On the morning of Sunday, February 27, U.S. Treasury Secretary Janet Yellen sat huddled in a secure room with a group of other senior Treasury officials—including me—to discuss a set of extraordinary economic and financial measures against the Russian Federation. A few days earlier, Russia had invaded Ukraine, a stark and violent transgression of international law. At the direction of U.S. President Joe Biden, the Department of the Treasury had already imposed full blocking sanctions on a number of Russia’s largest banks, put in place Russia-wide export controls on sensitive technologies, sanctioned a number of Russian elites, and determined that any Russian financial services firm could be a target for further sanctions. But in response to Russia’s growing aggression, Biden was calling on us to take further steps to cut the Kremlin off from the resources it needed to pursue its illegal war.
Over the course of the weekend leading up to Sunday’s meeting, we had worked with U.S. allies in Asia and Europe and our colleagues at the Department of State, the National Security Council, and across the U.S. government to develop a new tranche of actions: immobilizing Russia’s central bank assets, creating an international task force to hunt down and freeze Russian assets around the world, and removing key Russian financial institutions from the global SWIFT messaging system. Many of these steps were unparalleled in their scale and scope. But what was most significant was the speed with which this international coalition coalesced behind the actions. Within three weeks of Russia’s renewed invasion, more than 30 partners—including Australia, Singapore, South Korea, Taiwan, and the members of the European Union and the G-7—joined with the United States to counter Russia’s aggression.
There is a reason why so many countries backed these sanctions. The international economic system today reflects the rules-based financial architecture the United States and its allies collectively built after World War II to promote peace, prosperity, and economic integration. This system was designed to make these goals mutually reinforcing by enabling participating states to prevent countries that violate the system’s principles from reaping its benefits. The Treasury Department’s efforts to deter and, later, make it harder for the Kremlin to wage this war rested on the ability of the United States and its allies and partners to leverage their positions at the system’s center. It is no accident that the coalition includes the issuers of the world’s major convertible currencies, most of the world’s key financial centers, and more than half the global economy.
These efforts are succeeding. The bravery and determination of the Ukrainian people, aided by tens of billions of dollars in security and economic assistance from the United States and its allies and partners, have been paramount in Ukraine’s valiant defense against Russia. But economic sanctions have played a critical supporting role, as well. Over the course of the last ten months, Washington and its allies and partners have denied Russia’s key financial institutions access to the infrastructure that powers the global financial system and cut Russia off from the imports and advanced technologies that are essential to modern economic production.
Multilateralism has been decisive for the effectiveness of these economic measures. After the United States imposed sanctions on Russia for the 2014 invasion of Crimea, Moscow spent eight years working to limit its exposure to the U.S. financial system, hoping to insulate Russia’s economy from the impact of future U.S. sanctions. But although Russia was able to reduce its exposure to the United States and the dollar, it could not avoid the international economic system and the other major freely convertible currencies that form its core—leaving Moscow deeply vulnerable.
In addition to the world’s financial infrastructure, the companies that produce certain critical goods—such as semiconductors and other advanced technologies—are predominantly located in G-7, European Union, and other economies that joined the U.S. response. As a result, the coalition’s sanctions and restrictions hit the Kremlin even harder. Russia now faces years or even decades of economic decline. Foreign companies have exited the country en masse, significantly degrading Russia’s economic base. Without access to these critical imports, Russia will see its manufacturing sector shrink. One outside analysis predicts that, in the long term, Russia’s economy could contract as much as 30 to 50 percent relative to its prewar level. Most important, these actions will degrade Russia’s military-industrial complex and erode its ability to project power.
The lesson of these actions is that their potency rests not on the size of the U.S. financial system or the widespread use of the dollar alone but on the reach and resilience of the international economic system as a whole. Far from undermining that system, this international and coordinated response has underscored its power, value, and importance.
STUDY TO PRACTICE
Over the past 80 years, U.S. sanctions policy has dramatically evolved. In 1940, when Adolf Hitler’s Germany invaded Denmark and Norway, the U.S. Treasury Department froze the latter two countries’ U.S.-held assets. Over the following year, it also froze the assets of other countries that Germany invaded. But unlike today’s sanctions, these actions were designed only to keep those assets from falling into the hands of the Nazi regime—until the United States formally entered the war, the Department of the Treasury did not prohibit trade or financial transactions with Germany more broadly.
