How to mix sanctions and diplomacy to avoid disaster in Ukraine
After a month of intensive policy work at home and with allies abroad, the Biden administration may have assembled the right mix of sanctions and related policy tools to prevent Russian military action against Ukraine. The success of sanctions, according to our research, is based on four factors. First, sanctions must be multilateral in their design, implementation and enforcement. Second, both in their threat and in their multi-step imposition, they must be clear, credible and powerful. Third, all parties threatening economic sanctions must be willing to bear costs. Finally, sanctions should not be merely punitive but should be accompanied by diplomatic efforts to resolve the crisis.
Citizens of the world are waiting for news on how Putin will proceed in a crisis of his own initiative on the Ukrainian border. In the meantime, they have reason to be cautiously optimistic that Biden is pursuing a classic model of sound economic governance that could reduce the likelihood of war.
Sanctions are multilateral. Rather than proceed directly with imposing sanctions, the Biden administration has spent the past month rallying European allies. He sought to have them join US sanctions and pursue direct diplomatic engagement with Russia to end the crisis. According to a study, multilateral sanctions are more likely to succeed than unilateral measures.
The United States and several European countries are also working together on diplomatic efforts. The United States has begun talks with Russia on East-West strategic issues such as the future of NATO expansion, the alignment of Russian and NATO military forces in the region, and possible arms control agreements. Meanwhile, Germany and France engaged Ukraine and Russia in talks to resolve conflict issues in Ukraine. These commitments are still in their infancy, but observers are already seeing modest progress.
French President Macron had an hour-long phone call with President Putin last Friday to reaffirm France’s commitment to Ukraine’s independence. While Russian Foreign Minister Sergei Lavrov said last week that the US proposal for talks on strategic issues contained a “kernel of rationality”, there is still no evidence that the two sides are resolving the differences that divide them. Yet Russia, Ukraine, Germany and France issued a statement following their talks indicating that they would fully respect and adhere to the ceasefire agreement previously negotiated in the peace accords. Minsk.
Sanctions are clear, powerful and multi-step. The Biden administration’s sweeping sanctions proposals were crafted in coordination with Senate Foreign Relations Committee Chairman Bob Menendez of New Jersey, a Democrat. Menendez and his Senate colleagues have crafted bipartisan legislation to impose sanctions that will deeply and quickly damage the Russian economy if Russia invades Ukraine.
These sanctions fall into two general categories: financial restrictions and export controls. Financial sanctions prevent Russia’s most powerful banks from participating in the dollar-based economy. They also cut off access to the SWIFT system of global financial communication and credit facilitation. Export sanctions prohibit companies and countries from exporting to Russia technological equipment using microchips made or designed by the United States.
Excluding Russian companies from the dollar economy and denying access to SWIFT would severely and quickly devastate Russia’s mighty energy export sector. Access to Western credit markets and foreign investment would dry up. Without hard currency financing, the Russian economy would experience significant chaos, some of which would likely spill over negatively to Europe. A senior member of the German Christian Democratic Union has warned that disconnecting Russia from the SWIFT system would be “an atomic bomb for the financial markets“.
As for export sanctions, the United States already imposed microchip sanctions on Russian aerospace companies in 2014. The new sanctions would more broadly target Russia’s growth sectors and strategic industries, including the oil and gas sector and its aeronautical and armament industries. In 2019, Washington’s microchip sanctions against Chinese tech company Huawei led to a slump in the company’s international sales. No one knows if such sanctions would have the same impact on Russian companies.
The United States and Europe are prepared to bear the cost of the sanctions. While a Russian invasion of Ukraine would destabilize the world, the sanctions envisaged would have a negative impact on the American and European economies. Yet if the sanctions are to succeed, the United States and its European allies will have to preserve multilateral unity and bear these costs. Europe’s annual trade with Russia amounts to nearly $200 billion, which far exceeds US$30 billion. In this scenario, Europe has a lot to lose, even more than the United States.
Germany has postponed final decisions on the Nord Stream 2 gas pipeline between Germany and Russia until July, risking a colder winter and gas shortages in the coming months. The slowdown in gas deliveries from Russia has already led to higher prices for European consumers. Foreign Minister Annalena Baerbock nevertheless told parliament in Berlin that Germany was preparing a tough sanctions package covering many aspects “including Nord Stream 2”.
If the United States threatens to use export controls to stop the supply of microchips to Russia, it will introduce additional risks to the global economy. The militarization of the semiconductor industry would likely have ripple effects on supply chains, especially in an era of chip shortages. “We are in uncharted waters,” an industry representative said after being briefed on the new sanctions by White House officials.
Sanctions encourage diplomatic engagement. Washington’s concrete threat of strong sanctions, with the support of European states, shows Moscow the high price it will pay if it invades Ukraine. Threats can be an effective means of obtaining concessions, particularly when the expected costs of sanctions in the regime being targeted are high, as is the case here.
All parties claim to have no interest in the war. To secure this goal, the United States must now move forward with a new urgency and all diplomatic tools are working overtime. These range from tough negotiations with Russia to forge give-and-takes, to sustained cooperation with European allies and passage of the US Senate Sanctions Bill to increase the leverage of sanctions. Sanctions-based diplomacy offers the best option to avoid a military confrontation, especially the one currently brewing on the Russian-Ukrainian border, which would undoubtedly have catastrophic consequences.