Pro-Russian demonstrators in Eastern Ukraine are sponsored by the Kremlin to create chaos as a pretext for Russia's military intervention. With at least 40,000 Russian troops massed on the border threatening to invade the Donetsk, Kharkiv and Luhansk regions in Ukraine, President Barack Obama has warned of "consequences." The Obama administration can deter Russia's aggression by articulating specific sanctions it could impose on Russia's banking, energy, and mining sectors.
As opposed to pinprick "smart sanctions" after Russia seized Crimea, here are some measures that would really require Russia to "pay a price."
- Impose sanctions on Russia's central bank, Russian commercial banks, and financial services, thereby denying Russia access to the global dollar-denominated economy.
- Penalize foreign banks that do business with Russia, blocking them from the U.S. banking system.
- Freeze Russian assets in U.S. and European accounts. This would cause rating agencies to downgrade Russia's creditworthiness, precipitate capital flight from Russian companies, and devalue Russia's stock market. Oligarchs in Putin's inner circle would be greatly affected.
- Ban the export of luxury goods from Russia, such as furs and caviar, and the export of luxury goods to Russia, such as high-end automobiles and "haute couture."
- Prevent credit card companies such as Visa and MasterCard from servicing clients in Russia. Visa and MasterCard have already stopped processing payments to Rossiya Bank, which was sanctioned in March, as well as SMP bank.
- Black-list Russian banks in Crimea such as Genbank, which opened a branch last week, as well Sberbank and VTB, which are considering branches in Crimea.
- Require U.S. fund managers with investments in Russia to fully disclose holdings and warn investors of risk.
- Suspend Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which manages information flow on financial transactions. SWIFT conveys 15 million transaction messages daily between 9,000 financial institutions in 209 countries and territories.
Sanctions and export controls could also target commodities and the energy sector. Restrictions could limit the transfer of technology, as well as investments in energy exploration and infrastructure. In addition, measures could be taken to prevent U.S. and European insurers from issuing marine-cargo policies for commodities originating in Russia.
Critics argue that sanctions would damage to the U.S. economy, but Russia has limited trade ties with the United States. Europe, however, has a lot to lose. The EU accounts for about three-quarters of foreign direct investment in Russia. Europe's annual trade turnover with Russia is nearly $400 billion.
The United States cannot act alone. To be effective, sanctions must be multilateral. The Obama administration should engage EU Member States in developing a coordinated sanctions strategy. Common ground will be hard to find not only between the U.S. and EU, but between Europeans. The EU's 28 Member States have varying exposure to Russia's economy. For example, Germany and the Baltics states are largely dependent on natural gas supplies from Russia; France will be reluctant to give up its arms sales. Difficulties achieving a unified European view will exacerbate the challenge of trans-Atlantic cooperation.
Sanctions should not be seen as an instrument to punish Russia. However, a credible threat of sanctions can encourage Russia to adjust its pugilistic approach. Russia should withdraw its forces from the Ukraine border and stop stirring the Russian minority in Eastern Ukraine. Moderation will create conditions for progress on devolving power to the regions, as well as measures to protect and promote minority rights.
Diplomacy is far preferable to confrontation that could embroil the region and involve NATO members. Articulating specific "consequences" can help advance the goal of conflict prevention.
(David L. Phillips is Director of the Program on Peace-Building and Rights at Columbia University's Institute for the Study of Human Rights. He served as a senior adviser and foreign affairs expert to the U.S. State Department during the Clinton, Bush, and Obama administrations).