In this edition of the Global Sanctions Dashboard, we walk you through existing sanctions against the Wagner Group, limitations around enforcing them, and what more Western allies can do to counter Wagner’s influence in Africa. Moreover, we identify gaps in beneficial ownership information as the key vulnerability in enforcing sanctions against Russia, including in the case of the oil price cap.

The Wagner Group is heavily sanctioned but keeps making money

The Wagner Group, its affiliates, and leadership are the targets of Australian, British, Canadian, European Union (EU), Japanese, and US sanctions for human rights abuses and serious crimes, among other illicit activity, and for participating in Russia’s war of aggression against Ukraine. There are proposals and discussions in play within the EU and UK governments to designate the group as a terrorist organization. The United States redesignated the Wagner Group as a transnational criminal organization in January 2023. While these types of organizational designations may appear symbolic, they pave the way for more significant sanctions and actions such as prosecution of group members and affiliates pursuant to terrorism or criminal charges, which carry significant penalties. Terrorist organization and transnational criminal organization designations also send a strong signal to foreign governments that they may want to reconsider their relationships with these groups.

Shortly after the Wagner Group’s attempted mutiny against Moscow’s military leadership, the United States issued designations targeting the Wagner Group’s illicit gold activity and affiliated entities in the Central African Republic (CAR), United Arab Emirates, and Russia, exposing Prigozhin’s network and mining operations. Concurrently, the United States issued a twenty-nine-page joint advisory on Wagner’s illicit gold trade in sub-Saharan Africa, encouraging industry participants to apply enhanced due diligence to avoid the risks potentially facilitating the violation of economic sanctions or money laundering. 

Despite sanctions and efforts to curtail the Wagner Group’s illicit activity, the group has successfully evaded financial sanctions through a series of facilitators and front companies around the world and by taking advantage of lack of beneficial ownership to obscure operations and avoid identification. The Wagner Group has made more than five billion dollars since 2017, according to a Forbes assessment, mainly from mining, illicit gold trade, and forestry business in Africa, as well as funding from the Russian state. 

The restructuring of Wagner Group’s command and control creates new opportunities in Africa

Despite the mutiny, Russia is likely to continue using the Wagner Group as an irregular or “gray zone” instrument of foreign policy and regional influence across Africa, although some rebranding and restructuring of the organization is expected. The Kremlin could change the Wagner Group’s name but will likely keep the existing security contracts with African authorities and continue using the group for disinformation operations. Reportedly, the Kremlin has already begun the “corporate takeover” of the Wagner Group, with Russian law enforcement authorities seizing computers from companies connected to Prigozhin. 

Nevertheless, the Wagner Group’s organizational restructuring in Russia will likely impact the group’s operations in Africa as the Kremlin moves to assert greater control over Wagner Group operations and personnel and demonstrate that Putin is still in power. For example, around six hundred Wagner Group mercenaries left the CAR following Prigozhin’s failed rebellion, however the reason for their departure remains unknown. Russian government officials have been traveling to Africa and the Middle East in recent weeks to reassure regimes that Wagner Group will be able to meet their existing contract requirements under new command and control. In a visit to Damascus on June 26, Russian Deputy Foreign Minister Sergei Vershinin assured Syrian President Bashar al-Assad that Wagner forces would continue operations under the control of the Kremlin. In the CAR and Mali, Russian Minister of Foreign Affairs Sergey Lavrov offered similar assurances. 

The Kremlin’s attempts to save face and assert control provide Western allies with an opportunity to counter the Wagner Group’s influence and position, particularly in African countries such as CAR and Mali. The United States and its allies can take a “demand-side economics” approach and introduce positive inducements for regimes currently contracting with the Wagner Group, such as diplomatic, economic, and security cooperation that meet the needs of African countries while swaying them away from their reliance on the Wagner Group and ultimately Russia. 

The United States could leverage its designation of the Wagner Group as a transnational criminal organization to share information with foreign partners about the Wagner Group’s criminal activity, human rights abuses, and illicit financial activity to encourage partners to open investigations within their jurisdictions and prosecute Wagner Group personnel as criminals. These prosecutions could be brought to international organizations such as Interpol, to issue Red Notices and engage law enforcement around the world to bring criminals to justice. Further, if the United Kingdom and EU designate the Wagner Group as a terrorist organization, it may deliver a reminder to African governments that terrorism remains a priority and that the West is willing to cooperate with African governments on internal national security threats. A terrorist designation would also allow the EU and United Kingdom to bring terrorism charges against Wagner Group personnel within their jurisdictions and create the ability to further sanction the group and its network, disrupting their financial activity and ability to travel.

Additionally, Western allies can seize the opportunity to raise awareness about Wagner’s lack of success in places like Mozambique and Libya, human rights abuses in African countries, and exploitation of natural resources, to emphasize that their services come at a high cost. Western countries can partner with civil society organizations and African governments to track and identify the complex ownership structures of the Wagner Group-connected companies that enable sanctions evasion, share intelligence on these companies among partners, and take steps to freeze and seize assets of the Wagner Group that run counter to the interests of African countries. 

Identifying a key vulnerability in Russia sanctions enforcement: Beneficial ownership 

The key to understanding who is behind the shell companies and complex ownership structures of companies facilitating the Wagner Group’s activity is identifying the real human beings or organizations that control shell companies. They are called “beneficial owners.” 

The Financial Action Task Force (FATF), the international body responsible for setting global anti-money laundering standards, has called on its members to implement tougher global beneficial ownership standards and give competent authorities adequate information on the true owners of companies. Several countries, including the United States and United Kingdom, have passed legislation and developed or are in the process of developing regulations to bring their countries’ anti-money laundering and countering-the-financing-of-terrorism regimes up to FATF standards on beneficial ownership. 

The FATF and the international Egmont Group of Financial Intelligence Units (FIUs) can collaborate to ensure FATF regional bodies representing African countries and FIUs across the continent have the information they need and the capacity to understand and identify the risks the Wagner Group’s activities present to their respective domestic financial systems as well as the global financial system. 

Lack of knowledge on beneficial ownership also played a key role in obstructing the enforcement of the oil price cap against Russia. The United States and Group of Seven (G7) allies imposed a sixty-dollar cap on Russian crude oil in December 2022, with the goal of keeping oil flowing out of Russia while reducing the revenue stream into Moscow. The effectiveness of the price cap strategy depends on Russian oil exporters and importers accessing maritime services, such as insurance of oil tankers, provided by G7 countries that have sanctioned Russia. If Russian oil importers and exporters want to use these maritime services, which make up 90 percent of the market, they have to comply with the price cap. In response, Moscow built up a shadow fleet of oil tankers whose real owners are unknown. 

Why Russia’s shadow fleet is so dangerous

In February 2023, Russia’s shadow fleet was worth more than two billion dollars and consisted of around six hundred vessels. The fleet includes tankers previously used for Iranian and Venezuelan oil shipments and European tankers sold to Middle Eastern and Asian owners since Russia’s invasion of Ukraine began. The tankers operate without Western insurance and are not up to Western safety standards for oil tankers. Most of them are owned by offshore companies based in countries such as Panama, the Marshall Islands, and Liberia.

A third of Russia’s shadow fleet tankers are more than fifteen years old, which poses heightened risks of oil spills and environmental disasters. Normally, tankers should be demolished when they are around fifteen years old. The average age of the shadow fleet is twelve years and many of them will surpass fifteen years in the coming years. 

Fortunately, Asian nations have strengthened monitoring and inspection of old tankers. For example, Singapore held a record thirty-three tankers for failing safety inspections. Even Chinese port authorities in Shandong province have held at least two tankers older than twenty years for safety checks. Ships under detention for safety violations will have to re-apply for certificates and it’s unclear how long it will take them to get back to the ocean, if at all. 

How to prevent the growth of the shadow fleet

Last year, the number of undisclosed buyers of tankers more than doubled compared to 2021. Buyers of most of these tankers were located outside of G7 countries or the European Union. Specifically, London-based company Gibson Shipbrokers estimates that around one hundred fuel tankers were sold to companies outside of the G7. The undisclosed buyers of European ships most likely were shell companies or individuals acting on behalf of Russian beneficial owners of the shadow fleet tankers. This development is alarming and demonstrates a common theme in the challenges associated with enforcing sanctions against Russia including the oil price cap—beneficial ownership. 

Following FATF’s recommendation to its member states on making the identities of true owners of companies available to competent authorities could make it more difficult for sanctions evaders and money launderers to facilitate transactions for sanctioned Russian companies. It could also help sellers of tankers to identify whether the ultimate benefactor is a Russian entity or an individual. In the meantime, greater information sharing between partner nations on illicit Russian financial activity and the shell companies that are involved will help close this gap in sanctions enforcement and increase global understanding of Russia’s reach.   

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a young global professional at the Atlantic Council’s GeoEconomics Center.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

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On June 13, the Atlantic Council’s Iran Strategy Project hosted a virtual event, “The Mechanisms of Corruption in Iran” to discuss the nature of corruption and sanctions in Iran as well as the social, economic, and political implications of these issues.

The Atlantic Council’s Scowcroft Middle East Security Initiative Director, Jonathan Panikoff conducted opening remarks, stating that discussions of Iran’s current economic situation must also address the corruption that exists within the country given its rampant nature. This was emphasized by Atlantic Council nonresident senior fellow Nadereh Chamlou who served as the moderator for the session.

In order to discuss the complexities of corruption within Iran, it is first important to define corruption. Associate Professor of Finance at the University of Dallas, Ali Dadpay, explained that corruption is the use of a public position for personal gain. Dadpay shared how this phenomenon manifests in situations such as the importation of luxury vehicles into the Islamic Republic. He recalled how foreign made vehicles were banned from Iran, however, members of Parliament were able to import foreign made luxury vehicles due to their positions of power.

Causes of Sanctions and Corruption

The beginning of the conversation included a review of the causes of corruption in Iran and specifically analyzed the role that sanctions play in its prevalence. To initiate the discussion, Chamlou mentioned a study by one of Iran’s top economists that found only 20% of corruption can be traced back to sanctions, whereas 80% is attributed to other factors. This begs the question, what could that something else be?

Entrepreneur Majid Zamani claimed that while sanctions are not the only cause of this corruption, they have created a plethora of opportunities for rent-seeking, which only those who are ideologically connected to the regime have access to.

Within Iran specifically, Zamani discussed the existence of a theocratic system, stating that because people are selected for leadership based on their loyalty to ideology, rather than merit, the political system is poorly organized and thus more susceptible to corruption. Furthermore, Dadpay argued that because Iran has a nationalized economy with extensive regulations, as opposed to a globalized economy, the government benefits from corruption and monopolization. Zamani added that the banking system epitomizes this vulnerability to corruption due to the interest rates, corrupting all loans.

Impact of Corruption & Sanctions

The panel then moved to the discussion of how corruption and sanctions have manifested in Iranian society. Given the US Government’s prioritization of US interests, as opposed to those of the Iranian community, Atlantic Council’s nonresident senior fellow Brian O’Toole and Dadpay both recognized that even though these sanctions are targeted, they will ultimately influence all Iranians, by creating a demand for sanctions evasion and a market that avoids financial responsibility. When asked whether Iranians could avoid corruption in the private sector and still succeed, Zamani claimed that the entire private sector in Iran is impacted by its relationship to the government. However, there is a spectrum of involvement, with one end including those who are loyal to the government and comfortable with the corruption and the other end comprising of individuals trying to avoid engaging in corrupt behaviors but ultimately having to comply at times in order to survive. He also clarified that although they do not make up the majority of the GPD, the Iranian private sector includes small market owners and medical professionals, occupations that comprise the bulk of society.

How to address it

After discussing the causes and effects of corruption in Iranian society, the panelists moved to their recommendations as to how to address it. O’Toole said that it takes time, so patience and persistence are crucial, and tackling corruption begins by addressing root problems. While pursuing flashy cases of corruption may be more alluring, it often only targets a single perpetrator rather than the source. To tackle the wider system would require transparency at every stage, even the more mundane. Dadpay agreed with O’Toole, advocating for a clear and transparent legal framework and stating that accountability in corruption cannot be achieved without an explicit and independent judiciary branch. In order to achieve transparency and accountability, according to Zamani, civil society must demand it from the government, through civil disobedience and outward refusal to engage in a corrupt system of governance. Lastly, moderator Chamlou included her own belief that tackling corruption in Iran would require dismantling networks of patronage and government insiders.

Masoud Mostajabi is a Deputy Director at the Atlantic Council’s Middle East Programs.

Britt Gronemeyer is a Young Global Professional with the Middle East Programs at the Atlantic Council. 

