As Russia becomes more independent from the U.S. economy, the United States should reevaluate its harsh sanctions on Russia.
Last week, the Kremlin announced that it would ditch all of its holdings in U.S. dollars in its National Wealth Fund in favor of yuan, euros, and gold. According to Russian Finance Minister Anton Siluanov, after the changes are finalized, the fund is expected to have 40% of its holdings in the euro, 30% in yuan, and 20% in gold, with the yen and British pound both accounting for 5%, respectively. These changes will affect around $119 billion of Russia’s liquid assets in total with 35%, or $41.5 billion, of these liquid assets being in U.S. dollars specifically. These actions to eliminate the dollar from its National Wealth Fund were taken to reduce Russia’s vulnerability to sanctions imposed on their economy by the United States, as the Kremlin claimed in an announcement.
While Western sanctions are nothing new, Russia’s recent actions to protect its economy from the effects of these sanctions forecast a worrying trend for cooperation between the United States and Russia. By partially departing from its economic relationship with the United States, Russia can lessen the blow that U.S. sanctions have on its economy, but in return, this has the potential to weaken the U.S. dollar. Ultimately, sanctions are a largely ineffective tool that not only threatens a possible future for a strengthened relationship between Washington and Moscow but counterintuitively threatens the U.S. dollar and economy.
Failures of Sanctions
In the face of harsh U.S. sanctions, it only makes sense that the Kremlin would take these preventative measures against the U.S. dollar. Since the imposition of harsh sanctions by the United States as a result of Moscow’s actions in Crimea, Russia has been gradually embarking on a de-dollarization process to partly remove itself from the Western financial system since 2014. With President Biden’s recent further ratcheting up of sanctions on Russia, a move like this is appropriate to protect Russia’s assets and markets. These sanctions would have threatened detrimental outcomes to the Russian economy if it would have failed to become more independent. In April, sanctions that barred U.S. banks and institutional investors from purchasing certain ruble-denominated bonds, as part of President Biden’s plans to place heavier political and financial pressure on Russia showed evidence of weakening these bonds.
It is apparent that the United States fails to acknowledge that sanctions typically fail to work on countries that are not highly dependent on them. Despite sanctions, Russia continues to have a strong, albeit more independent and isolated economy, especially through being at the forefront of the global energy scene. According to Russian Deputy Prime Minister Alexander Novak, “[Russia] shall continue to be the world leader in the fossil fuels market and we shall diversify by going into the LNG and petrochemicals (markets)”, despite operating under heavy U.S. sanctions since 2014. Russia has in part been able to maintain this position in the energy market by some of its largest oil companies, such as Rosneft, switching to other currencies like the Euro in 2019 to protect themselves from harsh U.S. sanctions. If the United States continues to place sanctions on Moscow, the Russian economy will only continue to grow, while becoming more independent from the U.S. economy.
Moreover, there is evidence that while Russia can substantially mitigate sanctions’ harmful effects on its economy, the United States’ economy, and the U.S. dollar itself will bear the burden. Increased sanctions on Russia can prevent American companies from doing business in Russia, making them lose the opportunity to have access to a profitable market. Additionally, as Russia and other countries, shift away from the U.S. dollar in attempts to shield their economies from the effects of U.S. sanctions, the U.S. dollar becomes less prevalent in world markets. This just weakens the U.S. dollar when it loses some of its dominance in world markets and as President Putin stated when discussing the recent decision to ditch the dollar, “They’re [the United States] sawing the branch they sit on”.
Sanctions Endanger Bilateral Cooperation
In addition to the detrimental economic effects that American sanctions have on the Russian economy if Russia were to not further delink its economy from that of the United States, they threaten to further close the window for cooperation between the two countries. In a 2018 interview with NBC, President Putin explained the view that many throughout the Kremlin hold: “Sanctions have nothing to do with the myth of some Russian interference in the US election. Sanctions are about something else entirely: the desire to halt Russia’s progress, to contain Russia.” As long as Russia is able to take measures that mitigate the damaging effects of economic sanctions, sanctions only serve to increase mistrust in the United States and harm bilateral relations between the U.S. and Russia.
Sanctions on Russia not only harm the U.S. dollar but also make it more difficult for Russia and the U.S. to collaborate on key policy areas in which they share common interests. While tensions between the two countries may be at an all-time high, it is a uniquely important time for the United States to prioritize building a more cooperative relationship with the Kremlin. With a historic bilateral summit between President Biden and President Putin set to happen in Geneva on June 16th, it is of utmost importance that relations between Russia and the United States do not continue to worsen, and hopefully, turn a new leaf. Continued U.S. sanctions do the exact opposite of this, and instead, only drive the United States and Russia further apart from one another. Such harsh sanctions close the window of opportunity for Moscow and Washington to find common ground and collaborate on important issues, such as nonproliferation, climate change, among others If the United States wants a future with a mutually beneficial relationship with Russia, it must reconsider its sanctions on the Kremlin.
Alana Cross is a Policy Analyst at the Russian Public Affairs Committee (Ru-PAC).