Robert Asahina: Antony Blinken told CNN in January that the purpose of sanctions is to deter aggression. Ironically, at that point he was arguing against imposing sanctions on Russia. After Putin invaded Ukraine in February, successive rounds of “unprecedented” sanctions by the United States and the EU have failed not only to deter Russia, but to stop the war’s escalation. Meanwhile, Russia has responded by holding Ukrainian exports hostage, essentially weaponizing food.
So the question is what sanctions will accomplish in the long term, since they’ve mostly failed at their avowed purpose in the short term. But also: What will the international order look like down the road, now that sanctions, embargoes, boycotts and other geo-economic tools have effectively become weapons of war? That is, has the so-called neoliberalism of the past thirty years—which depends upon free movement of people and capital and technology and ideas—come to an end?
Stuart Levey: Sanctions can be understood in tactical and strategic terms. On the tactical side, it’s clear that financial tools have become an important instrument of national security. I was at the Treasury Department from 2004 to 2011, and initially there was skepticism about whether financial measures could be effective. Over time we’ve learned they can be, if done well.
They’re not magic, however. I think it’s unrealistic to believe they would have deterred Putin from invading Ukraine. Nonetheless, they have inflicted pain, thereby creating leverage for diplomacy with Russia in the medium term. There are a few important takeaways thus far. First, and to the Biden administration’s credit, the response has been decidedly multilateral. The United States and its allies have a well-established playbook to roll out sanctions and other financial measures efficiently, effectively, and quickly. With an exception I’ll come to, they showed some significant strength. A wide variety of measures—sanctioning banks and individuals, imposing import and export restrictions, restricting access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), banning travel—that normally would be disconnected, were all exercised in a concerted way.
Another thing that’s been done fairly well is the high level of focused effort to pursue corruption. Fighting corruption is often something where there is a lot of lip service paid. Everyone agrees that corruption is bad: There is a UN convention against it. Countries have signed up to all sorts of really great-sounding commitments. But in general, very little happens. It’s significant that this time the West has gone after oligarchs who became wealthy or are sustaining their wealth by supporting Putin. It remains to be seen whether we can turn that effort into something lasting beyond a one-time tactic of targeting Russia. But certainly in the United States, the United Kingdom, and in some other places, there’s been a reckoning as to why so much of this wealth has been stashed in our societies.
The last point on the tactical side is the exception I referred to: While sanctions have been quick and pretty effective, there’s a gaping hole in the sanctions we have imposed which essentially allows Russia to continue to sell its oil and gas, bringing in lots of hard currency, including from Europe. There are other things that haven’t been done, and ways sanctions can be improved, but this is the really big problem that mutes their effectiveness overall.
The multilateral coalition that exists is imperfect. A lot of countries haven’t joined the coalition, including of course China, but also India and other potential customers for Russian oil and gas. Our traditional Gulf allies, Saudi Arabia and the UAE, have not been willing to cooperate by increasing production and lowering the price of oil. So the United States still faces challenges making sanctions work just on a tactical level.
Francis Fukuyama: I don’t think people ever thought that sanctions by themselves would deter Russia. I think they were part of the calculation. Leading up to the war, Russia anticipated they would be hit with sanctions, and they protected themselves by building up their foreign currency reserves to over 600 billion prior to the war. They didn’t anticipate other central banks freezing a lot of those assets, but they clearly were worried and thought they had a way around anticipated sanctions.
Stuart is right that the big problem is the energy exports. Russia still gets around $700 million a day in payments for oil and gas, which is why the ruble hasn’t fallen more than it has. That’s why Russia can continue to fund its war machine. Whether Europe can actually wean itself off of Russian oil and gas remains to be seen. They’ve been making some progress in that direction. I was part of a working group advising both the Biden administration and the Ukrainians about exactly what kinds of sanctions are necessary. I think they have a pretty good plan not to ban imports but to impose tariffs on imports so that the Russians don’t capture a big differential between the global price and their production costs. This also allows the Europeans to move in the direction of cutting off Russian oil and gas but in a more gradual fashion so they can start replacing those sources elsewhere.
Other sanctions that may be highly effective are the blocking of technology exports, because a lot of Russian military equipment depends actually on Western technology. The Ukrainians shot down a Russian military helicopter that had a Garmin GPS system. Russian aviation uses Boeing jetliners, and they’re now cut off from spare parts. As time goes on, these kinds of blockages are going to start cutting much more deeply into the Russian perception of the costs of the war they’ve undertaken.
