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Russia sanctions are a ‘big deal,’ experts say. But effects could take years.

Over time, the sanctions aimed at punishing Russia could cause the country's stock market to falter, cut the value of the ruble and make doing business in Russia increasingly difficult. 
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The flurry of sanctions the U.S. announced this week against Russia are some of the hardest hitting that Moscow has ever faced, but the slow pain they inflict may not be enough to deter President Vladimir Putin from escalating his invasion of Ukraine, experts said.

President Joe Biden and several U.S. allies, including the European Union, the United Kingdom and Japan, have vowed to review further restrictions on Moscow as punishment for the invasion.

The sanctions already announced are significant in size and scope, former U.S. Treasury and State Department officials who handled American sanctions in the past said, but the longtime American reliance on the national security tool has left the U.S. with few other options if Putin and Russia do not respond.

Nevertheless, the Russian economy is already feeling the effects of war, and the sanctions could over time further cause the Russian stock market to falter, deflate the value of the ruble — which hit an all-time low Thursday — and make doing business in Russia increasingly difficult.

“We’re counting a lot on sanctions, and the ones the Biden administration have put together are really pretty tough,” said Daniel Fried, a longtime diplomat and former ambassador to Poland who helped lead the West’s 2014 response to Moscow’s aggression against Ukraine as the State Department coordinator for sanctions policy. He called the recent sanctions "a big deal." 

The use of sanctions is one of the most powerful national security tools at the disposal of the United States and its partners when attempting to influence a country that isn’t considered an ally. 

Sanctions from the U.S. are particularly forceful because many transactions run through New York City. The dollar also remains the world’s reserve currency and is used in payments across the globe. Whenever money from sanctioned people or entities flows through the U.S., which is common, those assets are immediately frozen. 

Biden announced Thursday that, in response to Russia's invasion, the U.S. was "building a coalition of partners representing more than half of the global economy" that would limit Russia's ability to do business in dollars as well as euros, pounds and yen.

In total, the sanctions will keep approximately $1 trillion in Russian banking assets from flowing through the markets of the U.S. and its partners' financial systems. The sanctions also limit tech exports to Russia and squeeze the country's tech industry.

"This is going to impose severe cost on the Russian economy, both immediately and over time," Biden said. "We have purposely designed these sanctions to maximize a long-term impact on Russia, and to minimize impact on the United States and our allies."

But it could take quite a while — even years — for the sanctions to hurt the Russian economy, said Brian O’Toole, who until 2017 served in the U.S. Department of the Treasury as a senior adviser to the director of the Office of Foreign Assets Control, which administers and enforces trade and economic sanctions.

“I do worry a little bit that if there’s no immediate economic impact on Russia, it may give Putin the idea that the pain of sanctions is less than he anticipates and gives him some incentive to keep pushing the envelope,” said O’Toole, now a fellow at the Atlantic Council. 

Image: President Joe Biden and Russian President Vladimir Putin, arrive to meet in Geneva, Switzerland, on June 16, 2021.
Presidents Vladimir Putin and Joe Biden in Geneva in June.Saul Loeb / Pool via AP file

When the U.S. placed sanctions against the Soviet Union after the former communist nation invaded Afghanistan in 1979, it took years to see results, Fried said. 

The 2014 sanctions that were placed on Russia after it annexed Crimea were effective, according to the International Monetary Fund, in the sense that penalties along with low oil prices slowed Russian economic growth in the ensuing years compared to other nations.

Fried said he believed it helped convince Putin to refrain from further military engagements for the next eight years, though those sanctions plateaued. Now it appears Putin is willing to take a risk again.

“Sanctions are like every other tool of foreign policy: They’re imperfect,” Fried said. “But in 2014, after we hit him, he backed off. Not all the way and not for good, but we had eight years of relative peace. Now he’s back. Maybe we should have kept the pressure on.”

Though sanctions are increasingly the cudgel of American diplomacy, the effectiveness of the tactic is debated — particularly as its prevalence has grown. 

The Treasury Department published a review of U.S. sanctions this month and noted that their use as a national security tool had grown by 933 percent from 2000 to 2021, from 912 sanction designations at the beginning of the millennium to more than 9,400 last year.

