Proposals for economic sanctions in response to Russia’s invasion of Ukraine

We appreciate that the sanctions will impose costs not only on Russia but also the US, the EU, the UK, and other countries. But this short-term pain (e.g., elevated energy prices) will be followed by long-term gain (e.g., avoiding another Cold War that would cost trillions in military budgets). Indeed, financial markets may interpret an increased resolve in imposing sanctions as favorable news, with its prospect of pushing the conflict to an earlier end.

We first describe the sanctions that are already in place, drawing on publicly available information. This information is often sketchy and changes continuously, but our understanding is that the following sanctions are in place: 

1. Financial sector restrictions. As of February 28, 2022, financial sanctions have been imposed by the US, the EU, the UK, Japan, Canada, Taiwan, New Zealand, Australia, South Korea, and Switzerland. It is especially striking that Switzerland has departed from long-standing policy by joining the sanctions.

• Certain Russian banks are now excluded from the SWIFT system of international payments, at least partially cutting them off from the international financial system. The following banks have been excluded from SWIFT: VTB, Rossiya, Otkrykiye, Novikombank, Promsvyazbank, Sovkombank and VEB.RF (ВТБ, “Россия”, “Открытие”, “Новикомбанк”, “Промсвязьбанк”, “Совкомбанк”, ВЭБ.РФ). Sadly, “Sberbank” and “Gazprombank” were excluded from the ban. (source: Economichna pravda).
• Sanctions have been imposed on Sberbank, VTB Bank, Otkritie, Sovcombank and Novikombank as well as some senior executives. These sanctions require US banks to sever their correspondent banking ties with these banks within 30 days. The UK has frozen the assets of some Russian banks.
• The United States, the United Kingdom and the European Union have banned transactions with the Central Bank of Russia.

We note that the Russian central bank is estimated to have $640 billion in foreign-exchange reserves.  About $140 billion of Russia’s reserves are in the form of physical gold in vaults inside Russia, with another $12 billion in currency in Russia.  About $84 billion of the assets are denominated in Chinese renminbi. The remaining assets are deposits in Western banks, with the bulk in the New York Federal Reserve Bank, denominated in various Western currencies.  The central banks can freeze much of the 640 billion. Russia cannot easily sell its gold (with China perhaps the most likely buyer, but presumably at a substantial discount). As a result, operations of the Russian central bank will be severely constrained.

• Switzerland, breaking a long tradition of neutrality, has placed sanctions and frozen assets affecting Vladimir Putin, Prime Minister Mikhail Mishustin and Foreign Minister Sergey Lavrov. Switzerland is evaluating further sanctions that have been adopted by the EU.
• US payment card firms Visa and Mastercard have blocked services to multiple Russian financial institutions from their network in compliance with the US government sanctions.

2. Trade restrictions:

• The US and other countries have placed restrictions on trade with Russia in semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies, and other military use goods.
• Most European countries above closed their airspace to Russian flights, including commercial flights. The United States also followed suit.
• Germany, in decisions that mark a fundamental change in policy, has pledged to abandon plans for a gas pipeline from Russia, has pledged to construct two new liquified natural gas terminals, to delay decommissioning of nuclear power plants, and pursue other energy sources, all designed to reduce dependence on Russian energy.
• Personal sanctions have been laced on a number of key Russian figures, including President Putin, Foreign Minister Sergey Lavrov, Russia’s security council, and some Russian oligarchs.

II. We now turn to suggestions for how these sanctions might be extended. We believe that sanctions extract larger and larger costs when supported by more countries around the globe. More global engagement, including China, therefore, is important. Furthermore, existing sanctions should be extended and tightened.  We list an expansive set of possibilities, some more important than others.  

3. Financial restrictions:

• The SWIFT ban could be extended to cover more Russian and Belarussian banks, including (among others) Sberbank and Gazprombank.  A guiding principle here is that carpet bombing should be met with “blanket” (sectoral) sanctions.  European banks exposed to the Russian banking system could be supported by the European Central Bank, so as to avoid a contagion of financial distress.  For example, Russian assets held by European banks could be securitized and purchased by the ECB at an appropriate discount.
• Both the SWIFT ban and sanctions on the Russian central bank will prompt attempts by Russia to engineer work-arounds. A task force should be committed to counter such attempts to bypass the sanctions.
• Anti-money-laundering tools can be used to identify assets of those who enable Russian aggression.  Countries can impose limits on real estate transactions by Russian nationals; implemented thorough auditing of past transactions, and aggressively expose corruption.
• The aggressor’s access to the EU/US/UK/etc. financial infrastructure should be limited to the extent possible. For example, one can implement changes in regulatory requirements for Russian assets to treat them as high-risk securities and thus demand higher reserves.  This will also help to remove Russian assets from index funds and punish them in the secondary market.
• Financial companies, hedge funds, and pension funds around the world should be encouraged to divest from Russian assets and Russian currency.  In the same spirit, foreign multinationals should be encouraged to divest from Russia and limit activities in Russia. For example, Boeing has stopped providing parts and maintenance services to Russia
• The US government should limit Russia’s access to physical forms of currency.  Similar policies can be pursued by the EU.
• Assets held abroad of Russian state-owned firms should be frozen.
• Switzerland, the Cayman Islands, the British Virgin Islands, Panama (and other tax havens) should freeze the accounts of Russian-related companies and personal accounts