Alternative Payment Systems and Digital Currencies
SL: I agree that cutting off technology has been critical, and it’s been an important part of what’s worked well. The question of reserves, however, raises broader questions. The rest of the world—particularly China—will be watching what sort of sanctions we put on Russia. And while we look at sanctions and financial measures as critical national security tools now, other countries will be persuaded that they really must find a way to escape a system in which the United States can inflict this kind of pain relatively unilaterally. Remember, there’s no UN Security Council resolution here, as there was with Iran and North Korea. This is a “coalition of the willing” sanctions regime.
If you’re China, you see that the West not only cut off Russia from access to its central bank reserves, but now the West is talking about confiscating those reserves in order to pay for the reconstruction of Ukraine. This may be justified under the circumstances, but it will have long-term implications for how the Chinese, for example, will react to the current norms in our financial system. Similarly, the Saudis or Indians might be wondering if this could happen to them—that their central bank reserves could be frozen and confiscated. These actions were always possible, but the current steps are very strong, so countries will be looking for ways to extricate themselves from the system that currently allows the United States to exercise coercive power.
I don’t think the United States should be a hundred percent confident that it has the rest of the Western world behind it in these matters. Even the Europeans are pretty skeptical of U.S. unilateral power in the financial system, and have at times been resentful of it. So we should flag this as potentially a medium-term strategic challenge for the United States.
FF: Underlying this issue is the position of the dollar as the world’s leading currency. There’s been discussion about alternatives to the dollar for as long as I can remember, and nobody’s really moved in that direction. But if these central banks are going to be confiscating dollar reserves held by other central banks, held by the U.S. Treasury, that’s a big incentive to start using currencies other than the dollar.
The advantages that the United States gets by being the world’s currency are enormous. We get away with running such enormous budget deficits year after year because other countries are willing to hold their assets in dollars. If there’s a broad move away from that, it’s going to raise interest rates domestically and make it much harder to fund deficits. But what’s the alternative? The renminbi is not freely convertible, the Euro has problems, and the Japanese yen and Swiss franc are relatively small players in global markets. What are the prospects of the dollar losing its supremacy around the world?
SL: Back in 2005, when I was a new under secretary at the Treasury Department and we instituted a unilateral sanction, I got a pretty strong lecture from some senior people about how unilateral sanctions would undermine the dollar as the world’s reserve currency. To date, that’s not been true. You’ve seen what’s happened in the intervening fifteen or sixteen years. We’ve continued to act unilaterally, and the dollar has remained strong—for exactly the reason you said. There is no real alternative. Of course, just because it hasn’t happened yet, doesn’t mean it won’t. But the dollar is currently the world’s safest currency, and it maintains its position for a variety of reasons, including the overall strength of our economy and the rule of law in the United States. That’s where our real leverage rests now.
One thing we should be concerned about though is whether it is possible to develop an alternative payment system with blockchain and digital or cryptocurrencies, creating an opportunity to move value without necessarily going in and out of dollars, and therefore not having to clear transactions through the United States. I was part of a working group at Hoover about the Chinese digital renminbi and how China is working on an infrastructure for such a payment system. There’s a risk China will want to develop payment rails free from U.S. domination. And there’ll be a lot of other countries willing and even eager to free themselves from the potential of U.S. financial coercion. If I were a policymaker in the United States right now, I would be trying to make sure that, as digital currencies develop, we maintain the ability to impose and enforce sanctions. Right now we could probably shape the development of a payment system based on digital currencies, but if we stand back and let the Chinese dominate—they are already well ahead of us—there’s a risk we could lose our leverage. This is also why it is critical that any such payment system be properly regulated.
FF: The current meltdown in the cryptocurrency market does indicate the real dangers of this type of completely unregulated form of payment. And for environmental reasons and because of the transaction costs, crypto will never be a means of payment. But it could be a store of value. So even though you’ll never use Bitcoin to pay for your gasoline at the pump, you could use it to hold a few billion dollars in reserves.
