What to know about economic sanctions and how they will affect Russia

In response to Russian President Vladimir Putin’s decision to recognize the separatist-controlled regions of Donetsk and Luhansk in Ukraine as “independent” states, President Joe Biden announced sanctions against Russia in a bid to deter it from launching a full-scale invasion into Ukraine.

Biden on Tuesday called Putin’s decision “the start of a Russian invasion of Ukraine” and warned that the sanctions could get tougher.

“As Russia considers its next move, we have also prepared our next move,” Biden said. “Russia will pay an even higher price if it continues its aggression, including additional sanctions.”

Russian Foreign Minister Sergei Lavrov told Russian state television that Russia was already “used to” sanctions and believed more sanctions would be imposed on Moscow no matter what it did.

“Which our [Western] colleagues try to blame Russia for the failure of the Minsk agreements, we also understand,” he said, referring to a truce between Ukraine and the separatists signed in 2014. “Our European colleagues , Americans, British won’t stop and won’t calm down until they have exhausted their possibilities for the so-called punishment of Russia.”

What are economic sanctions?

Economic sanctions are defined by the Council on Foreign Relations as the withdrawal from customary trade and financial relations for foreign policy and security purposes. Sanctions can be global, which prohibit economic activity with an entire country, or targeted, which block transactions by and with specific individuals, companies or groups.

These restrictions are imposed on individuals or entities and prevent them from doing business with the country imposing these sanctions. Sanctions put in place by the US government cut off an individual or entities from the US financial system, meaning they can no longer do business in the US and all of their assets under US jurisdiction are frozen.

Americans and American companies are also prohibited from doing business with these institutions unless authorized to do so by the Office of Foreign Assets Control of the United States Department of the Treasury.

Sanctions are intended to prevent the person or entity from performing basic functions in the international financial system. They are used by the US government based on foreign policy and national security objectives.

What sanctions has the United States imposed on Russia?

Sanctions were imposed on two Russian state financial institutions and five Kremlin-linked elites.

The financial institutions targeted are the Bank for Development and Foreign Economic Affairs, known as Vnesheconombank (VEB), and Promsvyazbank Public Joint Stock Company (PSB), as well as 42 of their subsidiaries.

According to the US Treasury Department, VEB is crucial for Russia’s ability to raise funds, and PSB is essential for Russia’s defense sector. The two institutions and their subsidiaries hold combined assets worth tens of billions of dollars.

“Today’s action limits Russia’s ability to fund defense-related contracts and raise new funds to fund its campaign against Ukraine,” the Treasury Department said in a statement Tuesday.

VEB has an asset portfolio of $53 billion, making it one of Russia’s top five financial institutions, according to the Treasury Department. Some of VEB’s sanctioned subsidiaries include banks and other financial firms, electronic component producers and a coal mining group in Russia and three other countries.

It is a manager of Russia’s sovereign debt, an export financier and a source of financing for investment projects with a loan portfolio of over $20 billion.

VEB funds Russia’s national economic development, including large-scale projects to develop national infrastructure and other industries critical to Russia’s revenue generation.

PSB, Russia’s eighth largest bank, has been appointed by the government to fund the Russian Defense Ministry and the defense sector, according to the US Treasury Department. It services almost 70% of Russia’s defense contracts and provides banking and personal finance services to Russian military personnel.

Seventeen of PSB’s subsidiaries were also sanctioned, including financial, technology and real estate entities.

Influential Russians and their family members within Putin’s inner circle and suspected of participating in the Russian regime’s ‘kleptocracy’ – including the chairman and CEO of PSB – have also been sanctioned, the Treasury Department said. .

“Today’s actions, taken in coordination with our partners and allies, begin the process of dismantling the Kremlin’s financial network and its ability to fund destabilizing activities in Ukraine and around the world,” the secretary said. Treasure Janet Yellen.

“We continue to monitor Russia’s actions and if it further invades Ukraine, the United States will quickly impose sweeping economic sanctions that will have a severe and lasting impact on the Russian economy,” she said.

Will the sanctions have an effect?

The penalties put in place were not the most severe option available. They targeted institutions specific to fundraising and the Russian defense sector, instead of institutions used by ordinary Russians.

“Today’s measures will have a measured impact on the Russian financial system. VEB is an important bank, but it is not the bank that banks Russians on a daily basis. It is a bit more niche,” said said Julia Friedlander, a former Treasury Department official who worked on sanctions policy.

She said not immediately putting the harshest penalties in place was used as a tactic.

“The idea is that you can’t blow up all your options at once,” said Friedlander, who is now a member of the Atlantic Council. “If you blow all your fire now, then what makes Russia hold back?”

The sanctions that could have the most impact would target Russia’s biggest banks – such as state-owned banks that cover more than half of Russia’s financial system – and the energy sector, Maria Shagina, a sanctions expert specializing in Russia and Eastern Europe, told ABC News.

Sanctions against big banks could impact ordinary Russians, Shagina said. Sanctions on current oil and gas production could also have an impact, but the United States and Europe could also see price spikes. If future production is sanctioned, it would have less impact, Shagina said.

White House officials have said they are considering targeting Russia’s biggest banks. Experts told ABC News that hitting these major state-owned banks — Sberbank, VTB, Gazprombank and Rosselkhozbank — would mark a major escalation in the US response.

“There are a lot more banks playing a much bigger role in the economy,” said Andrew Lohsen, a former officer with the Organization for Security and Cooperation in Europe (OSCE) special monitoring mission. in Ukraine.

Russia is preparing for sanctions, he said. Sberbank reportedly tested its ability to survive without access to Western software. It also has hundreds of billions in foreign currency reserves and a national wealth fund.

“The Russian economy has struggled to protect itself from sanctions since 2014,” Lohsen, a researcher at the Center for Strategic and International Studies, told ABC News. “But at the end of the day, I fear that Russia will force its citizens to tighten their belts and continue with this empire-building project that it has set itself in Ukraine.”

He wondered if the sanctions put in place would be enough to deter Russia.

“Can anything deter Putin,” he said, “unless we fight back?”

ABC News’ Ben Gittleson contributed to this report.

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