would reduce the capital available for investment inside Russia. Taking these steps would gradually make Russia’s adventurism harder to sustain, even while the Kremlin would be forced to make stressful tradeoffs among domestic economic priorities.

To increase the discomfort, U.S. and European officials should continue to try to drive a wedge between Putin and a Russian oligarch class that has profited handsomely off of his tenure. But the efficacy of oligarch sanctions has its limits. Landing on U.S. and European sanctions lists has, if anything, forced some oligarchs to tie themselves even more tightly to the Kremlin, given the lack of alternative business opportunities. For example, one of the first oligarchs sanctioned in 2014, longtime Putin confidant and childhood judo partner Arkady Rotenberg, ended up becoming the contractor Putin hired to build the bridge connecting mainland Russia to the occupied Crimean Peninsula. This suggests that oligarch sanctions may be stronger in the threat than in the execution. Policymakers should therefore make very clear what steps Russian oligarchs can take to distance themselves from Putin in order to avoid sanctions.

Ultimately, an economically weakened Russia is a Russia with less leverage over other nations, including the United States and Europe. But loosening those bonds requires a dedicated effort—one that policymakers should aggressively make. Since 2014, the European Union has taken steps to reduce its dependence on Russian energy, pledging to import more liquefied natural gas from the United States. This step is a positive one. But just last year, Russian oil giant Rosneft announced plans to acquire one of India’s largest refiners, Essar. Washington and allied governments should use diplomacy and international investment restrictions to encourage governments to block such acquisitions, particularly by Russian state-linked companies, because they provide Russia with long-term leverage in the countries where they occur.

In the United States, the Trump administration can use the recently reformed Committee on Foreign Investment in the United States (CFIUS) review process to restrict Russia’s ability to acquire stakes in technology firms. Doing so will not only reduce Russian leverage over U.S. businesses but also prevent Russia from gaining access to cutting-edge U.S. technology. Congress could step up disclosure requirements around Russian real estate purchases, which have become a gray-market haven for Russian money. And Congress should enact legislation requiring greater disclosure about who owns companies in the United States, which a 2012 study found ranks as the second easiest country in the world in which to establish a shell company. The lack of disclosure around real estate purchases and corporate ownership creates loopholes for Putin’s cronies to move money into the United States.

Taken together, these tactics will significantly increase the economic pressure on Russia. But even as they pursue this plan, the United States and Europe should be careful not to hinder mutually beneficial trade. Just as Reagan recognized 35 years ago with the Soviet Union, some business can serve both countries’ interests. Western exports of consumer products, automobiles, and other non-sensitive goods, for example, generally benefit ordinary Russians, as opposed to the Russian state. Russia remains a profitable export market for the Western manufacturers of such goods.

NEW TOOLS

In putting this strategy into practice, policymakers would rely on familiar tools: sanctions, export controls, and national security reviews of foreign investments. But they should think of creative new ways to put additional pressure on Moscow. (Reagan, after all, also authorized large-scale covert attacks on Russia’s energy pipeline infrastructure.)

In 2011, for example, the European Union initiated an antitrust investigation into the state-controlled Russian oil company Gazprom. The EU settled the investigation in May 2018, in exchange for price concessions allowing Gazprom’s European customers to resell gas across national boundaries. The EU should vigorously enforce this agreement and impose heavy fines on Gazprom and other Russian government-controlled companies should they engage in future anticompetitive activities.

Litigation can also play a role in the strategy. Ukraine has already sought billions of dollars from Russia over the latter’s failure to reliably supply gas since the countries’ 2014 conflict began. Ukraine has also brought a legal challenge at the International Court of Justice over Russia’s seizure of Crimea. The U.S. and European governments can encourage other victims of Russia’s malign activities, ranging from assassinations to cyberattacks, to bring suit. Russia can claim sovereign immunity, a legal doctrine that generally limits citizens’ right to sue foreign governments for governmental actions, to oppose such lawsuits. Russia, for example, is seeking to invoke sovereign immunity to block the Democratic National Committee’s lawsuit over Russia’s hacking of the its computer servers during the 2016 election. Western governments could provide would-be plaintiffs with legal tools by limiting sovereign immunity as a defense in cases involving election interference and certain other major crimes, much as the U.S. Congress has limited terrorist-supporting countries’ right to claim sovereign immunity as a defense. A heightened risk of private litigation, and the possibility that victims of malicious Russian activities will be awarded Russian assets, could chill Moscow’s enthusiasm for extending its influence through such means.

PLAYING THE LONG GAME

Containment through economic pressure is a long game, just as it was during the Cold War. Reagan did not expect his strategy to result in immediate Soviet policy shifts in Central Asia, Latin America, or Europe back in 1983, and he noted that it was “unlikely to yield a rapid breakthrough in bilateral relations.” Today, there is always a chance that raising economic pressure will ultimately convince Putin to curb his attacks on the United States and its allies, especially if doing so forces Russia to begin cutting domestic spending on key programs and state subsidies to close allies that underpin his government’s popularity. The more likely scenario, however, is that Putin will continue to challenge the West. In that case, a strategy designed to gradually weaken the Russian economy and bring about growing internal divisions and tradeoffs is necessary to limit the Kremlin’s ability to advance its foreign policy. Washington should always be open to relaxing pressure and improving relations if Russia does change course. Unless it does, however, Washington must seek to contain and undermine Russia’s economy over the long term.

 


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