Over the course of the twentieth century, the United States increasingly employed economic sanctions as a core tool of foreign policy, rather than merely as a supportive measure. For example, it imposed an array of sanctions and export controls on the Soviet Union and countries within the Soviet sphere beginning in the 1940s, as well as sanctioning South Africa in the 1980s for its apartheid policies. Washington further modernized its sanctions policies after the attacks of September 11, 2001. In 2004, the government created the Treasury Department’s Office of Terrorism and Financial Intelligence to coordinate Treasury’s sanctions and intelligence activities, which further enabled it to use sophisticated sanctions strategies to target terrorists and other nonstate adversaries—as well as the countries harboring them.
It isn’t just the terrorist attacks that have demanded changes to U.S. sanctions policies. Over the last two decades, the international financial system’s size and importance have grown, demanding a more sophisticated sanctions apparatus. From 2001 to 2021, global external assets as a share of GDP nearly doubled. And from 2011 to 2021, the share of people over 15 with an account at a bank or mobile money service provider jumped from 50 percent to 76 percent. At the same time, the expansion of cryptocurrency and decentralized finance has created new ways to hold and transfer value outside of traditional systems, enabling alternative methods for states, people, and organizations to launder illicit revenues. This evolution has created new ways to attempt to move beyond the reach of sanctions, raising the stakes for governments using these economic measures to hold rogue actors accountable.
In light of these changes, in the spring of 2021, Yellen asked me to work with our colleagues at the Treasury and the State Departments to conduct a comprehensive review of how U.S. sanctions authorities, strategies, and implementation have evolved—the first study of its kind since the attacks of September 11, 2001. In October of last year, we published the results of this study: the 2021 Treasury Sanctions Review. Among its many important findings, it showed that sanctions are most effective when coordinated with allies and partners, both because coordination bolsters diplomacy and because multilateral sanctions are harder to evade. It concluded that sanctions should be tied to a clearly articulated foreign policy strategy that is, in turn, linked to discrete objectives. And the review determined that U.S. sanctions should incorporate detailed economic analysis of their anticipated impacts, including the collateral effects.
Today, these conclusions may sound obvious. But past sanctions were not always well calibrated. In total, the number of U.S. sanctions designations grew over 900 percent from 2000 to 2021—some more carefully designed than others—as the number of U.S. sanctions programs increased more than 2.5 times. Our review found that more granular analysis would allow sanctions officials to better target restrictions and achieve more nuanced objectives, all while minimizing unintended effects.
Less than a month after the conclusion of the review, U.S. intelligence revealed that Russia was beginning to plan for a potential invasion of Ukraine. It was fortuitous that we had completed our work. In statements public and private, Biden made clear that, should the invasion come to fruition, sanctions would be central to the U.S. response. To ensure we were prepared, he tasked Secretary Yellen with developing a sanctions strategy that would maximize the costs imposed on Russia’s economy while minimizing the impact felt by the United States, our allies and partners, and the global economy more broadly.
RESPONDING TO RUSSIA
On February 24, 2022, Russia began its full-scale invasion of Ukraine. From the beginning, it was clear that crafting a response that was both effective and properly calibrated would be challenging. Although the scale of the Kremlin’s brutality demanded a powerful answer, the size and international integration of the Russian economy made it hard to impose significant costs, especially without causing widespread damage to the global economy. Russia is one of the world’s most populous states, and it has a central role in global energy markets. To damage the Russian war effort by using economic tools, the United States needed to incorporate the lessons from the sanctions review—and it had to do so quickly.
That started with the lesson that sanctions should be tied to a clearly articulated foreign policy strategy and linked to discrete objectives. In this case, the overarching objective was clear: to degrade Russian President Vladimir Putin’s ability to wage his illegal war. To that end, the United States has used a set of innovative and sweeping sanctions and export controls to deny Russia the revenue and resources needed to pursue its invasion and project power, including by diminishing its military-industrial complex. The United States and its allies have also undertaken substantial diplomatic engagement and provided abundant military and economic support to Ukraine, totaling tens of billions of dollars, and the Biden administration has requested an additional $38 billion from Congress to provide further assistance. These goals reflect the fact that sanctions alone are unlikely to stop Putin’s invasion entirely. But they have made it far harder for Putin to continue his war and have dramatically lowered his chances of battlefield success.
One way to think about this strategy is as a set of targeted, surgical strikes on Russia’s ability to wage war. It has allowed the United States to have a significant impact on Russia—frustrating Moscow’s ability to pursue its invasion and prop up its economy—while limiting the collateral impact on the global economy, especially on U.S. allies and developing economies. We decided to target three elements of Russia’s economy: its financial system, its elites, and its military-industrial complex. To target the financial system, we sanctioned Russia’s key financial institutions, immobilized its central bank reserves, and cut off many of its banks from the SWIFT messaging system in the days immediately following the invasion. To hit the network of elites and oligarchs who support the Russian government and act as its agents and instruments, we set up an international task force—the Russian Elites, Proxies, and Oligarchs (REPO) Task Force, with representatives from eight countries and the European Commission—to identify and seize their assets in jurisdictions around the world. This effort would prevent Russian oligarchs from accessing resources they could use to prop up Putin’s regime. And to target Russia’s military-industrial complex and critical supply chains, we implemented export controls and other restrictions that would deny Russia the imports needed to keep its war machine operational, forcing Russia’s military to steadily turn to outdated and less reliable weapons.
