Corporate Meeting

Russia’s Economy in Freefall

Wednesday, March 9, 2022
Ilya Naymushin/Reuters

Adjunct Senior Fellow for International and National Security Law, Council on Foreign Relations; Partner, Arnold & Porter LLP

Professor of International Affairs, The New School; CFR Member

Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations; @scmallaby


Chief Executive Officer, MCC Productions

Panelists discuss the breadth and depth of sanctions and divestment, the current state of the Russian economy, and whether any of these mechanisms will affect Russian President Vladimir Putin’s calculus in his war on Ukraine.

CARUSO-CABRERA: Hi, everyone. Thanks so much for joining us at this CFR panel on the state of the Russian economy, “Russia’s Economy in Freefall,” as a result of what we’ve seen in terms of sanctions here in the United States. I’m a longtime journalist, former chief international correspondent for CNBC.

And joining us, you can see on the screen, is John Bellinger. He’s the—with the Council on Foreign Relations, a partner at Arnold & Porter as well, and a senior fellow for international and national security law.

Nina Khrushcheva is the professor of international affairs at The New School.

And Sabastian Mallaby, Paul Volcker Senior Fellow for International Economics, Council on Foreign Relations. And of course, many know him as well for being a longtime journalist.

Lady and gentlemen, great to be here.

John, let me start with you. Can you, for the benefit of the audience, bring us up to date? What is the current state of the sanctions, which seem to be coming day by day more and more, both officially and also the kind of voluntary withdrawal that we’re seeing from a lot of corporations around the world?

BELLINGER: Thanks, Michelle. You’re right, the sanctions both mandatory and voluntary, have been snowballing. It’s really just extraordinary. I’ve never seen anything like it in my time in government or private practice. In the last thirteen days, Europe, the U.S., and many Asian companies have imposed the most punishing and comprehensive sanctions on a country in history. These are far beyond what have been imposed over time on Iran, Iraq, and South Africa in terms of their scope and, most importantly, the number of countries participating.

Let me, just to get us started, do a quick summary of the sanctions by sector and category so we can just sort of touch on the breadth. You know, obviously most important banks and financial institutions. Days after the invasion, U.S., EU, U.K., Japan, and others prohibited any transactions with Russian central bank, which cut Russia’s central bank off from access to foreign exchange. Many billions of dollars held outside the U.S.—or, outside Russia, rather. U.S., EU, U.K. other countries placed sanctions of varying severity on a number of Russian banks, starting with Russia’s largest banks, Sberbank, prohibiting it from clearing any dollar transactions in the U.S., and then going all the way to placing VTB Bank—which is Russia’s second largest, with close ties to the Russian government—and several others on our specially designated nationals list and freezing their assets in the U.S.

The SWIFT system, although not controlled by the U.S., the U.S. and the EU have pressured the SWIFT system from cutting off seven Russian banks from interbank messaging, which essentially cuts them off from banks in much of the rest of the world. The British government is prohibiting British insurance companies from insuring Russia’s aviation and space industry. So lots of sanctions on financial institutions, banks growing daily. Of course, yesterday the really big news, Biden administration announced that all imports of Russian oil, gas and coal into the U.S. are prohibited. And the U.K. said it will ban imports of Russian oil by the end of the year. And the EU is cutting imports of Russian gas. So huge financial impact.

Next, Russian officials. U.S. has placed Putin, Lavrov, the Russian defense minister, the FSB chief, and a number of others on the U.S. SDN and other sanctions lists. The EU has sanctioned over 350 members of the—of the Russian parliament, subjecting them to a travel ban and asset freeze. I’m sure we’ll want to talk about oligarchs. The U.S. and other countries have frozen the assets of several dozen wealthy Russian oligarchs, put them on the SDN List, subjected them and their families to a travel ban. Air travel, U.S., EU, U.K., Canada, others prohibited Russian airlines from overflying or landing in their countries.

And then, significantly—and this is probably going to grow—export controls. The Commerce Department has put stringent export controls on certain technology to Russia’s aerospace, maritime and tech sectors. And then significantly, and this is extraterritorial, has prohibited exports by other countries to military users in Russia if those manufactures use U.S. technologies. As I said at the beginning, what’s really remarkable about this is this is not just the U.S., but a coordinated effort by the U.S., the EU, U.K., Canada, Australia, but Asian countries. Japan, South Korea, even Singapore. These are the first sanctions that Singapore has put on unilaterally in forty years. Even neutral Switzerland has joined the EU sanctions.

And of course, these are just the mandatory government sanctions. As you said, Michelle, you know, one of the biggest impacts has been the voluntary withdrawal by U.S. and Western business in just under two weeks. You know, major oil companies—BP, which is Russia’s largest foreign investor, Shell, Exxon—pulling out. Visa, MasterCard, American Express, PayPal all cancelling cards and ceasing transactions. Microsoft, Apple ceasing sales of computers and phones. General Motors, Volkswagen, Volvo stopping deliveries. Yesterday, McDonald’s, Starbucks, Coke, Pepsi, Levi’s. Ikea stores are closing. No more Legos for Russian children. Sovereign wealth funds divesting. U.S. public pension plans here in the United States have started pressing U.S. companies to pull out of Russia. And then most sports federations, cultural organizations suspending Russian teams. Last week—this one amused me—the International Cat Federation even banned Russian cats from participating in international competitions.

