Russia sanctions, explained

December 1989.  Dresden, East Germany.  The Berlin Wall has fallen, heralding the end of the Cold War.  A surge of pro-democracy sentiment sweeps through Eastern Europe.  One fateful night in December, a crowd of demonstrators tries to storm a nondescript building known to be the East German headquarters of the KGB.  Rushing outside, a panicked, low-level KGB officer threatens the protestors with violence if they move any closer.  Back inside, the same officer hurriedly calls his superiors in Moscow.  He needs backup support from a nearby Red Army tank unit.  To his dismay, the response from Moscow is … silence.  No help is coming.  So instead, the young officer and his colleagues hastily burn documents in their Dresden headquarters.  “We burned so much stuff that the furnace burst,” he would later recall.

It’s hard to believe, but more than 30 years later, these events still thunder across the world’s stage.  Most biographers and experts agree – the fall of the Berlin Wall and the ensuing chaos in East Germany left an indelible mark on then-KGB officer Vladimir Putin.  It taught him a hard lesson in the frailty of political systems, the power of the crowd, and the need to rely on his own prowess without expecting any support from the outside world.

Today, that world watches as these lessons from the Cold War turn again and unfold.  With every indication that Russia will invade Ukraine, and some reports that it has already done so, the United States and its allies are responding with what Vice President Harris described as “some of the greatest sanctions, if not the strongest” in U.S. history.

This article provides a rundown of what we know today, and what may be on the horizon if events continue to escalate.

The first wave: oil and money

Yesterday, President Biden announced a “first tranche” of sanctions in response to Putin’s recognition of two, so-called “independent states” in Ukraine.  These sanctions are designed to cutoff Russia from U.S. and other western financial institutions.  Specifically:

• OFAC announced sanctions against two Russian banks: the Corporation for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB), along with 42 of their subsidiaries.
• According to OFAC’s press release, VEB is key to Russia’s ability to raise funds, while PSB is closely tied to the country’s defense sector.
• All assets from these banks under U.S. jurisdiction are immediately frozen. All U.S. persons or entities are prohibited from doing business with these institutions unless authorized by OFAC.
• With combined financial assets worth tens of billions of dollars, these institutions play a critical role in the Russian economy.

The aim of these measures is to severely limit the ability of Russian entities from accessing international loans and other forms of financial assistance they rely on.  The sanctions also prohibit VEB, PSB and their subsidiaries from making any transactions in U.S. dollars.  Some regulatory experts and commentators speculate that the secondary effect of this action could also be to force Russia’s central bank to deplete its hard currency reserves, in order to bail out the other banks, further weakening the overall financial structure of the Russian economy and potentially providing less funds to wage war.

In addition to these sanctions, the United States and its allies announced other measures:

• Five vessels owned by a subsidiary of PSB are now listed as blocked property pursuant to Executive Order 14024.
• A list of key Russian elites close to Putin have been blocked by OFAC. Among other things, this action prohibits all transactions by U.S. persons or within (or transiting) the United States that involve any property or interest of these persons.
• German officials halted certification of the Nord Stream 2 pipeline, cutting off a major source of income from Russia’s largest natural gas customer. (Russia responded by tweeting that gas prices in Europe will skyrocket.)
• The EU also announced sanctions against Russia, targeting 351 members of Russian parliament, other key individuals/entities, restrictions on economic relations and limiting access to EU capital and financial markets.

The next wave?  Technology.

In addition to these sanctions already announced, the United States has been threatening Russia with an array of additional measures if a full-scale invasion of Ukraine occurs.  Some of these measures might include:

• The foreign direct product rule. This novel export control could be used to damage a wide range of Russian industries – everything from quantum computing, aerospace and defense to video game consoles, tablets and smartphones.  The control targets the fact that almost every semiconductor in existence today is made with some U.S. tools, technology or software.  The rule was used most recently against Chinese tech firm Huawei, which saw a 30-percent drop in revenue as a result.  This rule differs from the de minimis rule in the EAR, because it covers a far broader range of items and technologies.
• In connection with this rule, the United States could also use its economic influence to persuade other countries from exporting similar products to Russia.
• There has been talk of potentially kicking Russia out of the SWIFT banking consortium. SWIFT is an electronic banking message system used by 11,000 institutions in 200 countries around the world.
• Congress has been in discussions about a measure that would use existing presidential authority to provide military equipment to Ukraine.
• There has even been talk of imposing sweeping sanctions against Russia that are similar to those the United States currently employs against Iran, Cuba, North Korea and Syria.

What happens now?  Biden vs. Putin

Events are unfolding rapidly in this region of the world, so we can expect daily updates and news reports to continue for some time.  Interestingly, President Biden in his speech yesterday touted the fact that Russian troops are stockpiling blood supplies along the Ukrainian border.  “You don’t need blood unless you plan on starting a war,” Biden said.

When he left East Germany in disgrace in the early 1990s, Vladimir Putin and his family were given a 20-year-old washing machine as a parting gift from some German friends.  He returned to Russia only to find the Communist government of his home country on the brink of disaster.  However, amid that chaos and turmoil, Putin saw opportunity.  Over the next three decades, he became a billionaire, built an oligarchy empire and made himself ruler of it all.

Now, Putin stands ready to move west again.  This time, with 150,000 troops and an array of military hardware that would quell any crowd of protestors.  He is prepared to invade Europe’s second-largest country and annex it back into what once was the glory of his former Soviet Union.  The United States and its allies might respond by blocking all manner of goods – including washing machines – from Russia.

Putin … the scrappy ex-KGB officer … doesn’t seem to care.