The US and allies have responded to Russia’s formal recognition of occupied regions of Donetsk (DNR) and Luhansk (LHR) and belligerent rhetoric with a “first tranche” of sanctions. These measures, more extensive than some anticipated last night, are nonetheless well short of the pledge to start with the “strongest” measures. This reflects the administration’s desire for proportionality, coordination and preserving some element of deterrence, while still fulfilling the commitment that an ‘invasion’ would be met with noticeable sanctions. The most impactful seem to be the halt of Nord Stream 2 and the US sanctions on VEB and its many subsidiaries, which are nevertheless and unsurprisingly a lower level of severity than the highest level of sanctions briefed. This doesn’t mean that the US is back to gradualism, but that the starting point in terms of sanctions severity is somewhat lower than the worst case, given the acts to which it is responding and the desire to keep the door open to diplomacy.
The allies, roughly in coordination, have gone for a middle path, cutting off DNR and LHR from global trade/finance (not insignificant but not systemic), dissuading Russian actors from investment there, as well as some entities and Russian officials/individuals. They have yet to target major Russian financial institutions or deploy export controls, which would likely be part of an escalation. This degree of coordination is a reflection of months of diplomacy, gaming out and pre-planning, which include greater coordination that may bear fruit in a range of policy areas. Overall, unless there is a major policy shift from Russia, which seems unlikely in the near-term, the direction of travel will be towards more sanctions, focused on financial institutions (with an energy carve-out), individuals and use of export controls, an area where the US hopes it has asymmetric power. The economic impacts will depend not only on sanctions and associated de-risking but also on Russian responses including in commodity exports.
Latest Steps
The UK has sanctioned 3 oligarchs and five banks, all of which had previously been listed by the US. These state-owned banks are not systemic in Russia’s banking system or in processing the energy trade. This is the first use of the UK’s new sanctioning authorities which allow it to designate entities and individuals that provide material support to the Russian government not just those directly involved in undermining Ukraine’s integrity. Given the degree of Russian elites present in London, the number of designations seems limited but this likely reflects a warning shot, hoping that banks and others will de-risk and others might disinvest.. UK sanctions cover UK persons and UK-based transactions rather than having extraterritorial power. However, the inclusion of Timchenko, a major investor in Novatek, does raise some questions for implementation. The company has been able to navigate US sanctions but this may require some finessing. Overall, the UK may well do more, including measures that look more like the EU and US ones on DNR and LHR and sovereign debt and especially if it aims to live up to Liz Truss and Boris Johnson’s rhetoric. Steps to revive transparency on beneficial ownership would help too.
EU foreign ministers have agreed in principle to a package of sanctions that target several additional Russian officials, increase restrictions on new Russian sovereign debt and other sovereign financing in EU capital markets (likely similar to measures from the US), and target several smaller banks involved in DNR and LNR. These sanctions could come into effect in the coming days unless there are technical issues from member states. The need for sanctions unanimity remains a limitation for EU sanctions, so this relatively quick turnaround would be a sign of extensive planning, diplomacy and a desire to be coordinated with the US rather than face extra-territorial measures.
More important politically, German Chancellor Sholz has halted Nord Stream 2 certification and ordered a new assessment of energy security that will keep it offline. EU actors are likely to redouble efforts to both diversify natural gas supplies (something that a combo of higher prices and diplomatic efforts have partly facilitated) and increase clean energy production. The balancing act between short and medium-term energy security issues will be hard to maneuver, especially given that higher fuel prices are already crimping output for a series of Russian institutions.
In addition to the more targeted measures announced last night that aimed to cut DNR and LHR (and any supporters) from the global economy, the US today turned to Russian actors. In this US officials tried to balance allied coordination, proportionality and deterrence, leaving them with this middle path, which occasionally muddied the messaging. It included full blocking sanctions on development bank VEB and Promsvyazbank, two banks closely tied to the Russian government and military – and 42 of their subsidiaries, which account for a large number of development projects. This aims to focus attention on government/military interests, not to Russian individuals. OFAC also announced sanctions on sovereign debt that ban the trading of new Russian debt in the secondary market, extending beyond prior measures that restricted ban primary market purchases for hard currency and then for local currency. It also announced sanctions on oligarchs and noted that more is to come. These sanctions are less painful than the highest that could have been achieved but will make Russian investment in growth-enhancing projects that much more difficult.
Congressional actors too have called for additional sanctions including on larger banks, more oligarchs and Putin himself. It remains to be seen if any of the stalled Congressional legislation will be revived. The administration does not need new legislation to act given extensive powers in last year’s EO and the ability to issue new ones, but coordinated legislation sends a clear message of political unity at at time when Russian media is apt to emphasize divides.
