London (CNN Business)Less than 24 hours after Russia ordered the deployment of military forces into eastern Ukraine, the West has sent a clear message that Moscow’s aggression won’t go unanswered. But the harshest sanctions may be kept in reserve as a deterrent to even greater escalation.
Germany halted certification of the Nord Stream 2 pipeline on Tuesday, the most forceful move taken so far to impose economic and financial penalties on Russia since President Vladimir Putin recognized two parts of eastern Ukraine as independent and ordered his troops into the breakaway territories.
The United States, the European Union and other Western allies have also announced limited sanctions. Western countries are not likely to deploy their own troops to Ukraine, making sanctions the best tools to punish Moscow — and deter further aggression.
Here’s what the West has done so far, and how it might really hurt Russia.
The United States
President Joe Biden Tuesday laid out what he called a “first tranche” of US sanctions against Russia, including on two financial institutions, Russian sovereign debt and — starting Wednesday — on Russian elites and their family members.
The White House on Monday announced sanctions on parts of eastern Ukraine that Putin recognized as independent. But those penalties are mostly symbolic, and don’t pose much of a risk to the Russian economy.
Deputy national security adviser Jon Finer said during an appearance on MSNBC that harsher penalties are likely to be held back in order to deter Moscow from ordering troops deeper into Ukraine.
“If Russia takes further actions, we will have further significant and severe consequences that we can impose via sanctions,” Finer said.
Biden reiterated that point Tuesday, saying the United States was prepared to add sanctions if Russia further encroaches into Ukraine’s territory.
In addition to VEB and Russia’s military bank, which were sanctioned Tuesday, the United States could target more of Russia’s biggest banks with sanctions, essentially making them pariahs and cutting them off from the global financial system.
Export control measures are another powerful weapon in the US arsenal. These restrictions could halt Russia’s ability to import smartphones and key aircraft and automobile components, hobbling its manufacturing industries.
The United States maintains sanctions on Russia that were imposed in response to its invasion of Ukraine in 2014. Other penalties have been imposed over issues including cyberattacks, election meddling, weapons proliferation and illicit trade with North Korea.
The European Union will table a package of sanctions against Russia on Tuesday, including proposals to target individuals and banks. But it has already played one of its major cards against Russia.
Germany’s decision on Tuesday to halt certification of the Nord Stream 2 pipeline shows that Europe is willing to target Russia’s huge energy industry — even if that means higher natural gas prices for EU consumers.
The 750-mile pipeline was completed in September but has not yet received final certification from German regulators. Without that, natural gas cannot flow through the Baltic Sea pipeline from Russia to Germany.
Nord Stream 2 could deliver 55 billion cubic meters of gas per year. That’s more than 50% of Germany’s annual consumption and could be worth as much as $15 billion to Gazprom, the Russian state owned company that controls the pipeline.
“I salute the decision of the German chancellor, Olaf Scholz, to cancel Nord Stream 2. And I think it’s a brave step … and the right thing to do,” Prime Minister Boris Johnson told UK lawmakers on Tuesday.
The European Union’s trump card could be SWIFT, a global messaging service used by banks and financial institutions.
Removing Russia from SWIFT would make it much harder for financial institutions to send money in or out of the country, delivering a sudden shock to Russian companies and their foreign customers — especially buyers of oil and gas exports denominated in US dollars.
“The cutoff would terminate all international transactions, trigger currency volatility, and cause massive capital outflows,” Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs, wrote in a paper last year for Carnegie Moscow Center.
SWIFT is based in Belgium and governed by a board consisting of 25 people. The organization, which describes itself as a “neutral utility,” is incorporated under Belgian law and must comply with EU regulations.
There is precedent for removing a country from SWIFT. It unplugged Iranian banks in 2012 after they were sanctioned by the European Union over the country’s nuclear program.
Excluding Russia from SWIFT would cause its economy to shrink by 5%, former finance minister Alexei Kudrin estimated in 2014 — the last time this sanction was considered in response to Russia’s annexation of Crimea.
The United Kingdom
The United Kingdom announced sanctions against five Russian banks and three wealthy Russians on Tuesday.
Johnson told lawmakers that Rossiya Bank, IS Bank, General Bank, Promsvyazbank and the Black Sea Bank would be targeted. Britain will also freeze the assets of three wealthy individuals: Gennady Timchenko, Boris Rotenberg and Igor Rotenberg.
The Rotenbergs are co-owners of SGM Group, which makes oil and gas infrastructure. Timchenko is the owner of private investment firm Volga Group. All three were already subject to US sanctions.
Britain is also set to sanction Russian lawmakers who voted in favor of recognizing the independence of the two breakaway territories.
“We are prepared to go much further if Russia does not pull back from the brink. We will curtail the ability of the Russian state and Russian companies to raise funds in our markets, prohibit a range of high tech exports, and further isolate Russian banks from the global economy,” said Foreign Secretary Liz Truss.
The United Kingdom could take action against oligarchs who have turned London into their playground.
Wealthy Russians flocked to London over the past three decades after gaining entry to the United Kingdom via investor visa programs, according to a report published by the Intelligence and Security Committee of Parliament in 2020.
“There are a lot of Russians with very close links to Putin who are well integrated into the UK business and social scene, and accepted because of their wealth,” said the parliamentary report, which described London as a “laundromat” for dirty cash.
The UK government could move to strip targeted Russians of their visas, Tyler Kustra, an assistant professor of politics and international relations at the University of Nottingham in England, told CNN Business earlier this year.
“These oligarchs and high ranking people in Russia, they don’t want to spend all their time in Moscow,” he said. “They enjoy being able to fly to Heathrow, to get out and live in their townhouses in Belgravia, Chelsea and Kensington, and to shop at Harrods.”
“If we were to sit down and take away their visas, that would be a lot scarier to them,” added Kustra, who studies economic sanctions.
Australia, Canada and Japan have also imposed sanctions. Prime Minister Scott Morrison said that Australia will initially impose travel bans and targeted financial sanctions on eight members of the Russian Security Council.
Canadian companies and individuals will be prohibited from purchasing Russian sovereign debt or doing business with two state-backed Russian banks. Japan will freeze the assets of Russian lawmakers who voted to recognize the territories.
Moscow has already paid a hefty financial price for its aggression, and the ruble has fallen to near-record lows against the dollar.
Moscow’s MOEX stock index crashed more than 10% on Monday, bringing losses so far this year to about 20%. In total, more than $25 billion has been wiped off the value of Russian stocks this week alone.
“We expect further declines near-term in the Russian stock market,” analysts at JPMorgan Chase wrote in a note to clients on Tuesday. The Wall Street bank downgraded Russian equities to “neutral” from “overweight.”
The most commonly discussed sanctions could knock 1% off Russia’s gross domestic product, according to analysts at Capital Economics, but more aggressive measures such as blocking Russia from SWIFT could reduce economic output by 5%.
According to Capital Economics, Russia’s economy is in a better position to withstand a shock than in 2014, when Western sanctions and plummeting oil prices combined to knock roughly 2.5% off the country’s GDP and spark a financial crisis. Russia’ balance sheet is stronger, its external debt is lower, and its financial connections with major economies are smaller.
“The key question now is how far into Ukraine President Putin wants to go,” said Societe Generale analyst Kit Juckes. “Clearly, pushing beyond the current area of conflict would escalate the situation as Russian troops engaged with Ukrainian forces.”