← The Lawfare Podcast
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- [00:01]
Eugenio Derbez
The following podcast contains advertising.
- [00:04]
Scott R. Anderson
To access an ad free version of the Lawfare Podcast. Become a material supporter of lawfare@patreon.com lawfare that's patreon.com Lawfair also check out Lawfare's other podcast offerings, Rational Security, Chatter, Lawfare, no Bull and the Aftermath.
- [00:32]
Lauren
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- [01:56]
Scott R. Anderson
Foreign.
- [02:08]
Julia Friedlander
Cornett, intern at Lawfare, with an episode from the Lawfare archive for March 9, 2025. On February 26, President Donald Trump told the press that Russian sanctions could be lifted at some point. And this week, Reuters reported that the Trump administration was drawing up a proposal to lift sanctions on select Russian entities and individuals. This would mark a break from the United States, European Union and other allies in position of sanctions unprecedented in terms of scope, coordination and speed throughout the war. For today's Archive episode, I selected an episode from March 1, 2022, in which Scott R. Anderson sat down with sanctions experts Julia Friedlander and Rachel Ziemba. They talked about how the economic sanctions are targeting Russia in ways that have never been tried before, what impact they will have on the Russian economy and what the consequences may be not just for the conflict in Ukraine, but for The Rest of the World Moving Forward.
- [03:13]
Scott R. Anderson
I'm Scott R. Andersen and this is the Lawfare Podcast for March 1, 2022. Over the past week, the United States and its allies have responded to Russia's military invasion of Ukraine with some unprecedented actions of their own. Economic sanctions that target Russia in ways that have never been tried before, let alone applied to one of the world's largest economies. Over just a handful of days. To discuss this revolutionary sanctions strategy and what it may mean moving forward, I sat down with two sanctions experts, Julia Friedlander, Senior Fellow at the Atlantic Council, and Rachel Ziemba, Adjunct Fellow at the center for New American Security. We recorded our conversation before a live Internet audience on the afternoon of Monday, February 28, meaning events on the ground may have shifted in the interim. We talked about the different types of sanctions being applied, what impact they will have on the Russian economy, and what the consequences may be not just for the conflict in Ukraine, but for the rest of the world moving Forward. It's the Lawfare podcast for March 1, making sense of the unprecedented sanctions on Russia. Julia, I want to start with you on this because I want to give the listener a lay of the land of what we're actually seeing, because over the last week we have seen several tranches of evolving different types of sanctions measures being imposed by the United States and of course, European allies, other allies in the international community joining to different extents. We've seen a really coordinated effort that involves United States, European Union, Australia, New Zealand, Canada. But then you've also seen a number of other countries join for other components of these sanctions regimes. And I think a number of countries are still kind of figuring out which parts they are going to implement, which part makes sense for them to implement given that all their economies are a little different. So let's start with kind of the baseline, right? I think the type of sanctions that seem the most like what we think of when we think of at least US Economic sanctions, International Emergency Economic Powers act type sanctions, which are the blocking sanctions. So we have blocking sanctions against a variety of entities, but the most kind of vanilla ones, I guess, in this particular case, target a number of Russian elites, Russian senior officials, Russian oligarchs, a lot of the family members of senior officials in several regards, and then a number of major state owned enterprises and major state owned and private financial institutions. Tell us a little bit about what to make of these blocking sanctions, like how big a step of this is beyond the sort of measures we usually see as a targeted diplomatic response to a major international incident like this, if you think back to Crimea and the Ukraine context, you think back to Yugoslav conflict, these seem to be a step beyond that, even just taking into account just the kind of blocking sanctions. Tell me if I'm right about that. And I should also that's on top of the new blocking sanctions we have for Donetsk and Luhansk, kind of cutting them off from the economy to the extent possible. How much of a more aggressive move are these than other sanctions regimes that use the same tool set in other contexts?
- [06:10]
Eugenio Derbez
Thank you, Scott. And I just want to say for a moment that I'm really, really honored to be on the Lawfare podcast. I've been a nerd follower for a long time, so it's really, really an honor and especially also to be on with Rachel. I think what you're experiencing right now is the full buffet of what the US Economy is able to wage in terms of economic warfare against another power. And I want to stress that this is happening incredibly fast on a timeline that I did not foresee. And again, we're talking about, we can talk about the blocking, the traditional blocking sanctions that you just referred to, but we're also obviously going to have to talk about the, the ramifications of the central bank foreign exchange freezes, which are turning its sanctions issue very quickly into a currency crisis and potentially a sovereign debt crisis. So this is going from the lawyers and the nerds to the market market analysts and the economists at lightning speed. I'd also like to start also by saying to tee this up that we're looking at something that would align with what the Trump administration would have called a maximum pressure campaign. But even that happened over the course of years and months. And again, I was part of the, I mean, I was in the White House at the time. I did not agree with this policy. I didn't think it was going to work, and it didn't work. But the idea was that we were going to ramp up in different tranches of sanctions against Iranian entities against the central bank in an attempt to coerce the leadership back to the negotiating table over a broader, a broader Iran deal. Also compare this to the implementation of Iran sanctions between 2010 and 2012 before the implementation of the JCPOA. That maybe be a little bit of a better comparison because that was multilateral. But that, of course, also happened over the course of years. And it also happened to an economy that was, that was not integrated into the global financial system in the way that Russia is. Russia is a G20 country. They have swap lines with the Fed Obviously we know about the role that they play in global, global commodities markets. And so we're really playing with fire. And what we're doing is trying to match up financial, financial timelines with what it takes to essentially bankrupt a country with military timelines in the attempt to essentially pull the bottom out of a country in time to disincentivize them from completing a war and an occupation of Ukraine. I have never seen anything like this. And, and I'm happy to talk about the specific blocking again. That is, you know, that, that seems to pale in comparison to what we saw from over the weekend. But we went from, from the, responded to the recognition of Luhans and Unesk, right. With some, with some blockings, with some individuals that was extremely traditional. And what we in sort of sanctions land of let's do this and see how Russia responds. And then we went pretty quickly to blocking, as you said, select SOEs, high level individuals. We even did Putin, which is usually a signal of regime change. And then also on the state owned banks, many of which alongside our allies and partners. I'm happy to go into that as well, but I think I'll stop there for a moment and I'm sure Rachel wants to jump in on this question as well.
