What if Russia invades Ukraine (again)? Consider these options for sanctions escalation.

Vladimir Putin is again massing troops near Ukraine’s borders, Kremlin-controlled media has ramped up threats of war, and the United States and key European allies are concerned that another Kremlin military offensive against Ukraine may be imminent.

White House Press Secretary Jen Psaki has noted that the Russian troop presence in the region is higher than at any time since 2014, when Russia invaded Ukraine, and there are concerning reports of Russian ballistic missiles being deployed to the Ukrainian border. The Kremlin is warning of a need to protect “Russian citizens”—that is, Ukrainian citizens in Ukraine’s Donbas region under effective Russian occupation since 2014, hundreds of thousands of whom have recently been given Russian passports. It’s a threat rightly seen as a potential pretext for a renewed Russian military offensive against its neighbor.

Analysts seem torn about Putin’s intentions. Some believe these developments are saber-rattling by an embattled and defensive Russian president, who is coping with a new and less accommodating US president in Joe Biden and potential domestic upheaval with the deteriorating health of imprisoned dissident politician Alexei Navalny. Others see danger of annexation or a real invasion by a Kremlin that wants to distract from domestic challenges and perhaps take advantage of a new administration in Washington. Some wise veterans in the Biden administration believe that Putin is following the old KGB playbook: threaten action, keep options open and your adversaries off balance, and exploit opportunities that may arise.

Whatever Putin’s intentions, the Kremlin’s anti-Ukrainian propaganda has not been so loud since 2014. The United States and its allies need to respond in order to prevent a major military escalation at worst and at least blunt Putin’s effort to gain political advantage through intimidation.

The good news is that the Biden administration has not been idle. In a well-choreographed move on March 31, the administration’s senior national-security team called their Russian counterparts and urged the Kremlin to stand down. On April 2, Biden called Ukrainian President Volodymyr Zelenskyy to express US support for Ukraine. French and German leaders have also called Putin, with German Chancellor Angela Merkel bluntly telling Putin on April 8 to unwind Russia’s military buildup.

That’s good but not enough. The United States and its key allies need to make clear to Putin that another Russian invasion of Ukraine—or annexation or recognition of the Russian-controlled territories in the Donbas—will be costly for the Kremlin. Putin, like Soviet leaders before him, is adept at reading his adversaries and calculating risks versus benefits. To ward off a war, policymakers in the United States, the United Kingdom, the European Union, Poland, Japan, and Canada, which worked together to impose sanctions and other measures on Russia after Putin’s 2014 attack on Ukraine, need to develop usable options for imposing costs in the event of an annexation or invasion. They should act together as much as possible.

Some of these options can be military ones: not sending troops but sending Ukraine weapons like anti-tank Javelins or drones. Other options can involve new sanctions that are tough enough to hurt but not so strong that they cannot be used. The Russia sanctions that are currently in effect, while costly for the Russian economy, are far below the level that could be imposed. While some in Europe and the United States have argued that there is little room to escalate these measures, there is in fact still a lot of space to do so.

If the Russian military attacks Ukraine, US and European policymakers will be making decisions in the shadow of a real land war with significant casualties and a massive displacement of civilians. The Kremlin could also take significant escalatory steps short of a major new offensive. It could introduce Russian troops as “peacekeepers” to protect the newly minted “Russian citizens.” Or it could recognize or even annex the Donetsk and Luhansk People’s Republics. Even in a less extreme case of annexation or recognition, Russia will have essentially used military force to conquer European territory. Steps that look excessively strong now may appear in a different light under those circumstances.

YGiven the threat of a significant expansion of Kremlin aggression against Ukraine, we recommend preparing escalatory options that go beyond the usual menu of options—and beyond even what we ourselves have previously written about. These would supplement broader economic-statecraft tools that the United States and its allies should deploy in any case to counter Putin’s aggression and repression more generally through actions such as election interference and assassinations.

Options for sanctions escalation

The Russian financial and energy sectors are currently subject to US prohibitions that restrict access to capital markets for several major government-owned entities, along with separate restrictions on Russia’s access to cutting-edge oil-extraction technologies. These sanctions have had a cumulative effect over time, slowing Russian economic growth and constraining these companies, but they have not crippled the companies’ daily business operations.

The United States and its allies can consider expanding the companies subject to the current sanctions or imposing more severe restrictions such as full blocking sanctions, which include an asset freeze and prohibit all transactions. Deliberations over sanctions typically take into account spillover effects on the economies of the United States and its partners, but sanctions policies meant to blunt the threat of a Russian invasion or annexation of territory will require a higher tolerance for those spillover effects.