SL: There are ways to have high transactional volume on blockchains, though not at the moment with Bitcoin. You can’t just look at the limitations of Bitcoin transactions. There are digital stablecoins that could be used as payment tokens right now. Of course, we just witnessed the collapse of a so-called algorithmic stablecoin that wasn’t backed by anything. But imagine a true stablecoin—a digital dollar backed by real assets. You could use it as a token to move on the blockchain to make paymentsand potentially create an alternative payment network.
Stablecoins are not big enough right now to support the massive volumes that are transacted, but theoretically they could. In fact, this is the aspiration of many projects in the crypto space. What is also being contemplated are central banks issuing their own digital tokens that could be moved very quickly on blockchains. The Fed is considering the possibility of issuing a digital dollar in the United States, though it’s a long time away. But meanwhile, the private sector does have alternative digital currencies, true stablecoins that could fill this role.
If that sort of payment system develops on blockchain-based rails, the United States may not be able to implement sanctions effectively in the way that the traditional financial system does. Sanctions work in the traditional financial system because there are intermediaries along the way that know the parties to the transactions and scrutinize the transactions. Who’s the counterparty? What’s the purpose of the transaction? Sanctions work because those intermediaries have real incentives to be careful. The whole purpose of the blockchain is to eliminate those intermediaries and make the transactions frictionless, allowing parties to transact without even revealing their true identity into the ecosystem. And that is a risk to our sanctions programs and therefore to our national security.
FF: But would anybody ever trust a private issuer of stablecoins that wasn’t heavily regulated by a government? That’s really the problem with existing stablecoins—they claimed they had adequate reserves, but they didn’t actually reveal what they were or whether they really existed. So would there have to be a government standing behind a stablecoin before people would truly trust it?
SL: My position has always been that no issuer of a private stablecoin will ever be as trustworthy as the Fed. A digital dollar issued by the Fed would be most trustworthy. But sufficient auditing and transparency as to your reserves could make a private digital currency that people did trust, if it had an audited reserve of a hundred percent of the value issued, plus a capital buffer or FDIC insurance. Even now, there are billions and billions of dollars of stablecoins in circulation, and some people are trusting them.
FF: Are the Chinese actually trying to create a digital renminbi, and if so, wouldn’t that mean losing control over their money supply? Or is this a parallel currency that will be used for transactions that will somehow be kept separate from the renminbi?
SL: My understanding is that it is a digital representation of the renminbi, but with centralized control. There’s no aspiration for decentralization in China, as you’d imagine. They are using some of the same technology but with a different set of values. They’re telling people they’re going to preserve privacy—but in fact that will mean that only the central authority will have all the information about the transactions and who’s making them.
At the moment, this digital currency is intended for domestic purposes. But the Chinese are creating the infrastructure needed to make it interoperable internationally. I believe they will eventually want to export this capability to countries who either want it or are coerced into taking it. In the long term, it’s part of an overall strategy for them to create a payment system where the United States doesn’t have the ability to control things.
China has been pushing back a lot against U.S. sanctions authorities. They’ve passed laws that make it a crime to honor U.S. or other country sanctions in China because they want to exert their own market power. Their efforts in digital currencies are part of a larger strategy to get out from under a U.S. dominated financial system. My worry is that we are not taking that risk seriously enough.
FF: Apart from the blockchain based digital currencies, there’s talk about an alternative payment system that the Chinese have been trying to set up, now that the Russians are being excluded from SWIFT. Could you say a little bit about how extensive that is and whether it actually could become an adequate alternative to SWIFT?
SL: SWIFT is a messaging system, and theoretically China and Russia can set up their own messaging system. But I think the alternative to SWIFT that the Chinese are looking into will only have limited effectiveness. Who would want to join such a system? Maybe Iran and Russia and a few others, but that’s not the party everyone wants to be invited to.
My worry is that digital currencies might enable the Chinese to create a larger party—a payment system where they can attract others by arguing that politics don’t play a role. Countries such as India might want to join that in order to escape a payment system where the United States and a few other countries can decide who gets to play. Even the Europeans will be somewhat open to that. My view is that this would not be in the interest of U.S. national security, that it is critical that we maintain our ability to protect the integrity of the financial system. We want to support technological innovation but not sacrifice our national security.
FF: To return to sanctions: The Iran sanctions were thorough and effective because of secondary sanctions, but we’ve not really moved in that direction in the case of Russia. Is it impossible to contemplate them?
