Planet Money - Putin's big bet: Sanction-proofing Russia

Episode Date: February 25, 2022

The U.S. is imposing economic sanctions on Russia to punish it for invading Ukraine. But Russia has spent years trying to make its economy immune to sanctions. So, will these new sanctions be enough? | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. So, Russia has invaded Ukraine. Russia is bombing the country. Civilians have been killed. The news is changing quickly, but as we're recording this on Friday afternoon, February 25th, Russian troops have entered Ukraine's capital. And there are a few things the U.S. can do now. Short of going to war with Russia, which the U.S. has repeatedly said it does not want to do, it can

support Ukraine's military with equipment and intelligence, which it is doing, and it can try to hurt Russia another way, economically, through sanctions. This is the one the U.S. is all in on right now to try to punish Vladimir Putin. They are sanctioning people close to Putin. They're sanctioning technology. They're sanctioning banks. Along with the European Union and the U.K., the U.S. is imposing these massive banking sanctions to hurt Russia's economy. Except Russia saw these sanctions coming years ago. Hello and welcome to Planet Money. I'm Sarah Gonzalez. Today on the show, banking sanctions and sanction proofing the economic war behind the war on the ground in Ukraine. Over the past

eight years, Russia has been building a fortress against U.S. sanctions. How did Putin do it? And what does that mean for the U.S.'s ability to help Ukraine? The last time Russia invaded Ukraine in 2014, Brian O'Toole was one of the people in the room trying to figure out what sanctions to impose. Brian was at the Treasury Department back then, and now he's at a think tank at the Atlantic Council. His focus is sanctions. Okay, so you're super busy right now? I mean, you know, it has been a busy couple of weeks.

The thing about sanctions is, in a way, they're most powerful when they're just threatened. Because once you impose sanctions, they can backfire. Things can escalate. The other country retaliates, then you retaliate back, and it can just go on and on and on. So threaten, but do not impose. That is the ideal scenario with sanctions. but do not impose. That is the ideal scenario with sanctions. But here we are, imposing, not threatening, real sanctions against Russia. You know, the threat of sanctions is critically important because you want to deter behavior. But once behavior happens, you also want to

demonstrate that that behavior needs to change. Brian says the U.S. had to respond. It has to punish Russia's behavior now. And one of the big things the U.S. had to respond. It has to punish Russia's behavior now. And one of the big things the U.S. is doing is hitting Russia's banks. And Brian says going after banks is a particularly useful tool in Russia because if you sanction just a few of them, you can cause a lot of damage. The four major state-owned Russian banks have something like 55% of the kind of total assets of the Russian sector. What does that mean that they control 55% of the entire sector's assets? They have almost all of the money, the country's money? Essentially, yes. I mean, these four banks have almost all of the, you know, of the money in the financial sector in Russia, which is huge, right? That kind of

concentration is hard to come by in most other large economies. So like the U.S. has some pretty big banks, but four big U.S. banks do not hold half of all of the country's money. In Russia, Brian says two banks hold almost 60% of all household deposits. So we are talking huge, important banks, which makes them really great targets for sanctions. How do you target them? You cut them off from what?

The traditional kind of heavy-handed sanctions are known as blocking or asset-free sanctions, and that means that all of their assets in the United States must be frozen. Do you sort of treat a bank like they are a cartel leader? We can't do business with them? They're on the like, this is a drug dealer list kind of thing? Yeah, or terrorism.

Now, the U.S. has not sanctioned all four of the major state-owned banks that Brian was talking about. But this week, the U.S. put six Russian banks, including some of the major state-owned ones, on this thing called the Specially Designated Nationals and Blocked Persons List. To the American government, this is the bad guys list. Terrorists and drug dealers make up a huge percentage of the names that are on the list, and so adding these banks to that list makes them functionally equivalent. So like the U.S. has put Colombia's Ghali cartel on this list. The Libyan government made the list this one time? Exactly. So a good historical precedent for this is Libya in 2011, where the Libyan central bank had about $38 billion that were frozen by U.S. sanctions. So that was 38 billion dollars that the Libyans,

that the Qaddafi regime couldn't use to buy ammunition to shoot his own people. Yeah, Libya had all this money and then the U.S. made it like unusable. They froze it. And freezing assets, that is just part of what full-on banking sanctions do. When the U.S. puts you on its bad guys list, the rest of the world doesn't even want to touch you. All these other banks in other parts of the world go, we don't know you, we don't talk to you right now, Russia. Exactly, yeah.

That can be devastating for a bank. Here's how it can be devastating. Banks all over the world use U.S. dollars. They do some business in U.S. dollars. So if you are a major bank in, let's say, the UAE, you are not going to want to deal with these Russian banks because you'd be violating U.S. sanctions and you'd face some pretty severe penalties from the U.S. So most banks all over the world are going to give these bad guy Russian banks the cold shoulder, although there will be some exceptions. Also, it's not just about banks avoiding you.