- [09:11]
Rachel Ziemba
Yeah. The other thing I would just add to reinforce what Julia mentioned about how different this is from what's seen before is at the same time we've also seen rollout of use of other tools, particularly export controls. Right. You know, and a real coalition here. Many of the countries that sort of, you, Scott, and you know, Julia mentioned are involved in different ways. But to take a tool that up to this point had only been used against one company, a big one, Huawei, and to really restrict Russian government industrial base from accessing military industrial base, from accessing a wide range of equipment and the like, there's still open questions how exactly that's going to work. But that coupled with all of the financial pressure measures really add up to a whole different way of focusing on economic coercion. And I think this sort of spirit speed that we've seen, the degree of the coordination, I think both is function of a lot of preparation. And Julia can speak to that about how difficult it was to get to the coordination when she was using tools like this, the nature of the sort of months leading up to it, but also the degree to which the mutually reinforcing different layers, especially within a week, create responsibility. You had responses from Russian actors that were quite rationally individually, but they were among those that then led to Perhaps even more financial market pressure at home than those crafting the sanctions might have anticipated. I'm thinking particularly the impacts on individual Russians because I think if we go back a week, which seems like a very long time or even five days, it was very much a different focus in which banks were being targeted in which ways in an attempt not to make it worse for the Russian individuals. But it's very hard as you go deep and quickly, it's very hard to target. And that over compliance, the broader de risking, that's part of the design here, unfortunately.
- [11:22]
Scott R. Anderson
That's a great setup. You guys have anticipated a lot of what makes the actions we see in the last week so interesting and so different. And that really does go beyond those basic blocking measures that I want to start with. Go ahead and jump into those because we, I think we all know we've got sanctions against, you know, President Putin, his foreign minister, senior officials. That's remarkable in itself on a largely symbolic basis. There's also probably, you know, some policy relevance there. But a lot of the reason why I think people were surprised and initially the Biden administration was behind European allies on that is in part symbolic to me. Maybe there's something more tell me if there's a more economic or policy impact. But what's really novel about this, what's really different pushing new terrain are these use of these other economic tools that you guys have already previewed for us. So let's jump right into to the export controls because I think that's the kind of was the first really big innovation we saw or at least aligned up with focusing on debt issues. Do you want to go to next? Rachel, let me come to you first on export control since you raised it. So this is a use unlike a lot of the blocking statutes, conventional sanctions regimes that a lot of lawfare listeners, other folks be familiar with that uses the International Emergency Economic Powers act, this very broad delegation of power by Congress to the President to impose all sorts of restrictions on the transfer and management of foreign assets and assets in which foreign individuals have an interest in the United States or in the hands of U.S. nationals. This one actually uses a set, separate set of authorities that are export control regulations and items that we usually use to limit how we export sensitive items, technologically sensitive item for national security reasons, sometimes for other reasons, usually in the tech space, although not exclusively, you know, you have export controls on everything from firearms to microchips to at times software to at times factories used to develop those kinds of high end technologies. What are the export control measures we're seeing imposed here. Do we have a model for them being used in this way in the past? And. And what is the intended effect on the Russians? Elaborate a little bit on it. Says you've. You've given us a preview that already.
- [13:23]
Rachel Ziemba
Sure. So, I mean, as you say, this is really a new step in using some of these tools. Now, these tools and authorities, unlike the sort of financial blocking measures which sit at the Treasury Department, these are very much tools that sit in the Commerce Department, you know, and you have tools that are also being used that are even at the level of sort of customs, Customs and trade. I think this is a function of the US Government overall use a wide range of tools when they're trying to meet a certain foreign policy objective. Right. We have seen, looking at the example of China and Xinjiang, the whole sort of supply chain. We have seen sanctions. We have seen of the entity list very extensively. We've seen use of home, you know, Homeland Security and cpp, you know, authorizations for forced labor. You know, all things I know that you guys have tackled on the Lawfare podcast. I like Julia. I'm a super big fan and glad to be here. And then we've also, we've also seen. We've seen this attempt to close any loopholes when something is a high priority. And so I think we're seeing that now here with export controls, which are really using, instead of using this asymmetric power that comes from financial transaction touching a US Nexus or US Person, we're using this sort of asymmetric power that involves US Intellectual property being involved in microelectronics or other items. And then the other thing that is unique here is not only did the US Use these tools that US has done in some cases, but only a given smaller entity, not sort of a whole country's military base, is that a whole set of countries, including countries like Taiwan and Japan, have signed up to do this. Now, partly it might be a factor that they're concerned about US Extraterritorial applications of the foreign Direct Product Rule, but it's also a function, I think, of both their concern about the situation and other precedents, but also a more assertive foreign policy stance, foreign economic policy stance from some countries, especially Japan. I mean, Japan's shift, I think here is quite important. They had. And this was moving away from export controls. But Japan, of course, had been. Had signed on to the G7 sanctions against Russia in 2014, but much more reluctantly. I think we've seen a different rhetoric there. So ultimately here I do Think it's just stepping back to the export controls piece. The exact rules and dynamics are still being worked out in especially some of the coalition partners, but across the board, restrictions on exports to Russian industrial entities, but also shipping and aerospace, and in some cases minerals. And the country stories change a little bit based on what countries might supply to Russia and where their critical advantages are. We've seen the Europeans, for example, ban inputs that could be used in oil refineries. We've seen the Canadians focus on minerals and aerospace. So I think we're seeing a lot of countries use the tools they have. But this is really a whole different landscape. And I would say it will raise a number of questions we'll probably eventually want to get to about how new tools might be developed. But this just, it's a broader element of trying to raise the cost of doing business in Russia, limit their access at a time when there's been such a violation of international norms.