To make this targeted strategy work, the Department of the Treasury had to work closely with a global coalition of allies and partners—consistent with the sanction review’s conclusions. From the outset, Biden and Yellen made multilateralism the foundation of our response to Russia, building on the administration’s commitment to rebuild U.S. alliances and restoring trust in the United States’ global role. At Biden’s direction, we began building our coalition far in advance of the war, reaching out many of the allies and partners we had consulted during the sanctions review. In November, the U.S. intelligence community quickly shared the intelligence pointing to Russia’s potential invasion with U.S. allies and partners in Europe and began laying the groundwork for the response. Although not every decision was finalized by February 2022, the United States and its allies and partners had developed a thorough set of initial actions.
The composition of this coalition has been critical to its efficacy. From a financial perspective, it includes the issuers of the world’s major freely convertible currencies. These currencies form the connective tissue of the global banking and payments system, enabling efficient and low-risk cross-border finance and trade. Russia’s need to transact in these currencies explains why the financial sanctions were so effective and why, despite its best efforts, Russia was unable to escape their reach. For example, as of 2019, 87 percent of Russia’s foreign exchange transactions were denominated in dollars. The European Union, meanwhile, is Russia’s largest trading partner, making the EU’s actions to economically isolate Russia highly potent. And because this coalition includes Japan, South Korea, and Taiwan—the world’s most important producers of key advanced technologies, along with the United States—its export controls have successfully cut Russia off from access to critical imports such as semiconductors, badly degrading its military in the process. To the extent there are risks involved in unilateral sanctions, the lesson of the U.S. response to Russia is that acting alongside allies and partners in the G-7—and across Europe and Asia—is the best way to mitigate them.
A NEW PLAYBOOK
Washington and its allies and partners have been innovative in the execution of this strategy. To deny Russia the financial resources to fund its invasion, for example, the coalition immobilized Russia’s sovereign wealth fund and central bank reserves. This move was deeply effectual. Over the preceding eight years, Russia had built up $630 billion in sovereign wealth and central bank assets to protect its economy from the impact of potential sanctions. The coalition’s actions made much of this war chest inaccessible, blunting the effect of Russia’s preemptive actions.
The coalition is also pursuing a novel approach to limit Putin’s revenue from Russia’s oil exports without taking that oil off the market: the price cap policy implemented by the European Union, G-7, and Australia earlier this month. The price cap was designed to overcome a seeming dilemma. Since the beginning of the conflict, the United States and its allies have purposefully crafted our sanctions to allow Russian oil and gas exports to reach the global market, even as the United States and some other governments have banned the import of these goods into their own countries. This was done for good reason. With consumers and businesses in the United States and around the world already under pressure because of elevated energy prices—caused in substantial part by the Kremlin’s actions—these governments did not want to add on. But it has meant that Russia has continued to reap significant profits from its energy exports, especially oil. At one point, Russia received more than $100 per barrel. Over the summer, it received prices 60 percent more per barrel than it did in the year before, meaning that Russia made more money despite the decline in its export volumes.
Using traditional sanctions strategies, the tension between these two objectives—restricting Russia’s revenue while continuing to allow its oil to reach the market—would be intractable. But the price cap policy balances these goals through a new approach: pairing sanctions that cut off seaborne Russian oil shipments from critical services such as insurance, trade finance, and shipping with an exception for oil sold at or below a specific price. Rather than an outright ban, the price cap essentially creates two markets for Russian oil: one market—at or below a certain price—in which Russia’s oil exports keep flowing, with the benefit of these services, and another market—above that price—where Russian oil can only be shipped using services from alternative suppliers that are likely to be more expensive and less reliable. It institutionalizes the discount on Russian oil by setting a ceiling for buyers who formally join the coalition imposing it and giving greater leverage to buyers outside the coalition to negotiate lower prices—even if they do not formally adopt the policy. All net oil-importing countries and consumers of oil globally stand to benefit from lower oil prices, while the Kremlin takes in less revenue. As an added benefit, low- and middle-income countries that need this cheaper oil most are likely to be the main economic beneficiaries of the price cap.
