US sanctions could send ‘Russian economy into freefall’, CNAS member says
Edward Fishman, associate fellow at the Center for a New American Security, joins Yahoo Finance Live to discuss the power US sanctions would have on the Russian economy, parallels between Russia and China, potential for cyberattacks and oil markets raw.
ALEXIS CHRISTOFOROUS: As you can see, we’re watching a podium shot there at the White House in the East Room as we await President Biden’s remarks on Russia and Ukraine. He is expected to announce new sanctions against Russia, as the United States now calls for the deployment of troops in eastern Ukraine and the invasion. I want to bring in Edward Fishman now, Adjunct Fellow at the Center for a New American Security who advised the Obama administration on economic sanctions.
Thank you very much, Edward, for being with us. If you were advising President Biden during this situation, what could you tell him about economic sanctions?
EDWARD FISHMAN: Sure. Thank you very much for inviting me. As you said, the Biden administration called it an invasion. And over the past few weeks they have made it very clear that an invasion would have rapid and severe consequences for the Russian economy. President Biden has the power, with the stroke of a pen, to bring down the Russian economy.
And that’s largely because of the outsized role that the US financial sector continues to play in the global economy. So my advice to President Biden is not to hold back – to face it and impose the sanctions that they have been planning and coordinating with their allies over the past few months.
KARINA MITCHELL: And then what are some of those penalties? I know that stopping the sale of sovereign bonds is one of them – what other sanctions can they impose?
EDWARD FISHMAN: Sure. I anticipate that the Biden administration will extend sovereign debt sanctions to secondary transactions. The initial sanctions were only for primary dealings with Russian sovereign debt, but that really won’t be the flagship part of the package. I expect the Biden administration to impose some really big sanctions on Russia’s biggest state-owned banks.
The Russian banking sector is therefore quite concentrated. There are only a handful of banks at the top that truly represent the lion’s share of the industry. And I would be very surprised if the Biden administration doesn’t today impose quite substantial sanctions on some of these banks. And I think that at the same time, it will be possible to increase these sanctions in the days and weeks to come if Putin escalates his aggression further.
ALEXIS CHRISTOFOROUS: Well, you know, Craig, I wonder how much these sanctions could really hurt or hurt Russia. Because we saw on a very public stage during the Winter Games, which have just ended in China, that there is a growing bond between Russia and China. So, I guess my question is, what can the United States and, indeed, the world do to have the most impact on Russia when it comes to sanctions?
EDWARD FISHMAN: Look, I think there’s a myth that the Russian economy is sanctions-proof. Certainly, in the last eight years since we initially imposed sanctions in 2014, Putin has done things to try to protect the Russian economy from sanctions. But the Russian economy remains very vulnerable. You know, we often boast about the 630 billion dollars accumulated in foreign exchange reserves.
What is not often said is that 2/3 of these foreign exchange reserves are held in dollars, euros and other assets denominated in Western currencies. All of this could be frozen with the stroke of a pen by President Biden and his EU and UK counterparts. China, I do not foresee, will be a white knight in this situation.
I believe that the Chinese government will take advantage of this situation. Certainly, you know, if Russia needs new markets and there is a cost-effective way for China to get involved, I’m sure they will. And by the way, the same thing applies on the other side of the coin. I think that as Russian raw materials come out of world markets, if there are opportunities for China to increase its market share, I don’t expect Beijing to hesitate for a moment.
So I think Beijing will do what is in its interest. And I don’t think that’s going to save Russia anytime soon.
KARINA MITCHELL: And Russia will certainly also do what is in its own interest. How might this affect us here in the United States? We are no stranger to crypto attacks and hacks from Russia. Do we expect more from these? And what could they target?
EDWARD FISHMAN: That’s an excellent question. And I anticipate that if the Biden administration achieves some of the harshest sanctions it anticipates, there could very well be retaliation. Earlier this morning you saw a threat from Dmitry Medvedev of Russia regarding rising gas prices in Europe. It is also possible that there will be retaliation in terms of cyberattacks.
But what I want to emphasize here is that when you compare the US economy and the Russian economy, they’re just not in the same league. The American economy is so much stronger, so much bigger than the Russian economy. There is only asymmetric leverage available to the United States. So I think if Russia were to retaliate against the United States, the most likely type of retaliation would be asymmetric cybersecurity retaliation, and less counter-sanctions. Because I don’t believe Russia really has the ability to affect the United States through sanctions.
ALEXIS CHRISTOFOROUS: What about oil markets? I mean, Putin says he’s not going to disrupt supplies going through Ukraine. It seems the market doesn’t really believe him. We see Brent Crude touching near $100 a barrel. What could world economies do in terms of sanctions to pressure Russia to at least continue that oil lifeline through Ukraine if tensions do indeed escalate?
EDWARD FISHMAN: Sure. Well, when we talk about oil, you know, the Biden administration was careful to point out that oil will not be included in the first wave of sanctions. Of course, they would rightly be concerned about soaring oil prices even higher than they already are. But what I will say is that none of us can really predict exactly where the oil markets are going.
And for some historical context, in 2014 when I was involved, again, you know, we imposed quite substantial sanctions on Rosneft, the Russian state-owned oil giant, as well as sanctions on projects deep-sea exploration and shale oil companies in the Arctic. And what happened in the next six months? We have seen oil prices crash.
So it’s not always clear exactly how the oil markets will react, but I don’t expect oil to be part of the first round of sanctions. I think that will be held in reserve in case Russia steps up even more in Ukraine.
KARINA MITCHELL: OK, we’ll leave it there. Edward Fishman, associate researcher at the Center for a New American security. Thank you very much for your visit and your views today.