- [17:21]
Scott R. Anderson
Julia, I want to come to you next on this because Rachel's given us a great overview of this one area where we see this expansion, this new set of tools being deployed, but there's a number of other ones going on. Another area that we've seen the United States and allies try and target major industry in Russia has been a focus on debt and debt markets. We saw some major restrictions get imposed on not just sovereign debt necessarily or strict concept, narrow conceptions of sovereign debt, but also limitations on both the primary and the secondary market for debt instruments. This is how, you know, major institutions get money from the global economy. They sell debt instruments so that they can get liquid capital they can use to buy things and build things on some private financial institutions in Russia and then lots of major state owned enterprises. I think there were rail lines, shipping lines, pipeline manufacturers, extractive industries. How does that fit into this picture? And is this sort of focus not on the primary and the secondary debt market basically saying like we're restricting your ability to even deal with trading these things, not with the Russians and trading them between different financial holders already? That's a pretty dramatic step. I'm not aware of us having seen something quite like that. At least that would have such ramifications because Russia actually has a lot of debt instruments out there, unlike other countries like Iran that have come under such dramatic levels of sanctions in the past. How new is this and what is the likely impact to be on those sorts of major industries?
- [18:49]
Eugenio Derbez
So thanks. I mean, so debt and equity restrictions are actually one aspect of it that is a holdover from our 2014 efforts when we designed sectoral sanctions for the first time and realized that we could use, we could impose restrictions on financial institutions not using the SDN list. Right. We didn't actually have to list, traditionally list and do a full blocking of an institution to limit its access to Western markets. So debt and equity restrictions are much more Limited. In 2014, again, the thought was we are going to disincentivize the elites from signing on to Putin's plan. So we're going to say, look guys, we're going to peel you off and realize there's something bad. Things are going to come to you if you stay this close to Putin. Of course, there's a long term debate about whether that worked, whether he would have gone further if we hadn't hit so hard, if we hadn't hit hard alongside our allies. Because again, Europe tied on to debt and equity restrictions then too. What we saw though was just a tightening up at all that, making it all, you know, broadening the scope, as you mentioned, to much broader set of, of financial institutions and enterprises. What was new was trading on the secondary market. That was something that again, we thought was one of the, one of the strongest things the administration would consider when we were using against Russia was trading of debt and equity in secondary markets. Of course, that's been blown to pieces, but that's, this is what you see now is a restriction on all fronts. Right. In monetary policy and in fiscal policy. Because again, debt markets have a lot to do with, with how countries finance their budget. So this is, it's a two pronged approach playing off of each of Russia's vulnerabilities to crack away at the fact that they had prepared themselves quite well for this moment. They had a strong, massive amount of foreign exchange reserves, holdings of gold, not running deficits.
- [20:39]
Rachel Ziemba
Right.
- [20:39]
Eugenio Derbez
Budget deficits, which is actually a sort of Achilles heel of Western economies because we do engage in a lot of social spending. So this is again sort of pulling out the sort of multi prong to get it, get it at Russia's vulnerabilities.
- [20:54]
Rachel Ziemba
Yeah. And I think, to Julie's point, I think this is something that, at least where the US was concerned, not only was there sort of holdover, there was sort of early steps in 2014, particularly relating to the financing for Russian energy companies and some of the banks and then Europeans joined. But there has been a study since about 2018, selective measures on Russian sovereign debt that gradually it's become tighter and tighter. So the sort of Russian use of chemical biological weapons triggered restrictions on US Persons from purchasing Russian hard currency debt. So US Dollar denominated in euros. Then the next phase was local currency, but the Europeans had not implemented that. The Europeans, oddly enough, were much more willing, maybe not oddly much more willing, to impose those restrictions on Belarus within the last year, sort of targeting sort of sovereign debt across the board, which of course made them more reliant on Russian finance. But that's another discussion we can get into. So there was this gradual comfort as part of this tightening up. And some of that was a function that many of Julia's colleagues at the time who were very concerned in 2014 about moving to those steps, were noting that, well, actually foreign holdings of Russian debt were starting to go down. Also that there was less contagion risk to, say, other emerging markets or to the global economy from such a measure. And that's still something we can look at and we're watching with this sort of cascading set of sanctions that we're seeing right now. There still are areas of global financial market stress that we're watching and monitoring. I still think that's mostly via the Energy Channel. But, you know, there were people very much writing notes last night, so Sunday night about whether global banks were going to need to do swap lines and other things. But I do think there is this story here of gradual exhalation and comfort. This is also kind of part of a broader preparation that the Russian government did. The Russian government, when you compare it to other emerging markets or developed markets, as Julia mentioned, has had a very conservative fiscal policy. They've issued very little debt. That's meant they've foregone growth, they've foregone investment, they have made choices that reduce their exposure to these sanctions. Now, I think what we're learning now is that when you have lots of major cascading measures at the same time, it's hard to fully prepare.