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Security

Military camps for Wagner reportedly under construction in Belarus

Tracking narratives

Pro-Kremlin sources spreading disinformation to justify missile strike in Kramatorsk

Kremlin blames Colombian victims for the injuries they sustained in the Kramatorsk attack

Media policy

Prigozhin’s online assets reportedly blocked in Russia

International Response

Questions abound over the future of Wagner contracts and Prigozhin-linked businesses in Africa

Analysis: With Wagner mutiny, Russia’s loses plausible deniability about its involvement in Africa

Investigation sheds light on how Putin’s childhood friends allegedly evade sanctions

Military camps for Wagner reportedly under construction in Belarus

Russian independent outlet Verstka reported on the construction of camps for Wagner forces near Asipovichi, Mogilev Oblast, located in Belarus approximately two hundred kilometers from the Ukraine border. According to Verstka’s local forestry source, the area will cover 2.4 hectares (5.9 acres) and accommodate eight thousand Wagner fighters. The source also claimed that there will be additional camps constructed. Family members of Wagner fighters also confirmed to Verstka that they were deploying to Belarus. 

Radio Svaboda, the Belarusian-language edition of Radio Liberty, reviewed satellite imagery from Planet Labs that suggested signs of expansion at the Unit 61732 military camp adjacent to the village of Tsel, twenty kilometers northwest of Asipovichi. The outlet interviewed Ukrainian military analyst Oleg Zhdanov, who suggested it was “too early to tell” as to whether the military camp’s expansion is specifically for Wagner forces. “Very little time has passed to start building a camp specifically for the Wagnerites—it’s unreal,” Zhdanov told Radio Svaboda.

On June 27, in his first speech after the Wagner mutiny, Russian President Vladimir Putin reaffirmed the deal that ended the rebellion on June 24 in which Yevgeniy Prigozhin would relocate to Belarus. Putin praised those Wagner fighters who did not participate in the revolt and said they could sign a contract with the Russian Ministry of Defense of other services. He added that other mercenaries who do not want to join could go either home or follow Prigozhin to Belarus.

—Eto Buziashvili, research associate, Tbilisi, Georgia

Pro-Kremlin sources spreading disinformation to justify missile strike in Kramatorsk

Pro-Kremlin sources denied Russia targeted civilians when a missile struck a crowded pizza restaurant in Kramatorsk, killing at least twelve civilians and injuring more than fifty others. According to this narrative, RIA Pizza was actually a military base hosting US and Ukrainian soldiers. To support the claims, pictures taken after the strike were published on Telegram and Twitter.

To support the claim that soldiers of 101st Airborne Division were located at the pizza “military base,” pro-Kremlin sources circulated grisly footage of the attack aftermath recorded by freelance journalist Arnaud De Decker. The clip shows a man wearing a morale patch of a US flag with the words “Always Be Ready: 5.11 Tactical.” 5.11 Tactical is a military apparel company that sells branded merchandise, including morale patches, worn to offer support to various causes and slogans but not used official unit patches. Various types of 5.11 Tactical’s “Always Be Ready” patches are readily available for purchase online.

Similarly, another post from Aleksandr Simonov’s Telegram channel that a man wearing an 101^st Airborne t-shirt was a member of the US Army division. These t-shirts are also readily available from online retailers.

—Sayyara Mammadova, research assistant, Warsaw, Poland

Kremlin blames Colombian victims for the injuries they sustained in the Kramatorsk attack

In addition to pro-Kremlin accusations that the Kramatorsk attack targeted a base housing US Army soldiers, Kremlin influencers also targeted citizens of Colombia, three of whom were injured in the attack, for being at the site of the incident. Colombian President Gustavo Petro said the attack targeted “three defenseless Colombian civilians” in violation of the protocols of war and called for the Colombian Foreign Ministry to submit a note of diplomatic protest to Russia. While the Kremlin acknowledged launching the attack, it insisted the assault struck military personnel rather than civilians.

The three Colombian citizens injured in the attack include acclaimed Colombian writer Hector Abad Faciolince; Sergio Jaramillo Caro, who previously led Colombia’s peace negotiations with FARC rebels; and Ukrainian-based journalist Catalina Gomez. According to the New York Times, Abad and Jaramillo were in Kramatorsk “collecting material” in support of their initiative, ¡Aguanta Ucrania! (“Hang On Ukraine!”), which seeks to garner support for Ukraine in Latin America.

Following the attack, Colombian influencers and officials criticized the attack through media outlets and social media accounts in Spanish. Danilo Rueda, Colombia’s current high commissioner for peace, issued a statement expressing support for the victims without mentioning Russia, while the Ministry of Foreign Affairs expressed its “strongest condemnation of the unacceptable attack by Russian forces on a civilian target.” 

Gomez, who was injured in the attack, broadcast a video for France 24 from the site of the explosion. Meanwhile, Abad and Jaramillo conducted interviews with Colombian media outlets such as El Tiempo in which they described the incident.

Actualidad RT, a Russian media outlets with enormous reach in the Spanish-speaking world, insisted that the victims of the attack were mercenaries and instructors of NATO and Ukraine rather than civilians. Actualidad RT quoted statements from Igor Konashenkov, spokesperson for the Russian Ministry of Defense,  and Kremlin spokesperson Dmitri Peskov, who said the attack struck “military targets” and that “Russia does not attack civilian infrastructure.” Actualidad RT promoted its claims via Twitter and Facebook multiple times on June 28.

Colombian radio station WRadio interviewed Kremlin foreign policy spokesperson Maria Zakharova on the morning of June 28. Zakharova stated that the restaurant was a Russian military target and called for an investigation into Victoria Amelina, a Ukrainian writer who was gravely injured while purportedly hosting the Colombians at the restaurant, claiming without evidence that Amelina had prior knowledge that the restaurant was a military target. Zakharova reiterated this statement after a WRadio journalist asked her to confirm the accusation. In contrast, Abad stated that it was Gomez who suggested they visit the restaurant, and that she apologized for doing so after the attack.

The Russian embassy in Colombia amplified Zakharova’s narrative later that same afternoon and evening. On Twitter, the embassy insisted that the city was “an operational and logistical-military hub, not a suitable place to enjoy Ukrainian cuisine dishes.” It also seemed to celebrate that the “reckless trip [of the Colombians] did not turn into an irreparable tragedy.”

—Daniel Suárez Pérez, research associate, Bogota, Colombia

Prigozhin’s online assets reportedly blocked in Russia

Over the course of the thirty-six-hour Wagner mutiny, the Kremlin attempted to limit information about Yevgeniy Prigozin on Russian social media and search engines, eventually blocking websites affiliated with Prigozhin. On June 24, the Telegram channel of Russian state-owned propaganda outlet RT reported that several Prigozhin-controlled media outlets including RIA FAN, People’s News, and Patriot Media Group were no longer accessible in parts of Russia. RT added that the reason for their disappearance was unknown. Similar reports appeared in Mediazona and several Telegram channels. 

The DFRLab used the Internet censorship measurement platform OONI to verify the claim and check the accessibility of RIA FAN within Russia. OONI detected signs that riafan.ru was blocked in the country. 

On June 29, independent Russian outlet The Bell claimed the Kremlin was searching for a new owner for Patriot Media Group, which includes media assets associated with Prigozhin. The following day, multiple Russian outlets reported that Prigozhin had dissolved Patriot Media Group.

—Eto Buziashvili, research associate, Tbilisi, Georgia

Questions abound over the future of Wagner contracts and Prigozhin-linked businesses in Africa

For years, Wagner has acted as Russia’s primary form of influence in Africa—spreading disinformation and propaganda, securing military contracts, and exporting natural resources to support Putin’s war effort. Following Prigozhin’s attempted mutiny, the future of Wagner’s operations on the continent has come into question. While it is highly unlikely the Kremlin would willingly abandon its influence in Africa, if Wagner is retired or its troops absorbed into the Ministry of Defense, it is uncertain who would maintain the group’s operations on the continent.

Russian Foreign Minister Sergei Lavrov confirmed that Russia’s work in Africa will continue. In a TV interview with Russia Today, Lavrov said, “In addition to relations with this PMC the governments of CAR and Mali have official contacts with our leadership. At their request, several hundred soldiers are working in CAR as instructors.”

A top advisor to Central African Republic President Faustin-Archange Touadéra appeared unconcerned about the weekend’s events. Speaking of Wagner’s military instructors, Fidèle Gouandjika said, “If Moscow decides to withdraw them and send us the Beethovens or the Mozarts rather than Wagners, we will have them.” In a statement released to its Telegram channel, the Officer’s Union for International Security—a US-sanctioned Wagner front company operating in CAR—claimed CAR’s defense minister had apologized for Gouandjika’s remarks. It quoted Defense Minister Claude Rameaux Bireau as saying, “The people of the CAR are grateful to the Russian instructors of Wagner, ask any Central African on the streets of Bangui or in the village of the CAR—he will confirm my words.”

In Mali, where Wagner forces have taken over responsibility for pushing back jihadists after the departure of French forces, the online outlet Mali Actu reported that the situation could dramatically impact Mali. “This situation raises major concerns about the security, stability and sovereignty of Mali, as well as the impact on the local population and counter-terrorism efforts,” it wrote.

—Tessa Knight, research associate, London, United Kingdom

Analysis: With Wagner mutiny, Russia loses plausible deniability about its involvement in Africa

While Wagner’s future in Africa remains uncertain, it is important to consider that the Wagner Group not just a paramilitary force. It is also a conglomerate of companies active in different sectors, from mining and logistics to political warfare and moviemaking, able to travel the spectrum between private entrepreneurism to state proxy. This flexibility has previously allowed Moscow to deploy Wagner to act as a force multiplier in Africa while simultaneously denying Russia’s direct presence on the continent. In Africa, Russia has used Wagner multiple times as part of a strategy to help authoritarian leaders stay in power and gain a pro-Russian military presence on the ground, all while maintaining plausible deniability. Until now, the positive outcomes of this strategy have far exceeded the costs for the Kremlin, as Russia has built a strong network of African influence with relatively little effort, securing concessions in strategic extractive industries, and expanding military-to-military relations on the continent.

However, this principle of plausible deniability, which made Wagner so successful and so useful for Moscow as an extension of its foreign policy and influence, is now damaged. As previously noted, Russian Foreign Minister Sergei Lavrov, as well as Putin, publicly confirmed direct links between Wagner and the Russian state apparatus.

Africa is intimately linked to Wagner: In the wake of Wagner’s involvement in Syria, Africa became the scene of the group’s expansion. Engaging in Sudan, the Central African Republic, Libya, Mozambique, Madagascar, and Mali, Wagner employed an opportunistic strategy of supplying security while taking concessions to mine natural resources. While its forces were in most cases invited to stabilize fragile states, its actions actively invited further instability, creating more opportunities and a greater demand signal for its services, ultimately granting renewing opportunities to Moscow to reinforce its footprint in the continent.

While denying direct links to Wagner’s actions in Africa might have become more difficult for the Kremlin, Russia is unlikely to waste the network of influence built by the group in recent years. Instead, Moscow will likely continue to deploy hybrid tools such as Wagner, although organized in different shapes and forms, so Russia can continue displacing Western influence, exploiting natural resources, and evading sanctions through dozens of front companies.

—Mattia Caniglia, associate director, Brussels, Belgium

Investigation sheds light on how Putin’s childhood friends allegedly evade sanctions

On June 20, the Organized Crime and Corruption reporting project (OCCRP) published a series of investigations titled “The Rotenberg Files” that shed light on the business dealings and alleged sanctions evasion attempts of Boris and Arkady Rotenberg, close friends of Russian President Vladimir Putin. The report is based on fifty thousand leaked emails and documents, examined by journalists from seventeen outlets. The OCCRP said the leak came from a source who worked for the brothers at a Russian management firm. The OCCRP investigation was conducted in partnership with the Times of London, Le Monde, and Forbes, among others.

Boris and Arkady Rotenberg are childhood friends of Putin. The billionaire brothers faced Western sanctions amid Russia’s 2014 annexation of Crimea, but their lavish lifestyles do not appear to have been impacted. 

According to the OCCRP, the leaked documents demonstrate how the Rotenberg brothers allegedly used Western lawyers, bankers, corporate service providers, and proxies to evade sanctions. 

One of the report’s findings also alleges the brothers maintain business links to Prince Michael of Kent, a cousin of the late Queen Elizabeth II who was previously accused by the Sunday Times and Channel 4 of profiting off close access to the Kremlin. According to the latest investigation, “Prince Michael distanced himself from earlier ties to the Putin regime in the wake of the 2022 invasion of Ukraine. But leaked emails and corporate records show he co-owns a company with two Russian businessmen who helped billionaire oligarch and Putin ally Boris Rotenberg dodge Western sanctions.” 

Another investigation from the Rotenberg files reported that Putin’s eldest daughter regularly visited a holiday property financed by Arkady Rotenberg in an exclusive Austrian skiing destination. Documents reviewed by the OCCRP suggest that the house was purchased by a Cypriot company in 2013 with a loan from a bank then owned by Arkady, using funds invested by another company he owned. Other records suggested that the former romantic partner of Putin’s daughter is connected to the company that owns the Austrian property. Residents claim to have seen Putin himself at the Kitzbühel residence, though this has not been confirmed. 

The Rotenberg brothers and Prince Michael declined to comment to the OCCRP investigative consortium.