So more sanctions, suspensions, closures, divestments are being announced every day. Secretary of Commerce Raimondo yesterday said that she would consider sanctions on the Chinese if they did an end-run around. So a lot happening just in the last two weeks. Massive cut off of Russia, it’s banks and its people, from the rest of the world.

CARUSO-CABRERA: Sebastian, let’s do a deeper dive, particularly into the part about the central bank asset freezes, which can be so crippling immediately at the national level. What do you think about the level that we’ve seen? What does it mean in terms of precedent? The likely reaction from the Russians and the Chinese as well, as John just highlighted the issues there? And, you know, what more can you tell us about this?

MALLABY: When I think of all the sanctions, the ones that sort of are both, you know, the combination of power and speed, one would have to pick out the financial sanctions because they have this ability to immediately cause a reaction in the economy kind of across it. Anyone who remembers the freezing up of payments that people feared in ’08 in the U.S., and you get a sense of what happens when you just sort of cause a heart attack in the middle of a financial system.

And so going into the invasion of Ukraine, the sort of standard line was to think of Russia as fortress Russia. That’s how outsiders thoughts about it, and that’s how insiders thought about it, because the central bank had deliberately gone to the trouble of forgoing national consumption to build up savings in the form of, you know, about $630 billion worth of central bank foreign exchange reserves, which were sort of a rainy day fund such that if the—you know, if oil revenues were cut off, for example, Russia could still afford to pay for imports very a very extended period.

So this was the sort of fortress Russia financial strategy that they had. Just like anybody might save for a rainy day, they had done that in huge size. And all of a sudden, it’s as if—you know, imagine you’re a household, and you’ve got your rainy-day savings. And then somebody says, you know, we’ve stolen the key to the safe and you can’t spend them. And that’s kind of what happened to Russia. They had these enormous financial reserves, and they couldn’t spend them. More than 600 billion (dollars) worth.

Now, there’s a slight exception perhaps with regard to the reserves that they built up in renminbi because China may allow them to use that portion of the reserves to import stuff from China. But it’s not going to be possible for them to use those reserves, which I think comes to about 90 billion of the 630 (billion) are in renminbi assets. And then there’s a swap line, which is effectively permission to borrow from China to the tune of 150 billion. So let’s call that around 240 billion of renminbi spending capacity that the Russians do have. But, you know, they can’t buy everything that they want in the world from China. And they can’t use that renminbi to switch into dollars and go off and buy other stuff, because if they did that it’s pretty clear that the U.S. would start sanctioning the Chinese banks that helped them.

And so by virtue of the pervasive nature of Western financial system that, you know, even if you’re a big Russian bank, you know, you’ve had exposure to the U.S. dollar system, the U.S. financial system. And if you’re any counterparty of Russia, including a big Chinese bank, you’re going to have exposure to the U.S. You’re not going to get that—want to have that frozen, your access to the U.S. payment system, because that essentially cripples your ability to act. So, you know, long story short, Russia’s access to foreign exchange was taken away, and therefore you had this collapse in the ruble. You’ve had lines outside ATM machines and just a sense of, you know, that this was going to be 1998 all over again when Russia went through that big financial crisis.

The effect of that is that, you know, you see people—you know, mobile Russians who have the ability to get on a flight and leave have been doing that in large numbers. A lot of skilled people are going. And so this has been highly impactful. Now, one question that people raise about this, and I want to just touch on this, is the idea that if you use the dollar and sort of the central bank channel as a weapon, it will just incentivize Russia and maybe China to pivot away from using the U.S. dollar and actually undermine the dollar status as the global reserve currency. And I think this is way overblown. The dollar’s power is kind of like English—the English language, right? It’s a super-sticky thing. You can imagine, you know, U.S. power declining and people will still be using the dollar outside the U.S. to transact with each other because there are network effects in the currency.

Once it becomes the lead currency, it’s the one that people accept, therefore it’s the one that people want to hold. And you know, an analogy, again, would be, you know, Britain declined more than a hundred years ago as a—you know, or about a hundred years ago as a leading global power. But the English language stuck. It wasn’t—you know, of course the U.S. is part of that. But I think once you entrench this sort of common operating system, it’s very hard to dislodge. A couple points on that. So, you know, the SWIFT system that John reference, which is used for international payments, has triggered an attempt by the Chinese and the Russians to build out alternative systems.

The Russian one is really nowhere. The Chinese one is a bit bigger, a sort of messaging system to facilitate financial payments. But the Chinese one really operates only within China. And if you want to transfer money from outside China into China, I think you still use the SWIFT system to a large degree. And the Chinese government has basically not been willing to allow their own version of SWIFT to grow too much, because it would threaten their control of cross-border currency flows, and they want to keep capital controls as a tool of macroeconomic policy.

And so they really haven’t—despite the fact they’ve been trying essentially since the 2008 crisis and then even more after the 2014 Crimea War, you know, there’s been a concerted effort to build up alternatives to the dollar system. But they really have not got very far. And so I think it’s going to be very tough for Chinese banks or, you know, anybody else who fears the future weight of sanctions, to pivot away from dollars and from the Western financial system. And instead of that sort of financial pivot, what you’re going to get is a kind of a real economy pivot, where the lesson that’s going to be drawn from this event is not that you should take your savings and put them out of dollars—you know, take them away from dollars or euros, because that’s just really difficult to do.