- [23:34]
Eugenio Derbez
I say one more thing about export controls, right? Just to add on top of what Rachel was saying about the sort of unprecedented use of export controls of the Foreign Direct Product Rule, it's referred to by some people as a secondary sanction of export controls because it actually gets at all everyone in the US Supply chain. So it effectively. And again, the Chinese may not, may not comply with this because it's not in their interest to do it, but actually they're implicated in this because they're part of the US Supply chain. And so I think this is really. It's a really novel use of the tool. I think it's new and we don't know what's going to happen with it, especially since the Huawei measure was rolled out so quickly that we ended up having to license the shit out of it and, pardon me, to make it actually feasible in the US Economy. So that's one, that's one big black box. But when you say you're going to, so if you're going to, on the financial side, you're going to try to take the financing out of the war, what you do with export controls is over time you can actually physically degrade the Russian military by denying them key components. Right. So chips, aerial, small component devices. Again, the Europeans have also banned the export of refined petroleum, which of course you also need. So maybe that's, you know, you can't, it won't take effect immediately, but over the medium term. You're talking about a crippling of the Russian, Russian military material that could last for decades if we keep these measures in place.
- [24:56]
Scott R. Anderson
Oh, absolutely. So, so we've gotten a couple lines of attack now, right? We've got the frozen assets of elites and major corporate entities and government entities. We've got a focus on export controls. Limiting Russia's access to a wide variety of technologies. It's going to degrade it militarily and potentially industrially in certain ways, certainly in high tech industries. Then we've got this debt instrument. It prevents the major Russian corporations from developing, expanding, growing and getting the financing they need to pursue a variety of activities. Then this past weekend we heard one of the big moves that got talked about a lot. But I want to talk about how big a deal it is, and that's Swift. It's this word that just, I think if you were on Twitter around this time, you saw a lot of hashtag Swift, something, something, something floating all over the place. But a lot of experts have been following, including you two, gave us reasons why, in fact, maybe this is getting a little bit more attention than is really warranted. Rachel, can you start us off with us, tell us a little bit with the Swift restriction, which is worth noting, is something really the Europeans drive the boat on, not the Americans, because it's a, I think a Belgian, if I recall correctly regulated sort of system. But tell us what it is and why it may or may not be a very big deal. The step that was taken over the weekend.
- [26:06]
Rachel Ziemba
Sure. So Swift is a messaging system that banks use to facilitate transactions. Right. And it's been, you know, it's not unprecedented to remove actors from it. It became a real political battle about removing various Iranian banks from Swift. Not so many years ago, but it seems a long time in this context. So effectively removing an institution from SWIFT would remove their ability to participate in that conversation and it would make doing the transfers that much more difficult. The argument that I have made, and Julia can weigh in and sort of more detail on this, but is that ultimately what's more impactful and also more direct and clearer is to designate the banks and limit the ability of, say, US Persons or European persons or the like from transacting with those institutions, or as Julia was already highlighting, designate what kind of behavior is. Okay, Right. So, for example, certain things might be banned, issuing of securities, but other things are still allowed. And so to some extent, what happened over the weekend was to take banks where US European allied entities couldn't do business with and say, well, in addition to that, you can't. So it closed off some, maybe potential loopholes, but it was more, I hate to use this more like icing on the cake. Right. So not insignificant, but it, the political furor around it, I think really sort of took on a life that was not consistent with it. I mean, it's been notable to me and to I think a lot of people that at various times over the last few weeks and months, there has been a fixation on an item that maybe is significant, symbolic, does have impact, but maybe doesn't have the same degree of impact people expect even Nordstrom 2. Right. Which for months and months had so much pressure, very important as a way for Germany to get its gas, or would have been a way for Germany to get its gas from Russia through a different pipeline and channel. But that doesn't necessarily change the fact that Germany was getting Russian gas. Right. That pipeline matters, but it maybe doesn't matter as much as people expect. SWIFT is kind of like that as well. I would say if we look at the measures taken over the weekend, the measures taken on the central bank I think are more impactful, much more impactful, partly because they are really unprecedented, but also because the freezing of central bank assets in jurisdictions that the coalition can control, but also the banning of transactions with the central bank. And that I think is something, if you'd asked me on Saturday, was there actually going to be banning a full transaction or the like, I'm not sure I would have expected that. And that's a nature of how quickly things have moved. And that has forced, I think, the Russian central bank to be even more defensive than it might have been otherwise.
- [29:18]
Scott R. Anderson
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Rachel Ziemba
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Scott R. Anderson
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Rachel Ziemba
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Scott R. Anderson
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- [30:48]
Scott R. Anderson
That perfectly tees up the next question I'll come back to you on Julian that is the central bank sanctions that rolled out on Saturday was announced Sunday. We got some more hints at it Monday. Just this morning they actually announced how they're doing it. This kind of IPA arrangement using Executive Order 1402 4, I think one of the mid-2021 regimes focusing on Russia. Tell us about this and why this is such a dramatic action because it hasn't really, I think, gotten quite as much popular attention as frankly even the swift measure, at least in terms of the popular imagination. But is really a dramatic point and it really undermines a concern that a lot of people had last week, which is the fortress Russia idea. The idea that Russia had a accumulated such a huge amount of foreign exchange reserves. These are, you know, pockets of foreign denominated currency or other holdings, usually overseas. Countries have to be able to do various things to stabilize their economy, support their currency, and just to back up the value thereof. And the assumption had been at least, or a view that had been expressed by many was that, well, Russia's got such extensive foreign exchange reserves, it's built up for years. This is going to give it the ability to really insulate itself from sanctions. And implicit in that was an understanding that these things probably were untouchable or very unlikely to find their way into sanctions regime. Then, as Rachel already noted Saturday, that assumption went out the window. Why is this such a dramatic step? Why was that assumption ever valid in the first place? Why is it so dramatic? It's being done away with now. And what does that mean for Russia? Not just the central bank, but the whole economy? It kind of supports.
