Treasury Aims for Economic Pain on Russia, but Critics Question Effectiveness

WASHINGTON — When Russia imposed retaliatory sanctions on top U.S. officials last month, its administration targeted President Biden and his top national security advisers, as well as Wally Adeyemo, the assistant secretary of the Treasury, whose agency developed the punitive measures aimed at crippling the Russian economy.

Russia’s move, while entirely symbolic, underscored the pivotal role the Treasury Department played in designing and enforcing the most sweeping financial restrictions the United States has ever imposed on a major economic power.

These restrictions amount to an economic war against Russia, which is entering a critical phase as the toll from the fighting in Ukraine continues to mount and the Russian government tries to find ways to avoid or mitigate the fallout from the Western sanctions.

In an attempt to prevent Russia from evading sanctions, Mr. Adeyemo, a 40-year-old former Obama administration official, has spent the past week criss-crossing Europe coordinating a crackdown on the evasion tactics of the Russia and planning for future sanctions. In meetings with his counterparts, Mr. Adeyemo discussed plans by European governments to target the supply chains of Russian defense companies, some of which were sanctioned by the United States last week, and he raised the ways the United States could help provide more energy to Europe so that European countries could reduce their purchases of Russian oil and gas, a Treasury official said.

On Wednesday, five days after Mr. Adeyemo returned, the Biden administration announced additional sanctions against Russian banks, state-owned companies and the adult daughters of President Vladimir V. Putin.

Yet while the United States and its allies have passed sweeping sanctions aimed at neutralizing Russia’s economic might, it remains to be seen whether the restrictions are working.

Over the past six weeks, the United States and its allies in Europe and Asia have imposed sanctions on major financial institutions in Russia, its central bank, its military-industrial supply chain and allies of M Putin, seizing their yachts and planes. Imports of Russian oil into the United States have been banned, and Europe is drawing up plans to wean itself off Russian gas and coal, albeit slowly. This week, the Treasury Department banned Russia from making sovereign debt payments with dollars held in US banks, potentially pushing Russia into its first foreign currency default in a century.

But so far, Russia has continued to pay its debts. Currency controls imposed by Mr Putin’s central bank, which have prevented Russians from using rubles to buy dollars or other hard currencies, as well as ongoing energy exports to Europe and elsewhere have allowed the ruble to stabilize and replenish Russia’s coffers with more dollars and euros. This raised questions about the effectiveness of the measures.

“I think we’re grappling with the backlash of the shock and the fear of the sanctions that have been put in place and the recognition that sanctions take time to fully impact an economy,” said Juan C. Zarate, former Assistant Secretary of the Treasury. for terrorist financing and financial crimes. “It’s asking too much of sanctions to roll back the tanks, especially when sanctions were implemented after the invasion.”

During a speech in London last week, Mr Adeyemo touted the ability of sanctions to change behavior, describing the measures as part of the equation that adversaries such as Russia must consider when violating international standards.

“The idea that you can violate the sovereignty of another country and enjoy the privileges of integration into the global economy is an idea that our allies and partners will not tolerate,” Mr Adeyemo told Chatham House, a think tank.

Yet even the United States, which is not dependent on Russian energy, has wondered how far to go with its sanctions.

Within the Treasury Department, officials have engaged in an ongoing debate about how far to push sanctions without creating unintended consequences that would rattle the financial system and ignite inflation, which is skyrocketing across much of the world.

The impact on the US economy has been a top priority, and Treasury Secretary Janet L. Yellen has expressed concern about measures that would amplify inflation. Sanctions on Russia have already driven up gasoline prices, and officials fear they could cause food and car prices to soar as Russian wheat and mineral exports are disrupted.

“Our goal from the beginning has been to impose as much pain as possible on Russia, while protecting the United States and our partners to the best of our abilities from undue economic harm,” Yellen told lawmakers on Wednesday.

