In the first few months following Russian President Vladimir Putin’s invasion of Ukraine, we documented how the voluntary exits of over 1,000+ global companies from Russia (that we helped catalyze), paired with government sanctions such as the G7 oil price cap (that we helped the U.S. Treasury design), had a crippling initial impact on the Russian economy–building on our research on how economic pressure campaigns are at their most effective when the public and private sectors are working together.
But as Putin’s invasion drags on past the two-year mark, although not a single company has returned to Russia, we are increasingly concerned some of the newly announced, well-intended, and widely trumpeted economic sanctions on Russia may be insufficient. As the Kremlin finds creative ways to evade government sanctions, marginal improvements in the Russian economy have led some critics to wrongly declare that all economic sanctions are ineffectual and useless.
Nothing could be further from the truth. Some sanctions are already having a genuinely debilitating impact on Russian productivity, as we’ve documented before, and have led Putin to cannibalize the Russian economy to fuel his war machine.
However, the targets of the new sanctions do not complete the job. For example, the U.K. slapping sanctions on Russian jailors themselves trapped in Siberian prison jobs are not likely to matter much to Putin’s missile launchers or to Putin’s coffers. Similarly, keeping the yachts of sidelined oligarchs doesn’t affect Russian naval destroyers, adding only massively costly maintenance fees to maintaining the strangely unsold seized properties.
Much public attention has rightly been focused on wavering House GOP support for military aid for Ukraine, but the economic pressure campaign is also crucial leverage against Putin, and we have to step up our game to prevent pressure on the Kremlin’s war effort from lapsing.
Here are the three crucial steps Western policymakers should take to fortify economic sanctions on Russia–and why these measures will not backfire economically on the West.
Imposing new sanctions on Russian metals and commodity exports and taking advantage of low prices and replacement supply
Some Western governments have long been reluctant to impose tougher sanctions on Russian commodity exports in particular, fearful of heightening inflationary pressures or setting off supply crises, even though raw commodity exports are equivalent to ~80% of Russia’s federal budget.
Many may be surprised to know that inexplicably, entire Russian export sectors remain largely untouched by sanctions, including metals (Russia’s second largest export behind energy, and equivalent to over $60 billion annually), as well as lumber and plywood.
However, commodity markets are much more resilient than many think. As we’ve carefully documented in our new analysis here, global commodity markets have already largely rebounded from the loss of Russian–and even Ukrainian–supply across several categories.
Stronger sanctions enforcement helps, not hurts, the global economy. For example, although Russia used to supply half of Europe’s natural gas, not only did Putin’s failed gas gambit in 2022 result in the full replacement of Russian piped gas with primarily U.S. liquefied natural gas (LNG), but incredibly, European TTF natural gas prices are close to their pandemic-era lows despite the virtually complete loss of Russian piped gas supplies.
Similarly, markets have been able to stomach the tragic loss of supply from Ukraine’s battered agricultural sector just fine, as we show in our analysis, with prices across staple crops such as sunflower oil, barley, corn, potatoes, and wheat close to pandemic-era lows despite the loss of 40%-50% of Ukrainian agricultural exports by some estimates.
The evidence clearly suggests that the rampant fears that sanctions on Russian metals will destabilize the global economy are unfounded. As we show carefully in our new analysis, with global prices across key Russian metals export categories such as aluminum, nickel, copper, zinc, and cobalt currently significantly lower than pre-war levels, Russia needs to export its metals much more desperately than the world needs to purchase them, since Russian metals supply is relatively insignificant for global markets (no more than 6% of global supply in any of the above categories) but metals revenues are hugely consequential for funding Putin’s war machine.
Russia is now resorting to outright market manipulation. Take aluminum manipulation as one example. Even though Russian aluminum amounts to less than 6% of global supply, Russian aluminum now constitutes a disproportionate 90% of the London Metals Exchange backlog, because Russia is desperately dumping unwanted, below-market-rate aluminum, boxing out other suppliers, while Russia collects windfalls of over ~$10 billion annually even with aluminum prices at depressed 2020 levels.
No wonder European and American aluminum suppliers are desperately collectively appealing for relief against Russian aluminum dumping. Clearly, sanctions on Russian aluminum would benefit rather than hurt Western economies. And even if Chinese purchasers refused to participate in Western sanctions, China could still leverage Western sanctions to demand even lower prices on Russian aluminum, similar to how India and China are leveraging the Russian oil price caps to drive a better deal on Russian oil.
Tightening enforcement of existing sanctions and cracking down on evasion
We have been vocal in our frustration that sanctions enforcement has been sluggish at best, if not downright inept, with under-resourced and blatantly outmatched mid-level bureaucrats scratching their heads while Putin does pirouettes around them. As Anne Applebaum aptly said, “If we were serious about winning this war, we’d have thousands of people working on sanctions, not a few guys at the Treasury Department.”
Take, for example, the novel Russian oil price caps imposed by the G7 coalition, which worked brilliantly for most of the first year of its existence, cutting into Putin’s oil profits by hundreds of millions while bringing global oil prices down 30%.
As Putin developed a shadow fleet of ships to evade the price cap, enforcement slipped to the point that even G7 shippers and insurers became increasingly complicit, with at least half of all Russian oil shipments evading the price cap, according to research from top economists at the Kyiv School of Economics. Even Treasury Secretary Janet Yellen has readily admitted to the need for greater enforcement amidst some “reduction in the efficacy” of the price cap.