- [32:20]
Eugenio Derbez
Sure. So the central bank restrictions are the big red button, you think it's like the eject button in the Austin Powers movie. That's what this sanctions parlance, relatively speaking, Swift is pittance. And I think that that's what Rachel just highlighted it again. You know, de Swifting a bank means it's, you know, transactions are a little bit harder to do, they're more expensive, they take longer. But there are, there are workarounds. And in fact, the US Government and its partners did leave workarounds specifically to make sure that there wasn't friction in those energy related transactions. I do believe that wasn't out of fear that the transactions would not be completed, but a fear that the Russians might see it as a signal that we had hit the third rail of energy first and therefore it might incentivize them to turn the taps or at least throttle them. So again, what you're seeing with these central bank restrictions, it's not, they're not freezing the assets. Again, this is not under terrorism, terrorism authorities, which is what we use to free central bank assets of Iran or Afghanistan.
- [33:19]
Scott R. Anderson
Done.
- [33:19]
Eugenio Derbez
And I think that that's sort of a crucial distinction there. This is a prohibition on US persons transacting with the central bank. And there are similar, similar provisions for the EU and the UK and maybe, maybe that's a little bit, a little, a little bit in the weeds, but this is the Lawfare podcast, I think, but I think that might, it might, you know, it might actually that distinction might play out going forward as the exceptions and the licensing will. It comes into, comes into effect. This is locking up what we thought was about 400 billion of reserves. It turns out it's a little bit less because the Russians smelled a little bit of a rat and did some sell offs on Thursday. So again, this is just short of 400 billion assets. That is the size of the economy of Austria. So if you think about what's being locked up there. So yes, I think that the Russians might have assumed that we were not going to do this, that this was, again, this is the top of every escalation ladder or at least we were going to do it later. So I was expecting and what actually I might have advised because again I'm a little bit nervous about this the central bank we'll get into that later. I would have said go for full blocking on more banks, so ease. And then maybe central and then maybe secondary sanctions on those, on those entities because then the secondary sanctions implement third parties that aren't signing other sanctions in the first place. And we know that sort of like the, the Chinas and Indias of the world have selective implementation of US sanctions but often really do implement them, although they pretend they're not trying to implement US sanctions. So again that's the chronology that we were sort of anticipating here. And so doing the central bank reserves right now again shows the sort of immediacy, the immediacy of take of the action, right. That this is, this is a sort of now according to the US Government and now we're never scenario.
- [35:06]
Rachel Ziemba
Right.
- [35:06]
Eugenio Derbez
And so we can go into what it means, means economically and again that's, that's also a black box going forward for the next week. But I just to highlight that the acceleration of this and hitting the reserves, locking up essentially the bread and butter of the Russian economy is the, is the strongest measure we could have taken. And we took it ahead of other things. And Swift was a political kick to the Ukrainians who thought that it became a symbolism of our support for them. And, and so we did it. But again that, you know, the pales in comparison to the central bank stuff.
- [35:40]
Scott R. Anderson
So before we turn to the consequences central bank thing, I want to go to the one big carve out that exists there and to some extent is a pretty persistent theme throughout a lot of the sanctions regime, not entirely, but through a lot of. And that's energy. Right. A lot of these measures are designed in a way. They're not going to target a lot of Russia's ability to sell oil and gas primarily to Europe in particular, but also to other parts around the world. It's particularly notable in the central bank asset or the central bank set of freezes. We saw again a pretty broad set freeze on these things and we saw OFAC issue a whole nother license basically permitting specifically basically any transaction regarding energy. It was a pretty broadly worded license, as I recall. So if that's the structure we're seeing, why is energy the big carve out of this? What risk are they trying to mitigate by allowing energy to go forward? Is this just about electoral interests and not limiting the hurt that's going to happen to the pocketbook of Americans, European consumers and voters? Or is this something more fundamental about the stability of the global economy? Or both? Rachel, I'll turn over to you first.
