(Bloomberg) — U.S. President Joe Biden unveiled sanctions targeting Russia’s sale of sovereign debt abroad and the country’s elites, responding to what he described as the start of Vladimir Putin’s invasion of neighboring Ukraine.
“He’s setting up a rationale to take more territory by force,” Biden said Tuesday at the White House. “This is the beginning of a Russian invasion of Ukraine.”
Biden said he’s sending additional U.S. troops to the Baltics in a move to defend NATO countries. And the president said sanctions will increase if Russia “continues its aggression,” calling the penalties he announced a first step.
The measures stopped short of the devastating steps that the U.S. and its allies have threatened. Crude oil futures in New York pared gains after Biden spoke, while U.S. stocks bounced off session lows. The S&P 500 Index finished down 1%.
The sanctions come after Russia’s President Putin recognized two self-proclaimed separatist republics in eastern Ukraine as independent, a dramatic escalation in his standoff with Ukraine and its supporters in the West. Putin has denied Russia intends to invade Ukraine.
Biden said he’s imposing “comprehensive” sanctions on new issuances of sovereign debt. “That means we’ve cut off Russia’s government from Western financing,” he said. “It can no longer raise money from the West and cannot trade in its new debt on our markets or European markets either.”
“In the short term, this is unlikely to have a major impact on Russia’s economy,” Clay Lowery, executive vice president of the Institute of International Finance, said of Tuesday’s actions. “But in the longer-term, this action, combined with other actions from European countries, is likely to hinder Russia’s economic growth.”
Daleep Singh, the deputy U.S. national security advisor for international economics, told reporters at the White House that “this was the beginning of an invasion, and this is the beginning of our response. The actions we took today were only the first tranche.” He added, “We are ready to press a button to take action on the two largest Russian financial institutions, which collectively hold almost $750 billion in assets, or more than half of the total in the Russian banking system.”
Additionally, U.S. Secretary of State Antony Blinken told reporters Tuesday that he has canceled plans for a meeting Thursday in Geneva with his Russian counterpart, Foreign Minister Sergei Lavrov, saying it “does not make sense” after Russia’s moves in Ukraine.
Banks Targeted
Instead of hitting Russia’s biggest banks, as some investors had feared, Tuesday’s penalties targeted state-owned banks VEB.RF and Promsvyazbank, which the U.S. said hold more than $80 billion in assets and finance the Russian defense sector and economic development.
The U.S. measures will freeze the banks’ U.S. assets, ban Americans from doing business with them, cut them off from the global financial system and eliminate their access to the dollar.
Biden said Russia’s elites “share the corrupt gains of the Kremlin policies and should share in the pain as well.” Three Russians who are part of Putin’s inner circle — Sergei Kiriyenko, Aleksandr Bortnikov, and Promsvyazbank Chief Executive Officer Petr Fradkov — will be hit with penalties blocking them from the U.S. financial system, as will some relatives.
The president said the U.S. is also working with Germany to ensure the Nord Stream 2 pipeline from Russia to Germany won’t move forward.
“As Russia contemplates its next move, we have our next move prepared as well,” Biden said. “Russia will pay an even steeper price if it continues its aggression, including additional sanctions.”
Brian O’Toole a senior fellow at the Atlantic Council who previously worked in the U.S. Treasury Department’s sanctions unit, called Biden’s sanctions “incremental.”
“We must wait to see if the U.S. 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.”
Allies Differ
A senior administration official defended the scope of the sanctions in a phone call with reporters, noting that the banks in question offered key financial assistance to Putin allies and the Russian military, while Nord Stream 2 represented a massive infrastructure investment. The freeze on sovereign debt, the U.S. said, would result in higher borrowing costs, less capacity to invest, and lower growth for the Russian economy.
The official, who spoke on the condition on anonymity, said the measures also telegraphed that no Russian financial institution would be safe if an invasion proceeded. The U.S. is specifically considering actions impacting Sberbank and VTB Bank if an invasion proceeds, the official said.
The U.S. is also prepared to implement export control measures in coordination with a large number of allies and partners, the official said.
If the initial wave of sanctions fail to work, Biden will have to work to hold together a fractious set of allies who differ on the scope of punishments Russia should receive.
Putin told reporters Tuesday that he’s not sending Russian troops into the breakaway areas in Ukraine for now but he added, “Since there’s a conflict there, with this decision we’re clearly showing if necessary we are ready to fulfill this obligation.”
The European Union and U.K. earlier outlined an initial, limited sanctions package, and Germany announced it would halt certification of the Nord Stream 2 pipeline. Japan announced sanctions on Russia including a ban on issuing or distributing new sovereign debt in Asia’s second-biggest economy, while Australia imposed financial and travel bans on top Russian officials as well as banks linked to the government and military.
Biden also signed an executive order on Monday blocking U.S. investment, trade, and financing in the two separatist territories in eastern Ukraine, though the penalties are not expected to have a significant practical impact.
Troop Movements
A U.S. defense official said that Defense Secretary Lloyd Austin ordered some U.S. forces already in Europe to temporarily deploy farther east to bolster NATO allies closer to the military alliance’s eastern flank.
The movement includes an 800-personnel infantry battalion shifting from Italy to the Baltic region, eight advanced F-35 jets from Germany to NATO’s eastern flank and 32 AH-64 Apache anti-tank helicopters being shifted from Germany and Greece to Poland and the Baltics. The Biden administration has consistently said that U.S. forces wouldn’t go into Ukraine itself.
