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“Why is it so difficult to convert America’s economic heft into geopolitical power? When it comes to sanctioning Russia, the U.S. faces three recurring challenges: The sanctions tend to be imposed gradually; they are negotiated with reluctant allies; and the most impactful ones would also be economically costly to the West. As a result, the Russia sanctions in place today are a watered-down compromise, designed to placate allies and minimize domestic costs.
Bending Russia’s macroeconomic fortunes — and Putin’s calculus — will require targeting the country’s financial system as well as key exports such as oil. Such sanctions would have significant effects on Russia’s economy and perhaps on the global financial system, which is why U.S. officials have been hesitant to go this far. But averting a war is a tall order and, unfortunately, won’t be cost-free. “Smart” or “targeted” sanctions won’t work. To really impose pain on Russia, the U.S. and Europe will have to bear some burden, too — although, fortunately, there are ways to minimize the fallout for Western economies.”

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“There are two main categories of sanctions that stand a chance of actually changing Putin’s mind — and each comes with downsides that the U.S. needs to consider seriously. First, the United States could threaten to cut off major Russian banks from the U.S. financial system. Blacklisting a major Russian bank, such as Sberbank, VTB or Gazprombank, would make it difficult — if not impossible — for anyone in the world to transact with it.

The Treasury Department has deep experience imposing sanctions on foreign banks, having done so repeatedly against Iran. The largest Russian banks are much bigger than their Iranian peers, which has given U.S. officials pause about sanctioning them in the past. Indeed, this would cause substantial financial distress in Russia. Full-blocking sanctions on Sberbank would be particularly impactful, since most Russians have an account there. Russia’s government would have to step in to bail out the bank and would struggle to prevent a domestic financial crisis. Companies would slash investment. The ruble would fall sharply against the dollar, but it would become riskier to hold dollars in Russian banks. Russian inflation would spike higher and real incomes would fall.

The impact would also be felt internationally. Many Western investment funds own Sberbank stocks and bonds, the value of which would slump.”

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“Second, the U.S. could substantially reduce Russia’s export revenues. Russia’s biggest export is oil (around 45 percent of exports), and other exports the U.S. could sanction include gas, coal and various iron and steel products. With Iran, the United States drastically cut the country’s oil exports by allowing Iran’s customers to gradually wind down purchases over time. A similar campaign is possible against Russia, though since Russia exports more oil than Iran, global oil prices would take a bigger hit. (Other countries would eventually increase production to make up for the shortage, but there would be a time lag during which oil prices would remain high.)

The United States could also sanction Russia’s natural gas exports, though this carries even greater tradeoffs. The world — especially Europe — already faces natural gas shortages this year. Energy-intensive European industries, notably in Germany, could face shutdowns if Russian gas supplies were halted. Given the Biden administration’s struggle with spiking energy prices and worsening inflation, it’s not hard to see why Washington may be reticent to impose such sanctions.”

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“Russia may have the advantage on the battlefield in Ukraine, but the West has vast power over Russia’s economy. It should be prepared to use it — and also be prepared for the costs.”