It’s not simply that sanctioning Russia will be expensive for the West, but rather it is that no one knows how expensive it will be.
FORTUNE — With exquisite predictability, the U.S. response to Russia’s stealth invasion of Ukraine has become a partisan issue in Washington. On Monday, the Obama administration levied a third round of sanctions intended to punish Russia and deter further Russian aggression in Ukraine.
The effects in Moscow remains unclear, but Senate Republicans seemed quick to question why the U.S. isn’t being tougher on Russia, even while sanctions targeted another seven individuals and 17 entities whose assets in the U.S. were ordered frozen. “Without being overly partisan,” Senate Majority Leader Mitch McConnell (R-Ky.) said, “I am deeply disappointed with the tepid response to Russian aggression.”
McConnell and others may have hoped for more, but sanctions are incredibly complicated, and America’s response is more strategic than critics might think.
The latest sanctions targets two of Putin’s closest cronies who are the heads of two of the crown jewels of the Russian economy: Igor Sechin, who’s the president and chairman of the management board of Rosneft, Russia’s leading petroleum company; and Sergey Chemezov, the director general of Rostec, a large industrial conglomerate that includes weapons, cars, and metals. U.S. officials describe the sanctions as a slowly tightening noose around the Russian leadership, including President Vladimir Putin. They believe they are conducting a calibrated attack against Putin’s inner circle, allowing de-escalation if Russia decides to back down, while keeping some economic weapons in reserve should Russia take further escalatory steps, such as moving military forces across the Ukrainian border. This calibration also ensures that U.S. and European efforts remain tightly coordinated, which is necessary if sanctions against Russia are to be effective.
Going forward, the bigger issue might be that no one really knows what the economic effects of broader sanctions will be – not just on Russia, but also on the U.S. and global economy. Those factors are likely what Obama and German Chancellor Angela Merkel are weighing, as the two leaders on Friday warned that Russia would face additional costs if Moscow disrupts this month’s presidential elections in Ukraine.
And as they continue discussing how to form the next round of sanctions, it’s worth understanding why careful calibration is appropriate. In recent years, sanctions have become America’s weapon of first resort. They have been used against dozens of countries, from Burma to the Central African Republic to Iran. In the case of Iran, in particular, sanctions have been viewed as enormously effective, having nearly crippled the Iranian economy and forced Iran to the negotiating table over its nuclear program at relatively little cost to the global economy.
Senate Republicans may think that if broader sanctions worked in Iran, they could work in Russia. However, administration officials understand that Iran’s precedent tells us very little about Russia.
True, U.S. officials contend that U.S. actions are already having a profound effect on Russia’s economy. Markets have priced in the possibility of further sanctions, and capital of over $60 billion has exited Russia so far this year, exceeding outflows from last year. This has contributed to sharp declines in the Russian stock market and Russia’s currency, the ruble. On April 25, ratings agency Standard & Poor’s downgraded Russia’s credit rating to BBB-, just one step above junk status. Both Putin and Russian Prime Minister Dmitri Medvedev have admitted that the sanctions are having an effect, while the Russian government has conceded that its economy will see little if any growth this year.
But the issue is not the effect of sanctions on Russia — it is their potential effects on everyone else. The $2 trillion Russian economy is bigger than the size of all other economies the U.S. has ever sanctioned combined. The Russian economy, particularly its big banks, are deeply interwoven with the global economy and international financial system. Russian commercial entities have tentacles everywhere from music venues in Finland to sports teams in England to investment funds in Switzerland, many of which are hard to map in advance.
For this reason, it is not simply that broader sanctions against Russia will be expensive for the West; it is that no one knows how expensive they will be. And the dirty little secret of sanctions is that once they are deployed, they are very hard to undo as market actors will be reluctant to re-engage with the Russian economy for fear of legal liability.
Broader sanctions against Russia would thus be a step into unknown territory, akin to allowing the Lehman Brother investment bank to fail in 2008. Such a risky step might be necessary to defend the global order against Russian lawlessness, but it is not to be taken lightly.
Jeremy Shapiro is a fellow in the
program at the Brookings Institution. Prior to rejoining Brookings, he was a member of the U.S. State Department’s policy planning staff
and Senior Advisor to the Assistant Secretary of State for European and Eurasian Affairs.