- [36:47]
Rachel Ziemba
I think it's both or I think it's all of the sort of above. I mean, in the sense of, yes, there is concern, particularly in the US about inflation. There was already concern about inflation some months ago. I mean, let's think about where oil prices were the last time there was a Strategic Petroleum Reserve release when there hadn't been an actual supply cut. Though US Officials did think that maybe OPEC should be pumping more oil and the like. So I do think there is a concern about both inflation, but also this sort of disconnect between fossil fuel production and demands. Now that of course, ties in and complicates with the longer term decarbonization narrative in ways that I think become important when we think about the exits of some of the large European for now, oil companies from Russia, which we can, we can come back to. So but then I also do think there is both a concern about what trying to impact a major supply of oil and gas to the market would do to the global economy, to the European economies. And that probably would have made keeping this coalition together even more difficult. Now, that being said, despite the fact that this general license is really quite broad, we have seen some friction, some hiccups, you know, in that that's natural and it's, you know, it's, it's, it's a natural response if you're a bank to say, well, I don't know what the rules are going to be, let me hold off and maybe I'll issue you a letter of credit tomorrow. Right. Let me not do it today. And as Julia mentioned, Chinese banks are in that category as well. Chinese banks, while they might be scrambling to figure out how to issue renminbi denominated letters of credit or open renminbi credit to Chinese oil companies, they don't want to directly put themselves in a position where they'd be subject to secondary sanctions. In that way, longer term, they might create new channels. But that's, I think that's harder and not immediate. So I think it's a mixture. The other risk that I know has been present, at least for US Officials is a concern. Well, if you cut off a meaningful amount of Russian fuel, there's a risk that the price shoots up. It's bad for US and global consumers. And you know what, the amount that Russia is still selling, they get more for right. They are earning more money for that smaller amount. So there's always been that element of, you know, are you making the same amount of money on those exports? So, and we have to be honest, we're not talking about taking a producer of 4 million barrels a day of crude offline. We're talking about a producer in the neighborhood of 10 million barrels a day of oil. And we're talking about at a time when Iranian supplies are still mostly offline. And we're talking about. And so I do think that there was a mixture, mixture of policies there. Now, that being said, it's not that energy is completely unaffected. We have seen these financial frictions. We've seen also challenges of even global oil companies paying some of their employees. And we've seen these sort of longer term hits to the oil and gas industry, which especially from the European side only reinforce policies that were aimed towards increasing the costs of doing business in fossil fuel and Russia, especially in the Arctic, that are part of their longer term decarbonization plan.
- [40:23]
Scott R. Anderson
Julia, I want to turn to you for the one last part of all of this before we get to some of the consequences and next steps. And that is some of the interesting developments we saw roll out in the last, really just last 24 hours where we saw, for example, Maersk shipping lines say essentially that they're cutting off any sort of interactions with Russia, if I'm reading their press release correctly, even though that's not something strictly required by sanctions. Right. They just seem to say, well, this doesn't make a lot of business sense for us to do this. And even the political risk at the risk of future sanctions. We saw British Petroleum or bp, I guess it is now, you know, kick pull people off boards and sever joint projects with Rosneft and other Russian petroleum companies. These are all things that are required by the sanctuary regime. But we're seeing a lot of movement in these, a lot of these big actors at the moment here. How much do we know about actually what the outer effects of some of these measures are going to be? It seems that, you know, a lot of the momentum that's built up in the last few days has these companies assuming that things are going to change even more in this direction in the future, or at least seeing any sort of engagement with Russia being a lot riskier than it may have seemed just a few days ago and dramatically changing their business practices. So, you know, should we expect a lot more of these ripple effects coming off of this very dramatic action in ways that may Be unpredictable.
- [41:42]
Eugenio Derbez
Yeah, absolutely. And this is what we broadly refer to as the cooling effect. And cooling effect has two reasons. One for fear of future sanctions that will cause, cause companies to take losses when they have to implement them. And the other is just bad business decisions. Right. I'm not going to see any return on this investment. And that's you know so you're seeing this the two sides of that stuff. So yeah, Maersk bp, the Norwegian state owned oil company a lot. And again that's part of the sort of the byproduct intention of sanctions on sometimes some sides is actually and that's I think one of the effect of like of sanctioning the, the sovereign wealth fund of Russia as well at rdif. Right. So I think that that's. That try to disincentivize companies from doing business with Russia. Right. And that was actually part of the swift stuff too is like because it had this big symbolic effect people were going to go oh God no. Like we're going to stay away from those markets. And so you know that. So it has so that that you're going to see that sort of roll out over the coming weeks and see insurance companies also pull out anything anything that sort of touches the Russian market. You know industry is going to start to say is that really, am I really going to see any return there? You're also going to see. And that's why we have sort of wind down periods and licenses is for companies able to get. Get their business out. Right. For the commercial bank sanctions or not only commercial bank but the bank sanctions. Right. There are wind down periods for this stuff because otherwise we're imposing hits on west on our own businesses for something for best for something that they did legally two days beforehand. So that's not really, that's actually not very legal. Right. You could be subject to lawsuit for doing that. And traditionally you know the, the sort of sort of cooling chilling effect around sanctions especially secondary sanctions. It has to do with humanitarian exemptions. So you know that we sometimes really worry about the or de risking right Worry about the. These effective sanctions that were that fully fully unsanctionable legitimate business is not going to be touched a because the compliance is too difficult. No one knows that they're actually touching a sanctioned entity because again compliance is difficult if you're a large commercial bank. If you can do it. If you're a mom and pop shop you can't. And also that it's just that risk is not worth a potential reward.
- [43:49]
Rachel Ziemba
Right.
- [43:49]
Eugenio Derbez
And so there we'll see that continue to roll out on Russia, a major global economy. We're used to seeing that with Iran, with the Caribbean being de risked from, from car spend and banking. Right. So this just all goes back to sort of like what, what does it look like when we're treating a major global economy like, like an offshore jurisdiction almost. Right. We're forcing Russia to sort of consider itself to turn back to some sort of autarky to keep the economy afloat. So again, very new.