—Ani Mejlumyan, research assistant, Yerevan, Armenia

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It is admittedly difficult to make historic political decisions, but the price of not doing so is often horrendously high. In this case, the price is obvious: By failing to integrate Ukraine and bring the countries of Eastern Europe out of the geopolitical grey zone, Western leaders set the stage for the full-scale Russian invasion of 2022.

Further mistakes will be just as costly. Thankfully, there is now a growing consensus throughout the West that only Ukrainian victory can end the global security crisis sparked by Russia’s invasion. Nevertheless, there is still a need for greater clarity on what would constitute victory and how Europe can achieve a lasting peace. 

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Defeating Russia and securing peace will require a series of interrelated measures that go far beyond the battlefield. I have identified five key elements to a sustainable settlement that will end the current carnage and prevent any repetitions in the years ahead.

The first element is arming Ukraine sufficiently for victory. This process is well underway, but serious issues remain in terms of both quantities and timing. Every single delay in military aid costs Ukrainian lives and emboldens Russia. Ukraine’s Western partners must overcome their misplaced fear of provoking Putin and should instead seek to streamline the delivery of weapons. After all, it is now widely recognized that Russia must be defeated on the battlefield.  

The second element is the strategic deterrence of Russia and creation of a new NATO-centered security architecture in Europe. There should now be no illusions: NATO alone can provide Europe with a credible and efficient security system. This means NATO membership for Ukraine. Nothing less will force Moscow to retreat. The upcoming NATO summit in Vilnius should conclude by inviting Ukraine to join the alliance. No bilateral guarantees or other compromise measures can hope to replace NATO’s Article Five or stop Russia. 

The third element is Ukrainian membership of the European Union and restoration of the Ukrainian economy in close unison with the wider European economy. There has been significant progress toward this objective since the outbreak of Russia’s full-scale invasion, but overall results remain disappointing and fall far short of the many political statements on the importance of Ukraine’s European integration.

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The fourth key task is undermining Russia’s potential to act aggressively. It is hard to assess how long Russia will remain capable of waging the current war, but financial issues will play an important role in any decision-making process. Last year, official Russian military expenditure amounted to approximately $85 billion. This year, the figure is set to reach at least $108 billion. Unofficially, the total sum spent on the war is likely to be far higher. Clearly, sanctions must continue and need to intensify. Additional steps could include the prevention of dual-purpose goods transit through Russia and the maximum implementation of secondary sanctions.

In parallel, it is also vital to protect and strengthen Ukraine’s economy. Further measures are necessary to facilitate Ukrainian exports. NATO-led naval convoys should break Russia’s Black Sea blockade and enable Ukraine to resume international exports throughout the country’s southern ports. Ukraine’s external debt should undergo restructuring.

The fifth element necessary for a sustainable peace in Eastern Europe is perhaps the most important and at the same time the most intangible. Genuine victory will only be possible when Russian imperialism is no longer a threat to the region.

Once Ukraine is liberated and secure under the collective umbrella of NATO membership, the top priority for the international community will be addressing the imperial ideology that encourages Russians to commit acts of international aggression with impunity and contempt for human life. Russia must bear full legal and financial responsibility for its aggression against Ukraine and for the genocide of the Ukrainian nation. The era of Russian impunity for war crimes must end.  

Unless the underlying issue of Russian imperialism is addressed at the international level, the liberation of Ukraine will provide little more than temporary relief. Confronting Russia’s imperial identity is the only way to achieve a lasting peace. This would pave the way for a new global security system and the much-needed reform of international bodies such as the UN Security Council. World peace will remain elusive until Russian imperialism is consigned to the dustbin of history.

Arseniy Yatsenyuk is Chairman of the Kyiv Security Forum and former Prime Minister of Ukraine (2014-16).

Further reading

UkraineAlert Jun 25, 2023

Short-lived Wagner mutiny will undermine Russia’s Ukraine invasion

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The short-lived Wagner mutiny was over in less than two days but it will have a long-lasting consequences for Russia, for a weakened Vladimir Putin, and for the already faltering invasion of Ukraine, writes Peter Dickinson.

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As Ukraine’s long-awaited counteroffensive gets underway, there are fears that Russia’s deteriorating military predicament could lead to an escalation in Vladimir Putin’s nuclear threats, writes Diane Francis.

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Initial analysis indicates that Russia deliberately destroyed the Kakhovka dam in what would qualify as one of Moscow’s worst war crimes in Ukraine, but holding the Kremlin accountable will prove extremely difficult, writes Danielle Johnson.

Civil Society Conflict

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Security

Ukrainian counteroffensive sees advances in Zaporizhzhia and eastern Ukraine

Wagner attempts to draft gamers as UAV pilots

Tracking narratives

Deripaska blames hackers after his website briefly takes credit for potential war crime

Rumors of alleged death of popular pro-Kremlin war correspondent gain traction on Twitter

Ukrainian counteroffensive sees advances in Zaporizhzhia and eastern Ukraine

On June 19, Ukrainian forces launched counteroffensive actions in at least three areas and appear to have made gains in Zaporizhzhia and eastern Ukraine. The Telegram channel of Russian military blogger WarGonzo reported that Ukrainian forces continued attacks northwest, northeast, and southwest of Bakhmut and advanced near Krasnopolivka. Ukrainian Deputy Defense Minister Hanna Maliar announced that over the past week Ukrainian troops advanced up to seven kilometers in the direction of Zaporizhzhia and retook 113 square kilometers of territory. Russian Telegram channels also reported that fighting was ongoing south and southwest of Orikhiv on June 19. Zaporizhzhia and Donetsk oblasts continue to be the most active areas of the frontline, as the Ukrainian army attempts to advance in the directions of Novodarivka, Pryutne, Makarivka, Rivnopil, Novodanylivka, and Robotyne.

On June 17, the Russian Ministry of Defense claimed that Ukrainian forces conducted ground attacks west and south of Kreminna. It also stated that the Russian army had repelled Ukrainian attacks on the Avdiivka-Donetsk sector. Meanwhile, Ukrainian forces continued operations around Velyka Novosilka near the border between Donetsk and Zaporizhzhia oblasts. 

According to Ukrainian forces, Russian forces conducted offensive actions in Donetsk and Luhansk oblasts. The Ukrainian military reported forty-five combat engagements with Russian forces near Yampolivka, Torske, Hryhorivka, Spirne, Avdiyivka, Krasnohorivka, Marinka, Pobieda, Novomykhailivka, and Donetsk’s Dibrova and Orikhovo-Vasylivka. According to Ukraine, the Russian army continued to shell villages in the direction of Marinka, Zaporizhzhia, Kherson, Lyman, and Kupiansk. Ukraine also alleged that Russian forces launched Kalibr cruise missiles from a submarine in the Black Sea and Shahed drones from the eastern coast of the Sea of Azov.

On June 20, Kyrylo Budanov, chief of the Main Directorate of Intelligence for the Ministry of Defense of Ukraine, alleged that Russian troops mined the Zaporizhzhia nuclear power plant’s cooling pond, which is necessary for the safe operation of the plant. According to Budanov, if Russia triggers an explosion, there is a “high probability that there will be significant problems.” Budanov did not provide any evidence to support the allegation, and the statement cannot be independently verified at this time. If true, however, it would put the nuclear plant at greater risk of a significant accident. The power plant complex, Europe’s largest, has been under occupation since February 2022.

On January 22, the governor of Russian-occupied Crimea accused Ukraine of targeting a bridge that connects the peninsula to Kherson Oblast, near the village of Chonhar. In a Telegram post, Vladimir Sal’do alleged that Ukraine struck the bridge with “British Storm Shadow missiles,” creating a hole in the middle of the bridge.

As fierce hostilities continue in eastern and southern Ukraine, there are signs of a new wave of arrests in Russia, including of people with ties to Ukraine. On June 20, Russian state media outlet RIA Novosti announced that a woman of Ukrainian origin was detained in Saransk and charged with treason.

—Ruslan Trad, resident fellow for security research, Sofia, Bulgaria

Wagner attempts to draft gamers as UAV pilots

A June 19 Telegram post from Russian opposition news outlet Verstka claimed that Wagner Group is encouraging gamers to apply to serve as unmanned aerial vehicle pilots in the war against Ukraine. The media outlet reported that no prior military experience was required to apply for the position. Posts from Wagner emerged on Vkontakte the same day, inviting gamers with experience in “manipulating joysticks in flight simulators” to enroll.

Verstka, which contacted a Wagner recruiter as part of its reporting, stated that the campaign aims to recruit soldiers to pilot “copters and more serious machines.” In this particular context, “copters” (коптеры) is a reference to commercial drones that are sold to the public and have been widely used in the war against Ukraine. A May 19 investigation published by the Organized Crime and Corruption Reporting Project found that Chinese manufacturers have reportedly continued to provide Russian armed forces with DJI drones through third parties in Kazakhstan. 

Verstka also noted that in 2022, the Russian defense ministry attempted to recruit gamers with a targeted ad campaign that invited them to play “with real rules, with no cheat codes or saves.”

—Valentin Châtelet, research associate, Brussels, Belgium

Deripaska blames hackers after his website briefly takes credit for potential war crime

The Russian-language website of Russian industrialist and US-sanctioned oligarch Oleg Deripaska briefly displayed an article appearing to take credit for deporting Ukrainian children to Russian-occupied Crimea in partnership with Kremlin official Maria Lvova-Belova, who is already facing an International Criminal Court arrest warrant for allegedly deporting children. 

Yaroslav Trofimov, chief foreign affairs correspondent at the Wall Street Journal, noted the article’s appearance and disappearance in a June 15 tweet. Trofimov shared screengrabs of the article, which by that time had already been deleted from Deripaska’s Russian-language website, deripaska.ru. A complete copy of the article can be found at the Internet Archive.

Later in the article, it added, “Separately, the Fund and personally Oleg Vladimirovich [Deripaska] express their gratitude to Maria Lvova-Belova and her project ‘In Hands to Children,’ which not only provided methodological materials, but also found an opportunity to send employees for psychological work with affected babies.” In March 2023, the ICC issued an arrest warrant for Lvova-Belova and Russian President Vladimir Putin, alleging they are responsible for unlawful deportation and transport of children from Russian-occupied parts of Ukraine to the Russian Federation.

In a response to Russian independent news outlet Meduza, which also covered the incident, a team of representatives for Deripaska called the article a “gross fake press-release” and blamed hackers for the article’s appearance. “The team added that Deripaska ‘unequivocally condemns the separation of children from their parents’ and that he is ‘one of the very few prominent Russian industrialists who openly criticizes the fratricidal war and consistently advocates for peace in Ukraine, as well as a reduction in global military spending,’” Meduza noted.

—Eto Buziashvili, research associate, Tbilisi, Georgia

Rumors of alleged death of popular pro-Kremlin war correspondent gain traction on Twitter

Rumors are spreading online that claim Ukrainian forces killed pro-Kremlin war correspondent Semyon Pegov, who operates an influential group of social media accounts under the name Wargonzo. The rumor first spread on Twitter on June 19 following the release of a graphic video from the 73rd Naval Center of Operations documenting how Ukrainian special forces unit had shot Russian soldiers in trenches. On June 19, Pegov’s Twitter account disregarded the allegations as fake. Wargonzo’s Telegram account has continued to operate as usual.

DFRLab analysis conducted with the social media monitoring software Meltwater Explore revealed that the most retweeted tweet came from the pro-Ukraine Twitter account @GloOouD, which stated, “LOOKS LIKE RUSSIAN TERRORISTS AND WAR REPORTER SEMEN PEGOV WAS KILLED BY UKRAINIAN SPECIAL FORCES.” The account shared a screenshot of a low-quality video frame depicting a red-bearded man that bears resemblance to Pegov.

The DFRLab confirmed that the video frame depicting Pegov’s look-alike was extracted from the graphic video posted posted by the 73rd Naval Center of Operations. The video’s metadata indicates the clip was created on June 18, 2023, at 22:16:07 GMT+0300. However, the video shows events occurring in daylight.

Pegov’s most recent public appearance was on June 13 during a meeting between Putin and Russian war correspondents. The Kremlin-controlled Channel One Russia broadcast the meeting on June 18.

—Nika Aleksejeva, resident fellow, Riga, Latvia

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Table of contents

Executive summary

I. Introduction

II. The role of economic statecraft in a Taiwan crisis

Goals of economic countermeasures

Current economic statecraft tools

Tools in a future crisis

III. Sanctions scenarios and their costs

Economic countermeasures aimed at China’s financial system

Economic countermeasures aimed at individuals and entities associated with CCP and PLA leadership

Economic countermeasures aimed at China’s industrial sectors

IV. Practical challenges in sanctions development

Conclusions and recommendations

Executive summary

In recent months, growing tensions in the Taiwan Strait as well as the rapid and coordinated Group of Seven (G7) economic response to Russia’s invasion of Ukraine have raised questions—in G7 capitals and in Beijing alike—over whether similar measures could be imposed on China in a Taiwan crisis. This report examines the range of plausible economic countermeasures on the table for G7 leaders in the event of a major escalation in the Taiwan Strait short of war. The study explores potential economic impacts of such measures on China, the G7, and other countries around the world, as well as coordination challenges in a crisis.