In addition to its creativity, the price cap policy is also emblematic of U.S. efforts to infuse rigorous economic analysis into our sanctions, the review’s third key finding. In addition to our traditional work with the Department of State, a team of sanctions experts, economists, and financial market experts at the Treasury Department—in coordination with the Department of Energy—has worked closely with economic analysts in finance ministries and other departments at the European Commission and across the G-7 to refine estimates of the price effects of the seaborne services ban; calibrate the right price for the cap itself based on historical pricing patterns; and assess Russia’s potential response based on the country’s oil output, equipment, and other variables. This new way of deploying sanctions—to segment the market for Russian oil rather than ban it entirely—has required corresponding innovation in analytic methods. Building on this experience, the Treasury Department is currently recruiting a chief sanctions economist who will help develop a full-fledged unit and corresponding analytical capabilities to enhance the United States’ ability to undertake this sort of detailed economic analysis in other instances.
Disrupting the critical supply chains that feed Russia’s military-industrial complex has also constituted a sea change for sanctions policy. The United States has remained heavily focused on ending Russia’s war and its brutalities in Ukraine. The goal, put simply, is to frustrate Russia’s ability to use the money Russia has to build the weapons it wants. But instead of concentrating on inflicting sheer economic pain, the Treasury Department—in coordination with the Department of Defense and Department of Commerce—and the United States’ allies have used sanctions and export controls to go after the specific technologies and inputs Russia needs to fight its war. This includes items such as semiconductors, transistors, and software that are only made outside Russia and in many cases only by the United States and its allies. The U.S. Office of the Director of National Intelligence estimates that measures by Washington and its partners have degraded Russia’s ability to replace more than 6,000 pieces of military equipment, forced key defense-industrial facilities to halt production, and caused shortages of critical components for tanks, aircraft, and submarines. The world is seeing the results of these shortages on the battlefield, where Ukraine’s tenacious fighters have forced Russia to quickly exhaust its supplies of modern weapons and turn to outdated, Soviet-era equipment or lower-quality alternatives procured from North Korea and Iran.
Together, these approaches constitute a bespoke strategy to deny Russia access to the revenue it needs to pay for its war, cut Russia off from resources to prop up its failing economy, and degrade its military capabilities. The design and implementation of these actions have required technical expertise and elaborate diplomatic coordination. The countries behind them will have to continue working together, particularly to prevent Russia from evading the various restrictions. But these economic measures are already eroding Russia’s ability to project power and will shape international economic policy for decades to come.
THE PATH FORWARD
When we began our campaign to hold Russia accountable, using all our economic and financial tools, we were met with criticism from some that our actions risked unraveling the global financial system. Ten months into this conflict, we can safely conclude the opposite. Far from driving a wedge between the United States and its allies, these sanctions have offered the strongest possible statement of our unity in the face of Russia’s aggression. They have demonstrated that Washington and its partners are willing to defend the principles at the core of the international economic system—including self-determination, territorial sovereignty, and free and open economic exchange—even when it may cost their own economies, representing a literal investment in the future of the international economic order.
The coalition’s response to Russia’s invasion reflects both the conclusions of our sanctions review and particular elements of the international economic system’s design—from the dollar’s role, to the correspondent banking networks that facilitate payments within it, to the geography of the service providers that support real economic exchange between its participants—that enable the benefits the system provides. These features are also what make denial of the system’s benefits so potent. The multilateral coordination that has undergirded the coalition’s actions from beginning to end—from strategy to tactics and execution—has reinforced that same system in the face of its greatest threat in a generation.
None of this means that the international economic system does not need updating. The system will require new investment as it further adapts to the twenty-first century. The United States and its allies should modernize the international institutions that form the backbone of this system, such as the multilateral development banks; finalize the international agreement on a global minimum tax that more than 135 countries reached at the Organization for Economic Cooperation and Development last fall; and update the international payments infrastructure to make it faster, cheaper, and more inclusive. These actions will help ensure the international economic system continues to drive global prosperity, that it lives up to the values embedded at its creation, and that it remains robust enough to matter when malign actors are denied access.
Of course, there is more work to be done. But there is no doubt that what the United States and its allies have accomplished is historic—and heartening. This coalition is not only holding Russia accountable for its unconscionable war; it is doing so in a multilateral fashion that demonstrates the enduring strength and importance of investing in the international economic system. We will remain focused on holding Russia accountable as the country wages its brutal war and will keep supporting Ukraine for as long as it takes. Years or decades from now, Russia’s invasion and the resulting, collective response will be viewed as a moment in which the international economic system, when faced with an enormous challenge, cemented its essential role.
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