WASHINGTON — The most punishing sanctions that U.S. officials have threatened to impose on Russia could cause severe inflation, a stock market crash and other forms of financial panic that would inflict pain on its people — from billionaires to government officials to middle-class families.
U.S. officials vow to unleash searing economic measures if Russia invades Ukraine, including sanctions on its largest banks and financial institutions, in ways that would inevitably affect daily life in Russia.
But the strategy comes with political and economic risks. No nation has ever tried to enact broad sanctions against such large financial institutions and on an economy the size of Russia’s. And the “swift and severe” response that U.S. officials have promised could roil major economies, particularly those in Europe, and even threaten the stability of the global financial system, analysts say.
Some analysts also warn of a potential escalatory spiral. Russia might retaliate against an economic gut punch by cutting off natural gas shipments to Europe or by mounting cyberattacks against American and European infrastructure.
The pain caused by the sanctions could foment popular anger against Russian President Vladimir Putin. But history shows that the country does not capitulate easily, and resilience is an important part of its national identity. U.S. officials are also sensitive to the notion that they could be viewed as punishing the Russian people — a perception that might fuel anti-Americanism and Putin’s narrative that his country is being persecuted by the West.
From Cuba to North Korea to Iran, U.S. sanctions have a mixed record at best of forcing a change in behavior. And while the Biden administration and its European allies are trying to deter Putin with tough talk, some experts question whether they would follow through on the most drastic economic measures if Russian troops breached the border and moved toward Kyiv, Ukraine’s capital.
President Joe Biden has said he will not send U.S. troops to defend Ukraine. Instead, U.S. officials are trying to devise a sanctions response that would land a damaging blow against Russia while limiting the economic shock waves around the world — including in the United States. Officials say that for now, the Biden administration does not plan to target Russia’s enormous oil and gas export industry; doing so could drive up gasoline prices for Americans already grappling with inflation and create a schism with European allies.
But many experts on sanctions believe that the boldest sanctions against Russia’s financial industry, if enacted, could take a meaningful toll.
“If the Biden administration follows through on its threat to sanction major Russian banks, that will reverberate across the entire Russian economy,” said Edward Fishman, who served as the top official for Russia and Europe in the State Department’s Office of Economic Sanctions Policy and Implementation during the Obama administration. “It will definitely affect everyday Russians.”
Washington is looking to take a sledgehammer to pillars of Russia’s financial system. The new sanctions that U.S. officials are preparing would cut off foreign lending, sales of sovereign bonds, technologies for critical industries and the assets of elite citizens close to Putin.
But the real damage to Russia’s $1.5 trillion economy would come from hitting the biggest state banks as well as the government’s Russian Direct Investment Fund, which has prominent Western executives on its advisory board. The Treasury Department would draw from its experience targeting Iranian banks under President Donald Trump, although Iran’s banks are much smaller and less integrated into the global economy than Russian banks.
Once the department puts the Russian banks on what officials call its “game over” sanctions list, known as the SDN list, foreign entities around the world would stop doing business with the banks, which would have a big effect on Russian companies.
For an average Russian, the harshest U.S. measures could mean higher prices for food and clothing, or, more dramatically, they could cause pensions and savings accounts to be severely devalued by a crash in the ruble or Russian markets.
“It would be a disaster, a nightmare for the domestic financial market,” said Sergey Aleksashenko, a former first deputy chair of the Central Bank of Russia and former chair of Merrill Lynch Russia. He noted that the ruble had already fallen more than 10% from its October value against the dollar, amid increasing talk of Western sanctions.
In a sign of the growing seriousness, officials from the National Security Council have been talking with executives from some of Wall Street’s largest banks — including Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America — about the stability of the global financial system in the wake of potential sanctions.
The European Central Bank has also warned bank lenders to Russia about risks if the United States imposes sanctions and has asked about the sizes of their loans.
For now, though, U.S. officials are not considering any immediate sanctions on the foundation of Russia’s economy: its oil and gas exports.
European nations rely on natural gas from Russia, and several U.S. allies, notably Germany, prefer that Washington refrain from disrupting the Russian energy industry. Analysts say sanctions that limit Russia’s ability to export oil and gas would be by far the most powerful weapon against the Russian economy, and perhaps the most effective economic deterrent against an invasion of Ukraine, but they would also cause pain in Europe and the United States.
“At some point, the West will have to sacrifice a little bit of its well-being if the goal is to deter Putin,” said Maria Snegovaya, a visiting scholar at George Washington University and an author of the Atlantic Council report.
Some analysts worry less about whether Russia can blunt the pain of U.S. sanctions than whether they might cause Putin to escalate his showdown with the West.
“If the sanctions are really that momentous and Russia is fighting its biggest war since World War II on an issue of vital importance, they will likely retaliate,” said Samuel Charap, a former State Department official who is now an analyst with Rand Corp.
Charap added that Moscow could conduct new cyberattacks against the United States and American financial giants. The Department of Homeland Security issued a bulletin last weekend warning of Russian cyberretaliation.
“We go after their big banks,” he said, “they would likely go after ours.”