The key findings of this paper:

1. In the case of a major crisis, the G7 would likely implement sanctions and other economic countermeasures targeting China across at least three main channels: China’s financial sector; individuals and entities associated with China’s political and military leadership; and Chinese industrial sectors linked to the military. Past sanctions programs aimed at Russia and other economies revealed a broad toolkit that G7 countries could bring to bear on China in the event of a Taiwan crisis. Some of these tools are already being used to target Chinese officials and industries, though at a very limited scale.
2. Large-scale sanctions on China would entail massive global costs. As the world’s second-biggest economy—ten times the size of Russia—and the world’s largest trader, China has deep global economic ties that make full-scale sanctions highly costly for all parties. In a maximalist scenario involving sanctions on the largest institutions in China’s banking system, we estimate that at least $3 trillion in trade and financial flows, not including foreign reserve assets, would be put at immediate risk of disruption. This is nearly equivalent to the gross domestic product of the United Kingdom in 2022. Impacts of this scale make them politically difficult outside of an invasion of Taiwan or wartime scenario.
3. G7 responses would likely seek to reduce the collateral damage of a sanctions package by targeting Chinese industries and entities that rely heavily and asymmetrically on G7 inputs, markets, or technologies. Targeted sanctions would still have substantial impacts on China as well as sanctioning countries, their partners, and financial markets. Our study shows economic countermeasures aimed at China’s aerospace industry, for example, could directly affect at least $2.2 billion in G7 exports to China, and disrupt the supply of inputs to the G7’s own aerospace industries. Should China impose retaliatory measures, another $33 billion in G7 exports of aircrafts and parts could be impacted.
4. Achieving coordination among sanctioning countries in a Taiwan crisis presents a unique challenge. While policymakers have begun discussing the potential for economic countermeasures in a Taiwan crisis, consultations are still in the early stages. Coordination is key to successful sanctions programs, but high costs and uncertainty about Beijing’s ultimate intentions will make stakeholder alignment a challenge. Finding alignment with Taiwan in particular on the use of economic countermeasures will be central to any successful effort. G7 differences on Taiwan’s legal status may also prove a hurdle when seeking rapid alignment on sanctions.
5. Deterrence through economic statecraft cannot do the job alone. Economic countermeasures are complementary to, rather than a replacement for, military and diplomatic tools to maintain peace and stability in the Taiwan Strait. Overreliance on economic countermeasures or overconfidence in their short-term impact could lead to policy missteps. Such tools also run the risk of becoming gradually less effective over time as China scales up alternative currency and financial settlement systems.

I. Introduction

For decades, Taiwan’s deepening economic ties with China and the rest of the world have helped maintain peace and stability in the Taiwan Strait. Mutual trade and investment have spurred rapid economic growth and—at least until recently— appeared to diminish the likelihood of military conflict.

The long-standing guardrails around the China-Taiwan status quo have weakened. Intensifying US-China geopolitical tensions, China’s increased use of military and economic tools to put pressure on Taiwan, Beijing’s draconian handling of Hong Kong, and evolving Taiwanese perspectives on their national identity and relationship with the mainland have all contributed to rising tensions. Taiwan’s presidential elections set for early 2024 increase the risk of escalation, as do both a rancorous US debate on China and political anxiety in Beijing in the face of a deteriorating economic outlook.

As concerns grow, so does awareness of the global economic stakes of a Taiwan crisis. Prior Rhodium Group research estimates that more than $2 trillion of global economic activity would be at risk of direct disruption from a blockade of Taiwan annually.¹ This is a likely underestimate of the short- and long-term economic fallout of a full-blown crisis. In all cases, the scale of these likely global impacts—ranging from widespread goods shortages, mass unemployment, and a possible financial crisis—underscores the need for clear-eyed analysis about the costs of a conflict. 

In this context, policymakers and business leaders around the world have begun discussing the potential role of sanctions and other economic countermeasures in a military crisis. The G7’s coordinated use of sanctions against Russia in the wake of its invasion of Ukraine have highlighted the range of tools on the table. In Washington and other G7 capitals, as well as in Beijing, leaders are now considering the potential for, and implications of, sanctioning China. Yet G7 coordination in a Taiwan crisis would involve a different set of challenges. China’s economy is ten times larger and more globally interconnected than Russia’s, raising questions about the viability of joint economic countermeasures.

Given these open questions, the purpose of this report is to provide a data-driven and objective first look at the potential for a coordinated G7 response to a Taiwan crisis. It evaluates different economic statecraft tools and considers the global economic repercussions from their use. Based on an extensive series of in-person roundtable discussions in the United States, the European Union, and the United Kingdom, interviews held with G7 policymakers and experts, and our own independent economic analysis, the report sets out the order of magnitude of what is at stake and the coordination that would be required for sanctions options to be effective.

While few US, European, and Chinese officials want to see tensions escalate in the Taiwan Strait, the past year has shown that situations previously regarded as highly unlikely can quickly materialize into a devastating reality. Understanding the scenarios and risks of using the tools of economic statecraft is not only a useful exercise, but also a critical step in ensuring all sides understand the full impact of actions that may be undertaken in a crisis.

II. The role of economic statecraft in a Taiwan crisis

A sense of heightened risk in the Taiwan Strait and the use of sanctions against Russia has led decision-makers around the world to reflect on the potential use of economic countermeasures against China in a Taiwan crisis. US lawmakers have already proposed legislation mandating sanctions on China in the event of an invasion of Taiwan.² Surveys of European countries underline an increasing—if still minority—willingness to sanction China if it were to take military action against Taiwan.³ Officials in Beijing are asking these questions as well, with China’s State Council reportedly considering the potential for Western sanctions in a Taiwan crisis.⁴ The economic fallout from sanctions on Russia have also led business leaders and major banks to conduct contingency planning exercises exploring their exposures to a cross-strait crisis, including sanctions on China.

In defining what sanctions to use—if any—policymakers are likely to take a series of factors into consideration: what goals they are looking to achieve, what options are on the table to achieve those goals, and their relative impacts, costs, and limitations. This section reviews these factors and lays out the most likely options on the table.

Goals of economic countermeasures

Economic countermeasures—defined broadly here to include financial sanctions, export controls, and other restrictions on economic activity—can have a variety of objectives. They may aim to deter aggression, either by promising punitive economic actions in response to a transgression (deterrence by punishment) or by denying an adversary the technology or resources to engage in aggressive activity in the future (deterrence by denial). They may also aim to degrade an adversary’s ability or willingness to sustain aggression after it has begun.

The aim of economic countermeasures may evolve over time. The United States had long imposed export controls to limit the flow of military and dual-use technology to Russia. Immediately prior to Russia’s full-scale invasion, the United States and allies threatened sanctions on Russia in a bid to deter military action. After the invasion, the focus of sanctions shifted to degrading Russia’s ability and willingness to continue the war. Sanctions may also have had a signaling effect that G7 countries were aligned and willing to bear prolonged costs in support of Ukraine.

As in the case of Russia, the United States and allies have limited the flow of arms and military technology to China in part to blunt its ability to engage in aggression against Taiwan long before a potential crisis. The proper design of these long-term restrictions is a matter of contentious debate in the field of export controls and technology policy, but is not the focus of this paper.

Some G7 partners are already communicating to China that actions short of an invasion could trigger economic countermeasures

Economic countermeasures might also be considered after a full-scale invasion of Taiwan to degrade China’s ability to sustain the conflict. In fact, interviews and roundtables highlighted near consensus about the fact that sanctions would be imposed on China were it to use military power to seize Taiwan. However, if the case of Russia is any guide, these sanctions take time to have an effect. Recent studies suggest that absent military intervention from the United States and allies, Taiwan is unlikely to withstand a full-scale invasion for the length of time necessary for sanctions alone to meaningfully degrade China’s military capacity.⁵

Some level of sanctioning might therefore also be contemplated in a crisis below the level of invasion, to deter further aggression. Some G7 partners are already communicating to China that actions short of an invasion could trigger economic countermeasures. These actions are the core focus of this report. While we do not identify specific triggers for economic action below invasion—because these are still intensely debated—they might include a military quarantine scenario, where the PRC restricts the free movement of ships or planes to Taiwan; acts of overt economic coercion such as wide-ranging punitive restrictions on cross-strait trade; and major cyberattacks or other disruptions to telecommunications networks on the island. Taiwanese officials have described some of these below-invasion scenarios as the most likely and pressing military risks to Taiwan’s sovereignty.⁶ Some of these “gray zone” actions, besides, come with high global economic costs that could warrant efforts by G7 nations to deter Chinese actions.⁷

Current economic statecraft tools

In looking to achieve these goals, G7 leaders have a range of tools available. Many economic countermeasures have been deployed in the context of previous crises (Table 1), including Russia’s 2014 annexation of Crimea and 2022 full-scale invasion of Ukraine, making them useful starting points to assess potential future action.

In understanding whether these tools could also be deployed in a major cross-strait crisis, it is important to remember that some tools are already being used against China today, both by the United States and other members of the G7. Actions include, among others:

• Export controls including product-based and end-user-based controls on certain strategic technologies, such as semiconductors, integrated circuits, and supercomputing technology.⁸
• Restrictions on the trading of debt and equity instruments in certain military-related companies under the Non-SDN Chinese Military Industrial Complex Companies List.⁹
• Sanctions imposed on persons involved in the repression of minorities in Xinjiang, as well as small Chinese banks aiding Iran and North Korea in sanctions evasion.¹⁰
• US and EU coordination of sanctions against Chinese firms involved in supporting Russia’s war on Ukraine.

While these measures are applied at a much smaller scale than they would be in a Taiwan Strait crisis, they illustrate the fact that G7 nations have already shown willingness to use economic measures against China when Chinese actions or policies were considered problematic. Importantly, these measures have been selective. From manufactured goods to inputs for electric vehicles, to machine tools, and pharmaceuticals, China is deeply embedded in global supply chains in a way wholly more complicated than Russia’s energy exports. At the same time, China’s reserves, capital controls, the state-owned banking sector, and abundant fiscal space provide the Chinese economy with critical buffers and economic defense mechanisms.

Tools in a future crisis

In imposing sanctions in a Taiwan crisis, G7 partners would seek to amplify existing measures taken against China and focus on asymmetric dependencies. Policymakers will likely look to the same types of targets described in Table 1, with varying intensity depending on the level of escalation, namely:

1. Sanctions on China’s financial sector
2. Sanctions on individuals associated with the leadership of the Chinese Communist Party (CCP) and People’s Liberation Army (PLA)
3. Restrictions on industrial companies in sectors relevant to China’s defense industrial base

We take these three types of tools as our baseline for likely G7 countermeasures in a Taiwan crisis and analyze each in depth.

While these are the most likely sets of tools identified by experts based on past actions, future crises may bring new tools to the table too. Conversations with US and European officials made clear that Russia’s invasion of Ukraine reshaped the contours of what was possible in the realm of economic statecraft. Just as blocking Russia’s central bank reserves and implementing an oil price cap were initially considered unrealistic, crises may spur discussions around new tools. Roundtable discussants raised options ranging from targeting casinos in Macau, which are regarded as havens of capital flight for China’s elite as well as illicit finance and money laundering; to imposing controls on China’s digital industries and firms, which power much of the country’s urban and consumer economy; to limiting access to International Monetary Fund (IMF) Special Drawing Rights, and stopping repayments of dollar-denominated Belt and Road Initiative (BRI) debt. We do not explore these potential countermeasures in this study. However, some of the ideas discussed by stakeholders illustrate the range of additional tools that could be brought to bear in a crisis.

III. Sanctions scenarios and their costs

In this section we examine three likely channels of G7 sanctions—on China’s financial system, on certain individuals and entities, and on industrial sectors. We provide an assessment of China-G7 economic value at stake through use of each type of tool, and evaluate implementation challenges, possible effectiveness, and risks.

Economic countermeasures aimed at China’s financial system

In a Taiwan crisis, G7 leaders could consider deploying economic countermeasures targeted at China’s financial system. Financial sector sanctions are a central pillar of the G7’s recent sanctions program aimed at the Kremlin. These measures include actions to block transactions with major Russian banks, freeze their assets, and deny them access to the global dollar payments infrastructure.

This section explores the economic implications of sanctions on China’s financial system, considering two primary options: a targeted sanctions program to limit dollar financing to small banks involved in funding military-related activities, and a comprehensive sanctions program targeting China’s four largest banks and its central bank with the aim of cutting China off from global financial markets.