Other allies such as Canada and Australia ( have announced plans for additional sanctions but have yet to announce them. All allies have signalled that the trajectory is pointed towards more measures, and indeed, several Asian allies have pre-announced plans to participate in future export controls if they need to be enforced. That would happen only in the case of
While the impact of the measures so far remains limited, the direction of travel is towards more extensive sanctions, unless Putin reverses course. This trend added market pressure on some key commodities and Russian assets, despite some relief following the US announcement . Many investors may have chosen to de-risk and reduce exposure to Russian actors, even those that are not yet sanctioned to avoid the need to dump them or cut ties later. This seems particularly the case in the EU, and foreign holdings of Russian government bonds are nearing historical lows. Russia-linked commodities such as Nickel, as well as energy products, have rallied as investors price in the risk of supply shortages either due to conflict, politically motivated cuts or other disruption. This derisking is part of the government’s plan, in the hopes that market actions reinforce the impact and send a deterrence message. It remains to be seen if it will lead lead to change or generate actual shortages. Given the risk of counter-sanctions and conflict related disruptions, prices for fuel, grains and key metals are likely to be volatile and make addressing the inflation issues more challenging.
Next Steps and Risks Ahead
The US and its allies may announce other sanctions of a similar severity in the coming days. Further escalation would be dependent on Russian response. An escalation from Russia, such as deployment beyond the Donbas or recognized regions would prompt tougher sanctions, perhaps additional state banks or export controls on micro-electronics for select state companies or listing of other banks and oligarchs. These would again be roughly in coordination with allies and might include a wider set of allies including Asian allies, who are historically less active with sanctions but rarely block or run afoul of US ones.
In several ways the ball seems to be back into Russia’s court, in terms of energy and key commodity supplies and counter-sanctions but especially in terms of the military situation on the ground. In fact Russian decisions either due to conflict, force majeure or choices are more likely to cause the energy spikes Biden is preparing the US populations for rather than sanctions per se.
The US and allies remain wary of blocking energy transactions or current energy production and would likely include carveouts or general licenses for energy trade. Individuals involved in energy companies could be sanctioned, forcing work arounds, and they could be subject to broader state-owned entity related export controls, though of course energy companies already face some financing and import restrictions. This suggests other sectors, banks and individuals are more likely to be targeted.
The US and allies are also aiming to avoid directly targeting the Russian population or even that in DNR/LHR if they can help it. The regional sanctions of yesterday from the US and EU ones today explicitly aimed to allow for some humanitarian trade including remittances and covid relief, including pre-emptively general licenses similar to those in Iran, Venezuela and Syria. Of course, the broad de-risking and lack of western players in these regions makes this harder to achieve amid the constructed humanitarian crisis, but it is an example of the Treasury Department’s learning on these issues. The choice of VEB too seems targeted towards government interests not the population per se. As sanctions escalate, if events warrant, maintaining these targeted natures, will perforce be more difficult. This is another area where Russian policy choices matter.
Energy: While US/allied sanctions aim to avoid impacting current oil production or current oil transactions, Russia may not. They could choose to defer shipments on grounds that supplies are needed at home (as done for supplementary fuel sales, ammonium nitrate and select grain exports) or pipelines are blocked maintenance. Already Russia had avoided sending additional volumes of natural gas in 2021 despite rising prices, sticking to its prior arranged long-term contracts. It will have a choice ahead whether it wants to continue to be a self-described stable supplier or not. These pressures may impact the natural gas market more than the oil one, given that Russia has an interest in boosting its levels within the OPEC+ group rather than losing market share. Higher natural gas prices in Europe as well as diplomatic wrangling have helped boost LNG imports.
Russian economic policy remains very defensive and focused on forced saving, a trend that will be amplified by recent sanctions and capital outflows. These trends will likely reinforce the low growth path as fiscal and monetary tightening as well as the need for Russian banks to provide government financing, making them even less likely to provide finance to the Russian population. Russia has taken strides to diversify its assets, reduce reliance on the dollar and US custodial relationships but remains quite exposed to EU banks and Euro assets. In the case of a significant escalation
China’s response also remains key, especially in the case where further sanctions escalation would be needed. So far the sanctions do not harm China’s interests much, but the uncertainty does. China has continued to express support for existing borders, prefers stability, including of key commodity prices even as they remain critical of Western economic coercion. China is unlikely to provide a full lifeline but will probably remain the critical foreign partner and buyer of commodities. China remains unwilling to be overly reliant on any one supplier of fuel – note that it has signed new long-term energy contracts with both Russia and US independents in the last few months, the latest example of its balancing. China would be a harder sell on compliance with future sanctions and export controls than Japan/Taiwan/South Korea. The prospect of such tech export controls, as well as other policies more directed towards China are likely to reinforce Chinese attempts to de-Americanize certain parts of its supply chain.
Ziemba Insights 