Sanctions in Response to Russia’s Invasion of Ukraine

Russian forces invaded Ukraine Wednesday morning, February 24.  In response, the United States, the European Union, and other nations announced a series of unprecedented sanctions on Russia. The Russian military appears to have encountered stronger-than-expected resistance, dashing Putin’s hope for a quick, decisive victory over Ukraine. Military and economic escalation are possible. Below is a summary of current sanctions, the economic implications for Russia and the world, and some related policy opportunities and questions for the United States.

Q1: How have countries responded economically to Russia’s invasion?

A1: On February 21, Putin moved “peacekeeping” troops into the Donbas region of Ukraine and recognized the independence of two republics in the region. The Biden administration quickly announced a first tranche of sanctions, modeled on those implemented after Russia’s annexation of Crimea in 2014. These included bans on investment in, exports to, and imports from the separatist regions as well as blocking sanctions placed on certain individuals in the Donetsk People’s Republic and the Luhansk People’s Republic. 

On February 24, the United States announced a second, stronger package of sanctions in response to Russia’s full-scale invasion of Ukraine. Implemented “in tandem with partners and allies,” these sanctions targeted high-ranking Russian officials and their families, state-owned enterprises, and Russia’s financial sector—including its two largest commercial banks. The package included an expansion of the Foreign Direct Product Rule (FDP rule), previously used to nearly bankrupt the Chinese telecom firm Huawei. The FDP rule blocks the export of any product derivative of U.S. technology or software regardless of its country of manufacture. It has the potential to deny the Russian economy and military end users critical technologies, such as semiconductors.

Russia’s egregious actions have galvanized a united response from U.S. partners around the world. The European Union, United Kingdom, Canada, Australia, Japan, South Korea, and Taiwan have all announced their own sanctions and export controls. A notable exception to this list is Israel. Despite its close alliance with the United States and good relationship with Ukraine, the Bennett government has been circumspect in its criticism of Moscow, fearing it could jeopardize Russia-Israel defense coordination in Syria.

The most severe and coordinated economic response came over the February 26–27 weekend. This third tranche of sanctions barred some Russian banks from SWIFT (the financial messaging system), sanctioned the Russian central bank, and announced the establishment of a multilateral task force to identify and freeze the assets of high-ranking Kremlin officials, including Putin. The SWIFT and central bank measures were previously assumed to be off the table because of the economic pain they would inflict on Europe. The European Commission appears to have led the push for harsher sanctions, with Germany and Italy dropping their opposition on Saturday, February 26.

While advanced economies have been increasingly aligned in their response, some emerging market economies have been more hesitant to condemn Russia. Turkey, which imports a third of its natural gas from Russia, has been reluctant to implement sanctions but may begin blocking some Russian naval ships from entering the Black Sea. Although Brazil voted on February 25 for the UN resolution “deploring” the Russian invasion, President Bolsanaro has said that Brazil will stay neutral in the conflict. India, with its long-standing ties to Russia, has sought to carve out a neutral position. Most importantly, Beijing has emphasized the importance of "respecting . . . territorial integrity" but also recognizing "Russia's legitimate security concerns."

Q2: How do these sanctions compare to previous efforts?

A2: The sanctions on Russia have some recent precedents but none aimed at an economy so large or important to global energy markets. Iran has twice been removed from SWIFT, first in 2012 and again in 2018 after the Trump administration pulled out of the Iran nuclear deal. North Korean banks were booted in 2017 after it was discovered they were using the messaging system to circumvent sanctions. Likewise, the United States has previously sanctioned the central banks of Iran, North Korea, Syria, and Venezuela. The United States has not previously implemented the FDP rule in such a broad fashion, targeting an entire nation’s military end users and economy rather than select firms.

Q3: What are the economic implications for Russia?

A3: The sanctions will impose enormous costs on Russia’s economy, effectively cutting it off from international capital, triggering a currency crisis, a potential banking crisis, and its worst financial shock since the debt crisis of 1998. The Central Bank of Russia (CBR) had built up its official reserves to $630 billion as of last month, which were double Russia’s goods imports and more than a third of Russia’s GDP last year. Many referred to these ample reserves as “fortress Russia.”

The sanctions demolished the walls of that fortress by severely limiting the CBR’s ability to transact in major foreign currencies and cutting off Russian banks from SWIFT and certain transactions. The sanctions effectively rendered most of the CBR’s reserves useless by prohibiting transactions in those currencies. As of March 2, the Russian ruble had fallen more than 30 percent against the dollar compared to before the sanctions. On February 28, the CBR doubled its key interest rate to 20 percent to stabilize the exchange rate and imposed capital controls.

Russian banks cut off from foreign correspondent accounts or facing blocking statutes could fail absent state support. Russians are reportedly lining up to withdraw bank deposits. As of March 2, the Russian stock market had been closed since Friday, but offshore proxies suggested Russian securities had lost more than half of their value since the invasion. Moody’s estimates that Russia’s GDP could contract 8 percent this year, although such estimates are particularly uncertain now. On its own, this will not have a major impact on the global economy, as Russia’s economy accounts for less than 2 percent of global GDP.

Q4: What are the economic implications for the world?