Global economic links: Finance

For an economy of its size, China has relatively limited external financial sector ties. China is the world’s second-largest economy and has the largest volume of international goods trade, yet it ranks eighth and ninth in the world in terms of total external assets and liabilities.¹¹ Nonetheless, these ties have critical global importance. As of the end of 2022, China held 95 percent of its $3.3 trillion in reserves in foreign currency (with the remaining held in gold).¹² China does not report the exact composition of its foreign exchange reserves, but it is known to hold at least $1.1 trillion in US government bonds through US custodians, and more routed through custodians in Belgium,¹³ as well as about $300 billion in corporate debt and equity.¹⁴ The remainder of China’s foreign currency reserves are held predominantly in euros, Japanese yen, and pounds sterling.¹⁵ In addition to China’s official reserves, China’s banking sector holds $1.5 trillion in cross-border assets according to State Administration of Foreign Exchange statistics, most of which is held in G7 currencies.¹⁶ 

Global bank holdings of assets within China’s banking system are much lower. On average, only 3 percent of global central bank reserve holdings are in RMB-denominated assets.¹⁷ G7 banks hold $112 billion in claims on Chinese banking institutions such as loans, deposits, and debt instruments, which is only 1 percent of total cross-border bank claims.¹⁸ While this means that global banks, on average, are not heavily exposed to China in terms of explicit bank assets, it also means that Chinese banks primarily borrow from Chinese domestic savers and do not depend heavily on foreign borrowing to maintain their balance sheets.

Global exposures to China’s banking system are much greater when considering China’s role facilitating cross-border financial flows, particularly trade. When Chinese importers and exporters do business abroad, they typically do so in foreign currencies: 77 percent of China’s total $6.8 trillion in goods and services trade is settled in currencies other than the RMB, primarily US dollars and euros.¹⁹ To facilitate these cross-border payments, Chinese banks maintain correspondent accounts at global banks, which debit or credit dollar and euro payments to the Chinese correspondent accounts on behalf of the foreign customer or supplier. Maintaining these correspondent accounts is a key part of the financial infrastructure underpinning global trade.

Chinese banks also finance other important cross-border flows, including $384 billion in repatriated income from foreign businesses and investments, $330 billion in inbound and outbound direct investment, and $381 billion in cross-border portfolio investment.²⁰

Scenarios

With these financial sector linkages in mind, we consider two potential sanctions scenarios: one in which G7 countries would impose limited sanctions on a small bank with linkages to China’s military or technology sector, and another where they would deploy full-scale sanctions on China’s central bank and China’s Big Four banking institutions.

Limited sanctions scenario

One potential scenario would involve imposing blocking sanctions on a small Chinese bank with limited financial ties to the global financial system and with links to China’s military or dual-use technology sectors. The nominal purpose of these sanctions would be to constrain the flow of foreign financing to military-relevant economic activities.

Actions of this kind have been imposed by the United States before. In 2012, the US Treasury Department sanctioned China’s Bank of Kunlun for providing financial services to six Iranian banks sanctioned by the United States for involvement with Iran’s weapons program and international terrorism.²¹ In 2017, the United States issued a final rule under Section 311 of the USA PATRIOT Act severing China’s Bank of Dandong from the international dollar financing system for its role in helping the Democratic People’s Republic of Korea (DPRK) evade sanctions.²²

The Bank of Kunlun and Bank of Dandong were relatively small and had limited ties to the global financial system. The financial impact from these actions on the global financial system was minimal. In the case of the Bank of Dandong, for instance, the bank processed $844 million in cross-border transactions in 2016 just prior to being identified as an institution of “primary money laundering concern,” a modest sum in the broader picture of global financial flows.²³ While these banks were cut off from the global dollar financing system, they remain connected to the rest of China’s banking sector. As raised in our roundtables, this enables them to continue providing financial services for US sanctioned entities, including Iran and the DPRK.

In a Taiwan crisis scenario, policymakers would face a similar challenge. G7 countries could impose blocking sanctions on small banks, freezing any foreign assets held in G7 jurisdictions and prohibiting domestic individuals and entities from transacting with those banks. However, even if the sanctioned banks lost direct access to correspondent banks in the United States and Europe, they would still have access to financing channels from other Chinese banks, and China’s military-industrial enterprises could still easily access dollar financing, if needed, from other channels in China’s state-run banking system. Rather than make a substantial impact on China’s financing flows, the primary impact of these types of sanctions would be limited to conveying an intent to escalate financial sanctions further, potentially on larger, more systemically important institutions.

Full-scale financial sector sanctions scenario

At the other extreme, the United States and allies could take much more drastic measures against China’s financial system by, for example, imposing blocking sanctions and denying SWIFT access to China’s central bank, its finance ministry, and China’s Big Four banks, which collectively hold one-third of China’s total banking assets.²⁴

The economic impact of such moves would be dramatic, both for China and for the world. This would effectively freeze China’s foreign exchange reserves held in overseas custodial accounts, making them unusable for the defense of China’s currency or to meet short-term obligations to finance China’s imports or external debt repayments. The bulk of overseas assets of the Big Four banks —amounting to around $586 billion—would be frozen.²⁵ This represents a floor, not the ceiling, of the global economic disruption from these actions, which are many magnitudes higher.

G7 assets in China would also be at risk. It is likely that China would freeze the (relatively small) renminbi-denominated holdings of G7 banks. Chinese banks, facing a sudden shortage of foreign exchange due to asset freezes, would likely fall into technical default on G7 bank-issued debt, totaling around $126 billion.

Sanctioned banks would also be cut off from the international dollar payments system. Chinese banks do not systematically report the scale of their cross-border transaction settlements, so we are left to estimate the scale of disruption if China’s Big Four banks were sanctioned. Starting from China’s balance of payments statistics on cross-border trade and investment, we estimate what share of that activity is attributable to the Big Four. We assume that the Big Four banks’ role in facilitating cross-border trade and investment is proportional to their share of foreign asset ownership in China’s whole banking sector, indicating approximately $3 trillion in trade and investment flows could be put at risk, primarily from disruptions to trade settlement. This is only a rough estimate and is likely an undercount, but it illustrates the scale of economic activity at risk from full-scale sanctions on China’s largest banks.

Over the long term, Chinese importers and exporters could move to other, unsanctioned banks for trade settlement and finance, but the immediate disruption to global trade would be substantial and smaller banks would likely struggle to backfill the enormous demand for trade-facilitating financial services in the short term. Eventually, Chinese importers and exporters would adapt to financial-sector sanctions by turning to a different set of banks and potentially engaging in more renminbi-denominated transactions (see Box 1 on China’s international payments alternatives). But the vast majority of China’s exports would be impacted in the short term, as it would be extremely difficult for Chinese companies to receive US dollar- or euro-denominated payments for goods.

$3 trillion in trade and investment flows could be put at risk, primarily from disruptions to trade settlement.

Freezing China’s official foreign exchange assets would also have substantial global spillovers. An asset freeze of China’s dollar reserves would suddenly make dollars in China scarce, driving down the value of the renminbi relative to the dollar. Beijing could fight this depreciation pressure in the short term through strict capital controls and exchange rate interventions, but ultimately would need to allow the renminbi to depreciate to ease outflow pressures and stabilize China’s balance of payments.

A weaker exchange rate would make goods imports more expensive and reduce China’s global economic throw weight. Disruptions to China’s export trade would also entail substantial economic hardship and financial stress for Chinese companies and suppliers to global markets. However, assuming that Chinese exporters and importers eventually found other non-sanctioned banks to legally conduct trade with foreign counterparties, China would still avoid a balance of payments crisis. China presently runs a large current account surplus, providing a consistent flow of dollars into its financial system. In fact, devaluation of the renminbi would ultimately make Chinese exports more competitive relative to other countries, which would push some of the impact of sanctions on to exporters in those countries. Other emerging market currencies, including those of US allies, would be likely to depreciate sharply against the US dollar as well. Countries that depended upon exports to China, such as Angola and Brazil, would see those export markets contract sharply.

The imposition of broad-based financial sanctions on Chinese banks would create significant dislocations within the global financial system and would likely require a coordinated policy response among developed market central banks in order to manage the fallout. Global supply chains would be upended while exporters and importers routed activities to unsanctioned banks. Countries that rely on dollar financing— to finance trade with the United States and Europe, for instance—would face a surge in financing costs, requiring the Federal Reserve to pump dollars back into the global economy through central bank swap lines. But even if swap lines with China were prohibited, these dollars would find their way back into China’s economy due to its trade surplus with the rest of the world.

Takeaways

While it is likely that a financial sanctions package would be on the table in the case of a major Taiwan crisis, avenues for sanctioning China’s financial system face limitations. A lower-scale response that targeted small banks involved with financing military activities would limit the negative impact on the global economy, but it would have little effect on Chinese behavior or military activities because other financing channels would remain open. On the other extreme, a full-scale sanctions response targeting China’s central bank and most of the country’s major commercial banks would have massive economic spillovers—for China’s economy, but also for the global financial system and the global economy. Second-order consequences could include a tightening of global trade financing conditions; weakness in emerging market currencies and balance of payments problems in emerging markets; major supply chain disruptions and interruptions to global manufacturing of consumer goods; and inflationary short-term impacts from interrupted China-world trade.

Sanctions on China’s financial sector could end up falling somewhere between these two extremes, with sanctions placed on midsize banks, for instance. Impacts from these sanctions on trade and financial markets would be more moderate than in the case of a maximal sanctions scenario, but these face many of the same limitations as more comprehensive sanctions.

Fundamentally, the long-term strategic benefit of financial-sector sanctions is unclear. Imposed on small banks, they would have minimal impact on China’s ability to finance military activities. At a large scale, sanctions would disrupt trade with China in the short run, but they would not fundamentally change China’s position within global manufacturing supply chains. Over time, China’s terms of trade would probably improve along with a weaker exchange rate. The symmetrical impact of such sanctions on China and the rest of the world reduces the credibility of such broad-based financial sanctions as a deterrent.

Box 1: How Well-Developed Are China’s International Payments Alternatives? 

Over the past five years, China’s Ministry of Finance and the People’s Bank of China (PBOC) have established several platforms to facilitate cross-border transactions and reduce reliance on dollar-based payment systems. Given the increased interest from across the Global South in alternative payment systems to the dollar in the wake of G7 sanctions on Russia, it is likely that in the next five years more of the Chinese systems could be used as a means of sanctions evasion.

In 2015, China launched its Cross-border Interbank Payment System (CIPS) to function as a settlement and clearance mechanism for renminbi transactions. An alternative to the dollar-based Clearing House Interbank Payment System (CHIPS), CIPS is supervised by the PBOC, and participants have the opportunity to message each other through the CIPS messaging system.

Data on CIPS usage suggest that transaction volumes have more than doubled in that period, growing by 113 percent.²⁶ However, while China is making significant progress in developing international payment alternatives, it lags behind the established global payment ecosystem.²⁷ Research indicates that CHIPS has ten times more participants and settles forty times more transactions compared to CIPS.²⁸ These incumbents have well-established networks, widespread acceptance, and trust among global users.

Perhaps the most significant payment alternative is China’s development of its Central Bank Digital Currency (CBDC), the e-CNY, which began in 2017. The retail CBDC project focuses on enabling individuals and businesses to use the e-CNY for everyday transactions. Interestingly, the PBOC has over 300 staff working on their CBDC project, and only about one hundred working on CIPS.²⁹ However, this retail CBDC project may have limited ability to help internationalize the yuan and facilitate its use as a means of sanctions evasion given its domestic focus and the lack of infrastructure for cross-border use.

The same cannot be said, however, of China’s wholesale CBDC ambitions. China’s wholesale project aims to streamline interbank transactions and improve its cross-border financial system efficiency. Project mBridge is a joint experiment with the Hong Kong Monetary Authority, Bank of Thailand, Central Bank of the United Arab Emirates, and Bank for International Settlements to create common infrastructure that enables real-time cross-border transactions using CBDCs. In October 2022, the project successfully conducted 164 transactions in collaboration with twenty banks across four countries, settling a total of $22 million, with almost half of all transactions in the e-CNY.

This initiative demonstrates China’s active involvement in exploring innovative solutions for international payments, particularly in the context of cross-border transactions which do not use dollars or euros. This system, though not yet ready for full launch, could help countries bypass dollar-denominated systems like SWIFT or CHIPS and develop an alternative financial architecture.

The biggest challenge for new China-based cross-border payments architecture is liquidity. China maintains capital controls on yuan and offshore clearing, and settlement of yuan is severely limited in comparison to the dollar, euro, pound, and yen. Removing these capital controls to provide liquidity pools for offshore clearing and settlement in yuan will come with some financial instability in Chinese markets, which is undesirable to leadership in the short term.

However, even if certain transactions will be more costly to execute, the recent history of sanctions evasions shows actors are willing to pay a premium to have specific transactions avoid dollars and US enforcement. China is investing significant resources in scaling up these capabilities.

Economic countermeasures aimed at individuals and entities associated with CCP and PLA leadership

Sanctioning the leadership and key associates of adversarial governments, criminal organizations, and terrorist groups is a well-established mechanism deployed by G7 nations and international organizations, including the United Nations. These measures are meant to pressure the targeted individuals, organizations, and governments to change their behavior or policies, while freezing their assets and restricting their ability to raise, use, and move funds.³⁰. In the event of a Taiwan crisis, G7 countries could impose targeted financial sanctions on Chinese government and military officials as well as other politically connected elites to attempt to deter further escalation and increase economic pressure on General Secretary Xi Jinping and his close allies.