SL: It certainly will not be easy. We had an even broader coalition regarding Iran as well as several UN Security Council Resolutions to rely upon. Think about the countries that are still doing business with Russia: India, Mexico, Indonesia, Brazil, Turkey, South Africa, Argentina, UAE, Saudi Arabia—and, of course, China. That is a lot of countries for us to say that we will sanction entities within them that continue to do business with Russia. So secondary sanctions are somewhat more challenging though not impossible. You start by suggesting reduced transactions in exchange for not imposing secondary sanctions.
Corruption and Democracy
SL: I’d like to return to corruption for a second. There’s this notion that fighting corruption is an important part of promoting liberalism and the rule of law. Yet some of the most authoritarian regimes are very adept at using the tools of anti-corruption as a way to consolidate their own power. Think about Xi Jinping: When he came into power, the first thing he did was to get rid of mid-level leaders, some of whom were undoubtedly corrupt. An even better example is Mohammed bin Salman in Saudi Arabia, who went on an anti-corruption campaign when he came to power. This was really popular with young people in Saudi Arabia. So MBS has consolidated his power not just through fear but also through popularity. How do you deal with the fact that anti-corruption drives can be used so effectively by the most authoritarian regimes?
FF: This has been a pet peeve of mine—the assumption that the cure for corruption is more democracy and transparency and accountability. That’s not true just as an empirical historical matter. You can get effective and non-corrupt government under an authoritarian regime. The great bureaucracies that developed in Germany or Japan or South Korea or Britain all started in pre-democratic times, put in place by authoritarian regimes that wanted effective government. Charles Tilley’s classical theory was that war is actually what produces good clean government, because you can’t afford to have your incompetent cousin bleeding off money or running your army. So I don’t think there’s any necessary connection between good government and democracy.
China and Singapore are the best poster children for that. Everyone would concede that they’re pretty good at doing what they do, but they’re clearly not democratically accountable. Some of the worst cases of corruption are actually democracies in which politicians have to give out favors. That includes the United States in the 19th century, where we had a patronage system that was fed directly by the need of politicians to get people into the polls and vote for them.
Chris Carruthers wrote a book about Xi Jinping’s anti-corruption drive in China, as well as campaigns in other authoritarian countries. Carruthers concluded that Xi Jinping actually did reduce corruption in China. His methods were not democratic, but they were still effective, as similar drives were in other authoritarian countries. So we have to get out of this mindset that democratic elections and transparency mean effective government and lower levels of corruption. Corruption and anti-corruption can occur in any regime. Good governance and anti-corruption are achieved independently of democracy.
SL: If Putin wins, that’s a disaster. If Putin loses in Ukraine, maybe he loses power at home, and that could be good for Russia. But there’s so much in the middle that’s not clear cut. How should we be planning for that? Should we be planning for a long-term sanctions regime that will last for years? What can our relationship with Russia be if Putin remains in power? It’s hard to imagine that these sanctions would ever get lifted. Even if they did eventually, it’s hard to imagine that the private sector going back into Russia if Putin is still in power.
RA: This raises the strategic question that I wanted to get to, which is what the world is going to look like post-Ukraine—particularly if Russia and China become an alliance exercising not just economic but military power.
FF: If the war devolves into a stalemate, that will be a Russian victory. If Russia holds onto southern Ukraine, Ukraine will be choked economically, a non-viable country. Putin will be able to say he’s accomplished his goals. More and more people, in this country but especially in Europe, will begin peeling off from the coalition, saying we need a ceasefire. Henry Kissinger made that case at Davos recently.
That is not a good outcome in my view, which is why I think that we should up the ante and continue to supply things like the multiple launch rocket systems the Ukrainians really need to beat back the Russians. Those might not be decisive weapons, but I would certainly support supplying them because Ukraine needs to drive the Russians out of the south of their country. If there are a lot of voices in the West calling for a ceasefire, then the politics get complicated because, as I’m sure Stuart knows, it’s really hard to get rid of sanctions.
Without a very clear outcome one way or the other, we’ll be in for an extended period where we’re continuing sanctions and Russia is not triumphant but also not defeated. That’s going to make the world quite messy.