- [44:20]
Rachel Ziemba
Yeah. And just to reinforce something, Julia, which is about this sort of perception of risk, I would say the responses that the Russian government is doing right now to sort of mitigate some of these short term risks, including forbidding foreigners from exiting their positions, canceling near term payments, who knows what would happen down the line. But for sovereign debt, these sort of elements of default, they add to these alarm bells and these sort of red flags that companies and counterparties face. I mean it's the, you know, in the face of a massive capital outflow which you know, really started weeks ago but you know, really accelerate over the last few days. That's what you would expect a central bank to do. That's what it's like to government to do. But it's not something that investors like to see. It's not even something that investors theoretically are there for the long term. And so that's where I think it's always important. We're thinking impact of sanctions to think about, you know, what's the response from the sort of targeted entities, especially governments, because there are degrees of policy space and policy choices and how those play out. Those impact both the sort of the attractiveness going forward and here the combination of all the sort of political and military risks sort of on the ground, but also a direction of travel. If you're a European company, not only do you have your shareholders calling up and saying, well maybe force you to divest, but also you look around and say, well maybe there'll be retaliation, maybe there will be financing that's more difficult to get. And I do think you have to see some of the short term decisions or like Amerisk, of saying, well, I don't want to, we don't. Why should we be accepting taking ships into ports that are in a war zone. So that might be short term, but also what's the repayment going to look like? And so I think there'll be a whole reassessment of risks at different points. And once those risk levels go up, it's much harder to have them come down. Right. How Rating agencies, for example, deal with these issues and the like. And so I think that cooling effect could, could, could last, could, could just reinforce this trend. And, and that's why I think also this element of an attempt to target, you know, and, and, and not focus on the Russian population that becomes harder and harder to do.
- [46:49]
Scott R. Anderson
Well, let's talk about the impact then on the Russian population. We are, despite everything that's happened in this area only five, arguably six days in to the sanctions campaign, we really only saw major Russian institutions taking certain clear actions just in the last day or two to try and stymie some of these measures. A lot of the economic impact we expect to build over a period of time, I think it's going to happen much more quickly here because of the severity of the measures and the rapidity with which they're being applied. What should we expect for the Russian consumer in the next week and the next month? And then what should we expect for your average global consumer? Do we know what the knock on effects of this are going to be for the American economy, for European economy, other parts of the global economy? Given Russia was the 11th largest economy in the world as of a week ago and it now has been effectively decoupled from a lot of the international economy. Julia, let me turn it to you for the, on this first.
- [47:48]
Eugenio Derbez
Sure. So I think for the Russian consumer again, I think we did try to initially try to carve out so that it would affect the, the average person the least. But as Rachel said, as we accelerate this, it's almost impossible to continue, continue to do that. Again. The, the. There was a specific measure that was used for Fairbank, it's called Capta. That's not a full blocking and that was basically a prohibition on correspondent relationships. That was a, an attempt to maintain the liquidity of spare bank because that's where the majority, the lion's share of Russians hold their deposits. And so we tried to do that so that they, that we could still withdraw money. But if you look at footage in, in, in St. Petersburg, in Moscow right now there are lines around the block to withdraw because everybody's anticipating that there are going to be capital controls. There are, that, that there could be potential liquidity or insolvency issues from these banks. And so everybody wants to take their, their assets out. I don't blame them. You're creating a bank run and which all which is a vicious, is a vicious cycle because that of course accelerates the, the instability of the banks. And so that, so that in the financial sector you know, accessibility to cash, then of course there's a inflation problem and then ultimately this is going to affect supply chains. If Maersk is not going to, you know, the biggest global shipper is not, is not bringing goods to the region. You know, as if, if shipping is not being insured. If you're no longer, if Russian airlines are closed to, to airspace right there says you're basically over time going to isolate the, isolate the, the actual physical economy as well as the financial one. What the timing of this is hard to, is hard to predict. It's hard to predict what sort of third party providers, alternative providers that China will be able to, to seek out, China being one of them. But again shipping is global and the, the last aspect is I think it will eventually, whatever happens, this is going to affect the price of, the price of oil, gas and the knock on effects and as, especially as people seek flight to safety and safer assets. And so I think we don't really, we can't necessarily predict the timing here, but things are going to sort of break down in ways that we can anticipate such as, you know, the major tanker in the Suez Canal, you know, like we didn't anticipate that. That was sort of a deus ex machina thing. But it of course it had all kinds of trickle down effects. Everything is just in time production, just in time delivery. So again I think that this is going to affect the Russian consumer very, very deeply. And then you asked also about the global economy and again I'm going to turn over to Rachel to answer this because I've been talking quite a bit, but I think that we are going to see in specific areas the Russians eventually are going to end up retaliating or just not able to ship out the things that they export minerals and mining like palladium, which is actually something we majorly source from Russia. And then of course Ukraine itself is one of the largest global produce, global exporters of grain. So you'll see that be affected and the price of foodstuffs go up, which of course, you know, we may not feel as much here in the United States, but will certainly affect developing, the developing world quite tangibly.
- [51:04]
Scott R. Anderson
Rachel, I want to hand it over to you to get your perspective on this too, but let me add one more question to this mix just because we're running a little on time and that is, you know, I think a takeaway from our conversation is that we've seen a lot of dramatic measures implemented quickly that have a lot of very clear impact and then have a Lot of potentially unknown impacts. And all this was done, as Julia, I think very aptly described in her introductory remarks and in part to try and match the military timing happening on the ground in Ukraine to try and get put incentives on Russia to limit or end the military campaign as quickly as possible before they could progress to a certain point. So for that to be effective, there has to be routes for de escalation here and for backing off of this. And even if Russia does not capitulate there, in theory at least, could be severe consequences for the global economy that might drive the United States and other powers to say, whoa, actually we need to find a way to correct course on this. How easy is that to do with some of these measures or how reliably can we be, have confidence that we are going to be able to do that moving forward or are we really entering a bit of an unknown where we're, you know, driving a ship in the dark in terms of exactly where we're going and how reliably we can get there without hitting something on the way?
