The sanctions almost instantly put Russian President Vladimir Putin on the defensive against skyrocketing inflation. Russia’s central bank, unable to tap foreign reserves, tried to use what resources it had to slow the ruble’s steep decline.
It goes unchallenged among economists that Russia’s $1.5 trillion economy, previously about 7% the size of the U.S. economy, will shrivel further in ways that could be unprecedented for a nuclear power.
There is a push for even greater financial penalties. Ukrainian parliament member Oleksandra Ustinova met with U.S. senators on Tuesday to advocate for more sanctions immediately if Ukraine is to hold off Russian attacks.
“It works,” Ustinova said of the sanctions while sitting in the offices of Pennsylvania Sen. Pat Toomey. “In Ukraine, people are standing in line to get guns. In Russia, people are standing at the ATM machines because they understand they might not be able to get this money in two days, or, it will be like twice as less.”
The U.S. and its allies have retaliated against Russia with a series of financial attacks, reflecting a massive change in how conflicts can be waged in a world that is globalized, digital and highly dependent on accessing money.
There have been economic targets in the past that depended on military maneuvers such as factory bombings, blockades and the capture of strategic resources. But the waves of sanctions unleashed over the past week have demonstrated how financial markets can respond faster than setting up conventional weapons.
The sanctions also are a substitute for direct military action against Russia by the U.S. and its allies. Biden has repeatedly said there will be no U.S. troops on the ground, even as weapons and materiel are provided to Ukraine.
The impact of the sanctions likely depends on the pace of the fighting and whether Russia takes Ukraine or finds itself in a slog in which the pain of any sanctions becomes more acute over time. But the value of the ruble has fallen about 35% since Friday, according to the financial data firm FactSet. The sharp decline of the currency has triggered higher inflation, higher interest rates and shortages of goods that hurt regular people in Russia.
“Ordinary Russians will no doubt suffer, but if Ukraine succumbs quickly, and its government is overthrown, Putin is unlikely to face enough internal political pressure to force him to back down,” said Benn Steil, director of international economics at the Council on Foreign Relations. “If the conflict settles into an extended bloody stalemate, however, the sanctions may force him to withdraw and declare victory.”
But Steil cautioned that the sanctions and the freezing of Russian central bank assets could cause other countries to move away from using the U.S. dollar in international transactions, making it easier for them to resist the kind of pressure now being put on Russia. That could possibly weaken the dollar’s prominence in the world economy.
“The moves will also accelerate movement away from the U.S. dollar as the dominant settlement currency for international transactions,” Steil said. “China will take the sanctions as a warning that it, too, must take firmer steps to reduce dollar dependence.”
French Finance Minister Bruno Le Maire went so far as to say during a Tuesday radio interview that there was “a total economic and financial war against Russia.”
Le Maire later walked back those remarks in a written statement that said the term “war” was inappropriate. Yet the words were provocative enough for Dmitry Medvedev, a deputy head of Russia’s Security Council, to respond on Twitter: “Watch your tongue, gentlemen! And don’t forget that in human history, economic wars quite often turned into real ones.”
Toomey, the top Republican on the Senate Banking Committee, defended the sanctions and the need to extend them to the oil and natural gas sector — something the Biden administration has resisted to keep gasoline prices lower for U.S. consumers. White House press secretary Jen Psaki said Wednesday on MSNBC that the administration is “very open” to sanctioning Russian’s energy sector, though any sanctions would be weighed against costs for U.S. drivers.
Oil prices are a politically sensitive issue, and there’s been an effort to keep prices from rising too much. The International Energy Agency said Tuesday that 31 member countries, including the U.S., agreed to release a combined 60 million barrels of oil from reserves.
Russian banks “will continue to do transactions unless and until we actually put direct sanctions on oil and gas,” said Toomey, who added that sanctions should also be placed on financial institutions that continue to do business with their Russian counterparts.
“Is that weaponizing the economy? Yep, you could say that,” Toomey said. “But you know what? Putin has weaponized, like, an entire society against an innocent country.”
Following Saturday’s sanctions against the central bank, Putin placed Russian nuclear forces on high alert, a serious escalation and a sign of heightened tensions in trying to stop the Ukrainian war and contain Russia through economic penalties.
“His shaking of the nuclear saber, the saber-rattling that we’ve heard over the past couple days, is a sign that the sanctions are getting under his skin,” said Jim Townsend, a former U.S. Defense Department official who is now a fellow at the Center for a New American Security. “These sanctions really, in fact, matter to him.”