Two Years of War - Where are We?
Ukraine, Russia, and the West
Today is two years since Russia—despite its leaders’ assurances to the contrary—invaded its neighbor Ukraine and started a full-on war the likes of which Europe had not seen in decades. During these two years, Russia destroyed civilian infrastructure and murdered civilians, kidnapped, tortured, and raped thousands of Ukrainian children, engaged in war crimes, murdered opposition leader Alexey Navalny, and tortured his mother by demanding that she hold a secret funeral for her son, withheld his body for more than a week, and threatened to bury his body on the prison grounds where he died. Russian president Putin is now a war criminal, wanted by the International Criminal Court, along with his Commissioner for “Children's Rights”—and I use that term loosely—Maria Lvova-Belova, limiting both their travel to non-signatory countries of the ICC, lest they be arrested for kidnapping thousands of Ukrainian kids and “russifying” them.
Following the attack on Ukraine, the reactions from the West were quick and coordinated.
President Biden issued an Executive Order (EO) blocking the property of certain persons and prohibiting certain transactions “with respect to continued Russian efforts to undermine the sovereignty and territorial integrity of Ukraine” three days before Russia launched a full invasion in response to Russia’s recognition of Ukrainian regions Donetsk and Luhansk, violating Russia’s commitments under the Minsk agreements and further threatening the peace, stability, sovereignty, and territorial integrity of Ukraine. The EO embargoed the two regions, prohibiting US persons from transacting with those territories, much like Crimea was embargoed in 2014.
On the day of Russia’s invasion, OFAC sanctioned 24 Belarusian individuals and entities for their support for, and facilitation of, the invasion.
Two weeks later, the US Treasury began sanctioning Kremlin elites and their families and proxies, oligarchs with close Kremlin ties, members of the Russian Duma, bank officials, and others.
Fast forward two years, and OFAC and the State Department yesterday targeted more than 500 additional individuals, entities, and vessels with sanctions. Allies also issued designations this week, including more than 50 from the UK and roughly 200 by the EU.
Russia as of mid-February is under more than 16,500 designations by the United States, Canada, Switzerland, EU, the UK, France, Australia, and Japan, according to due diligence firm Castellum.AI.
Russia is facing a $60 per barrel price cap on its oil, limiting its resources to wage war, since the majority of Moscow’s budget revenues depend on energy exports. Russia has had to turn to Iran and North Korea for help refitting and equipping its military, which is like asking the homeless guy under a bridge for his coat.
Russian diamonds are now banned, and OFAC has begun aggressively targeting Russian oil price cap evasion and sanctioning vessels and the companies that own and manage them, including Russia’s state-owned shipping company and fleet operator, Sovcomflot, along with 14 vessels in which Sovcomflot has an interest.
The Price Cap Coalition—an international coalition of countries that includes the G7, the EU, and Australia, that have agreed to prohibit the import of crude oil and petroleum products of Russian origin and have agreed to restrict a broad range of services related to the maritime transport of Russian oil above the price cap—released multiple guidances and alerts to help stakeholders detect and deter Russia’s efforts to evade the price cap. The intent wasn’t to stop the flow of Russian oil, but rather limit the revenues Russia earns from oil. Recent Treasury analysis shows the price cap is working.
The first phase of the price succeeded in significantly limiting the revenue Russia derived from energy exports – it's key cash cow – to pursue its unprovoked war in Ukraine, with oil tax revenue down 40% during the first nine months of the year. At the same time, Russian energy exports remained stable, avoiding the potential spike of global oil prices to as much as $150 per barrel that market analysts predicted.
Three months into the second phase of the price cap, the price at which Russia sells its oil has declined markedly. The discount Russia earns relative to other global oil suppliers increased from a low of $12 to $13 per barrel of crude oil in October to about $19 per barrel over the past month.
In addition, energy market participants, analysts, and even Putin’s own oil czar, Alexander Novak, have linked the rising discount on Russian oil to the Coalition’s increased enforcement activities reflected in the second phase of the price cap.
Deputy Prime Minister Alexander Novak told reporters in Moscow that Russian prices have seen bigger reductions relative to global prices since the most recent sanctions packages were brought into effect at the end of last year, the Tass news agency reported.
Earlier this month, the Price Cap Coalition published an Oil Price Cap (OPC) Compliance and Enforcement Alert, which provides examples of specific evasion methods to help stakeholders improve compliance measures and provides avenues to report suspected oil price cap breaches to members of the Price Cap Coalition.
OFAC, in December in coordination with the Price Cap Coalition, updated its Guidance on Implementation of the Price Cap Policy for Crude Oil and Petroleum Products of Russian Federation Origin, to strengthen the attestation and recordkeeping processes for certain covered service providers and reduce opportunities for bad actors to disguise Russian oil purchased above the cap.
The Price Cap Coalition in October published a Coalition Advisory for the Maritime Oil Industry and Related Sectors, providing recommendations concerning specific best practices to help prevent and disrupt sanctioned trade and enhance compliance with the price cap.
The United States and western partners have published numerous guidance to help compliance efforts, flag possible evasion methodologies, and highlight new Russian efforts to evade sanctions.
In what I believe is one of the most powerful actions this administration took to enforce sanctions compliance, President Biden on December 22 signed EO 14114, amending EO 14024 and authorizing OFAC, among other things, to impose sanctions on foreign financial institutions that support or transact with Russia’s military-industrial sector. Secondary sanctions are an effective tool that designate persons or entities engaging in activities that would normally be subject to US sanctions if US jurisdiction or person was involved.
The sanctions against the foreign financial institutions engaged in helping Russia rebuild and equip its military can include full blocks and restrictions on correspondent accounts. These activities can include either (1) facilitating significant transactions on behalf of persons designated for operating in certain key sectors of the Russian economy that support the country’s military-industrial base; or (2) facilitating significant transactions or providing services involving Russia’s military-industrial base, including those relating to specific manufacturing inputs and technological materials that Russia is seeking to obtain from foreign sources.