But rather, that you should sort of, you know, develop autarky within your supply chains so that on the real economy side you have your own semiconductor plant, if you can manage that, you have your own spare parts for your aircraft, you have your own spare parts for you—you know, your oil infrastructure or whatever it is. And that’s going to create around the world a sort of bloom of capital spending, a lot of duplication in resources. It will be a drag on global growth. It will uplift global inflation as enormous capex spending goes on across the system, as everybody tries to build their own national systems to make up for the fact that you can’t get away from the dollar.

CARUSO-CABRERA: Yeah, interesting. And that would be—that would be just a continuation of almost what we saw during the—during COVID, where we saw this onshoring happening here in the United States because people couldn’t—you couldn’t get supplies out of China and different parts of the world, as we saw different shutdowns.

Nina, Sebastian talked about the lines at the banks, the inflation that would happen because of, you know, a weakening ruble, the spike in interest rates that the central bank has imposed. What kind of effect are we seeing on the people?

KHRUSHCHEVA: Thank you very much. Well, I first want to say something about this economic and national autarky because Russia is trying to do this, because Russia is already claiming that now we are cut off from the world, but we are going to create our own parts and that’s how we’re going to withstand all this onslaught and essentially economic war on Russia. Putin has been talking about it, and everybody else has been talking about it. So this is—if that’s, as Sebastian says, the way of the future, Russia in fact is ahead of that trend because they are the ones that have no other choice at this point.

Another thing that was already mentioned was central bank—both of you actually mentioned central bank. And the latest news is that when there was a meeting with economic—an economic meeting with President Putin and others, Elvira Nabiullina, the director of central bank—long-time director who thought that she would retire from central bank and join International Monetary Fund and would be this kind of functionary—global functionary—economic global functionary, tried to resign in recent days. Tried to resign twice, and twice was told that she can’t do it. She has to stay. And she would never be part of the International Monetary Fund anymore. So she has to stay within Russia and in her position.

So this brings me to your question, what’s happening in Russia? Those who could flee already did. I mean, I think we don’t have the exact numbers, but there are hundreds of journalists that left because of all these draconic laws that if you report on the war as a war, or if you show anything that is not a special operation in which Russia is winning all the way through, then you can get up to fifteen years in prison. So not only the foreign outlets were closed, but also Russian journalists left. But even people, young boys or young men, or not even so young men, are afraid of conscription. So they left.

And one of the recent things that I just talked to somebody who was a Muscovite and left for Kyrgyzstan. In no universe Russian would ever immigrate to Kyrgyzstan. It would be Georgia. It could be Ukraine before it would be—potentially Armenia. It could be, you know, obviously Poland and the Baltic states. But now in Kyrgyzstan, every hotel is taken by the Russians. So that’s the stampede that, of course, we’ve never seen before.

In Russia itself, what’s also interesting—because, you know, there’s various organizations that have done polling but also have done kind of breakout of how sanctions can influence certain people. And oligarchs have been mentioned as a kind of great way to influence Putin. That doesn’t seem to be happening. In fact, we know that Putin for many years have been saying—for decade, at least—saying get out of the West. The West is out to get us. Sebastian mentioned the fortress Russia. And it’s more than just fortress Russia in terms of economics. Putin has been positioning, and his people have been positioning Russia as a besieged fortress that the West is trying to get. So now whatever they’ve been promising would happen, has happened.

And that’s actually a message to the rest of the country because the high—those high players, they are probably, I don’t know, from very high-class to lower-high class. There’s about, I would say, 5 percent. And then there are upper-middle class that’s about 20 percent of people. So they would be very much influenced. But they would be told: We told you so. So just, you know, get along with the program. But over 50 percent of Russia—of Russians really don’t have that much access to all this Western—yes, they can press a button and the taxi would come, but they can live with it. And so those sanctions wouldn’t necessarily affect them the way—the way we think they would affect Russia.

Of course, the—not the economic sanctions, at least, for now, but also those cultural, social—there’s a cultural relationship that’s now being completely severed with sports, with theaters, with everything. Russia now—Russians are a pariah nation, and pariah people. So that—but so that is problematic. But then the Putin propaganda goes on and says: Well, we told you that they hate us. Look, the whole world is against us. And ultimately, at least in the short run, I think—and a lot of analysts agree with that—that in the short run those who left, left.

But those who stayed would have to buy that kind of that argument that the world is out to get us. Look, they even took out McDonald’s, and we haven’t done anything to them. We are not part of the Kremlin. And yet—we didn’t vote for Putin. He’s been there for twenty-two years. Our vote didn’t count for at least fifteen years. And yet, the West is here to take us over, to undermine our existence. And therefore, you’re going to see—at least already seeing—people blaming the West rather than—rather than Russia, because they have to stay within that—within that environment.

And one last thing that I just want to say is that there have been proposals for nationalization of all this—of all these enterprises and firms that Western companies or other companies have left. So that’s a revolutionary moment, because if you nationalize other people’s property, then you really close yourself up, down, on all levels from the rest of the world. We saw it in—you know, after 1917, the Bolshevik Revolution, 1991, revolution, when that McDonald’s opened. In fact, around the time that McDonald’s opened was opening of Russia. So now we are facing the same kind of—the same as 1917, but in a different way. The revolutionary moment when Russia really closes itself, and willingly closes itself, from the rest of the world.

And I don’t see—



CARUSO-CABRERA: Go ahead, finish your thought, but you’re raising a key question that I want to get to.