Putin is also running circles around Western export controls designed to limit Russia’s access to advanced technology, with pervasive smuggling and “parallel import” schemes. One Central Asian Ambassador privately admitted to me that advanced semiconductors are illicitly pouring into Russia from his country, with barely any resistance or even detection from any government officials. This was confirmed in my private conversations with many CEOs of leading American aviation and airline companies, who have been complaining to me for many months that Russia is swimming in smuggled aerospace parts. They shared with me proprietary Russian aircraft tracking data showing that Aeroflot and S7 inexplicably increased their number of in-service Boeing and Airbus aircraft significantly, even though both companies cut off all sales, service, and support to Russia and took steps to ensure that end users are not Russian.
It is not just military-grade technology being smuggled into Russia. Ludicrously, just last week, Russians became some of the first customers globally to access the new, highly anticipated Apple Vision Pro goggles when they suddenly started popping up for sale in Russia, even before Apple launched the product anywhere else in Europe. Smugglers readily admitted that getting the goggles into Russia was all too easy–they simply flew to the U.S., bought caseloads of the goggles, and hopped on a plane back to Russia, much to the frustration of Apple and legions of disappointed customers globally. Evading U.S. sanctions cannot be this easy, and this level of enforcement–or lack thereof–makes a mockery of the entire system.
The 1,000+ businesses that pulled out of Russia deserve better than having the enforcement arms of their own governments turn a blind eye to unfettered smuggling of their products and illegal rip-offs of their intellectual property, and allied governments need to re-prioritize sanctions enforcement and dedicate more intelligence community and law enforcement resources toward tracking evaders.
We do not intend to indict the Biden Administration writ large, or any allied government for that matter. Even within the same government, the left and right hands are often not working in synchrony. We admire the sanctions leadership shown by many on the policy side of the Treasury Department, not to mention the brilliant National Security Advisor Jake Sullivan, the National Security Council staff, and the State Department under Secretary Antony Blinken–but at the same time, there are occasionally errant, risk-averse voices who fear rocking the boat. Incredibly, when we were advocating for companies to exit Russia in the earliest days of the invasion, one U.S. official called for companies to stop leaving, confusing business leaders not to mention administration colleagues. When we confronted this official, to their credit, they promptly reversed course.
Stop dithering over the seizure of Russia’s $300 billion in foreign exchange reserves
When we first started asking top officials in the Treasury Department nearly two years ago, why not seize Russia’s $300 billion in foreign exchange reserves, the excuse we heard the most often was that such a measure would run contrary to international law.
However, after Harvard Professor Laurence Tribe published a compelling 199-page legal treatise on why international law authorizes the US to seize these assets, which quickly garnered widespread support from top international law scholars, the next excuse up was that such a seizure would undermine the reserve currency status of the dollar. These concerns, in turn, were rectified, with hundreds of leading business, financial, and government voices offering their public support and reassurance that such a move would hardly undermine the dollar, especially given there is no functional alternative reserve currency ready to replace the dollar.
Running out of excuses, the Biden Administration finally signaled last fall that they hoped to have a major announcement on asset seizures by the two-year anniversary of the war, but Feb. 24 came and went with nary a mention, amidst stalled-out international negotiations and apparent pushback from some European capitals.
How much dithering is finally enough? Ukraine desperately needs these funds: Some estimates are that the costs of Ukrainian reconstruction will easily run over $500 billion, not to mention the continued heavy costs of resisting Russian aggression. It’s impossible to see how Ukraine would possibly fund its massive reconstruction burden without a reparation payment, with the cost and risks prohibitive to both the private sector and Western governments.
Doing nothing is the most dangerous path of all
Ultimately, just as with tightening enforcement of existing sanctions as well as the imposition of much-needed new sanctions taking direct aim at Russia’s unencumbered revenue streams, the seizure of Russia’s $300 billion in reserve assets comes down to whether our political leaders have the courage and willpower to overcome their unfounded economic and political fears and revitalize the economic pressure campaign against Putin.
We understand why over the last two years, allied governments have taken an increasingly cautious stance to economic sanctions, and recognize they very likely will continue to do so. But they must recognize that choosing passivity–the ostensibly safe choice–is the most dangerous of all.
Economic pressure alone cannot stop Putin–but it’s a vital component in the fight to end Putin’s invasion of Ukraine, alongside the military and diplomatic components. Falling back to largely symbolic and toothless sanctions on Siberian prison wardens risks placing the entire fight against Putin at risk.
Already, the allies and Russia are putting massively disproportionate economic resources into the fight. Although the allied countries represent economies 25x the size of Russia’s economy, the U.S. and EU are spending 0.3% and 0.4%, respectively, of their government budgets on supporting Ukraine, across military and humanitarian aid. Meanwhile, Russia is spending 40% of its budget attacking Ukraine, equivalent to 10% of its GDP.
When faced with a similar crossroads, with no safe choice, over 1,000+ top CEOs of global multinational businesses chose to boldly exit Russia practically overnight, in the unprecedented, largest business exodus in history. The stock market ended up rewarding those who left immediately while punishing those who dithered. We hope that governments may rediscover the same decisive courage and step up the economic pressure on Putin before the allied nations lose our economic advantage through passivity.
As Greek philosopher Plutarch once advised, “Courage stands halfway between cowardice and rashness, one of which is a lack, the other an excess of courage.” The halfway moves on sanctions by global policymakers do not yet match the courage of the business leaders who went all the way.
Jeffrey Sonnenfeld is the Lester Crown Professor in Management Practice and Founder and President of the Yale Chief Executive Leadership Institute. In 2023, he was named “Management Professor of the Year” by Poets & Quants magazine.
Steven Tian is the director of research at the Yale Chief Executive Leadership Institute and a former quantitative investment analyst with the Rockefeller Family Office.
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