Every morning since Russia’s invasion of Ukraine, when markets open, analysts watch two things simultaneously: the advance of Russian troops on one screen and the value of the ruble on the other, two battle fronts in the same confrontation.
Over the course of two historic weeks, the U.S. and its partners sanctioned Russia’s biggest financial institutions — including removing some from the SWIFT messaging system — ratcheted up debt restrictions, and sanctioned Russian President Vladimir Putin himself. Each of these moves overturned a sacred cow that had been in place since the invasion of Crimea and the Donbas in 2014: Major Russian banks would not be touched; restrictions wouldn’t apply to debt on the secondary market (trading of Russian debt between two non-Russian entities); and Putin would never be sanctioned, typically a political signal that the U.S. seeks regime change. The expressed goal in 2014 was to focus on the Kremlin’s behavior and not hurt the broader Russian economy.
The strategy has now shifted to driving the country into the ground. Last weekend, the G-7 countries froze Russian foreign exchange reserves held in their jurisdiction, severing Russia’s access to nearly $400 billion, or over 60 percent of reserves, overnight. The action showed unparalleled resolve among allies to escalate to the most damaging option. On Tuesday, the U.S. announced it would ban imports of Russian oil, a largely symbolic but politically escalatory measure. Western leaders have chosen to match the severity of Russia’s war of choice with severe financial pressure, dwarfing the “maximum pressure” campaigns of the Trump era.
But the West’s response is no longer just pressure — it’s financial war. As opposed to previous sanctions campaigns, which sought to use pressure over time to bring a country to the table or prompt a longer-term behavior change, the goal of these Russia sanctions is to change military strategy in a war that is already happening.
Can financial pressure force a leader bent on war to alter battle plans — a decision that would need to play out in days, not months or years? Can the U.S. and its partners wreak enough havoc on the Russian economy in time to make war unsustainable? No one can answer that.
Never have sanctions played out like they are right now, a high-stakes gamble over European security, in real time, through financial and economic means. The moves are all the more surprising given that the Biden administration telegraphed a more restrained approach to sanctions when it first came into office.
Ultimately, the Biden administration’s choices may prove to be a make-or-break scenario for the use of financial and economic levers in national security. Failure to forestall Russia’s aggressions — or to prevent serious ripple effects in the global economy — will signal that even the strongest of U.S. sanctions cannot direct a political or military outcome. Policymakers may need to reconsider a tool that has assumed a central role in government decision-making, but could lose its legitimacy if the current gamble fails.
Although the raft of Russia sanctions is unprecedented in both its scope and in the speed in which it was implemented, full-on financial warfare has arguably been a long time coming. Practitioners have long referred to sanctions as “economic warfare” and discussed financial measures using military terminology. We’ve heard of an “arsenal” of sanctions, sanctions “deterrence,” even “kinetic” and “nuclear” sanctions. Even referring to sanctions “targets,” which is how the U.S. government describes those potentially subject to penalties, evokes an image of being at gunpoint — and this may be part of the problem.
Couching sanctions in the language of warfare tends to make decision-makers overly optimistic (if only subconsciously) about what sanctions can achieve in lieu of military force. Because of this framing, financial mechanisms are often assigned to deliver more specific political results than they are able to achieve. You cannot stop tanks (or oil tankers) with banks. Accelerating political change through sanctions is possible, such as the embargo that helped bring down apartheid in South Africa or the economic implosion of the Soviet Union, but these were both slow-motion squeezes over decades.
No group was more frustrated with this reality than Trump’s closest advisers on Iran and Venezuela. Under pressure to deliver quick wins for a president without patience, “maximum pressure” campaigns emerged to sap the will out of both the Venezuelan and Iranian regimes. For Venezuela, this meant blocking oil markets and locking up assets while military and opposition leaders plotted Maduro’s ouster. Iran sanctions amounted to a full embargo as well as secondary sanctions obligations, subjecting third countries with commercial or financial ties to Iran to U.S. penalties. Rolled out in stages, the increase in pressure was designed to force Iranian leadership back to the negotiating table to negotiate a more comprehensive and restrictive deal.
At the time, observers viewed these policies as unthinkable escalation and an abuse of U.S. financial leverage — it was, after all, maximum pressure. But even Trump’s hardliners were using the tool in a relatively traditional way. They wanted results as soon as possible, but there wasn’t a specific timeline during which the sanctions needed to work. The effectiveness of the sanctions did not rely on external factors such as the target country’s ability to win or lose a war in a matter of weeks, as the U.S. government is doing now.