KHRUSHCHEVA: Right. So what I’m trying to say is that the predictions we want to make, I don’t think we can make them because on that level of closure, for the purposes of one man who decided that Russia is going to be separated from the world, I don’t think we’ve seen that, at least in modern times.

CARUSO-CABRERA: So you raised the question, the oligarchs—look, sanctions, we have used sanctions in the past to try to effect change in behavior from leaders that we don’t like, right? And this is being done. What we are seeing around the world is to try to convince Putin to either withdraw from Ukraine or, you know, there’s been speculation in the press about oligarchs, his internal circle, the people rising up. That there’s—something happens as a result, that people get so angry that Putin will be gone. To me, what you’re saying, that sounds like a pipe dream.

KHRUSHCHEVA: Well, I don’t—it could be not a pipe dream. And maybe, you know, six months from now when it really becomes absolutely dire, that may happen. But, for example, when I’m talking to the Russians, they say—with all the sanctions—they say: Well, do we really want a revolution in Russia? Do they really want us to uprise? Do they understand, does the West understand what kind of bloody and horrible moment would that be? So once again, those who could leave and get their own life, they left. But those within, it doesn’t seem, at least now, they are ready to rise up. But instead, they’re rallying around—they’re rallying around the flag.

And the oligarchs would probably be put in line because what I’m fearing is that the KGB, the FSB, the security forces, as much as they were—as we know now—were against the invasion of Ukraine, because they thought it was just talking about a pipe dream of having Ukraine under the Russian jurisdiction, they actually welcome the fact that now it gives them an opportunity to crack down on Russia and all these random ideas about liberty, connection to the world, because that breaks down all this potentially—something the Russians talk about as Russia, the Kremlin and the Orthodox Church, about Russian traditional values against the sort of decadent satanic West that doesn’t want the Russian soul to keep on. Basically, Putin and his actions took Russia back way into the medieval—into the medieval mindset. And I don’t think we’ve seen that, as I said, in modern history.

CARUSO-CABRERA: John, if I could go back to the issue of sanctions and the seizures. You raised the question—or, you raised the item about the seizure of yachts and the seizure of oligarchs’ assets. Under what legal framework are we able to do this? Because we still have a notion of private property in the West, right? And just—the same way that Sebastian talks about the possible effects of will we reduce the dollar’s role as a reserve currency in the world, what about the notion of protecting private property, which is so sacrosanct in the West? Is there any potential violation of that, or is there a real legal framework out there to do this?

BELLINGER: No, there’s a real legal framework in the U.S. Of course, this is done under the International Emergency Economic Powers Act, IEEPA, which OFAC issues sanctions under for asset freezes. And it’s an incredibly powerful tool. Now, now clear to me—we may have people listening here who can pipe in—not clear to me how much assets Putin, Lavrov, or these oligarchs have here in the U.S. But if they do, they are frozen, and it’s lawful. You know, lots of litigation for us lawyers, although, you know, it’s going to be interesting, Michelle. I don’t think we’re going to see too many lawyers these days wanting to represent the oligarchs to try to get their assets unfrozen.

Where I think we’re seeing more of this is, you know, the yachts, the planes, the properties in London, France, elsewhere. You know, we’ve been all seeing these articles about the yachts in the Rivera and in Italy and so forth. I don’t know their legal frameworks, but I assume that those are similar. But here in the U.S. we have very powerful, strong laws that are enforced by the Office of Foreign Assets Control of the Treasury Department.

CARUSO-CABRERA: Let me turn to Sebastian then on that. Sebastian, you talked about the impact on the reserves in Russia. Let’s go the reverse route. What is the pervasiveness, to the degree that we know about Russian assets outside of the United States? To what degree are they are owned by institutions around the world? And, you know, is there a potential for a destabilizing economic event out there if there’s, you know, a hedge fund out there with a very large, concentrated position. Maybe there were short oil or long Russian assets and there’s that, you know, butterfly effect that we talk about.

MALLABY: Yeah. I mean, I think if there are hedge funds out there that were wrongly positioned for this crisis, those hedge funds will lose plenty of money. And the beauty of hedge funds is that we don’t care, right? I mean, systemically they are not backstopped by the taxpayer. And so, you know, investors lose so money but it’s not a kind of bigger problem than that. As I used to say, if you don’t like too big to fail financial institutions, try small enough to fail ones. Those are hedge funds. So I’m not too worried about that.

I think just sort of picking up on this question of what do the sanctions achieve geopolitically—you know, Nina was emphasizing that it’s not at all clear that, you know, Russia will change policy in the direction we want. It might just go back to some past period of autarkic nationalistic defiance. And I think that might well be right, although revolutionary situations are super difficult to predict. So you can never tell when, you know, the butterfly effect takes place politically inside Russia and the revolution or some sort of palace coup that we really didn’t—I’m not saying it’s probably, I’m just saying we can’t rule it out.

But I think you have to frame this debate a bit more broadly, because whenever you’ve got a geopolitical confrontation like this, the stakes for the West are partly the immediate crisis—like, we want to help Ukraine—but they’re also about, you know, the credibility of U.S. power more broadly to deter other acts of aggression by potential rivals or enemies. And so you could argue that the sanctions have come too late to really do anything for the Ukrainian people, but they might help the Taiwanese people. It’s going to deter the next-order effect. It will deter Putin from going beyond Ukraine into some other, you know, territory that he has designs on. It’s the next sort of domino that may be saved by this, even if, tragically, it doesn’t save Ukraine.