  • Gazprom financing restrictions. The United States, the European Union, the United Kingdom, and others have so far not targeted Gazprom with sanctions commensurate to those applied to the Russian energy company Rosneft. Given Europe’s dependence on Gazprom-supplied natural gas, full blocking sanctions are not practical. But imposing restrictions on Gazprom’s capital-market financing would carry less risk of blowback while still having a significant impact, especially over time. Russia has few near-term options other than to ship gas to Europe; it can’t simply change the delivery terminals the way it can with an oil tanker. And in a difficult fiscal environment, Moscow needs all the revenue it can get.
  • Rosneft financing restrictions: Rosneft, one the world’s largest energy companies, is subject to relatively minor financing sanctions. While full blocking sanctions may be unpalatable given the spillover effect they would have on allies and partners of the United States, sanctions on Rosneft could be tightened to further hamper its finances, including for new investments. Policymakers could also consider blocking sanctions against Rosneft subsidiaries that are less important to global energy markets but whose sanctioning would still hurt the company. The Trump administration, for example, targeted Rosneft Trading after accusing it of supporting Nicolás Maduro’s regime in Venezuela. Similar logic would apply to Gazprom subsidiaries.
  • Russia’s state-owned banks have the vast majority of market share domestically, and none has been subject to blocking sanctions. Consideration of blocking some of these banks, e.g., VTB and Gazprombank, would be appropriate for a scenario where Russian tanks are streaming across Ukraine’s border. Imposing such blocking sanctions would represent a major escalation, and Western policymakers would need to take some steps to avoid economic blowback for doing so.VTB has a major retail consumer presence in Russia, and some consideration for not impairing operations inside the country would help reduce the impact of sanctions on ordinary Russians. If sanctions on VTB as a whole risk too much retail impact, blocking sanctions on VTB Capital, VTB’s investment bank, would be an alternative.
  • Gazprombank plays a major role in US securities markets as well as financing and insurance for energy shipments, and the impact of any sanctions on those areas may need to be blunted to avoid undue impact on Western companies.
  • However, these banks are not “too big to sanction,” and the impacts of sanctions can be managed through consultation with allies and appropriate wind-down authorizations and carve-outs where impact may rest more on the West than on the Kremlin.
  • Other Russian energy companies could also be targets ripe for blocking sanctions. Surgutneftegas is Russia’s fourth-largest oil producer and has a shadowy ownership structure that suggests proximity to the Kremlin. Novatek, which is subject to financing sanctions, is partially owned by Gennady Timchenko, whom the Treasury Department sanctioned for allegedly acting as a Putin money man. Novatek is also part-owned by France’s Total, which means the United States would have to act with some diplomatic finesse if it were to push for harsher sanctions against the company. But such sanctions may be on the table if the frozen conflict in Ukraine turns hot.
  • Russia’s mining and metals sector is largely untouched and some targets could be viable. Much discussion about sanctions against oligarch Roman Abramovich, who controls steelmaker Evraz, has ensued since Navalny’s arrest. Also close to the Kremlin is Alrosa, the state-controlled diamond company managed by Sergei Ivanov Jr., son of a sanctioned long-time Putin associate. Sanctions against the latter may raise fewer concerns about spillover than sanctions against the former, given the critical role of steel in global supply chains.
  • Russia’s largest state-owned shipping concern, Sovcomflot, is a key player in the country’s energy sector. Sanctions against it could hamper Russia’s energy exports and increase pressure on the sector that is most closely linked to Putin’s wealth and influence. Care would need to be given to avoid interrupting flows of typical consumer goods such as food or medicine deliveries, which are generally exempt from territorial sanctions under US law.
  • The Russian insurance giant Sogaz is a key insurer of projects by companies tied closely to Putin and the Kremlin. Sogaz was briefly subject to sanctions in 2014 because it was a subsidiary of the sanctioned Bank Rossiya before a divestment removed their impact. The insurer’s continued close relationship to Bank Rossiya, which the United States sanctioned in 2014 for allegedly serving as a key bank for Putin’s network of cronies, makes it an attractive target. Sanctions targeting Sogaz would need to be calibrated to avoid causing havoc for key insured parties such as ships at sea. But the use of appropriate wind-down periods and other more targeted carve-outs should mute any broader impact.

These are but a few areas for consideration as policymakers in the United States, Europe, Canada, and elsewhere debate how best to deter Putin. Options need to be prepared in advance so that the United States and its allies are in a position to implement them quickly should the situation in Ukraine take a turn for the worse. The strategy of “putting sanctions in the window,” which was used in 2014 to let the Russians know what the West had in hand, is a useful tactic to revive. That approach may be better than making loud public threats.

Measures apart from the situation in Ukraine

Before this escalation against Ukraine, the Biden administration was rightfully considering additional sanctions against Putin’s Russia for its aggressive actions—including election interference, hacking against the United States in the SolarWinds case, bounties against US soldiers in Afghanistan, assassinations and attempted assassinations using chemical weapons, and repression at home. These steps should take place regardless of Putin’s latest threat against Ukraine. Full blocking sanctions against the Russian government development institution VEB, moves against the issuance of Russian sovereign debt, and individual sanctions against Putin’s circle of corrupt oligarchs, bagmen, princelings, and agents should go forward, among other steps.

The Nord Stream 2 gas pipeline is a bad idea quite apart from the Kremlin’s recent escalation against Ukraine, though US sanctions against German and other European companies would be a costly way of dealing with it.

A new Kremlin attack on Ukraine might finally get the German government to change course on the pipeline. In any case, the German government would be well-advised to declare a moratorium on the project while the United States does the same on sanctions against the project, giving all the parties—Ukrainians and Poles included, along with the European Commission—time to address Nord Stream 2’s risks.

Sanctions are not cost- or risk-free. All options can cause some level of pain to Western companies, and all pose some risk of unintended consequences. But demonstrating determination to resist Putin’s aggression, bear the costs of doing so, and work as much as possible as a united transatlantic community may be the best way of deterring the Kremlin.

Brian O’Toole is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. He is a former senior adviser to the director of the Office of Foreign Assets Control (OFAC) at the US Department of the Treasury. Follow him on Twitter @brianoftoole.

Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. He was the coordinator for sanctions policy during the Obama administration, assistant secretary of state for Europe and Eurasia during the Bush administration, and senior director at the National Security Council for the Clinton and Bush administrations. He also served as ambassador to Poland during the Clinton administration. Follow him on Twitter @AmbDanFried.


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