Russia’s War Demands a Long-Term Economic Response

Russia’s invasion of Ukraine relies on old tanks but new tactics—engaging in a hybrid war of bullets, propaganda, cyberattacks, nuclear bluster, and economic bullying. This last tactic is broad and indiscriminate, aimed at Ukraine and the democratic, rules-based order. Russia has unleashed comprehensive economic warfare, using its energy sector, currency reserves, and infiltration of Western financial systems to sow division within Europe and build deeper economic alliances with China and Iran. Comprehensive and long-lasting financial isolation must be enforced to show the world that the global financial order will no longer tolerate Russia’s military expansionism and economic disruption.

The United States has responded to Russia’s unjust war on Ukraine, unleashing its own economic weaponry of sanctions and export controls, targeting leaders and oligarchs who push the conflict forward and feed the Kremlin’s war machine. The United States and Europe have unified to cut some Russian banks off from the SWIFT messaging system, freeze Russia’s overseas currency reserves, cap the price of Russian oil, and deny access to the Western financial system. The Western private sector, too, has fled Russia in substantial numbers, divesting assets and writing off billions of dollars in losses. Ukrainian teachers- and accountants-turned-soldiers are holding the frontline for their homeland while the entire democratic and rules-based economic order fights a parallel war against illicit money and malign oligarchs.

Russia is not simply seeking to shift its borders but has, for years, been sowing chaos, disinformation, and interference in democracies around the world, including election interference in the U.S. propaganda campaigns in Latin America, ransomware attacks on multinational companies, exporting corruption and infiltrating multinational organizations, propping up dictators in Iran and Syria, and funding mercenaries and terrorists around the world.

As the Foundation for Defense of Democracies (FDD) lays out in its new report, Ruble Rumble: Offensive and Defensive Measures to Defeat Russia in the Economic Domain, the United States and its allies must bolster Russia’s economic isolation and step up their financial pressure campaign if they expect to effectively undermine the military war machine and economic coercion of an autocratic and bellicose Russia. Sanctions must be designed and enhanced to impose true consequences on Moscow for its reckless and destructive choices. There is an offensive element of our economic battle with Moscow. Still, there must also be an equally strong defensive approach—protecting our election integrity against interference, redoubling our protections against hackers and cyber-attacks, cutting Russia off from the global financial system, and weeding out dirty Russian money from our real estate, our hedge funds, and our supply chains.

For China, which is watching and plotting its next move along the Taiwan Strait, a permanent financial ostracization of Putin’s Russia should make the CCP think twice about using missiles and battleships to bring Taiwan under Beijing’s authority.

A weakened Russia also stymies Beijing’s attempts to create a political and economic order parallel to and in defiance of democratic capitalism. If Russia and China work together, China can afford to increasingly turn its back on engagement with the West, controlling our supply chains but more resilient against any attempts at economic isolation.

To properly counter Russia’s expanded economic war, sanctions, and other economic consequences against Russia should be aggressively expanded. As recommended in the FDD report, the United States should increase secondary sanctions, eliminate sanctions exemptions (and omissions) in the banking sector, address weaknesses in the oil price cap, and hobble the Russian energy sector, including winding down U.S. dependence on Russian state-owned Rosatom. In addition, the United States and its allies should take steps to cut out the Russian alternative to SWIFT and similar economic workarounds. The West should reach out to neutral economies, like India, Turkey, Brazil, and the United Arab Emirates—making a case for the benefits of joining the democratic fold against Russia… and the consequences of continuing to do business with Putin or joining an anti-Western alliance with China. Finally, the United States must levy real and substantial punishments for sanctions evasion—with particular attention to third countries such as China as well as so-called “enablers” that move tainted Russian money through the Western financial system.

While Russia has engaged in an economic war against the West for more than a decade, its actions have been facilitated by weaknesses and loopholes we have built into the financial and legal system. It is time for robust defensive economic measures, taking a firm and aggressive stand against malign finance and illicit actors that have infiltrated Western economies—undermining democracy, fueling corruption, funding terrorism, and finding new ways to evade U.S. and allied sanctions regimes. This will require a fight for financial transparency, the effective implementation of beneficial ownership rules, due diligence requirements for professional enablers, limitations on foreign influence on democracies, a battle against misinformation, and expanded resources for enforcement authorities at the U.S. Treasury, State, and Commerce Departments.

Putin and China seek to build a new rogue gallery of autocrats and oligarchs who can undermine democracy and transparent capitalism around the globe. For democracy and capitalism to flourish, we must unleash the full arsenal of economic weaponry to isolate Russia from the world, hobble its expansionist tendencies, and remind others that the Western financial system is closed to those who seek to destabilize and undermine the liberal, rules-based order.

Elaine Dezenski is the Senior Director and Head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies. Peter Doran is an Adjunct Senior Fellow at the Foundation for Defense of Democracies. Follow Peter on Twitter @PeterBDoran. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.