Alexis, are we ready for questions?


(Gives queuing instructions.)

We will take the first question from John Gannon.

CARUSO-CABRERA: John are you ready to go? I think you need to unmute, John Gannon.

Q: Can you hear me?


Q: OK. Thank you very much. I have two quick questions.

First of all, thank you for a terrific presentation that couldn’t be more timely. The first has to do with bitcoins. And I turn to Sebastian Mallaby who can answer that, maybe with John helping out on this one too. But should we be concerned in any way that the oligarchs in particular and then Putin individually would have access to bitcoins to stash their assets in a way that would be a hedge against the—hedge against the sanctions?

The second question is for Nina. And that is about the—I go over in my mind the whole history of determinations of casus belli. And it always seems to me it’s the victim of the sanctions that makes that determination. Certainly, with Germans after World War I, the Japanese also in that same period, and then the Israelis and the ’67 War, where they simply determined that closing the Straits of Tiran was a casus belli and they would go after the Egyptians on that basis. We have Putin who has said—who has been very emotional about the determining that a no-fly zone over Kyiv would be a casus belli that we would be in war with Russia if we were involved in such an effort. But what about the sanctions themselves? Don’t they get to a point—can we get into Putin’s mind enough to say that he will see the sanctions themselves as such a threat to Russia, and Russia’s own territory and Russia’s own economy, that he might be tempted to strike out on that basis?

CARUSO-CABRERA: That’s a good question. Thank you, John. Yeah, so two questions there. One was about the pervasiveness of bitcoin among some of the leadership, Putin included. And also to what degree will Putin see these sanctions as an act of war? Who would like to take that? I think he asked you specifically, Nina, but others can weigh in, of course, too.

KHRUSHCHEVA: I’ll just be very quick about this because Putin already said that sanctions is an act of war. So that’s—and that’s the next step is nationalization. So whatever he’s taken away from Russia, Russia says it’s going to take away back. Whether they’re going to strike further in military terms in relations to sanctions, I cannot say. Because it does seem that the FSB forces, as I said—I mean, they may not want Ukraine, but they’re very interested in keeping the lid on civil society and everything else in Russia.

So the point is that even if Putin is gone, although even if they decide to get him out they would still be interested in keeping him just because that would look like they gave up to the West. But it doesn’t seem that the sanctions would change the high-level behavior. It is, from my point of view, I think Sebastian is completely right, we don’t know. And they may take him out. But more often than not, it may not happen in the way it happened in ’91, or even after Stalin’s death in 1953.

So that’s also a guess, which way it’s going to play out. But also, let’s remember the people in charge of Russia, or those who are close to Putin, the FSB characters, they’re also not the ones collecting stamps and wanting to go to Rivera to swim. They—the French Rivera to swim. They are the ones—once again, they are for strong Russia. It may play out perhaps less militantly towards other societies in terms of weapons, but it may not be changed behavior in terms of connections and negotiations and other aspects of this kind of adversarial relationship. But as I said, or as we all said, at this point we’re not ruling out any Putin’s lashing out, because the way he did on February 22nd, and then February 24th. So all is—all options for him I think at this point are open.

CARUSO-CABRERA: John or Sebastian, any thoughts on bitcoin?

MALLABY: Well, I think bitcoin specifically and crypto more generally, their power has tools of evasion of U.S. law enforcement have been exaggerated. So I think John might speak to this too, but, you know, the ability after some of these ransomware attacks for the FBI to track the people demanding the payment or receiving the payment, I think law enforcement in the U.S. has kind of cracked that with respect to bitcoin. And there may be other cryptocurrencies where it’s tougher to trace, but it’s certainly not a simple as people think. It's also the case that the Russians, and by the way the Chinese also, because they don’t like capital flight, they don’t like their citizens to have too much ways around the government, they have been hostile to crypto. So to the extent that that hostility translated into effective restrictions on the ability of Russians to hold crypto, that would diminish that channel as a way of getting money in and out.

So I—you know, and the last thing I’d say is that this’ll be really interesting to watch. I suspect we don’t really know precisely how crypto might be used to affect the whole sanctions standoff. But I think one thing is clear, if it turned out to be an effective end-run against the sanctions, Western governments are going to be even more likely than they were before to clamp down on the whole crypto sector and say: You know, we’ll have central bank digital currencies and capture some of the sort of technical benefits of digital currencies, but the idea that we’re going to allow private agents to issue money and get around government policy, actually we’re not.

CARUSO-CABRERA: John, any insight on bitcoin, or you want to move on?

BELLINGER: Just two sentences and then we can move on. John, there was actually a report a couple days ago that says that Biden is going to sign an executive order on bitcoin more generally, but particularly to limit Russia’s possible evasion. I don’t know if that’s true, but if I had any bitcoin I would probably bet that we will see a bitcoin executive order. And then, just more generally, you know, we’re going to see more sanctions on everything. OFAC, DOJ, Commerce working twenty-four hours churning out more sanctions. So bitcoin may very well be the next one.

CARUSO-CABRERA: And OFAC stands for the Office of Foreign Asset Control involved in sanctions. Long involved in Cuba, for example, and enforcing the Cuban embargo.

OK, let’s move on to the next question, Alexis.

OPERATOR: We will take the next question from Doug Rediker.

Q: Hey, good morning, good afternoon to everybody. Thanks for this. It’s great.

