Markets brush aside ‘first tranche’ of Russia sanctions

US President Joe Biden’s debut set of sanctions on Russia for its actions over disputed Ukrainian territory hit markets with a whimper and were quickly criticised as limited in scope. 

Instead of a sweeping package that crippled top Russian banks, cut its financial transactions off from the global economy or personally singled out President Vladimir Putin, the US and its allies settled on a modest “first tranche” of penalties. Markets responded with a shrug.

The sanctions targeted a pair of Russian banks, VEB.RF and Promsvyazbank as well as three members of Russia’s elite with close ties to the Kremlin. The penalties also sought to freeze future purchases of Russian sovereign debt. 

Yet the sanctions hardly amounted to the precedent-shattering, economy-crippling measures the US and its partners long telegraphed if Russian troops were to roll across the border. 

White House officials spent Tuesday afternoon trying to defend the measured approach, as questions swirled whether their response would be enough to deter the Kremlin from mounting a bigger assault. Moscow has denied it plans to invade Ukraine and Putin has said he does not plan to send forces — he has called them “peacekeepers” — into the breakaway areas of eastern Ukraine, though the treaties he signed with the separatist leaders allow him to do so and build Russian bases.

Putin has said that the crisis could be averted if Ukraine accepted demands that included recognising Russian sovereignty over Crimea and renouncing its bid to join Nato. Ukraine on Wednesday moved towards declaring a nationwide state of emergency.

US equity futures and Asian shares rose, suggesting investors also see the initial sanctions as limited. Demand for traditional havens such as gold also eased. Brent crude, which came close to $100 per barrel a day earlier partly on worries about potential disruption to Russian supplies, was steady at about $97 a barrel.

The most consequential move came from Germany, which announced it was halting certification of the Nord Stream 2 pipeline and threw into jeopardy the $11bn project that would have solidified Russia’s grip on Europe’s energy sector. US secretary of state Antony Blinken announced that a summit this week with Russian foreign minister Sergei Lavrov is off.

Geopolitical peril

“This was the beginning of an invasion, and this is the beginning of our response,” Daleep Singh, the deputy national security adviser for international economics told reporters in Washington.

For Biden, the approach carries geopolitical danger.

Putin has long preyed on disunity and disorganisation in the West as he pursued land grabs closer to home. Under closer inspection these Western measures might not appear as muscular as they seem at first glance. 

One of the banks targeted by the US had been under restrictions since 2014, and the US already had limited prohibitions on Russian sovereign debt in place since 2019. Stocks in Europe recouped losses as investors learnt the details of the penalties, while crude oil futures and the rouble erased declines.

Brian O’Toole, a senior fellow at the Atlantic Council who previously worked in the US treasury department’s sanctions unit, called Biden’s sanctions “incremental”. 

“We must wait to see if the US will impose the impact they’ve promised for further aggression and how that is defined,” he said. “I fear at the moment that Putin may not think the West has the stomach to follow through.”

Bipartisan criticism

Biden is also facing intensifying criticism from hawkish legislators on both sides of the aisle. Republicans who encouraged him to impose sanctions before any attack by Putin spent Tuesday criticising his actions as ineffectual half-measures, with senator Lindsey Graham calling the developments “the 1930s all over again”.

But the South Carolina Republican was not the only one to raise the spectre of World War 2-era appeasement. Allies such as senator Bob Menendez, the New Jersey Democrat who chairs the foreign relations committee, said the US should levy the “overwhelming amount” of sanctions now to deter further aggression by Russia.

“I don’t know what we need to wait for,” Menendez said in an interview with CNN. “What we can’t have here is another Munich moment,” a reference to a 1938 agreement that allowed Nazi Germany to seize part of Czechoslovakia.

The response leaves Biden vulnerable to criticism that the White House has once again overpromised and underdelivered on the world stage. Earlier in February, his aides publicly insisted they would immediately impose penalties inflicting significant costs on the Russian economy.

“We would not adopt the traditional escalatory ladder that we’ve used in the past, where we begin with targeted sanctions on government officials, move on to state-owned entities and then the strategic sector,” White House aide Peter Harrell told a sanctions conference on February 2. “Instead, we expect to adopt a ‘start high stay high’ approach.”

Yet the package unveiled on Tuesday appeared more like the product of a rushed effort after Putin recognised breakaway territories in Ukraine’s Donbas region while avoiding, at least for now, a full-scale invasion of his neighbour.

The move came as the US was also evaluating an 11th-hour gambit by French President Emmanuel Macron to broker a summit between Biden and Putin to avert war. While both the Kremlin and White House signalled they could theoretically see such a conversation happening, the prospect collapsed as quickly as it emerged. The White House formally ruled out the possibility on Tuesday evening. 

Both developments complicated US intelligence that officials say show the Russians readying a wide-scale assault that could include the seizure of the Ukrainian capital of Kyiv. US officials were so convinced that a broad incursion could be in the works that diplomatic staffers retreated across the border to Poland on Monday.

The bigger question remains whether sanctions are the way to bring someone like Putin, who considers the collapse of the Soviet Union “the greatest geopolitical catastrophe of the century”, to back down. In the 1980s Helmut Kohl’s foreign minister, Hans-Dietrich Genscher, was firmly against economic sanctions on the Soviet Union. He said they did not work and could do more harm to the West. 

Privately, administration officials said they continue to believe Putin is readying such an offensive and those expecting a more aggressive response sanctions package might not have long to wait.

One person familiar with the administration’s thinking said the US still expects further Russian moves in the next 24-48 hours, which would trigger additional sanctions. In his address announcing the penalties, Biden said it appeared that Putin was laying the groundwork for Russian forces to move into areas now administered by the Ukrainian government — an action a second person familiar with the administration’s planning said would prompt the president to unleash additional penalties.

Officials also argued that critics are misconstruing how sanctions worked, saying the impact will grow gradually but significantly over time.

Still, the White House publicly insisted that the package it presented was already significant, implemented faster and more aggressively than the response after Putin annexed Crimea during the Obama administration.

“President Biden has rallied the world, rallied Europe, to stand up to the actions of President Putin,” White House press secretary Jen Psaki said on Tuesday.

Singh took the unusual step of outlining some of the specific individual measures in the chute were Russia to move further, saying the administration is “ready to press a button to take action on the two largest Russian financial institutions, which collectively hold almost $750bn in assets”. 

Measures being prepared by the White House include actions affecting Sberbank and VTB Bank if an invasion proceeds, as well as export control measures in co-ordination with a large number of allies and partners.

“Make no mistake, this is only the sharp edge of the pain we can inflict,” Singh said.

Bloomberg News

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