Bloomberg Opinion columnist Niall Ferguson feels similarly: “I have heard it said that the breadth and depth of the sanctions imposed on Russia make them unprecedented. I disagree. The way in which the U.S. and the European Union have severed financial ties with Russia … recalls but does not quite match the sanctions that Britain and its allies imposed on Germany at the outbreak of World War I.”
The Athenians who surrendered to Sparta in 404 BC, or Mark Antony at Actium, might also have semantic quibbles.
This is not to disparage the effectiveness of the West’s response to President Vladimir Putin’s aggression, which Oxford Economics estimates could cause a 7% contraction in Russia’s economy. (Germany in 1914 set exactly that precedent, according to the Peterson Institute for International Economics.)
Perhaps what is unprecedented is bringing about this tsunami of sanctions in such a globalized and financially interconnected world.
For insight on how this was possible, I had a discussion with Juan Zarate, who was the first-ever assistant secretary of the Treasury for terrorist financing and financial crimes, and later deputy national security adviser for counterterrorism, in the second George W. Bush administration. These days, Zarate is a managing partner at the risk consultancy K2 Integrity, chairman of the Center on Economic and Financial Power at the Foundation for Defense of Democracies, and a senior adviser at the Center for Strategic and International Studies. Here is a lightly edited transcript of our talk:
Tobin Harshaw: Wow, were you expecting the sanctions to bite so deeply? For so many allies to jump in right away?
Juan Zarate: What surprised me was the combination of the scope, the pace and the clear intent of the sanctions. With Russia, sanctions are not easy: It’s a major economy, it has oil and gas, we’ve been through a series of sanctions for Crimea and for other malicious activities. It’s a complicated target.
These sanctions are aimed at really isolating the Russian economy very quickly and directly, absent the oil and gas sector, but largely unplugging the financial system as much as possible. Within two weeks we had massive sanctions coming from Europe and the U.S.
TH: And from Asia — Japan, Singapore, Taiwan — which I found surprising.
JZ: And Asia. You often have to modulate and calibrate sanctions to account for different jurisdictional needs and preferences, which explains the difficulty of harmonization. In this case, with the moral opprobrium of what’s happened, the desire to isolate Russia has been so high. The weight of the response to the war has been put on the shoulders of sanctions, and sanctions continue to bear this burden in the absence of direct intervention. It’s important to note the role of the private sector to divest from Russia and close its doors has been a devastating and remarkable element of the economic and financial isolation of Russia, even before sanctions were in place or took full effect.
TH: You mentioned just how revolutionary this has been in its breadth and intensity, things like taking Russia out of the SWIFT payment network, sanctioning the assets of its central bank. There has been some concern about potential lingering negative effects, such as undermining confidence in the global financial system. Are you worried about anything like that?
JZ: I don’t worry about that at all. In fact, I think this reinforces the strength of the system, that there can be relative unanimity in response to an international crisis, that sanctions can be leveraged to not just punish but to actually protect the integrity of the financial system.
I think the question about how you unwind exposure in Russia, what you do with Russian debt, what happens if it defaults — those are all manageable issues. It’s not inconsequential that a major economy is being isolated as quickly as it is, so not to suggest that it’s not serious or complicated, but I don’t think you’re running the risk of collapsing the global system.
TH: Okay, what about sanctions evasion — ways the Russians can get around this? I’m thinking of crypto in particular, but what are the back doors?
JZ: You always have to worry about evasion when an economy has been isolated because you know money will flow, trade will continue, and there will be desire for things that Russia has like oil and gas or minerals or timber or the rest. You have to worry about a range of evasion mechanisms. I think the first is obvious, which is the countries and economies that are still willing to do business with Russia.
Will China serve as an outlet for Russian payments, Russian goods, Russian commerce generally? Can you deter or dissuade third-party countries and their companies from continuing to engage in transactions with Russia? This is why you had the U.S. signaling to China that it could be at risk if it decides to serve as a backstop for the Russian economy.
TH: Beyond China?
JZ: There’s a broad set of potential evasion techniques — how you can transfer value or trade when the normal means aren’t available. There’s bartering; we’ve seen that before with Iran and Turkey, oil for gold schemes. You could see new shell companies established. This is why FinCEN [the Treasury’s Financial Crimes Enforcement Network] put out a “red flags” warning in early March on what evasion might look like — especially attempts by Russian oligarchs to establish new funds, new shells, to transfer assets through nominees or proxies.
Crypto can certainly be an outlet, and I’m assuming that some of these oligarchs may have already had some assets in crypto. But the Russian economy as a whole can’t easily convert to the crypto economy to make payments, to hold assets or to ship reserves.
