After Russian President Vladimir Putin recognized two breakaway regions in eastern Ukraine earlier this week and deployed Russian troops to the two areas, the U.S. and its European allies announced new sanctions on Russian financial institutions and individuals. Germany canceled the opening of a major Russian gas pipeline. President Joe Biden stressed that these new sanctions go “far beyond the steps we and our allies and partners implemented in 2014,” when Russia annexed Crimea and the armed conflict in Ukraine began.
The coordinated announcements made clear that a number of steps are being held in reserve in case Russia takes further military action. What’s less clear is whether any economic penalties will be enough to change the Russian president’s mind.
To discuss the latest sanctions, their potential impact and what we could see next, Grid spoke with Anders Aslund, one of the world’s leading experts on the Russian economy. Aslund has served as an adviser to both the Russian and Ukrainian governments, and is now a senior fellow at the Stockholm Free World Forum. This interview has been edited for length and clarity.
Grid: Tuesday, the U.S. announced sanctions on two Russian financial institutions — VEB and Promsvyazbank. What should we know about these two banks, and why do you think they were chosen?
Anders Aslund: First of all, it was a very good choice. This is what you start with. These are state financial institutions that are only working for the state. VEB is effectively Putin’s slush fund. He used that for financing after the global financial crisis of 2008-2009. He used it to finance purchases of enterprises, pretty much for himself, in Ukraine in 2010. And it spent $50 billion for the Sochi Olympics. So, it is a sort of extraordinary Putin-Kremlin fund. It’s completely unregulated. Its public accounts are unaudited.
Promsvyazbank was a private bank that collapsed in 2017, because the two brothers who owned it stole too much money from it. And then it became a state bank for the military industrial complex. It’s not very big, but it only supports the armaments industry, and everything about it is secret.
G: There were also three individuals targeted by the Treasury Department — Denis Bortnikov, Petr Fradkov, Vladimir Kiriyenko — all of whom are also the sons of powerful officials or oligarchs. Why do you think these men were chosen?
AA: Putin has a habit of appointing the sons, only the sons, of his closest collaborators to lead the top state companies. So, one of them is the head of Promsvayzbank, one of them is the head of VK, formerly VKontakte, which is Russia’s version of Facebook, which is owned now by Yury Kovalchuk, who is one of Putin’s main cashiers. These are people who only got their jobs because they are the sons of Putin’s friends.
G: There are also new restrictions on dealing in Russian sovereign debt. How big an impact do you think that will have?
AA: So, they can’t sell sovereign debt anymore. That’s all three institutions that hold sovereign debt: the central bank, the ministry of finance and the sovereign wealth fund. So this is good. Previously, it was only primary, now it’s also secondary. That means you’re not allowed to buy Russian bonds. A substantial part of these are owned by the big American funds because they’re part of index funds.
G: The other big headline from Tuesday was Germany’s cancellation of the Nord Stream 2 pipeline. Were you surprised to see that?
AA: I was really surprised but very happy about this decision. It’s symbolic; it is the new German government defining itself. As I understand it, this was very much the decision of Chancellor Olaf Scholz himself. The Greens, the second-biggest party in the German coalition, has been dead against Nord Stream 2, all the time, for many reasons. They are very skeptical of Russia. They don’t like fossil fuels. And they don’t like the market implications.
The Social Democrats, because of this corrupt character Gerhard Schröder [the former German chancellor is a friend of Putin’s who now holds senior positions at Nord Stream and Rosneft], have been the main proponents of Nord Stream 2. So, Olaf Scholz has made a very brave decision. He has distanced himself from his [Social Democratic] Party’s policy of cooperation with Russia.
G: It’s clear that both the U.S. and EU are holding some “big guns” in reserve, in case Russia escalates further in Ukraine. What are some significant economic measures we could still see?
AA: Well, first, it’s obvious that they are going to go after more state financial institutions. So, the five biggest state banks have 60 percent of the banking assets in Russia. So, you hit a couple more in the next round. Secondary debt of Russian sovereign bonds that are already out in the market could be sanctioned. This would take out about $20 billion from the Russian foreign debt.
What was expected in this round but did not come are these export controls on technology. This, I think, will be in the next package. And a fourth thing is the sanctioning of the real oligarchs, which was not done this time.
G: Who are the real oligarchs?
AA: Roman Abramovich [former governor with major investments in minerals; best known abroad as the owner of the Chelsea soccer team in the U.K.], Alisher Usmanov [stakes in iron, steel, tech and media] and Leonid Mikhelson [natural gas and chemicals magnate] are the top three on my list.
G: These measures are clearly meant to target the elites and the people around Putin. But do you think that ordinary Russian citizens will feel the impact of these sanctions, as well?
AA: Well, Russia’s economy has not grown since 2014. And my assessment is that the sanctions have done away with about 2 ½ percent of economic growth each year. All these Russian economists who are representing the government more or less claim it has not been so much. And strangely, also, the international financial institutions try to play it down.
The reason is that Putin has pursued an extreme austerity policy. And this austerity policy has been costly to the population. This is the reason that instead you have all these state bank economists claiming that it’s wonderful that Russia has $630 billion of cash reserves, but it’s not. It’s a waste of money.
G: People talk about those cash reserves that Putin has built up as a form of sanctions-proofing for Russia. But you’re saying that they also have a cost for the Russian economy?
AA: Yeah, $150 or $200 billion [of reserves] would perhaps be reasonable. So, about a quarter of what he has done. But Putin has to do this in order to pursue his aggressive policy. This is the cost of that aggressive policy.
G: There’s also been a lot of focus on the Russia-China economic relationship. Do you think growing trade with China could help protect Russia from the impact of Western sanctions going forward?
AA: Not really. China does not have many of the things Russia would need, as we saw with the U.S. sanctions on Huawei. And the Chinese are very cautious. After the U.S. imposed financial sanctions on Russia in July 2014, the big Chinese state banks refused to lend anything to Russia, because they were afraid of being sanctioned by the U.S.
To the Chinese, the relationship with the U.S. is far more important, economically, than their relationship with Russia. And they don’t want to expose themselves too much.
G: Finally, I won’t ask you to try to get inside Vladimir Putin’s head, but given how many sanctions have already been imposed, do you think there are still measures that could be taken that would meaningfully change his calculus? That would make him reconsider his course of action in Ukraine?
AA: Sure. Let Ukraine into NATO. Send NATO troops to Ukraine. My late friend Boris Nemtsov [a former Russian deputy prime minister turned opposition leader who was assassinated in 2015] always said that Putin respects Article 5 [NATO’s mutual defense guarantee].
But there’s no political will to do that. I don’t see any politician who could do that.
G: So, sanctions alone won’t change his mind?
AA: No. But it’s much better than nothing.