A question for I guess John and Sebastian, because Sebastian made a reference to the fact that the Russians have access to their renminbi reserves and the swap line to China, and that they are effectively shut out from using the rest of their reserves for other purposes internationally to purchase goods. I was under the impression that by drawing the distinction the administration did of not freezing the central bank reserves but actually freezing the ability to use them for foreign exchange intervention, that other than those high-tech and specifically sanctioned products, that Russia still could—if they could use a financial intermediary that was not itself sanctioned—they still could engage in the basic blocking and tackling of widget-like trade with other countries. So that the use of those reserves is restricted for FX intervention, but not for whatever remaining, you know, low-level trade still exists.

And I’m just wondering if that is what John’s understanding of this is, and whether that changes your view, Sebastian, on that reliance on the Chinese renminbi. Because my thinking was the opposite of how you phrased it. The Chinese renminbi is something that they would not want to swap rubles into. But in order to keep the renminbi—sorry—the ruble from falling further, they would love to be able to buy renminbi—sorry—they would like to be able to buy ruble. And of course, the PBOC doesn’t have a lot of rubles for them to buy.

BELLINGER: Sebastian, you want to start?

MALLABY: Well, I mean, I defer to Doug, if he thinks that there’s a loophole there—a limited loophole for non-FX intervention with the reserves. But, yeah, I don’t—I’m not sure about the details. But one can see the effect in terms of the currency, in terms of the panic at the ATMs. You know, all these sanctions have leaks are imperfectly enforced, but they can still be pretty powerful.


CARUSO-CABRERA: Doug could be a panelist on this very panel, I think, right? (Laughs.) Hey, John, go ahead.

BELLINGER: Yeah, all I’ll say, because I think Doug may know more on this, is you’re right. This is mostly a limit on use of central bank assets for foreign exchange purposes. Certainly, that money can be used for certain other things, for energy purchases and perhaps for others. So I think right now it is focused on foreign exchange and really trying to get at those central bank functions. Although, again, I think these are the sanctions that we could see ratcheting up over time as Treasury watches to see what the Russian central bank does.

MALLABY: Yeah, one just—the fact that the central bank felt the need to double its policy interest rate also tells us that—(laughs)—there was some affect in that intervention on the reserves. Because I think, you know, Doug would agree, I’m not saying you’re—I’m not pointing out you don’t know, Doug. But I am saying that the effect—whatever the details—the effect was pretty powerful.

Q: Well, I just—to weigh in—I think the distinction is important because I think the administration was very careful about not freezing central bank reserves, because if they had done so that would have sent a signal to all of the other countries in the world—including China, that keep a huge amount of their reserves at the Fed in U.S. dollars—that those reserves were effectively ours to play with. And I think they went out of their way to ensure that was not the path that they went down, but instead limited it—now, again, it’s a big limitation—to FX intervention, so as to say: You still have your $630 billion of reserves. We haven’t taken those away. We haven’t frozen them. We’re just limiting the use that you have. Which is why, again, Sebastian, you pointed out that they’re being forced to double the interest rate as a means by which they could stop the freefall of the ruble, which only lasted for so long. But I think it was a smart policy choice by the administration to not go down the route of actually freezing the assets, but rather freezing the flows and not the stocks.

CARUSO-CABRERA: Interesting. Yeah, good point, Doug. Thank you very much.

Alexis, who’s next?

OPERATOR: We will take the next question from Elmira Bayrasli.

CARUSO-CABRERA: Hi, Elmira. You can unmute.

Q: Hi. I apologize I have no idea how I hit that by accident. But—(inaudible)—Michelle. (Laughter.)

CARUSO-CABRERA: What’s your question?

Q: I actually don’t have a question.

CARUSO-CABRERA: Oh, OK. We’ll move on. Nice to see you.

Q: OK. Bye-bye.

OPERATOR: We will take our next question from Barry Zubrow.


Q: Good morning. Thanks, all. Excellent discussion.

Going back to the opening comments, and what we all see of U.S. businesses and other businesses exiting their operations, what is the Russian response going to be to that? Is it to be assumed that those assets are going to get seized or frozen? Are those companies and investors going to walk away from the value of those assets, or do they think they may recoup something down the road?

BELLINGER: It’s a great question. I’ll take maybe part of it, and maybe Sebastian or Nina know more. Barry, you know, a lot of these—U.S. and Western businesses are taking different actions. Some of them are suspensions. So many of the consumer product companies—you know, McDonald’s, others—are obviously suspending operations. And they obviously would like to stay in good favor, be able to sell hamburgers and Coke and Pepsi and other things. So they’re just suspending operations. We’ll have to see what ultimately happens.

You know, certainly—we can talk about this—but I think a takeaway of all of this is this is not going to just be weeks or months of sanctions. I think we’re talking about years before these are unwound. So what, you know, some of these consumer product companies will do in, you know, three months, six months, you know, is unclear. Some of the big oil companies have been divesting and are literally getting out. But, you know, you went to the heart of the matter, is do we think U.S. companies will actually see things nationalized? You know, their stores, their facilities actually taken over by the Russians? I would assume that’s probably a significant risk.

CARUSO-CABRERA: Sebastian, do you want to add anything there, or no?

MALLABY: I mean, just to say I think there’s a sort of duration question, right? So immediately the recovery value of an asset in Russia may be close to zero. But in the longer term, it’s a sort of—it feels like one of these distressed workouts where there may be some scope to recover money if you’re patient enough. This isn’t enough in hiring Arnold & Porter. (Laughs.) And there may be some—but I think, you know, in the near term it’s—you know, recovery is almost impossible.