Secondary sanctions are a powerful tool. They can impose asset freezes even if no US nexus is present, even if the dollar is not used, even if the sanctioned entity is located outside the United States and has no US presence. We have not sanctioned anyone under EO 14114 yet, but as I wrote last month, certain financial institutions in China and Türkiye have gotten nervous.
Media reports last week said that at least two state-owned banks in China have begun reexamining their relationships with Russian entities, and financial institutions in Türkiye, which is working to get off the FATF grey list of jurisdictions under increased monitoring for AML regime deficiencies, are also increasing their scrutiny of transactions linked to Russia.
In March 2022, I wrote an article answering the question that was on numerous people’s minds: are sanctions effective?
I did several interviews with journalists who asked me that question and engaged with numerous professional colleagues to discuss this issue.
I’m afraid that many continue to misconstrue the goal of sanctions against Russia. The goal was not to destroy Russia’s economy. Presidential administrations—for the most part—take extra care to avoid exactly that in an effort to mitigate deleterious impact on the people of the country in question.
Sanctions have increasingly been used as a foreign policy tool, and their efficacy depends on the goals we are trying to achieve.
Is our goal to punish Putin for the bloodshed he has caused by cutting Russia off from the global financial system?
Is it to force him out of Ukraine?
Is it to reduce his base of support among the Russian populace and among the oligarchs who have been loyal to him over the years?
Is it to help ensure that he and Russia cannot afford his aggression for long?
Is it all of the above?
In a testimony in front of the Senate Committee on Banking, Housing, and Urban Affairs last year, the former Deputy National Security Advisor for International Economics, Daleep Singh, who has just returned to government service, and who is considered the “architect” of the current US Russia sanctions program, thoughtfully outlined the program’s goals in response to Russia’s aggression.
Once the invasion began last February, the purpose of sanctions evolved along three dimensions: in the short term, maximize the costs on Putin for the continuation of the war, subject to an acceptable amount of spillovers to the US and global economy; over the medium term, degrade Putin’s ability to exert influence and project power on the world stage (i.e., ensure his “strategic failure”); and, long term, generate a negative demonstration effect for any autocrat that might consider redrawing borders by force to create his own backyard. (Emphasis mine)
This is not the first misleading headline I have seen. This one just happens to be the most recent from Politico.
I will note that nothing in Singh’s testimony specified that the purpose of sanctions and export restrictions against Russia was to destroy Russia’s economy or even stop Russia’s war, although stopping the war is a desirable outcome. However, last year, when I wrote a piece about the effectiveness of sanctions against Russia, I also listed some impacts that indicated all was not well in the country, and although our intent was not to destroy Russia’s economy, regular people were impacted.
Inflation at the time was up to 20 percent. This year, Russia faced an “egg crisis,”—an increase in basic food costs that's driven up inflation and caused long queues outside supermarkets
Russia’s GDP declined by 2.5 percent at the time I wrote my last article, compared with more than 4.5 percent growth during the previous year. This year, the IMF projects that Russia’s GDP will grow by 2.6 percent, but let’s remember that wartime economies are always robust, and once the war is over, Russia will almost certainly be in economic trouble.
Russia’s public spending is at unprecedented levels, and around 40% of the government budget is spent on the war. Total military spending is expected to reach more than 10% of GDP for the year 2023.
A year ago, reports tracked more than 130 “incidents” in Russia’s aviation sector, because the country could no longer procure the components and parts it needed to keep its aircraft flying safely. The problems continue, with Russian civilian airplanes experiencing at least eight serious mechanical failures in early December alone, forcing pilots to make emergency landings in cities across the country.
Russia has been booted from the Egmont Group of financial intelligence units. The Financial Action Task Force suspended Russia’s membership last year.
A year ago, there were reports that Russia cannibalizing washing machines and other appliances because they’re unable to get components for their military equipment. This year, the US Senate's permanent subcommittee on investigations is holding a hearing on Tuesday in an effort to investigate how microchips manufactured by US companies such as AMD, Texas Instruments, and others continue to make their way into Russian hands.
Preliminary information obtained by the panel showed that since Russia invaded Ukraine almost two years ago, these four companies had "significantly increased" exports to countries identified as potentially being used by Russia to evade U.S. export controls
This is why the United States and allies are so focused on enforcement of existing sanctions. It’s not because sanctions are not effective, but because Russia works to find ways around them, using witting and unwitting intermediaries and facilitators, shell companies in third countries, proxies, and other methodologies.
Enforcement will make evading sanctions more expensive for Russia. The riskier the activity, the more it will cost. The bigger the threat of financial penalties, asset freezes, or loss of correspondent accounts and access to the global financial system, the less willing facilitators will be to help Russia.
When it comes to stopping Russian aggression, it’s about imposing costs—both on Moscow and on those who help the Kremlin continue its aggression. That’s what sanctions and other enforcement measures aim to do.
Note: I’ve wondered for a while now why we don’t just comprehensively sanction Russia like we did North Korea, Iran, and Syria. My educated guess is that Russia has become very integrated into the world economy after the Soviet Union fell, and comprehensively sanctioning the world’s 11th largest economy is probably more difficult that we imagine.
Last thing: to mark the two-year anniversary of Russia’s attack, I’m hosting a webinar that will explore the progress global powers have made in limiting Russia’s ability to wage war. I will be speaking with Pavel Verkhniatsky, Managing Partner of Ukrainian due diligence and corporate intelligence firm COSA, about two years of sanctions, restrictions, and other measures countries around the world have implemented after Russia’s invasion. I do hope you will join us.