A4: The global economic implications will depend mostly on what happens to energy and other commodity prices. U.S. officials have said the sanctions are designed to not disrupt global energy markets, with carveouts for energy transactions. But the severity of the financial sanctions and geopolitical uncertainty are nonetheless rattling energy markets. The United States, as the world’s largest energy producer, is somewhat insulated, but Europe is vulnerable, as Russia provides a quarter of Europe’s oil imports and 40 percent of its natural gas. Without Russian pipeline gas, Europe would struggle to obtain enough liquefied natural gas (LNG) by sea because leading exporters—the United States, Australia, and Qatar—are already shipping at or near full capacity. Europe would have to make up the difference by reducing gas consumption or bidding up the limited supply of LNG on the market. Russia and Ukraine are also major grain producers

This potential commodity shock comes at a time when the United States, Europe, and other major economies are already dealing with high inflation from pandemic-related disruptions and excess demand from some stimulus policies. The U.S. Federal Reserve and other central banks probably will try to look past this supply shock and maintain their plans to tighten monetary policy, although this is less likely for the European Central Bank. Still, the shock will make the trade-offs between combating inflation and maintaining job growth harder.

The crisis is more likely to reaffirm that dollar’s global standing than to risk it. Some policymakers have understandable concerns that the overuse of U.S. sanctions will encourage alternatives to the global dollar network. Indeed, the CBR appears to have assumed that by replacing most of its dollar assets with euro assets it could shield itself from potential unilateral U.S. financial sanctions. But the sanctions were not unilateral—they have been multilateral.  They cover the U.S. dollar, the euro, the Japanese yen, the UK pound, the Swiss franc, and essentially all reserve currencies except for the Chinese renminbi. Moving away from the dollar did not help the CBR. Economies accounting for more than half of world GDP are involved in the sanctions. This shows not only the power of the dollar’s global status, but also the power of the U.S. alliance network when sufficiently coordinated and motivated.

Evading these restrictions will be difficult for Russia. Some of its trading partners like China, Brazil, and India will look to settle trade in local currencies without touching the dollar or euro. This will be difficult because these currency cross-pairs have limited liquidity. Russia developed an alternative to SWIFT called the System for Transfer of Financial Messages (SPFS), but the network is only operational during business hours and has capacity limits. Russia had planned to integrate the SPFS with China’s Cross-Border Inter-Bank Payments System (CIPS) for renminbi transactions. These systems might see increased usage for bilateral trade, so the CBR can use its $77 billion in renminbi reserves for Chinese imports. Russia is also likely to pay for some imports with its gold reserves, valued at $132 billion as of January.  

Escalation in the crisis is the biggest wild card, economically and otherwise. Moscow previously said that cutting Russia off from SWIFT would be a “declaration of war,” but Russia has not retaliated against the West. Moscow might suspend energy and other commodity exports in an act of desperation, even though this would cut both ways. Russia could also launch cyberattacks against Western economic or financial infrastructure or seize foreign corporate assets in Russia. The biggest risk would be a widening of the conflict itself. Without a clear path toward de-escalation, markets will remain jittery.

Q5: What are some other policy opportunities for the United States?

A5: The Russia-Ukraine crisis is an illuminating moment of strategic clarity and offers the potential for alignment of U.S. national security, economic, and climate interests that could cut across political divides. While the sanctions will harm Russia’s economy, in the long term the most effective way for Washington to weaken the Russian economy and constrain Moscow’s resources would be to reduce the global price of oil and gas. Fossil fuels are about half of Russia’s exports, and oil and gas revenues account for 30 percent of Moscow’s budget. The United States could encourage domestic oil and gas production in the short to medium term while supporting green technology initiatives to reduce fossil fuel dependency in the long term. More broadly, the crisis is likely to reaffirm the importance of secure supply chains, adding to the existing impulse in Washington to address these risks.

China has not condemned Russia’s invasion and is perceived as Russia’s partner. While much remains uncertain, and Beijing’s relationship with Moscow is complicated, it is possible that this crisis will increase international concerns about Beijing’s authoritarianism and the dangers of its military modernization efforts. It could also cause some governments or firms to reassess what they previously wanted to believe was unthinkable—a China-Taiwan military crisis. Such changed perceptions could offer Washington an opportunity to advance its Indo-Pacific Strategy and efforts to counter China more broadly.

Policymakers will continue to debate the effectiveness of economic sanctions as a deterrent. Clearly, the West’s threatened sanctions did not deter Putin from invading Ukraine. But the West also did not warn about—or expect to enact—the financial sanctions it has. Would things have been different if the economic costs had been clearer to Moscow? This debate has ramifications for U.S. military strategy vis-à-vis China and Taiwan. Putin probably believed that Europe’s dependence on Russian energy would deter a strong response. Does Chinese president Xi Jinping believe that the world’s reliance on Chinese manufactured goods and its large commercial and financial linkages would deter a strong Western response in the event of a Taiwan crisis?  

Gerard DiPippo is a senior fellow with the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Matthew Reynolds is a research associate with the CSIS Economics Program.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). 

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Gerard DiPippo

Gerard DiPippo

Former Senior Fellow, Economics Program
Matthew Reynolds

Matthew Reynolds

Former Fellow, Economics Program