- [52:16]
Rachel Ziemba
Yeah, it's always easier to impose new restrictions and to lift them. So, you know, just to sort of clarify kind of where Julia left off, not only do you have the sort of issues of both Russia and Ukraine being major grain suppliers and the like, also the network of sanctions has major impacts on fertilizer, both directly because of the sanctions that are in place on Belarus and Belarus having lost access to ports. So you have a physical and a financial choke point reinforcing each other. They were exporting via Russian ports. You know, I mean, this all kind of amplifies and potash is a very concentrated commodity. It might be good for nutrient and the Canadian producers and others, but this just only I think adds to global food, you know, price pressures, particularly an issue for North Africa, some other emerging markets. But across the board, and of course this is another area where the dynamics of climate change and the like and harvest cycles can, can be mutually reinforcing in a negative way. So there's an element there. And so. But across the board I think there are discontinuities we can't quite identify at this point. Both that come from companies withdrawing, relationships that were already strained becoming even more so. Implications that come from expulsion of Russian media outlets that we're doing misinformation, sort of disinformation, but that then kick out Western journalists. There's a number of sort of impacts that I'm sure I'll be looking at. Plus over time there are some sort of workarounds and other question marks that might materialize. This is probably, in my view, also not a global consumer question. But from the Chinese side, while they might not want to circumvent US Extra territorial measures, it probably only makes them double down on the domestic side of the dual circulation strategy and looking to increase some of the supply chain. So questions de escalation. I mean, what worries me right now is that if anything, the discussion is around further escalation from this point. You know, and I'm not saying it's always good, I think when you're thinking about measures in place, to think about, well, what would it take for them to be lifted? Right. There has been incredible unity and coordination across the sort of coalition. There are. It's clear what we don't want, and there's some ideas of what would be good, you know, a decent outcome. But I think that is much harder. I think there's been some discussion in place about whether they're real signs of some of the oligarchs and elite actors really breaking from Putin. Would it make sense to unblock some of them? Then? There's a question of how far they're going. I do think a lot depends on how things go on the ground with the conflict. Is there really a Russian willingness to engage? I'm not sure that even just pulling back to just the occupied regions would lead to a sort of meaningful lifting, particularly since there's a question of why wouldn't this happen again? So I think your focus of thinking about de escalation, thinking about what it would take to lift them, is valid, theoretically. The fact that a lot of these measures were put in place by executive order, at least in the US Context, probably makes them easier to lift than if they were put in place by congressional order. And that's quite important because now that Congress is back in session, I would not be surprised to see various sanctions bills sort of back on the table and the like. And one of the sticking points might be what would it take to lift these? Same thing to some extent, with a lot of US allies, a lot of them theoretically sort of nitty gritty, its executive authorities, its national authorities. The EU will have an important point coming six months after impositions on some of them on whether they renew the sanctions. The eu, unlike the US has an automatic revisiting sanctions that comes into place. And so that can be a point to revisit or lift. And of course, you need unanimity to impose them at the first place and unanimity to lift them, at least at this point, I'm talking about financial sanctions. Other tools require different levels.
- [56:57]
Scott R. Anderson
Julia, we're almost out of town, but I want to hear your views on this, so I'll hand over to you for the last word.
- [57:02]
Eugenio Derbez
For the last word, I'll be really quick. I think that we are going to be continuing to drain the Russian economy and drive them into ground while while the Ukrainians are putting up a really tough fight and the Russians are forced to fight an insurgency. We know, the US Knows very well how much blood and treasure it costs to fight an insurgency in Iraq without the kind of crazy restrictions we're putting on Russia. So I think that when the rubber hits the road, my worst case scenario is a destroyed economy in Russia with all the consequences thereof and a physically destroyed Ukraine. I would not be surprised if we end up there. But again, as Rachel said, if you have the combination of the central bank governor, the one person that Putin is afraid of, combined with the oligarchs, combined with the legitimate questioning of his power by popular demand, you could see some of these negotiations that are starting to pop up at the Belarusian border or brokered by by Israel start to start to gain teeth. But I'm not going to be too pollyanish right now.
- [58:14]
Scott R. Anderson
Fair enough. Julia Friedlander Rachel Ziemba, thank you so much for joining us here today on the Lawfare Podcast.
- [58:20]
Rachel Ziemba
Thanks for having me. Thank you.
- [58:25]
Scott R. Anderson
The Lawfare Podcast is produced in cooperation with the Brookings Institution. Please take a moment to rate and share the Lawfare Podcast on itunes, Spotify or wherever you might be listening to gain access to our weekly Lawfare Live online discussions, an ad free version of our podcast and other benefits. Please consider supporting Lawfare on our Patreon account at www.patreon.com lawfair and be sure to check out our written work@lawfairblog.com as well as our other podcasts, including our light hearted weekly news talk show Rational Security, our series of Deep Dive interviews, Chatter, and our latest Lawfare Presents podcast series on the government's response to January 6th the aftermath. This podcast was engineered by Kara Schillen and Hamza Shattu of Goat Rodeo and edited by Jen Patya Howell. Our music was performed by Sophia Yan. As always, thank you for listening.
- [59:20]
Rachel Ziemba
G'day America. It's Tony and Ryan from the Tony and Ryan Podcast from Down Under.
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Scott R. Anderson
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Rachel Ziemba
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