Sanctions targeting Russian government and military officials and elites have been a central part of the G7 and allies’ sanctions strategy to counter Russia’s aggression toward Ukraine. Since the 2014 invasion of Crimea, G7 allies have collectively sanctioned more than 9,600 Russian-linked individuals, with a specific focus on government and military officials, oligarchs, and others with links to the regime as well as their family members and close associates who received asset transfers before a sanctions designation.³¹ As of March 2023, members of the Russian Elites, Proxies and Oligarchs (REPO) Task Force—a coalition of G7 nations, Australia, and the European Commission—have blocked Russian assets valued at more than $58 billion, including both financial accounts and assets such as real estate and luxury goods.³²

Separately, some G7 nations have imposed unilateral sanctions on PRC officials in response to human rights abuses and PRC actions in Hong Kong. As of May 2023, the United States had designated forty-two government officials, including former Chief Executive of the Hong Kong Special Administrative Region Carrie Lam and other PRC government officials, in response to actions undermining Hong Kong’s autonomy.³³ In March 2021, the EU also made a rare use of its Global Human Rights Sanctions Regime to sanction four high-ranking Chinese officials for their involvement in human rights abuses against ethnic minorities in the Xinjiang Uyghur Autonomous Region, with sanctions including travel bans and asset freezes³⁴—a move complemented by economic countermeasures taken the same day by the United States, the United Kingdom, and Canada.³⁵

It is highly likely that G7 nations would consider multilateral targeted designations against Chinese government and PLA officials and their associates in a major Taiwan crisis, given their relative success coordinating multilateral sanctions to counter Russia’s invasion of Ukraine.³⁶ The following section explores economic ties at stake and potential sanctions scenarios.

Global economic links: Individuals abroad

Assessing the scale of overseas assets covered by a potential sanctions regime on Chinese government, party, and military officials is extremely complex. There is limited available public information on the wealth of Chinese officials, in large part because that wealth is concealed via layers of personal networks and investment vehicles, and is often managed by third parties. These third parties invest on behalf of officials in domestic and overseas properties, publicly listed companies, and other investments—often in offshore jurisdictions such as the British Virgin Islands (BVI), the Cayman Islands, and Samoa. These offshore company structures often open bank or brokerage accounts in other jurisdictions, thereby further obscuring the relationship to the ultimate beneficiary.

For the purpose of this study, the authors used data derived from investigative reports and leaks of financial information such as the Panama Papers, which combined give a broad sense of the scale of assets connected to some of the highest-ranking figures of China’s leadership. In 2012, Bloomberg reported that Xi’s extended family held more than $400 million in business holdings and real estate.³⁷ The same year, reporting by the New York Times identified $2.7 billion in assets linked to former Premier Wen Jiabao and his close network.³⁸ Leaks of financial information including the offshore accounts analyzed by the International Consortium of Investigative Journalists in 2014 confirmed the existence of shell companies incorporated in the British Virgin Islands that are linked to the relatives of Wen and Xi, although the value of assets linked to these companies is unknown.³⁹ The leaked information also contained evidence of BVI-incorporated companies held by relatives of former Premier Li Peng and former President Hu Jintao, among others. Despite the opacity surrounding the overseas assets of the elite of the CCP, these single cases are potential indications that relevant, sanctionable assets likely represent tens of billions of dollars in aggregate.

This figure could grow quickly if the targets of financial sanctions were extended beyond high-level CCP and PLA leadership to include politically linked private business leaders. The estimated net worth of the top 200 wealthiest people in China is around $1.8 trillion.⁴⁰ Twenty-nine of those business leaders are current members of the National People’s Congress (NPC) or the Chinese People’s Political Consultative Conference (CPPCC), with a combined net worth of $278 billion. Much of this net worth is, however, linked to business activities taking place in China, rather than within G7 jurisdictions.

Twenty-nine of those business leaders are current members of the National People’s Congress (NPC) or the Chinese People’s Political Consultative Conference (CPPCC), with a combined net worth of $278 billion

Scenarios

A scenario involving sanctions on Chinese officials could proceed in several stages, with a first set of actions targeting a narrow and lower-level set of party, government, and military officials with direct links to a Taiwan crisis. Further actions could expand these sanctions to close associates of designated individuals, a longer list of officials, or ultimately to a broader set of politically connected business elites. Under the most extreme of scenarios, these sanctions could be widened to include China’s highest-level leaders in response to major developments in the Taiwan Strait.

Sanctions on a narrow set of CCP, government, and military officials 

One likely scenario would involve sanctions—asset freezes and travel bans—imposed on a narrow group of CCP, government, and military officials with clear responsibilities over actions taking place in the strait. China’s current minister of defense, Li Shangfu, is already under US sanctions⁴¹—but designations could be extended to cover select members of the Central Military Commission or high-ranking PLA commanders. These could also include close advisers to these officials or to China’s high-level leaders on Taiwan-related issues.

The nominal purpose of these sanctions would be largely symbolic, and a means to condemn Beijing’s actions. Their effectiveness in changing behavior is likely to be extremely limited and could contribute to a hardening of positions. Most of this group of designated officials would likely be highly aligned with Xi’s decisions on Taiwan. Narrowly crafted sanctions on officials might also generate limited financial outcomes, given that these individuals are already under tight political scrutiny in China and unlikely to be allowed major overseas holdings. The scope of sanctionable assets might grow marginally larger, however, if close associates and family members are included, especially children of government officials studying in G7 countries, as well as close aides and the third parties handling their investments. Similar to the Russian case, these individuals may become a focus for the G7 if asset transfers occur ahead of designations.

Sanctions on a wider range of CCP, government, and military officials as well as business elites 

In response to an escalation in the Taiwan Strait, G7 countries could decide to progressively expand sanctions to cover a longer list of government, CCP, and PLA officials. The list could also include certain business elites with known links to China’s leadership, who lend their public or financial support to China’s actions, or those who are active in sectors linked to China’s military-industrial base. The United States has already designated several Chinese executives and companies for breaking US law by providing support to North Korea, among other violations.⁴²  

In addition to asset freezes and travel bans, G7 governments might impose restrictions on professional and financial services provided to these elites, including wealth management or business advisory services.⁴³ While Chinese clients overwhelmingly rely on the expertise of wealth managers based in Hong Kong, a small percentage of other managers are located in Switzerland (1.6 percent), the UK (1.6 percent), and the United States (1.1 percent).⁴⁴ 

The purpose of this second round of sanctions would be to attempt to pressure these officials to push internally for a change in policy. Assuming intelligence about their overseas assets were available to G7 implementing authorities, these broader sanctions could end up covering tens of billions of dollars in overseas assets. The costs to designated officials could be high: besides the financial implications of an asset freeze, even the public revelation of foreign assets could be politically damaging.

Our roundtable participants noted that sanctions on individuals amid a Taiwan crisis could potentially produce a stronger response than has occurred with recent designations of Russians. Whereas many Russian officials have been under sanction since 2014 and have had time to adapt, such sanctions on China would be mostly new and immediately impactful to those designated.

Still, it remains unclear whether sanctions on China’s business elites would compel a change in policy. Business leaders arguably have the most to lose from Chinese aggression against Taiwan to begin with, since disruptions in trade and investment with Taiwan and G7 partners will affect businesses first and foremost. The waning influence of the private sector in governance due to crackdowns on the technology and financial sectors under Xi raises further questions about business elites’ ability to influence policy outcomes toward Taiwan.

Sanctions on China’s high-level leaders

In an extreme escalation in the Taiwan Strait, sanctions could end up targeting China’s highest-ranking officials including most members of the Political Bureau of the CCP’s Central Committee and Xi himself. If Russia sanctions are any indication, this third circle of sanctions could also include China’s ministers of foreign affairs, science, and technology or finance, the PBOC governor, or high-level members of China’s legislative bodies (the NPC and CPPCC). These sanctions would similarly be largely symbolic.

Takeaways

The G7’s response to Russia’s invasion of Ukraine demonstrates that coordinated multilateral financial sanctions on political and business elites are now a central tool in G7 economic statecraft. By design, these sanctions have the benefit of having relatively low immediate economic impacts on G7 economies, concentrating costs on a small number of targeted officials. In principle, these sanctions also have the benefit of avoiding indiscriminately targeting China’s broader populace.⁴⁵ Though in practice they often end up inadvertently affecting the broader population or the national economy, as foreign banks and private-sector entities reduce exposure to a broader range of individuals or entities than the ones directly sanctioned.

Their effectiveness as deterrence tools in a Taiwan crisis is in question, too. Narrow sanctions on CCP, government, and PLA officials would probably end up targeting political leaders already aligned with Xi’s decisions on Taiwan. Chinese officials may conceal their offshore assets through complex personal networks and corporate structures that are potentially painful and costly to unravel. They also require tight coordination and information sharing among sanctioning parties, in order to locate and act against sanctioned individuals’ assets across jurisdictions. (The foundation for this cooperation does exist, however, as a result of recent sanctions on Russia).

Broader sanctions on business elites could freeze greater overseas wealth, but this may have limited impact on policy outcomes. Private business leaders are already incentivized to disfavor Chinese aggression toward Taiwan and have diminishing political sway after years of power centralization under Xi. Yet because they are an important signaling tool, sanctions on Chinese officials would very likely be considered in a major Taiwan crisis.

Economic countermeasures aimed at China’s industrial sectors

Finally, G7 leaders may consider deploying export controls and other economic statecraft tools against Chinese companies or industries linked to China’s military or defense industrial base.

These actions featured prominently in the G7 sanctions program on Russia, with a variety of trade and investment-related measures imposed on companies and industries linked to mining, electronics, aviation, and other sectors. The United States implemented stronger sector-wide export controls on certain industrial and electrical equipment, added military-linked companies to the US Commerce Department’s (export-control) Entity List, and designated numerous companies on the SDN list.

Currently, Chinese firms with ties to the PLA and specific companies utilizing dual-use technologies already face sanctions and export controls. This signals additional businesses operating in these sectors as likely targets in a Taiwan crisis. In a crisis scenario, a number of economic countermeasures could be used to limit the flow of potential dual-use goods to China’s military and restrict the operation of sectors critical to China’s defense industrial base.

This section describes the economic linkages between potentially targeted sectors and the global economy, as well as the economic assets and flows that could be implicated under an economic statecraft program. To bring more granularity to our analysis, we use a case study approach that explores the potential for restrictions on China’s aerospace sector.

Our findings point to significant economic risks from a broad sanctions package, as well as deep interdependencies between China and G7 economies in potentially targeted sectors. This suggests that, if deployed, countermeasures would likely target narrower industries—or single firms within industries—where China depends on imported G7 technology and where global dependence on Chinese exports is small. Even then, sanctions could come with substantial costs to G7 technology exporters in the sanctioned industries.

Global economic links: Industries and supply chains

A number of Chinese industries could become the target of G7 countermeasures in the context of a major Taiwan crisis, due to their linkages to China’s defense sectors. Among them, chemicals, metals, electronics, aviation, and shipbuilding already feature prominently in US lists of Chinese military-industrial companies, including the Non-SDN Chinese Military-Industrial Complex Companies list and the Department of Defense’s Chinese Military Companies list—making them likely potential targets for future action.⁴⁶  

Collectively, these five industries already comprise over ten percent of Chinese gross domestic product, produce over $6.7 trillion in annual revenue, and employ over 45 million people.⁴⁷ They also are deeply linked to the global economy: in 2018, Chinese companies in these industries imported goods valued at $686 billion, and exported goods valued at nearly $1.1 trillion.

These sectors are also linked to the global economy through investment. Collectively they have been the destination for $107 billion in direct investment from the United States, United Kingdom, and European Union since 2000, and Chinese companies in these sectors have invested at least $179 billion abroad, either through acquisitions or greenfield investment, according to Rhodium cross-border FDI monitoring. Bloomberg data and Chinese official data suggest that foreign holdings of listed Chinese companies and their subsidiaries in these sectors amount to about $120 billion, and these firms have at least $76.9 billion in dollar-denominated debt instruments currently outstanding.⁴⁸

Scenarios

G7 countries have a range of economic countermeasures that could be brought to bear against select Chinese industries in the event of a Taiwan crisis. Here we consider two potential scenarios, a maximalist export controls scenario targeting major industries with comprehensive export controls, and a targeted sanctions scenario using China’s aerospace industry as a case study.

Maximalist export controls scenario

In an extreme scenario, G7 countries could impose strict export restrictions on trade with China on a range of major industrial sectors, such as chemicals, metals, electronics, and transportation equipment. These sanctions, though highly costly, would not be entirely unprecedented. In the case of Russia, the United States and other G7 countries imposed restrictions on exports in the oil and gas, metals and mining, defense, and technology sectors through a combination of tightened export controls and property blocking rules.

