The Washington Post:Biden aides explore rarely used sanctions weapon against Russia

To date, the sanctions imposed by the United States have prevented American banks and firms from transacting with Russian banks, oligarchs, defense firms and other parts of the Russian economy. But now White House officials are preparing rarely used measures that would also punish third parties in other countries for interacting with parts of the Russian economy that have been sanctioned by the United States, according to four people aware of administration conversations who spoke on the condition of anonymity to describe the private talks.

© Bill O’Leary/The Washington Post President Biden departs the White House on Wednesday ahead of his European trip. (Photo by Bill O’Leary/The Washington Post)The people familiar with the matter said the step was probably not imminent and that no decision to impose these measures had been made.

The Biden administration already has the legal authority to impose sanctions on international firms for working with sanctioned Russian entities, but has not yet done so. The measure would be aimed at expanding the bite of America’s sanctions by cutting off parts of Russia not only from the American and European economies, but also the rest of its international trading partners, such as China, India and Persian Gulf states.

One of the people aware of the internal conversations said the sanctions would aim to “make Russia radioactive to non-U.S., non-European businesses as well.”

This strategy — known as “secondary sanctions” — would represent a major intensification of economic hostilities over the invasion of Ukraine, and has only been deployed by the United States on a handful of occasions. If enacted, secondary sanctions would require countries in Asia and elsewhere that have refrained from imposing their own sanctions on Russia to have to pick between continuing to interact with sanctioned parts of Russia and the economies of Western allies.

“Secondary sanctions are potentially very powerful,” said Dan Katz, who served as a senior adviser at the Treasury Department from 2019 to 2021 and is a co-founder of Amberwave Partners, an investment management firm. “They’re a device we use to essentially put up an economic blockade against countries. The original form of economic war was a naval blockade, and secondary sanctions are a way of re-creating that in our modern financial world.”

Spokespeople from the White House National Security Council and Treasury Department declined to comment.

The White House’s weighing of secondary sanctions measures comes as pressure grows from both the Ukrainian government and some members of Congress to intensify the West’s economic attacks on Russia.

The United States and its allies have already moved with virtually unprecedented speed to hurt Russia’s economy. They froze a large chunk of the Russian central bank’s foreign currency reserves, restricted the sale of semiconductors and other components to Russian factories, and severed many Russian banks from the global financial system.

President Biden announced a more modest expansion in sanctions on Thursday in coordination with the European Union, extending financial penalties to all members of the Russian parliament, more than 400 Russian individuals and entities, and Russian defense companies.

But by some measures, Russia is so far weathering the measures better than expected. It can still depend on the nation’s continuing oil and gas exports, high global prices for energy, and some strict currency controls adopted by Russia’s central bank. Assessments on the volumes differ, but Europe continues to import large amounts of Russian gas and oil.

The ruble initially lost about half of its value against the U.S. dollar after sanctions first hit. A rash of corporate departures from Russia is also hammering the nation’s economy, depriving it of consumer products and jobs. Inflation is rising at 2 percent a week, and some economists estimate that Russia’s gross domestic product will contract by as much as 15 percent this year. But the currency has partly rebounded to a level about 20 percent below its prewar level, according to the official central bank rate, restoring part of Russians’ purchasing power.

“Despite all the financial sanctions, the one big loophole is oil and gas,” said Jeff Schott, a senior fellow at the Peterson Institute for International Economics. “That has allowed billions of dollars a week to flow into the country … [and] provide resources to fund the Russian government and military.”

Secondary sanctions would go a long way toward hurting the Russian economy, although it remains unclear how they would work in practice.

Oleg Ustenko, economic adviser to Ukrainian President Volodymyr Zelensky, wrote in the New York Times on Thursday that Russia is exporting more oil than it did before the war. Ustenko urged the United States to impose secondary sanctions to prevent international traders from shipping and financing Russian oil. And Sen. Patrick J. Toomey (R-Pa.) is urging the administration to move forward with secondary sanctions to force “China … like every other country, to stop doing business with Russian banks.”

“It will go against companies that trade with Russia — you trade with Russia, you can’t trade in the U.S.,” said Ariel Cohen, a senior fellow at the Atlantic Council Eurasia Center and a member of the Council on Foreign Relations. “Is it going to be every company that trades with Russia? Yes, if they keep behaving like they want to destroy the world — the Indian, the Chinese, the Emirati companies, would be afflicted.”

The United States deployed the measure most notably in 2011, when secondary sanctions on Iran helped crush that country’s economy and was viewed by the Obama administration as forcing Iran to negotiate a nuclear treaty.

Mark Weisbrot, a liberal economist and a director at the Center for Economic and Policy Research, said the United States must be careful about using secondary sanctions because of its potentially devastating humanitarian and economic impact. “The sanctions on Iran polarized the place. … It reinforced the hard-liners,” Weisbrot said. “The U.S. does have to be concerned about the global repercussions of secondary sanctions.”

The secondary sanctions may also seem like a strange measure to undertake if Europe continues to buy huge amounts of Russian oil and gas. “It’s hard to tell a third-party country that they need to stop buying widgets through [a Russian bank] when Europe is still buying a ton of Russian energy,” said Katz, the former treasury official.

But as the invasion continues, pressure will grow to exact an economic toll on the Kremlin. The United States will probably only need to impose a handful of sanctions on international firms, because the impact of one such move will cause the others to fall into line.

“It’s a very powerful tool because it forces the question of, ‘Are you with them, or are you with us?’ ” said Adam Smith, a partner at Gibson Dunn and a former Obama administration sanctions official.