Q: Right.

CARUSO-CABRERA: All right. Thanks, Barry.

 Alexis, who’s next?

OPERATOR: We will take our next question from Ken Morse.


Q: Yeah, this is Ken.

It’s been heartwarming to see how quickly the diverse nations of Europe have come together, in a matter of hours in some cases and under Ursula’s leadership in others. To what extent is this unity of Western democracies a dress rehearsal for the crisis that we may have to face with Taiwan?

MALLABY: Maybe can I—

CARUSO-CABRERA: Sebastian, go ahead.

MALLABY: And so I agree that one of the most astonishing things to me, as somebody who’s watched German policy for a long time, is that flip that Germany did from saying, you know, it would not supply weapons to a country that was at war to saying, yes, it would; to saying it wanted Nord Stream 2 to saying no, it didn’t; to saying it wouldn’t spend 2 percent of GDP on defense to saying yes it would. I mean, this is an amazing U-turn and it feels like a durable U-turn. And Germany has this quality of frequently kind of—you know, it’s a social democracy, it usually has coalition government, it muddles its way along.

Through most of the euro crisis Angela Merkel was doing just enough to kind of keep the whole thing from the wheels falling off, but not doing more than she had to. And this feels like really more than they had to, I mean, more than I would have predicted. And there are just these moments in German policymaking—as happened, by the way, ten, fifteen years ago with the energy policy switch, the Energiewende, when they suddenly said no to nuclear, no, zero, zero. And you get these sort of radical lurches in policy in Germany. So that sort of I think then triggers some of the unity you see. You know, with Germany with states on the frontline of Ukraine, whether it’s the Baltics or Poland. And just the sheer, you know, humanitarian crisis and kind of the Zelenskyy courage triggering a lot of that unity. So I think, and I agree, that that’s been amazing to watch.

And with respect to Taiwan, clearly there’s an attempt now to seize the potential to deliver the message to China that the West will be more united and tougher in its response than might hitherto have been predicted. Hence the trip by, you know, high-level U.S. officials to Taiwan just not to stand with the Taiwanese and deliver that message publicly. You know, you never know what’s going to happen in a crisis until it actually happens, but I think certainly the calculus that China might make with respect to the likely Western response—at the minimum China would think that the financial counterattack by the West would be ferocious.

CARUSO-CABRERA: OK, thank you.

 Alexis, who’s next?

OPERATOR: We’ll take our next question from Judith Goldstein.

CARUSO-CABRERA: Hi, Judith. Go ahead. You want to unmute.

Q: Sorry, a mistake. I hit by mistake. Somebody else should ask a question.

CARUSO-CABRERA: Oh, you did. OK. Got it. All right. Alexis, who’s next?

OPERATOR: We will take our next question from Frank Wisner.

CARUSO-CABRERA: Ambassador, good to have you on. What is your question for the panel?

Q: Thank you very much. What a terrific panel.

I’ll take you in a slightly different direction. Russia and Ukraine have emerged as major international players in the food market—wheat exports in particular. Decisive exporters to the Middle East. To what degree do you assume this crisis will disrupt those exports? And what are you—either directly in terms of export capability or the movement of financial payment systems? And second, what do you think are the possibilities of the world being able to make up the deficiencies in the food market if Russian and Ukrainian grains are cut off from the trade?

BELLINGER: I can take a small stab at that, but, Sebastian, may be more in your area. Hey, Frank, that’s a great question which I hadn’t really thought about. But, I mean, I assume Ukraine will try to export, if it has the capability to do so while they’re being overrun. But I don’t know whether that will continue. On Russia, as you well know, we generally have got exceptions for humanitarian supplies, whether it’s food or medicine. And so I would assume that people will not be sanctioning grains from Russia. That would surprise me, but it is possible. So, but, you know, as long as this goes on in Ukraine, there are more sanctions that can be—that can be added.

I’ll just add a footnote, it’s a slightly different direction. But of course, you know, Russia, in addition to grain, is a huge exporter of military equipment. A lot of countries buy Russian military equipment. And there’s been a lot of talk in the press about whether Russia will continue to be able to do that, because of the financial sanctions that will then make it extremely difficult for buyers of Russian military equipment to buy from Russia. But on grain, it’s a good question.

CARUSO-CABRERA: You know, what about—what about in the reverse? The Irish defense minister was at CFR earlier this week. And he raised the possibility of countersanctions. Which is we can say, hey, we’re not going to buy this or that from Russia. And Putin could say, oh yeah? Well, I’m not going to sell you a number of things. And so grain, for example, natural gas. I mean, what are the possibilities that we see that kind of response?

KHRUSHCHEVA: I was already actually seeing that, because they were—we talk about the sanctions as an act of war. And, you know, the Russians now started talking about the sanctions as a force to, as we also discussed, for regime change. So as a regime change, that’s an act of war back. So Russians already talk about closing Nord Stream 1 and saying, well, fine. If that’s how you want it—you want to play it now, we have the right to close all your gas before you transfer to all other sources. Let’s just see how you’re going to freeze to death or don’t have, you know, oil prices jump. I mean, of course, the economists on this panel know much better, but it’s now, what, $130.

