The Russia sanctions announced by the Biden administration on Thursday did not impose severe financial costs on Moscow, although the measures are stronger than those of the Trump administration because they are credibly reinforced by the president’s words and backed up with important revelations about the interference toolkit used by the Russian intelligence services. That will probably not be enough to deter Russian President Vladimir Putin from his increasingly aggressive actions, whether they are the cyber intrusions and election interference these measures respond to, or potential future escalations, like invading neighboring Ukraine again or killing jailed opposition leader Aleksei Navalny. But it does provide a solid framework from which the United States can escalate sanctions together with its allies in response to future harmful foreign activities.
The U.S. Treasury Department argues that the new sanctions are very strong, particularly the prohibition against U.S. financial institutions participating in the primary market for Russian sovereign government debt. That is simply not credible. Whereas financial restrictions in the Obama administration broadly prohibited dealing in any securities issued in the future, Biden has taken a page out of the weaker book innovated by the Trump administration in 2019 by only stopping U.S. investors from purchasing bonds directly from the Russian government itself, leaving them free to buy the bonds as soon as they trade freely in the secondary market.
To see how ineffectual that is, consider the most influential bond buyer in modern history: the Federal Reserve, which is legally prohibited from buying Treasury securities in the primary market to preserve its independence. Instead, the Fed just buys bonds in the secondary market, which has the effect of reducing the U.S. government’s cost of borrowing. U.S. investors remain allowed to do that with Russia, even if some will probably shy away due to the reputational risk of being seen as helping an adversarial government.
If Treasury declined to fully sanction Russian sovereign debt out of concerns about potential financial contagion, that caution would be misplaced. The Russian government debt market is not very big, and U.S. investors hold less than 10 percent of it. Moreover, investors have had numerous years to prepare for sovereign debt sanctions, and secondary market trading of existing securities would not be directly affected by prohibiting dealings in future securities. Taking this step now would have probably pushed Russia’s central bank to marginally raise interest rates to entice investors, but it would not have been destabilizing.
Treasury also decided to hold in reserve, for now, its other natural option to impose severe costs on the Kremlin, which is to sanction oligarchs close to Putin and the international companies they own.
A more reasonable defense of these measured sanctions than the argument provided by Treasury would be that they give Putin a pathway and a reason to cease and desist his escalating aggression, even if he does not take up the offer, while also providing the signaling, information, and legal authorities needed to ratchet up sanctions together with U.S. allies in response to bad behavior by the Kremlin in the months ahead.
In his phone call on Tuesday with Putin, President Joe Biden proposed a summit meeting in Europe this summer, an offer that could provide Putin with valuable atmospherics and would probably be revoked if Russia escalates further against Ukraine or Navalny. The Kremlin has not responded directly to Biden’s summit proposal but indicated on Thursday it remained open to the idea. Biden also warned Putin that he will react firmly to harmful Russian behavior, a message arguably reinforced by the new sanctions, which put into place the technical and diplomatic pieces needed to potentially ramp up sanctions quickly in the future. A fact sheet from the White House on Thursday said the U.S. government has the authorities to “expand sovereign debt sanctions on Russia as appropriate.”
Moreover, four strong messaging components of the information released on Thursday could underscore that the U.S. government is prepared to expose, attribute, and respond to Russian malign behavior. First, the new executive order established a framework for more sanctions in response to “harmful foreign activities” prioritized by the administration beyond the scope of existing orders, from strategic corruption to targeting journalists. Second, for the first time the U.S. government officially attributed the SolarWinds hack to the Russian intelligence services. Third, the U.S. revealed extensive detail around disinformation outlets controlled by Russian intelligence services and technology companies that support their hacking operations. Fourth, the U.S. government said for the first time that the Russian agent who received polling data from Paul Manafort, Trump’s 2016 presidential election campaign manager, ended up passing it on to the Russian intelligence services.
All this disclosure is arguably the best way for democracies to use true information to fight back against manipulative active measures, a value-laden approach that could help with the important work of winning over hearts and minds that do not reside within the walls of the Kremlin, including key U.S. allies. Acting in concert with allies was the feature of Russia sanctions that most unpleasantly surprised Putin during the Obama administration and was sorely lacking under Trump, so if Biden’s measured approach helps bring the allies along that would be stronger than any possible technical detail.
What remains unclear is whether Putin will be persuaded that the Biden administration and its allies are willing and ready to deploy the considerable options for additional sanctions that they continue to hold in the chamber, or whether Putin will perceive these new sanctions as mushy and follow Lenin’s advice: “Probe with bayonets. If you encounter mush, proceed; if you encounter steel, withdraw.”