The disruptions to China from such sanctions would be substantial: G7 exporters are the source of 18 percent of the imported content these industries in China consume, totaling $153 billion based on trade in value-added data that estimates the origin and value of production activity along supply chains. G7 countries also account for 43 percent of China’s export market in these industries, putting $225 billion in Chinese manufacturing activity at risk. Altogether, over fifteen million jobs in China are estimated to depend on exports in these sectors. Many more jobs would be put at risk from the loss of imported inputs into Chinese production processes.

These dependencies run both ways, however, and impacts on the sanctioning countries would also be extremely high. The $153 billion in goods that G7 countries export to these industries in China support approximately 1.3 million jobs across the G7; and China itself is the source of 25 percent of G7 imports in these industries.

Even these substantial figures far underestimate the total economic impact from a total ban on trade between G7 economies and these industries in China. The value-added approach provides a useful estimate of the value that different countries contribute to well-functioning global value chains. But disruptions from a sudden stop of trade in these industries—in particular in hard-to-replace critical components—would result in massively greater economic disruption until alternative sources were fully brought up to speed.

Exports from China to the G7 would be disrupted as well. Trade restrictions on foreign inputs to these industries would affect Chinese production and exports. China could also take retaliatory action banning exports from these and other sectors to the G7.

In some cases, alternatives to disrupted trade flows might be found quickly, putting the efficacy of trade restrictions in doubt. A ban on G7 exports of iron ore to China, for instance, would disrupt only a small volume of trade unless other partners such as Australia, which exported $72 billion of iron ore exports in 2022, were also to join. Even so, these supplies could in large part be replaced by exports from other countries such as South Africa and Brazil.⁴⁹ Additionally, the G7’s challenges in halting the export of high-end Western technology to Russia following its invasion of Ukraine demonstrate that such regimes can be porous.⁵⁰

The deep interlinkages between Chinese and global industries mean potential economic disruptions from targeting certain sectors could be significant. Altogether, a conservative accounting of the trade flows disrupted by export controls in these sectors amounts to at least $378 billion in disrupted trade.⁵¹  

Except under extreme circumstances, it is unlikely that G7 leaders would be able to agree to trade restrictions on this scale. Germany, for instance, is deeply invested in and dependent on China in the chemicals industry. The French, UK, and US aviation industries have huge sales to China (see case study below), and Japan and non-G7 members South Korea and Taiwan are deeply connected with mainland China in electronics. These linkages would make agreeing on a broad package extremely difficult. Broad trade restrictions would also be indiscriminate in their impact on China’s citizenry, a fact with serious ethical implications and potentially political ones, as a broadbased export-control regime could in fact strengthen popular support for the government rather than undermine it.⁵²

Finally, a broad export-control package would have major spillovers to the global economy due to global value chains that depend on imports of Chinese intermediate goods (electronics, for instance) that would be disrupted by strict controls. These considerations make measures of this scale highly unlikely, except under the most extreme circumstances.

Targeted sanctions scenario

Due to the costs of a maximalist approach, economic countermeasures against China’s industrial sectors are more likely to be narrower in scope, targeting specific companies or subsectors with high technological dependencies on G7 countries and relatively low global dependency on Chinese exports. The key feature of these countermeasures would be asymmetry: imposing restrictions that disproportionately affect China’s economy. Importantly, asymmetry does not imply costlessness. Any effective trade restriction inevitably results in costs to the sanctioning economy and the global economy as a whole.

China’s aerospace industry, which depends on foreign-sourced engines and parts, provides a case in point. In a potential sanctions scenario, the United States and G7 partners could impose blocking sanctions and export restrictions on China’s two largest aerospace companies, the Commercial Aircraft Corporation of China (COMAC) and the Aviation Industry Corporation of China (AVIC). These companies depend heavily on inputs from overseas suppliers. Of the eighty-two primary suppliers to China’s first narrow-body jet, the COMAC C919, only fourteen are from China (and seven of those are Chinese-foreign joint ventures).⁵³ China’s most critical vulnerability is engines: all three of its domestically manufactured commercial aircraft rely on foreign-produced engines, and China’s domestic jet engine manufacturers are widely believed to be far behind Western competitors in terms of technological sophistication.⁵⁴

In a scenario in which blocking sanctions and export restrictions were placed on AVIC and COMAC, all exports of aerospace goods to these firms could be prohibited, amounting to approximately $2.2 billion in aerospace parts trade at risk.⁵⁵ However, the ultimate impact of such measures on China’s aerospace ambitions would be much greater. China has begun mass production of its ARJ21 regional airliner–which depends on GE engines–and exported its first model to Indonesia last year. COMAC’s flagship C919 narrow-body jet marked its first commercial flight in May 2023, and the country has aspirations to sell over 1,200 over coming years. Restricting the sale of aviation parts to COMAC and AVIC would substantially disrupt China’s civil aviation ambitions.  

$33 billion of G7 aerospace exports to China could be disrupted through retaliatory measures.

While the impact of these measures would be particularly acute for China, the costs on foreign aerospace companies would also be substantial. China could respond to restrictions by halting aerospace exports to G7 countries. China exported $1.2 billion in aircraft parts to G7 countries in 2018, including inputs to for eign airliners. While most are low-tech inputs, they can be difficult to replace in the short run: a shortage of wire connectors that coincided with widespread lockdowns in China in 2022 led to US production delays for the Boeing 737.⁵⁶ China could also respond by delaying purchases of Airbus and Boeing planes. In total, approximately $33 billion of G7 aerospace exports to China could be disrupted through retaliatory measures.

Foreign aerospace companies also have substantial tie-ups with AVIC and COMAC. Since 2000, US and British companies and those based in EU member states have invested an estimated $3.7 billion in China’s aerospace sector, according to Rhodium’s cross-border FDI tracking. A substantial number of these projects are connected to AVIC and COMAC, including Airbus’s A320 final assembly line in Tianjin, which produces six aircraft per month, about 10 percent of Airbus’s average monthly production.⁵⁷

AVIC and COMAC also have invested in global aerospace companies. AVIC, for instance, acquired Austrian FACC AG, which produces aerostructures and other components for Airbus, Boeing, and other global firms. In a scenario where COMAC and AVIC were put under blocking sanctions, these operations would likely be forced to wind down or divest

Finally, foreign investors would be exposed to losses in equity and debt in AVIC. Foreign equity holdings in twenty-four listed subsidiaries of AVIC companies totaled $1.4 billion, or 1.4 percent of their combined market capitalization as of April 2023.⁵⁸ Dollar-denominated debt issued by AVIC and subsidiaries amounted to $3.8 billion, approximately 21 percent of its total debt issuance.⁵⁹  

Sanctions on China’s leading aerospace companies and export controls on the components they import would be a heavy blow to its civil aerospace ambitions, making them a plausible economic countermeasure in a Taiwan crisis. However, the impacts on foreign aerospace companies would be significant given the high degree of trade and investment ties to China, making these countermeasures costly and potentially difficult to coordinate in a crisis. Targeted sanctions on other sectors where G7 countries hold asymmetrical technological advantages could also be considered, but these all come with non-negligible costs to the sanctioning economies as well.

Takeaways

China is deeply connected to the global economy in sectors that would potentially be targeted for economic countermeasures in a Taiwan crisis. The expansive nature of these ties would make broad export controls and trade restrictions extremely costly and likely hard to justify except in the most extreme circumstances.

Targeted sanctions on specific firms and technology choke points are more plausible, but they come with substantial costs to foreign companies. Our case study, with export controls placed on China and full blocking sanctions imposed on China’s leading aerospace manufacturers, shows that tens of billions of dollars in aerospace goods trade, inbound and outbound direct investment, and portfolio holdings in China’s aerospace sector would be put at risk. While China would face substantial challenges in achieving its goal of developing a strong domestic commercial aviation industry, foreign aerospace companies would lose out on billions of dollars in exports and sales to China and risk seeing billions of dollars in direct investment lost.

IV. Practical challenges in sanctions development

Beyond identifying specific tools and appropriate targets for economic countermeasures, policymakers will confront a range of complex coordination issues around implementing sanctions in a Taiwan crisis. Discussions with participants in our roundtables highlighted areas of consideration in developing economic countermeasures to deter aggression against Taiwan.

Understanding Taiwan’s perspective. A crucial factor in designing G7 economic responses to possible aggression against Taiwan should be the policy preferences of Taiwan itself. Depending on the nature of the crisis and political conditions in Taiwan, Taiwanese officials might not support economic countermeasures against China and opt for a de-escalatory response. Given the depth of economic ties between China and Taiwan, certain economic countermeasures against China could be highly costly for the Taiwanese economy. Public opinion would likely be divided on the question of how to respond. With only mixed Taiwanese support, G7 coordination on economic countermeasures could be difficult to achieve. Strong Taiwanese support on the other hand would make coordination easier, so long as Taiwanese actions were not seen to have precipitated the crisis.

Defining clear redlines and triggers across the G7. A key barrier to coordinating sanctions among G7 partners and with Taiwan arises from the difficulties in agreeing on what Chinese acts of aggression should trigger economic countermeasures. While some actions might be seen by all parties to have crossed redlines–such as a military quarantine of Taiwan—Chinese coercion against Taiwan often takes the form of “gray zone” measures that are more ambiguous and brush up against but do not clearly cross redlines.⁶⁰ Getting G7 nations to agree to impose economic countermeasures against China in response to such actions will be more challenging. The roundtables highlighted different levels of tolerance for escalatory action measures among G7 partners.

The specific drivers of a crisis would matter as well: European experts note that a crisis that was seen to be provoked by the United States or Taiwan would make G7 alignment more difficult, especially given divergent views among EU member states about how to respond to a cross-strait crisis.

Coordinated signaling in order to deter. The challenges involved with identifying redlines and agreeing on responses in advance also complicate efforts to signal resolve to China. Successful deterrence depends on the would-be aggressor knowing what actions would provoke a response and believing that the defender’s threats of retaliation are credible.⁶¹ The ambiguous nature of Chinese escalatory actions and the potential for disagreements among partners over how to respond in the moment of crisis make establishing deterrence through the threat of economic countermeasures a significant challenge.

Participants in roundtables disagreed about the best signaling approach, with some arguing that clarity about redlines and consequences is essential, and others arguing that providing too much specificity could instead encourage aggressive behavior and focus China’s countersanctions and sanction-proofing work. Providing clarity on what Chinese actions would elicit a punitive response could encourage Beijing to take actions just below such thresholds.

Building out necessary tools. Our roundtables highlighted the fact that G7 countries joining a sanctioning coalition may need additional legal tools to carry out effective countermeasures on China. In the wake of enhanced export controls on Russia, for instance, the EU faced challenges restricting reexports of export-controlled products through third countries to Russia, as doing so would require additional legal authorities.⁶² And differences in UK, EU, and US regulations have complicated the efforts of multinational companies to wind down their operations in Russia.⁶³ For effective action and deterrence, such authorities would need to be shored up.

Scoping a cost mitigation strategy. Even limited economic countermeasures against China would have global economic spillovers. This means any sanctions program would likely need to be paired with measures to support industries at home as well as third countries affected by lost trade and investment with China. Sanctions triggering a devaluation of the renminbi would negatively affect countries dependent on commodity exports to China. A stronger dollar resulting from global investors seeking liquidity and safe assets in a crisis would put additional stress on countries with substantial dollar-denominated debt. G7 countries would need to manage the global spillovers of sanctions with additional dollar liquidity, loan extensions and forgiveness, and other tools to support the global economy in a period of economic stress.

Factoring in the market reaction. Any G7 economic statecraft response would have to contend with additional disruptions to global supply chains from Chinese aggression against Taiwan and the resulting market impacts. Russia’s 2022 invasion of Ukraine caused market gauges like the S&P 500 to fall by around 4 percent, and the initial market impact of a Taiwan crisis could be significantly larger due to the size and importance of the economies involved. US officials have estimated a disruption to the exports of Taiwan Semiconductor Manufacturing Company alone could cost the global economy between $600 billion to $1 trillion a year.⁶⁴ Roundtable participants stressed that G7 actions would have to avoid aggressively compounding the inevitable supply chain and market effects of a crisis. The initial shock could undermine domestic political support for sanctions that would incur additional economic costs.

Conclusions and recommendations 

Policymakers in G7 capitals are increasingly discussing Taiwan crisis scenarios, and starting to explore the range of options available to them in responding to Chinese actions against Taiwan, both beyond and below the level of invasion. While our work shows that maximalist countermeasures would be highly costly and therefore unlikely except in the most extreme circumstances, G7 countries may consider a set of more limited tools that target areas of asymmetric Chinese dependence on foreign technology and critical inputs. 

That options are available, and that G7 leaders are discussing them, does not mean that deploying them in an aligned fashion would be easy. Coordination on economic countermeasures will be critical to effective deterrence, but could be hard to achieve given the difficulty to define red lines in a conflict that is likely to be marked by ambiguity and uncertainty. Given these limitations, economic countermeasures can only be one part of a broader deterrence effort and toolbox that also includes diplomatic and military channels.