Getting on the bad guy list tells everyone do not do any business with those banks. Companies and individuals within the United States cannot conduct any transactions or have any dealings with those banks, right? So it's not just wiring money back and forth. It's providing consulting you know, consulting services from the United States to those banks. It's importing software, say, from Microsoft or others to run programs and servers at those banks. Those things all get wrapped up in the sanctions prohibitions if they use that full scope measure. So that's where we're at right now. The U.S. is pulling out these banking sanctions to punish Russia in a big way for attacking Ukraine. But

Russia has been anticipating these sanctions for years. They've been building up their economic defenses and preparing for this very moment. Russia has been sanction-proofing itself. We'll get to that after the break. Okay, sanction proofing. The last time Russia invaded Ukraine, the U.S. hit Russia with all sorts of sanctions. Vladimir Putin didn't like that. He wanted to be able to do whatever he wanted to do without repercussions. He wanted to be able to do whatever he wanted to do without repercussions.

So he started trying to make Russia immune to future sanctions so that he could put himself in this position to say, go ahead, impose your sanctions. They're not going to hurt us. Vladimir Putin has been preparing for this moment for the past eight years. Andrew Weiss is with the Carnegie Endowment for International Peace. He's a Russia expert, was on the National Security Council, and he has been very closely watching as Russia has put up its defenses. He says there are a few things Russia has been doing, like it started stockpiling foreign currency. Russia has huge reserves in a few different currencies and gold. Right now, the Russian government basically has stuck away in a mattress somewhere on the order of $635 billion.

These are huge amounts of money that would give Russia the ability to brazen out new forms of Western pressure and sanctions. So that's one way that Russia has tried to sanction-proof its economy, by stashing cash that it can tap into at any time. But the reserve might not be enough. So Russia has done other things to prepare for this moment. Putin has been building relationships with China to work around future U.S. banking sanctions.

He made Russia's exchange rate free-floating, which basically just means Russia is less dependent on the dollar. And, and here's the big important thing, he's reduced his reliance on foreign investment, on Western financing. Basically, Putin decided, I think we're going to stop borrowing money. Vladimir Putin is allergic to borrowing money. So back in 2014, 2015, Russian companies borrowed tons of money in the West, had tons of banking relationships. All that has slowly scaled back in the subsequent eight years. And so he's

not looking to use the banking system in Russia or access to Western capital to make Russia great. And Andrew says there's one big reason Putin can pull this off, how he can run a country without borrowing a lot of money. Putin thinks he can pay for a lot of what Russia needs by exporting oil and selling it on the global market. This is his trump card. Basically, every day the Russian government, in some form or another, pumps out four plus million barrels of oil a day. And it sells those on world markets. And if oil is priced at, as it is right now, around $100 a barrel, that is a lot of money every single day.

By the way, Russia can still sell oil because no one has put sanctions on Russian oil. Yet, it could happen. But stopping Russian oil exports would be terrible for the global economy. It's a horrible dynamic in terms of trying to choke off the ability for Putin to finance himself. And he has all this dollar income that's coming in every day from selling oil and gas. How does he have access to U.S. dollars by selling oil? All major transactions involving oil and gas are conducted in Western currencies. So every time Russia sells oil, it's mostly receiving either dollars or euros.

I mean, it certainly undermines the sanctions in a very big way if the idea is shut them off, freeze them out to U.S. dollars, and then they have this, like, unlimited access to U.S. dollars through this other way. Yep. Russia has the world over a barrel. And Vladimir Putin knows this. It's part of his whole calculus with Ukraine. Yep. So the idea is, we know that the things we sell are too important to you, for you, the

West, to sanction them. So does this make Russia sanction-proof then? We're going to find out. Putin feels he can basically tough things out. He can tighten his belt at home. He can continue to run a very tight budget and make the average Russian bear the brunt of any adjustment. That's the structure of the Russian economy that Vladimir Putin has deliberately built. It's a fortress mentality. A fortress. That is how everyone is describing Russia right now. And listen, even people like Andrew, who think that Russia is pretty well positioned, say that these sanctions will hurt. If just some of your banks get cut off,

you can maybe tough it out. But if all the big ones do, which could still happen, that would be harder. Plus, the U.S. has announced another kind of sanction to prevent Russia from getting pretty important technology that's been developed in the U.S. The goal here is to cut Russia off from technology it needs for its military, its shipping industry, its space program. Andrew Weiss says the U.S. has rolled out maybe two-thirds of its whole sanctions arsenal. It could still sanction Russia's central bank. Or it could kick Russia out of the international money transfer system. It's the thing that connects most international banks and lets companies do business across borders. That would be a big one.

So there are still real targets to hit. Obviously, this is a fast-moving story, and we're going to keep an eye on it. If there's something you are interested in, you can email us at planetmoney at npr.org or find us on social media at Planet Money. Today's show was produced by Nick Fountain and Emma Peasley. It was fact-checked by Willa Rubin with help from Sam Yellow Horse Kessler and Taylor Washington. It was mastered by Isaac Rodriguez and edited Horse Kessler and Taylor Washington. It was mastered by Isaac Rodriguez and edited by Molly Messick and Jess Jane. Planet Money's executive producer is Alex Goldmark. I'm Sarah Gonzalez. This is NPR. Thanks for listening. Thank you. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.