2. Trade Restrictions

• The Russian government uses its energy exports to fund war in Ukraine. Russia critically depends on export revenues from oil and gas. This is especially so now with the foreign reserves frozen and the Russian government scrambling to raise US dollars from their exporters (with a 80% mandatory sale of US dollar revenue to the Central Bank of Russia). There could be several options.
• The buyers in the West can impose taxes or tariffs on Russian energy (rendered all the more effective by using the receipts to compensate Ukraine) to reduce the revenue of the Russian government. (Note that such a tax would also serve the dual role of increasing the cost to Russia of purchasing foreign goods for imports.)
• The “Iraq” option (the “oil for food” program) can restrict Russia to using energy revenues to purchase goods of humanitarian nature (food, medical supplies, etc.).
• The international community can impose quotas on Russian energy and publish a schedule of future quotas where quotas are decreasing over time. This could help to contain disruptions of energy supplies in the short run and signal the seriousness of sanctions in the long run.

Energy prices will increase as a result of these policies, but eventually energy supply and flows will adjust. Sanctions on Iran suggest that the price effects are likely temporary. It would also help to diversify European energy supplies and reduce dependence on Russian energy.  A number of countries are now tapping strategic oil reserves, and producing countries could expand output, both in an attempt to limit energy price increases.  

• The same policy could be applied to other major exports from Russia, most notably metals.
• Trade routes can be limited (e.g., close air traffic and sea ports, delay ships, trucks, etc. by checking whether cargo contains sanctioned items) and the cost of trade can be raised (e.g., raise insurance premiums on shipments, require banks to hold large(r) collateral on debt issued to finance Russian trade). Foreign companies can be encouraged to curb their exports to Russia.
• International mail/parcel delivery services can be asked to stop operating in Russia.  For example, UPS, Fedex, and others should be asked to stop any service to Russia.  (UPS and Fedex have apparently announced such measures.)
• Foreign governments can prohibit import of government monopoly products, like alcohol and tobacco, from Russia. Citizens of other countries can be encouraged to avoid Russian products.
• Russian officials and citizens can be prohibited from traveling to or obtaining visas in Western countries.

3. Other restrictions

• Given the Russian government’s evident disdain for international law, Russia should not be a member of any international organization or club. The exclusion of Russia should range from financial organizations (the International Monetary Fund, Bank for International Settlements, Basel committee, etc.) to sport and cultural organizations (the UEFA, the Olympics, International film festivals (Cannes, Venice, Berlin, Sundance and Toronto), International music festivals and competitions, etc.). For example, the UEFA has moved its Champions League final out of St. Petersburg.  Gymnastics and tennis associations have taken steps to limit Russian participation.
• Countries should revoke (and not issue new) visas and residency permits for Russian government officials and members of their families, and apply the same policy to those who wage the war in Ukraine such as management of state-owned companies (e.g. Sberbank) as well as media personalities, elites and businesspeople supporting the war.
• Russian state-owned/controlled media companies should be banned from operating outside Russia. On the other side, Netflix, Amazon, and other streaming services should be encouraged to join in combating Russian disinformation.  Disney has stopped releasing its products in Russia today.

III. Though we have focused on sanctions designed to put pressure on Russia, our discussions also produced some ideas for how aid might be channeled to Ukraine. Governments could:  

1. Send prompt humanitarian aid to Ukraine using international organizations (UNDP, Red Cross) and government agencies.
2. Provide emergency funding to the Ukrainian government to support purchases of critical supplies and weapons. This can be done as loans from multilateral institutions (the IMF, World Bank, etc.) and on a bilateral basis (e.g., loans guaranteed by the US government).
3. Activate lend-lease programs to transfer equipment and materiel to Ukraine.
4. Streamline procedural/logistical processes to accelerate transfers of funds and resources to Ukraine. Cover the cost of shipping resources to the Ukrainian border.
5. Create a swap line between the Federal Reserve (and other central banks) and the National Bank of Ukraine (NBU) to make sure that the NBU can keep the economy functioning.
6. Position and inform foreign investors about Ukrainian government military bonds. All proceeds go to the needs of the Armed Forces of Ukraine and financial needs of the government during the war.