The agency cited multiple successes of U.S. sanctions, from pushing Iran to the negotiating table in 2015 and protecting tens of billions of dollars from former government officials following the uprising in Libya in 2011, to financially crippling drug cartels in Colombia and undermining more than 1,600 terrorist organizations across the world. The Treasury Department also admitted, however, that American adversaries and allies are increasingly turning away from the U.S. dollar, which “could erode the effectiveness of our sanctions.”

In 2017, for example, Venezuela attempted to float a cryptocurrency to evade U.S. sanctions, as they are often dependent on banks for enforcement. 

“People are certainly attempting to find workarounds,” said Ben Coates, a professor at Wake Forest whose work centers on the history of economic sanctions and their effects. “I think no one has succeeded yet, but if they do that would shift things dramatically.”

For now, these economic penalties are the main way for the U.S. and its allies to hold Russia accountable, and each day this week has brought a new layer of financial pain. 

First, on Monday, Biden signed an executive order that prohibited investment, trade or financing to the two speculative states that Russia recognized after they claimed independence from Ukraine. 

A second tranche of sanctions came Tuesday when the U.S. and its allies blocked two of Russia’s largest banks from operating in the U.S. and European financial systems. One of the banks, VEB, is “a glorified piggy bank for the Kremlin,” a senior administration official said, and the White House believes the second, Promsvyazbank, finances Russian military activities. Altogether that blocks $85 billion in Russian assets. 

Tuesday’s sanctions also barred the Russian Central Bank from financing in the U.S. and some European countries, meaning Russian government bonds can no longer be sold in many Western markets, causing their values to plummet. A handful of Russian oligarchs who the White House said were believed to be “participating in the Russian regime’s kleptocracy” can no longer access any property or engage in any transactions in the U.S., either.

On Thursday, after Russia invaded Ukraine, the White House went further, announcing a wide-ranging number of economic sanctions and export limits to Russia.

The latest sanctions, coordinated with the other Group of Seven leading industrial countries, did not include kicking Russia out of the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, banking system. Leaders in Ukraine as well as many members of Congress have called for the move, but the U.S. is limited in its ability to do that unilaterally. 

While the latest U.S. sanctions are biting, experts say an important aspect of the announcements this week is that the Biden administration coordinated a response to Russia with its allies. The European Union is mirroring the White House’s moves, the United Kingdom put further sanctions in place and Germany has gone so far as to suspend the $11 billion Nord Stream 2 pipeline that would’ve brought cheap fuel from Russia.

Germany’s decision to rescind the pipeline, a pain Biden furthered Wednesday with economic sanctions on the company behind the pipeline and its corporate officers, is a serious hit to Russia and caught some observers by surprise as it will likely hurt Germany as well.

“It’s not just about the money,” a senior administration official said Tuesday. “This decision will relieve Russia’s geostrategic chokehold over Europe through its supply of natural gas, and it’s a major turning point in the world’s energy independence from Russia.”

What remains to be seen is how the Russian people will react to a change in their economic realities. 

While the 2014 sanctions against Ukraine did lead to “a rally around the flag effect,” they were targeted at the country’s elites and were not intended to harm the greater Russian populace, O’Toole said. The latest sanctions, coming after Putin’s approval ratings fell following Russia’s annexation of Crimea, could have a larger effect on everyday Russians. It’s also relatively unknown what the Russian people privately think of Putin’s latest military push.

It is possible that they may be less accepting of Putin’s international ambitions after facing a long recession because of the 2014 sanctions and recent economic hardship during the pandemic, O’Toole said. 

That could become increasingly true as sanctions are expanded and the Russian people are forced to bear a greater brunt of the financial fallout. There is some pushback against the argument that targeted sanctions don’t negatively affect larger populations. The current sanctions against Afghanistan, for example, are likely exacerbating a crisis of starvation there.  

“The point is to cause enough economic harm to get Putin to sit up and take notice.” O’Toole said. “They can’t do that without having something that also hurts the broad Russian populace.”

The latest sanctions, as Biden has stated, could run into blowback on the U.S. this time as well. 

Only hours after the invasion, the stock markets plunged early Thursday and oil prices rocketed up. There’s some belief that inflation will also be pushed up, Coates said.

“The idea that the U.S. can issue sanctions without real costs on itself — that’s unlikely to be the case,” he said. “We could potentially be thinking about sanctions very differently in five years, a year or even in a few months than we do today.”