The crypto economy isn’t mature enough in the Russian context. The Russian government probably doesn’t trust the crypto economy it doesn’t control. At least among the legitimate institutions or elements of the crypto ecosystem, there’s also wariness and awareness of what may be coming out of Russia. Full disclosure here: I’m an adviser to CoinBase. But I would note that it closed 25,000 accounts that were considered suspicious or tied to Russia. The crypto economy isn’t necessarily the Wild Wild West.
TH: I see it reported over and over, as fact, that the West has frozen about half of the Russian central bank assets. I believe this came from the Russian finance minister himself. Do we know whether that is true? Because my understanding is that this tells us what it is denominated in, but not necessarily where it is.
JZ: It’s a great question. I think it is telling that the Russians themselves have admitted this, signaling that they don’t have access to their full reserves. It’s hard to tell what is happening with all the Russian reserves globally — and this is important as we think about sanctions and enforcement — how much fence-ringing or active controls involving Russian central bank assets are actually in effect in different jurisdictions.
The various forms or types of reserves affect how they may be identified or handled, and in some cases, the solution could be a freezing of specifically denominated central bank reserves. In other cases, it could be centered around fence-ringing bonds that are held by the Russian central bank in some other form. As of now I don’t know entirely where things sit with all of the Russian central bank assets and how they’re being restrained or corralled in each instance.
TH: We Americans think of ourselves as the good guys in all this. But then we read about South Dakota trusts and other ways people can hide money in the U.S. What can we do about that?
JZ: This is one of the most important issues for financial transparency and reform, which regulators, policy makers and experts like my business partner and former Treasury official, Chip Poncy, have been talking about for a very long time. Two things have happened recently: the passage of the Anti-Money Laundering Act and the Corporate Transparency Act. Both strive toward greater transparency of corporate vehicles and the requirement for beneficial ownership information to be known, so that we avoid bad actors purchasing assets in the U.S. to hide ill-gotten gains or to use the corporate system in the U.S. for money laundering.
Right now, we need to enforce not just greater financial transparency, but to understand better the nexus between that transparency and national security risks. If we don’t know where Russian oligarchs or the Russian leadership hold assets here, that is a security vulnerability for the U.S.
TH: Are you worried that all this focus on Russia is taking attention away from terrorists and North Korea and all the other things officials have to be on top of?
JZ: There can only be so many priorities, and Russia is now at the top in terms of application of sanctions, asset recovery, targeting of individuals and assets, and helping the private sector determine how best to unwind or divest from exposure to the Russian economy. So it does strain other programs that rely on sanctions and targeting of financial networks tied to illicit actors.
That said, there are people who remain focused on those other actors and programs. There are cases and investigations and analysis going on. The focus on Russia may actually give some life to other programs, because you have the Russian nexus with so many other conflicts and issues: Syria, Venezuela, human rights abuses, maybe even now Iran, in terms of allowance of an economic channel and its related effects on the nuclear deal discussions. Russia suddenly becomes a window through which to peer sharply at other concerns and actors. China also becomes an interesting dimension of Russian sanctions enforcement if China becomes a financial or commercial outlet for the Russian economy.
TH: Let’s finish with the obvious question: What more can be done to put the screws on Moscow?
JZ: I think there are three big categories. One is further restrictions on the oil and gas trade, and that is largely up to the European allies. That would open up other targets, for example the de-SWIFTing of Gazprombank and Sberbank, which remain on the SWIFT system as a result of the oil- and gas-trade exemption. The oil and gas sector is a major hole in the sanctions regime, despite what the U.S. and Canada have done to restrict this trade.
Next, you could put in place secondary sanctions(1) against third parties that do business with sanctioned entities. Now you don’t necessarily have to apply them, you can make them part of the regime and threaten third parties doing business with Russia. This would not just be targeted at third parties facilitating sanctions evasion, but also those simply doing business with Russian entities or segments of the Russian economy that have been designated in some way.
The third thing is active enforcement of the sanctions that are in place. This is why the targeting of oligarchs’ assets is so important and qualitatively different from the past. It’s not just allowing the sanctions to run their course and to have their isolating impact in the market — it’s the actual hunting of assets that are presumed to be ill-gotten gains. It’s about sanctioning additional entities and individuals that are tied those already being sanctioned. And it’s about shining a light on sanctions evasion and punishing those actors wherever they sit.
All of this reinforces the sustainability and effectiveness of the sanction regime. Sanctions enforcement is often more than half the battle.
(1) Bloomberg Opinion columnist Shuli Ren has a detailed explanation of secondary sanctions here.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tobin Harshaw is an editor and writer on national security and military affairs for Bloomberg Opinion. He was an editor with the op-ed page of the New York Times and the paper’s letters editor.
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