How the U.S. and EU Cut Russia Off From the Global Economy

This is extremely fascinating to me. For all the talk of U.S. relative decline, the administration's actions have displayed the brute power of economic sanctions to wield havoc on strategic rivals. The Russians have just begun to hurt. 

At WSJ, "Unprecedented coordination from late November set the stage for aggressive sanctions when Ukraine was invaded":

Shortly before Thanksgiving, Treasury Secretary Janet Yellen met with senior officials in the White House Situation Room to discuss a Russian troop buildup on the border of Ukraine. The meeting included top intelligence advisers, defense officials and diplomats, who concluded Russia might be preparing to invade.

Ms. Yellen said she would contact counterparts in Europe and elsewhere to urge them to begin preparations for an economic response, according to people familiar with the meeting, and she started making calls to coordinate after the holiday.

That meeting marked the launch of an unprecedented financial sanctions program by the West aimed at a major economy. In the war between Russia and Ukraine that program, along with massive arms shipments, were the front lines of the West’s engagement. It is a strategy designed to steer clear of direct combat between Russia and members of the North Atlantic Treaty Organization while crippling Russia’s economy to ensure that any military victory is pyrrhic.

“We’re using economic statecraft to fight for democracy and take on autocracy,” said Mark Gitenstein, U.S. ambassador to the European Union.

It remains unclear whether the campaign will achieve its goal of deterring President Vladimir Putin or altering his calculus on the battlefield. So far, Russia’s military progress has been slower than many anticipated and Ukraine’s resistance stronger, but Mr. Putin has shown little interest in de-escalating the crisis.

Some observers also note that such sweeping Western measures could cause collateral damage by shocking commodities markets that countries around the globe rely on for energy, metals and food.

“The risk now is that these sanctions have a grave impact on the world economy because of their size and the role of the Russian economy in global markets,” said Nicholas Mulder, a historian at Cornell University who studies the history of sanctions. “It is going to be a pretty serious drag on global growth and could lead to recession.” As a shock to the Russian economy, however, the program to cut off Russia’s access to international finance appears to have met with early success even though the U.S. and Europe have continued to allow Russia to collect hundreds of millions of dollars a day in payments for its energy exports to Europe. Many global companies—such as Visa Inc., Mastercard Inc., Exxon Mobil Corp., Microsoft Corp. and McDonald’s Corp. —amplified government efforts to isolate Russia by abandoning or scaling back operations there.

Russia’s currency, the ruble, is down 13% since the invasion started on Feb. 24. Russians have lined up to withdraw their savings from the country’s banks and Russian factories have been crippled. Assets held internationally by a host of Russian oligarchs viewed as close to Mr. Putin have been frozen. Russia’s stock market has been closed for weeks.

Russia calls the actions aggression. “The United States has unconditionally declared economic war on Russia, and they are waging this war,” Kremlin spokesman Dmitry Peskov said this month.

The campaign also took the drastic step of isolating Russia’s central bank by freezing the reserves it holds at central banks around the world—denominated in dollars, euros and other currencies. Those assets help authorities manage the economy and are a resource for Russian companies that do business internationally.

As of June 2021, the Russian central bank had 16.4% of its reserves in U.S. dollar assets, 32.3% of its reserves in euro-denominated assets and much else in China, gold and other places. Together, U.S. and EU officials have blocked Russia’s access to nearly half of its global funds.

In recent years, the U.S. and Europe at times have been at odds over how far to go in financial deterrents. U.S. and European officials squabbled in the past when the U.S. imposed sanctions on foes such as Iran or North Korea and threatened European companies with repercussions if they didn’t comply.

When faced with Russian aggression toward Ukraine, the two sides worked with an unprecedented level of cooperation and scope between Treasury, the White House, the Commerce Department and the European Commission, the EU’s executive branch, according to several of the participants.

They brought together elements of other sanctions and measures that among them they have launched in recent years against Iran, North Korea and Venezuela, as well as Russia over its 2014 seizure of Crimea, and Chinese telecommunication-equipment maker Huawei Technologies Co.

As the war grinds on, Ms. Yellen has said the West isn’t done seeking out economic responses. The Biden administration has since banned imports of Russian oil into the U.S. and sought to sever normal trade ties with Russia.

“The atrocities that they’re committing against civilians seem to be intensifying,” Ms. Yellen said last week in a public forum. “So it’s certainly appropriate for us to be working with our allies to consider further sanctions.”

After the pre-Thanksgiving meeting, senior Treasury officials including Ms. Yellen’s deputy, Wally Adeyemo, who oversees the day-to-day sanctions operation at the Treasury Department, and Elizabeth Rosenberg, assistant secretary on terror financing issues, led the coordination effort from Washington.

The central point of contact at the White House was Daleep Singh, a former Federal Reserve and Treasury official now at the National Security Council. He in turn was in regular contact with Björn Seibert, a former German defense official who serves as head of cabinet to European Commission President Ursula von der Leyen, coordinating EU policies.

Messrs. Singh and Seibert began talking about sanctions in December. Among the hurdles: Each element could blow back differently on the U.S. and the EU’s 27 national economies. The two focused on sanctioning Russia’s government-owned banks and imposing export controls, which would cut off Russian businesses from global suppliers.

For that, U.S. officials turned to the Foreign Direct Product Rule, a regulation they read as enabling Washington to block exports to Russia of potentially any product, including foreign goods made using U.S. equipment, software or blueprints. The rule has enabled the U.S. to hobble Huawei.

Many EU officials were hesitant, according to people involved in the talks. The EU exported about $100 billion of goods to Russia last year, while the U.S. exported directly less than $10 billion...

Still more.