As officials ponder how to target the rouble, former Federal Reserve chair Ms. Yellen argued against imposing a ban on foreign exchange transactions, which would prevent Russia from buying dollars . Instead, she suggested that immobilizing Russia’s foreign exchange reserves – savings held in US dollars, euros and other liquid assets – while creating exemptions allowing Russia to accept payment for certain energy transactions would be the way to go. the most effective way to inflict pain on the Russian economy while minimizing the impact on the United States and its allies.

At a congressional hearing this week, Republicans criticized those exclusions as giant loopholes that allow Russia to earn hundreds of millions of dollars a day from oil and gas sales.

Treasury Department officials have been tracking measures Russia has used to support its economy, such as buying stocks and bonds, and watching for signs of a growing black market for rubles, indicating the minus real value of money. The Biden administration has watched with concern as the value of the ruble has rebounded in recent weeks, undermining Biden’s claims that sanctions have reduced the Russian currency to “rubble.”

“Of course, that means that, having said that, when the ruble bounces back for reasons that don’t necessarily indicate weak sanctions, people will say, ‘well, they failed,'” Daniel Fried said, former US Ambassador to Poland and Assistant Secretary of State for Europe.

A Treasury official said the United States also maintains a private list of oligarchs whose financial transactions are under scrutiny for future sanctions so they can better understand the networks of people who help these people hide their money. . The United States has yet to impose sanctions on Roman Abramovich, a Russian billionaire who is already under European Union sanctions.

Economists at the Institute of International Finance wrote in a research note this week that Russia’s domestic markets appear to be stabilizing due to tight monetary policy, tight capital controls and its account surplus. fluent.

“Sanctions have become a moving target and will require adjustments over time to remain effective,” they said.

Monitoring sanctions against Russia and coordinating anti-evasion efforts with Europe falls largely to Adeyemo.

Mr. Adeyemo worked in the Treasury Department during the Obama administration and served as deputy national security adviser for the international economy when the United States adopted sanctions against Russia after the annexation of Crimea in 2014. Ms. Yellen, an academic economist with no national security experience, Last year, Mr. Adeyemo was named deputy secretary and tasked with reviewing the department’s sanctions program.

The review underscored the need for sanctions, which have often been deployed unilaterally under the Trump administration, to coordinate closely with US allies so they can “disrupt, deter and prevent” actions that undermine peace. national security of the United States.

Mr. Adeyemo has worked in close coordination with State Department officials and with Daleep Singh, who was deputy assistant secretary for international affairs at the Treasury during the Obama administration and is now deputy national security adviser for the economy. international.

“proportional” and it could destabilize the Russian economy. The gradual build-up of Russian troops heading to Ukraine ahead of the war, she said, also gave the Biden administration more time to coordinate with allies and prepare to deploy sanctions quickly once the invasion begins.

“It’s really a tactical shift between responding proportionately against those involved and wanting to inflict damage as a tactic,” Ms Friedlander said.

But some sanctions experts say the Biden administration didn’t go far enough and was too cautious. Many of the harshest measures the United States has used against Iran to prevent it from benefiting from energy exports have yet to be used against Russia. Several major banks have yet to be sanctioned or cut off from SWIFT, the international financial messaging service. And the United States has been cautious about pressuring Europe to stop buying Russian energy.

“Time is not on Ukraine’s side,” said Marshall S. Billingslea, who served as Assistant Treasury Secretary for Terrorist Financing in the Trump administration. “The longer the administration dribble around these half measures and fail to take action to truly cripple the Russian economy, the longer the Russian offensive lasts and the more carnage, destruction and war crimes continue.”

Ms Yellen said this week that any sanctions targeting Russia’s energy sector should be closely coordinated with Europe, which remains heavily dependent on Russian oil and gas. Taking this step, she added, could have undesirable consequences.

“We’re probably going to see prices skyrocket if we put a complete ban on oil,” Ms Yellen said.