TRANCHE WARFARE — Biden’s response to Putin moving troops into eastern Ukraine: a “first tranche” of sanctions against two Russian banks and individual Russian oligarchs , in addition to cutting off much of Russia’s sovereign debt from Western financing. Some Republicans in Congress are calling on Biden to take an even more aggressive stance against Russia. Sen. Lindsey Graham (R-S.C.) called the moves “woefully inadequate” and said he would work with Democrats for “more crippling” sanctions. But crippling sanctions could also backfire: The S&P closed down more than 10 percent from January highs today, after Biden’s announcement. Biden also acknowledged he wants to hold back some U.S. firepower giving American allies room to maneuver with Putin. “I am hoping diplomacy is still available,” Biden said at the end of his address. Nightly chatted with Morning Money author Kate Davidson over Slack today about the potential impact of a sanctions regime both in the U.S. and in Russia. This conversation has been edited. Senate Minority Leader Mitch McConnell said he wanted “tough” sanctions against Russia. Does what Biden announced today count as tough? They include what are called “full blocking sanctions” against two major Russian banks, VEB and a Russian military bank. That’s a pretty dramatic step, but those often come with exceptions which we don’t know yet. In addition they moved to cut off Russia from western financing by imposing sanctions on its sovereign debt. That means essentially the government can’t raise any new debt from U.S. or European markets. If Russia can’t tap debt markets to raise money, it can’t finance its operations. To help put this in perspective, think about the drama surrounding our own debt ceiling in the U.S., when Congress needs to raise the limit or risk a default. It rattles investors, raises borrowing costs, and just generally threatens to undermine financial and economic stability. The question is to what extent Russia can insulate itself, by relying on reserves or turning to other investors outside the U.S. and Europe to secure financing. Biden also announced sanctions on Russian individuals. How much will this hurt the average Russian oligarch who probably has lots of cash in Swiss bank accounts? I spoke with one sanctions expert today who said these measures typically have a big effect on the person sanctioned, but little effect on the broader economy. The U.S. and its allies have been broadcasting these moves for weeks now, so it’s possible the oligarchs have been able to move money to avoid some of the sting of these sanctions. In some ways, this person said, it may make these oligarchs more reliant on Putin by cutting them off from the West. If this is the first tranche, what is next? Officials have said export and re-export controls are still on the table. That would prevent U.S. technology and goods from making its way to Russia, either directly or through third-country exports. That means the restrictions would apply to exports sent to China, for example, that are then placed on goods and passed on to Russia. The White House and sanctions experts with whom I’ve spoken have said this would seriously crimp Putin’s ability to keep industrializing his economy, by affecting the military and other high-tech sectors. And what about the impact on the U.S.? The risk of big, broad, devastating sanctions is that they can come back to bite you. And administration officials have tried to be careful about calibrating these in a way that they hurt Putin and curb his ambitions, but don’t cause undue pain for ordinary Russians, or for the U.S. and its allies. But Biden basically acknowledged today what economists and investors have been expecting — that this confrontation and the ensuing sanctions could cause energy and commodity prices to spike. In the U.S., it almost surely means higher prices at the gas pump. That’s not great for the White House, which is already grappling with historic inflation. Washington reacts: Video producer Renee Klahr has a roundup of politicians’ and officials’ reactions to today’s sanctions announcements, and Russia’s moves around Ukraine.
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