SL: Let’s assume that Russia’s not definitively defeated, so we don’t lift sanctions. But Russia continues to try to cooperate with China. This plays into the dynamic we were talking about earlier, where countries want to set up a way to operate outside of U.S. coercion. If I were in the U.S. government now, I would be trying to make sure that that kind of alternative financial mechanism doesn’t become broader than a China-Russia channel. We’re not going to be able to stop China and Russia from doing whatever they want together, but how do we make sure that we don’t end up with other countries joining them? I would be working hard to ensure that India and our other Asian partners are not tempted to become part of this. The risk is that the important national security benefit we have from dominating the financial system could deteriorate over time. I don’t think we can afford to be too relaxed about this threat.
RA: Stuart, you talked earlier about inflicting pain, but the pain is not just what we inflict on Russia. Russia inflicts pain on, to begin with, Europe regarding energy, and Africa and elsewhere regarding food. So which way is the pain going here?
SL: You make a good point. Russia has leverage at the moment with respect to gas in Europe, and we’ve seen they have leverage over food. This is a rough game. As appalling as it is, but given the brutality they have displayed, we can’t be surprised that they’re using food as a weapon. Let’s put it this way: We certainly are not going to be able to shame them into stopping. We have to continue to use whatever tools we have to counter them.
RA: Speaking of food, I’m reminded of Thomas Friedman’s remark of twenty-five years ago, which now seems comic, that countries that could support a chain of McDonald’s wouldn’t go to war with each other. McDonald’s has now pulled out of Russia. But it seems to me that Russia holds the cards, not McDonald’s. That is, we care more about Russia supplying food and oil than Russia cares about us supplying McDonald’s.
SL: Western businesses’ abandonment of Russia is going to be painful and not easily reversible. A lot of very big companies that are leaving won’t be returning anytime soon, even if the Russians wanted them to. And that’s going to have long-term implications for Russia, even post Putin. I think that he’s really inflicted damage on his society there.
Even if the Ukrainians decided they wanted to sign a treaty or an armistice with Russia, and we lifted sanctions, the private sector’s not going to be comfortable doing business with Putin’s regime. We could end up in the same situation we had with Iran after the Joint Comprehensive Plan of Action, which was somewhat comical to me. We entered into the Iran deal and we lifted sanctions on hundreds of Iranian entities. But Western banks said they would not be doing business again with entities that had been sanctioned ten minutes earlier for terrorism and proliferation. Then we had John Kerry flying to Europe to try to talk European banks into doing business with Iran, and of course he didn’t persuade anyone. I don’t see how the private sector is going to return to doing business with Putin in the future.
RA: On the other hand, we have corporations like Google and Apple and Disney kowtowing to Chinese demands. Could something like that evolve with Russia?
FF: It’s hard to see. China has such a broad, diversified, big economy. The Western interest in Russia, apart from the energy sector, is pretty minimal. There’s only one Russian consumer product that I purchase regularly. That’s vacuum tubes, because in high end audio, some of the best amplifiers are still tube amplifiers, and Russia is one of the few countries that still manufacture vacuum tubes. However, that’s not a large part of the global economy.
RA: Still, Russia does account for 20 percent of nickel and 20 percent of agricultural products. It’s a bigger player than we imagine when thinking of it as having an economy the size of Spain. In terms of purchasing power parity, Russia is actually more like Germany than Spain.
SL: For big Western companies, I think Frank is right that they have a strategic need to access the Chinese market if they want to continue to grow. Very few of them depend on the Russian market. There may be some natural resources that we need from Russia that we’d have to work through, but for these big multinationals, China’s a more important market. And China has much more leverage over these companies than Russia does.
This conversation took place in the summer of 2022, and references to world events will reflect this timeframe.
Francis Fukuyama, chairman of the editorial board of American Purpose, is Olivier Nomellini Senior Fellow and director of the Ford Dorsey Master’s in International Policy program at Stanford University’s Freeman Spogli Institute for International Studies. His latest book is Liberalism and Its Discontents (2022).
Robert Asahina, an editorial board member of American Purpose, has been editor-in-chief of Broadway Books and vice president of Simon & Schuster. He is author of Just Americans: How Japanese Americans Won a War at Home and Abroad, one of the Washington Post’s best nonfiction books of 2006.
Stuart Levey was most recently CEO of the Diem Association. He previously served as Under Secretary for Terrorism and Financial Intelligence at the U.S. Treasury Department in the George W. Bush and Obama administrations.
Image: Flickr: Ganesh.Sundaresan
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