So it’s a very, very big possibility. And since I don’t believe that Putin is going to deescalate in the short run just because he cannot show weakness, and now the whole world is looking at him, and therefore he keeps pushing on rather than backing off. And even inside Russia, there’s more and more—there is more and more clamp down on any possible voice of any possible reason. So I would easily imagine them doing that and, you know, having the Russian attitude of, fine, we’re going to die, but we’re going to show them all. So that’s kind of part of cultural DNA of the Russian empire from the beginning of it, for 1,000 years. So I wouldn’t discount that at all.

CARUSO-CABRERA: Alexis, what’s the next question?

OPERATOR: We’ll take our next question from Hani Findakly.

CARUSO-CABRERA: Hi, Hani. Go ahead.

Q: Yeah, thank you so much. And thank you for this excellent discussion.

There was an earlier conversation about what part of the central bank foreign exchange reserves are subject to sanctions, and whether they are subject and imposed on flows as compared to stock. But my question is, if they are—if they are exempt from any kind of sanctions in terms of use, they can only rise because they’re going to be selling at least—from oil and gas—that’s $15 billion or more a month. And that will continue to rise. How much flexibility does that—since money is fungible—it gives the Russians to buy products that are exempt from sanctions?

CARUSO-CABRERA: John? Sebastian? Either one of you? Nina?

MALLABY: You know, the flexibility of using the money to buy things is obviously restricted by the more specific sanctions that have been imposed. So if the Russians want to buy, you know, those critical technology parts, or other parts for maintenance of infrastructure, those things have been directly sanctioned. So I imagine that would be a strategic priority for the Russians, to keep some of their, you know, industrial infrastructure working. And that is specifically being targeted. So I think it’s limited, frankly, Hani, in terms of what degrees of freedom are left to Moscow.

CARUSO-CABRERA: Alexis? We have four minutes left, for one or two more questions.

OPERATOR: We will take our next question from Tom McDonald.

CARUSO-CABRERA: Hi, Ambassador. Go ahead.

Q: Hi, Michelle. We don’t know each other, but my compliments on your run for Congress, first of all.


Q: Appreciate all you’ve done. To the group, I’m a partner at Vorys Sater, was a U.S. ambassador to Zimbabwe.

Putin came in toward the end, and I gave remarks out there at the time—(laughs)—in the public record. One, Putin’s a thug. Two, the Cold War is not over. And I would ask whoever on the panel would like to comment on that. I mean, I—sitting in Africa then, I felt like we were sort of deluding ourselves. And then really the question is that the Cold War was over, because it wasn’t, and never was, and it isn’t now, obviously. The question, though, is not surprised that some of the old guard in South African has stuck with the regime, because they supported, you know, ZAPU, the Russians, in Zimbabwe during the war of liberation, and they were supporting the ANC. But what does the panel think about, you know, how much Putin can lean on Africa? And to arms sales, a lot of them have been to Africa, to no good end. So thank you.

CARUSO-CABRERA: Jump ball. Anybody have a strong answer here?

MALLABY: I mean, I just think that at a time like this—I mean, a sympathize with the ambassador’s perspective. I was in Zimbabwe in ’89-’90, when the wall came down. And watching everything from there was interesting. In particular, the Zimbabwean leadership pretending that Ceaușescu’s ouster in Romania was a sort of fake news thing, and not believing it and denying it, and then say, whoops, maybe it was true. So these Cold War things reverberated around the world in interesting ways.

But I think the sort of central fact is that right now, yes, you know, some African governments may, you know, side with Russia diplomatically. Yes, I believe it’s the case that the junta in Myanmar has explicitly sided with Russia. But so what? I mean, this is not moving the needle in terms of Putin’s isolation. He’s not going to get much economic or political or military meaningful upside from any of that. So I think it’s not helping him at all.

BELLINGER: I’ll just add—

CARUSO-CABRERA: Oh, yeah. Go ahead, John.

BELLINGER: I’ll just add briefly, I’m not an Africa expert, but, you know, the—one of the things that we all watched was the UNGA resolution condemning the invasion.

CARUSO-CABRERA: That’s the U.N. General Assembly. I assume almost everybody in this crowd knows that, but just in case. (Laughs.)

BELLINGER: Thanks, Michelle. I should know better. That overwhelmingly condemned deplored the invasion. But, Ambassador, you’re right, there were seventeen African countries that abstained from that resolution. I think there was only one that actually voted with Russia, but a lot of African countries did sit on the fence, abstaining, obviously along with other countries, like India. And I have read that—you’re the Africa expert—but that there’s been a good deal of criticism of the governments by their people for abstaining as Ukraine was overrun.

CARUSO-CABRERA: So, look, we’re right at the twenty-nine-minute mark. Nina, unless you want to weigh in on that last question, I think I’m going to wrap it up here.

KHRUSHCHEVA: Just one last thing. In Russia, these abstaining countries are not exposed as African countries. Like, oh, look, there’s all these countries abstained so we’re not that bad. I think the only person who can influence Putin at this point, if anybody possibly influences Putin, is Xi Jinping. And the question is how much he would be pushed by his own kind of economic threats to him be forced to do this or not, because he is probably the last line of defense, which is bizarre to say, but the last line of defense against Russian aggression here.

CARUSO-CABRERA: Incredible moment. Lady and gentleman, thank you so much, to all our attendees. I really enjoyed this. And the way things are going, we may have to do it all again in a few weeks or months. Thank you so much for participating today.






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