President Joe Biden’s team initially saw their predecessors’ aggressive use of sanctions as ineffective and potentially counterproductive. Treasury Secretary Janet Yellen promised a review of U.S. sanctions practices during her confirmation hearings. What resulted was a carefully drafted but none-too-daring policy document, promising to coordinate with allies and consider how the overuse of U.S. financial pressure could over time unwind the primacy of the U.S. dollar and erode U.S. legitimacy.
But observers rightly noted that whether this restraint would stick depended on the churn of international events. First came Belarus President Alexander Lukashenko’s brutal repression in Belarus and a coup in Myanmar. Then came Ukraine. The Treasury’s principled reframe faded quickly. Despite its intentions to do the opposite, the Biden administration took financial pressure to a level unprecedented in the history of U.S. sanctions. The idea that we had already seen “maximum” pressure was blown to bits.
Still, the Russia strategy does share some similarities with previous sanctions campaigns. Russia, Iran and Venezuela are all petrostates. In each country, economic fragility at home has made it safer to store oil profits overseas in stable markets and in dollars, the currency of the trade. These profits are amassed by state-run companies and tied to wealth funds or central bank assets, giving the US leverage over sovereign wealth. Thus, like with Western sanctions on Russia now, Venezuela and Iran programs also involved freezing of energy-derived state assets held abroad and imposing an embargo on oil imports. But unlike Iran and Venezuela, Russia is a G-20 country and deeply integrated into global markets. Iran was cut off from Western markets over years. Russia was cut off over days. Imposing sudden economic isolation may have huge consequences for the global economy.
What happens now? The West’s sanctions strategy is a race against the clock — or rather, two clocks racing against each other. One clock is financial — how long it takes to bring the world’s 11th-largest economy to its knees — and one is military, how long Russia needs to defeat Ukrainian forces.
In the coming weeks, market-watchers are likely to record a cliff-drop in the value of the ruble as Russia leverages its remaining financial resources to fend off a currency crisis. Bond yields will rise and credit ratings will fall, triggering fears that Russia is reaching default, especially as bonds reach maturity this month. Initial economic findings project that Russia will experience a drop in productivity worse than during its major financial crisis in 1998. This time, however, the International Monetary Fund is very unlikely to intervene.
Economists are only able to speculate what the rapid collapse of a G-20 country means for the rest of us. Energy prices may rise to unaffordable levels despite the release of strategic reserves. Soaring commodity prices could send developing countries reliant on Russian and Ukrainian grain into even deeper debt after Covid. Financial and debt contagion could pop up in unforeseen places, revealing new corners of interconnectedness and dependencies in a globalized economy. This is likely to begin in Central Asia, where economies are closely bound by finance and trade to Russia, and potentially extend to North Africa and even areas of Europe, where Russian subsidiaries have filed for bankruptcy.
Debt crises, inflation and human need are known to spur confrontation, most famously through the economic instability in Germany that led to the rise of Nazism, but also the bread riots in Egypt during the 1970s and the breakdown of the antebellum economy in America. None of this is fated to happen, but the collateral damage of the current strategy could be larger than we know.
When designing a strategy to end a brutal, senseless war, any option for powerful escalation has merit. But there is no doubt now: Locking up Russia’s reserves is not financial pressure, it is financial war, and the stakes are high.
This may be the last time a strategy based on locking up currency may be feasible. If the sanctions don’t end the war — the maximalist goal they have been assigned — it will be easy to argue that the absolute maximum use of U.S. financial power has its limits. The basic flaw is the assumption that sanctions are “weapons” and the accompanying hope (or misperception) that financial censure can be an effective brake on military aggression. Sanctioned countries will further reduce Western leverage over their national wealth because the safest markets have proven they can become the riskiest of all. This won’t happen immediately because the world remains overwhelmingly dollarized, but as the Treasury’s initial strategy notes, U.S. financial power is likely to erode over time. The power of sanctions as a central tenet of national security strategy could be on the verge of unwinding. The further the U.S. pushes geopolitical challengers away from its financial ecosystem, the less leverage it will have to deny that access as punishment in the future.
The U.S. and its allies have decided to take that risk. In this way, their gamble is threefold: First, that sanctions can bring sufficient financial ruin in time to make Putin turn back his troops, or at least negotiate with Kyiv in good faith. Second, that the benefits will outweigh the potential ripple effects on the global economy. And their third gamble is with the idea of sanctions themselves — that they can be used to defend a political principle and a way of life (democracy over autocracy).
It’s arguably the biggest geopolitical objective economic measures have been tasked with achieving, certainly in the shortest amount of time. If the campaign has serious impact on regional or even global economies but still prevents future aggression against eastern Europe, that is a consolation prize worth winning. But if the West impoverishes Russia as an unhindered, unhinged Putin flattens his neighbor, no one can say the gamble was won. And it will be hard to see how governments can keep their faith in sanctions.