From our research, roundtables, and interviews, a set of recommendations emerged for policymakers considering the use of economic countermeasures in a Taiwan crisis:

• G7 partners and Taiwan should scale up private coordination and signaling. G7 discussions about the role of economic countermeasures in a Taiwan crisis are still in the early stages. Given the challenges involved in agreeing upon red lines and appropriate countermeasures, pragmatic discussions around contingencies must be a priority. This includes creating effective private channels of communication among G7 partners and key stakeholders on emerging trends, financial ties, and shared vulnerabilities. Meanwhile, G7 partners should privately message to China the extent they are willing to go in using economic tools to counter Chinese aggression toward Taiwan. Coordination with Taiwanese officials is also crucial.
• The G7 should coordinate beyond its membership. This report assumes that most or all of the current coalition that has imposed sanctions against Russia would align on measures in a Taiwan Strait crisis. Roundtables and consultations with like-minded capitals in the Asia-Pacific region have suggested this is a reasonable assumption. However, even more so than in the case of Russia, exchanges outside the G7, including the rest of the G20, will be necessary given the scale of economic disruption at stake.
• Economic asymmetries need to be better understood. Policymakers argued that the most likely economic countermeasures would focus on areas where China is asymmetrically dependent on foreign goods, technology, and finance. Further research is needed to identify these areas and the potential costs, vulnerabilities, and limitations of targeting them in a crisis.
• Take practical legal steps now to boost the credibility of G7 deterrence. Discussants noted that successful deterrence requires making clear that G7 nations are ready to act decisively in a crisis. This may require legal steps, including: shoring up of the EU’s framework for export controls; advance preparation of US executive orders specifying and granting sanctions authorities to the Office of Foreign Assets Control; preliminary analysis on the potential impact and spillovers of proposed packages; and the construction of communication channels among US government stakeholders such as the Federal Reserve, Commodity Futures Trading Commission, Securities and Exchange Commission, Office of the Comptroller of the Currency, Financial Crimes Enforcement Network, and appropriate bilateral, plurilateral, and multilateral counterparts. This may include preparing the legal and regulatory landscape across G7 jurisdictions to ensure appropriate authorities are in place to deter or respond to a crisis.
• Invest in other forms of deterrence. Economic countermeasures should be considered as part of a whole-of-government and multilateral strategy as they have costs and limitations that can make them less effective on their own. These tools will be more effective when paired with traditional tools of deterrence in both the military and diplomatic realms.
• Keep lines of communication open. Bilateral and plurilateral communication is the best tool to de-escalate in a crisis. Recent breakdowns in military-to-military communication channels between the United States and China are of serious concern given elevated tensions in the region. Maintaining open communication lines and regular exchanges with Chinese counterparts is a key element in any risk-mitigation strategy.
• Balance credible threats with credible assurances. Effective deterrence requires credible threats to be matched with credible assurances. The G7 should make clear to Beijing it has no desire to change the status quo in the Taiwan Strait. Efforts to maintain the status quo and shore up traditional diplomatic, military, and economic tools to ensure peace and stability in the Taiwan Strait should be the priority. 

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About the authors

Charlie Vest is an associate director on Rhodium Group’s corporate advisory team. He manages research and advisory work for Rhodium clients and contributes to the firm’s research on US economic policy toward China. Vest holds a master’s degree in Chinese economic and political affairs from UC San Diego and a bachelor’s degree in international affairs from Colorado State University. Prior to joining Rhodium, he worked in Beijing as research manager for the China Energy Storage Alliance, a clean energy trade association.

Agatha Kratz is a director at Rhodium Group. She heads Rhodium’s China corporate advisory team, as well as Rhodium’s research on European Union-China relations and China’s economic statecraft. She also contributes to Rhodium work on China’s global investment, industrial policy and technology aspirations. Kratz holds a Ph.D. from King’s College London, having studied China’s railway diplomacy. Her previous positions include associate policy fellow at the European Council on Foreign Relations and editor-in-chief of its quarterly journal China Analysis, assistant editor for Gavekal-Dragonomics’ China Economic Quarterly, and junior fellow at the Asia Centre in Paris.

Acknowledgements

This report was written by Charlie Vest and Agatha Kratz with support from Juliana Bouchaud in collaboration with the Atlantic Council GeoEconomics Center. The principal contributors from the Atlantic Council GeoEconomics Center were Josh Lipsky, Kimberly Donovan, Charles Lichfield, and Niels Graham.

The GeoEconomics Center and Rhodium Group wish to acknowledge a superb set of colleagues, fellow analysts, and current and former officials who shared their ideas and perspectives with us during the roundtables and helped us strengthen the study in review sessions and individual consultations. These individuals took the time, in their private capacity, to critique the analysis in draft form; offer suggestions, warnings, and advice; and help us to ensure that this report makes a meaningful contribution to public debate. Our gratitude goes to Dave Shullman, Jörn Fleck, Logan Wright, Daleep Singh, Jeremy Mark, Richard Aboulafia, Annie Froehlich, Julia Friedlander, David Barboza, Chris Skaluba, the Centre for Financial Crime and Security Studies at the Royal United Services Institute (RUSI), and Atlantik-Brücke.

This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations.

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China’s assumptions and lessons learned
US assumptions and lessons learned
Europe’s lessons learned
Implications of conflicting lessons for deterrence
Policy recommendations
Conclusion
Acknowledgements
About the authors

The lessons that Washington and Beijing appear to be learning from Russia’s February 2022 invasion of Ukraine, and from Ukraine’s resistance and counteroffensive, could set the stage for a crisis over Taiwan in the next few years. This grim prospect is driven by the United States and China arraying themselves for a strategic rivalry since 2017 through the continuing trade war, economic decoupling, and increasing rhetorical and military positioning for confrontation over Taiwan. In light of the Chinese military’s threatening gestures, belligerent rhetoric, and other recent actions that read like they could be preparation for war, there is a danger that the successive warnings by senior US military commanders that Chinese CCP General Secretary and President Xi Jinping has already decided to use military force in the near term could become the proverbial tail wagging the dog — and could impose a logic that makes a US-China war more likely, rather than enhancing deterrence.¹ Therefore, the key question for the United States and its allies is how an increasingly truculent and belligerent Chinese leadership can be incentivized to walk back from the brink. This paper examines what lessons China, the United States, and European allies have drawn from the Ukraine conflict and how such lessons have shaped these actors’ strategic assumptions. It concludes with a discussion of policy recommendations for the transatlantic community confronting the possibility of a US-China conflict over Taiwan.

China’s assumptions and lessons learned

Even as Beijing modulates its public statements in support of Moscow, China’s strategic assumptions from before the Ukraine invasion likely have not changed, and may depend on the longer-term outcome in Ukraine. That includes the prospect of an outcome that Vladimir Putin can claim as a Russian “victory,” in which Russia continues to hold territory and forecloses Ukraine’s NATO or European Union (EU) integration.

China is likely to apply the following strategic assumptions as it digests lessons learned from the Ukraine war.

According to Beijing, the United States is an adversarial, declining hegemony that will be antagonistic to China’s rise for the foreseeable future, and which will seek to foment instability within China and hostility on its periphery. In Beijing’s view, US antagonism to China is now structural and bipartisan. China’s previous self-imposed restraint, as it chose to prioritize stable US relations and drive economic reform and growth, is therefore moribund. For the Chinese Communist Party (CCP), the relatively peaceful global and regional environment that prevailed in the late bipolar Cold War and the post-Cold War period is severely challenged, as Xi told President Joe Biden in their March 18 call.“² Economic growth and rising prosperity are still important, but diminishing, sources of regime legitimacy. Defense of the CCP system, fueled by nationalism, expanded party control, while more active cooperation with Russia and other US adversaries, such as Iran, is becoming more prominent. Xi made this explicit in his speech to China’s National People’s Congress on March 6: “Western countries led by the United States have implemented all-around containment, encirclement and suppression of China, which has brought unprecedented severe challenges to our country’s development.”³

Economic growth and rising prosperity are still important, but diminishing, sources of regime legitimacy.

Giant screen displays a live broadcast of Chinese President Xi Jinping delivering a speech during the closing ceremony of the National People’s Congress (NPC), in Beijing. (Tingshu Wang via Reuters)

Another key view in Beijing is that Russia is China’s strategic partner. This status was further elevated on the eve of Russia’s invasion of Ukraine, when Russian President Putin and Xi met in Beijing and signed a joint statement on February 4, 2022.“⁴ Throughout the war in Ukraine, China’s leaders have reiterated their stance, most recently during visits to Moscow by Xi and by China’s top foreign affairs official Wang Yi in early 2023.⁵ The two countries are unlikely to ever have a formal mutual-defense treaty, but intensified cooperation in many spheres—including military coordination, intelligence sharing, energy, and trade—will continue and even accelerate.⁶ Even before its invasion of Ukraine, Russia was the junior partner in the bilateral relationship, but Beijing has deep strategic interest in ensuring that Moscow—and Putin personally—remains a viable ally in blunting US power and coordinating at the United Nations. Most importantly, Beijing has a strategic need to keep Russia from internal turmoil or international setbacks that could result in the rise of a regime that is hostile to China. One of the greatest gifts to Beijing of the Sino-Russian rapprochement that started during the 1990s, and truly took off from the mid-2000s, was a passive 4,200-kilometer border that enabled China to focus military modernization on naval, rather than land, warfare for potential conflict with the United States and Japan over Taiwan, or with India or Vietnam over border and maritime sovereignty disputes, respectively. The fact that Russia had dared to commit an estimated 97 percent of its entire forces to the fight in Ukraine by mid-February 2023 and, thus, baring its far-eastern borders, is a testament to this.⁷

Third, in the view of China’s leadership, the EU can act as a Western counterweight to perceived US hostility to China, and Beijing has at times tweaked its approach when deemed necessary to try to stabilize its ties to Europe. The EU lacked unanimity about following Washington’s lead, or did so only slowly and with less intensity, on hostile trade action and efforts to isolate China internationally prior to Russia’s invasion. In late April, inflammatory comments from China’s ambassador to France Lu Shaye, who essentially denied the sovereignty of former Baltic states, sparked an outcry across Europe and beyond.⁸ Shortly thereafter, Xi held his long-awaited call with Ukrainian President Zelenskyy,⁹ and separately, the Chinese Government voted in favor of a UN resolution containing language that explicitly acknowledges “the aggression by the Russian Federation against Ukraine,” a sharp departure from Beijing’s previous neutral UN voting patterns on Ukraine.¹⁰ While these moves are largely symbolic and mark a slight tactical rather than a strategic shift, they underscore Beijing’s willingness to make adjustments to try to maintain favorable relations with Europe, given the value Chinese leaders place on the region as a counterbalance to the United States.

However, China’s refusal to condemn the war against Ukraine and its enabling stance toward Russia have galvanized worries, particularly in Eastern European countries, over the trustworthiness of the Chinese government.¹¹ On January 30, Czechia’s president-elect made it a point to accept a phone call from Taiwan’s President Tsai Ing-Wen, in a stark departure from previous practice.¹² US intelligence made public in February 2023 that China was considering lethal arms supplies to Russia, causing grave concern in European capitals.¹³ Should Beijing actually deliver arms or ammunition to Russia despite its assurances to the contrary, China’s relations with much of Europe could be stretched past the breaking point and, indeed, there are signs of worsening strain, such as the aforementioned call between the Czech president-elect and President Tsai and his intention to plan a personal meeting with her, an unprecedented step from any Western leader; the withdrawal of the Baltic states from the Chinese 17+1 format; and, following similar decisions by many other European countries, Germany’s decision after long hesitation to finally ban and remove key components delivered by Chinese telecoms firms Huawei and ZTE from its fifth-generation (5G) network.¹⁴ At the same time, German leaders have continued to reach out diplomatically to China in the hopes of avoiding a complete Cold War-style economic decoupling scenario. On the other hand, European Commission President Ursula von der Leyen’s March 30, 2023, speech on EU relations with China put the future of the shelved Comprehensive Agreement on Investment (CAI) firmly in doubt.¹⁵

How the CCP and the People’s Liberation Army (PLA) ultimately digest strategic lessons from Russia’s war on Ukraine, therefore, will depend on that conflict’s course, the longer-term effects of Western sanctions on Russia and the global economy, and myriad other aspects, including elections in the United States and Taiwan in 2024.

Beijing has deep strategic interest in ensuring that Moscow—and Putin personally—remains a viable ally in blunting US power.

Vladimir Putin and President of the People’s Republic of China Xi Jinping made statements for the media following the Russian-Chinese talks on March 21, 2023. (Mikhail Tereshenko, TASS via Russian Presidential Press and Information Office)

Beijing likely is also watching closely to see how deeply entrenched in—or distracted by—the Ukraine conflict the United States becomes, where it contributes the lion’s share of direct military aid, including key munitions and weapons platforms that are in short supply; Ukraine is currently expending US annual production of nine thousand HIMARS missiles every two months.¹⁶ As Russia continues to achieve reduced war aims in the east and south, the war seems likely to continue for the foreseeable future. It presents new opportunities for fissures in the Alliance, and reduced US strategic standing headed into US presidential elections in 2024 that are likely to be even more disruptive than previous election campaigns after former US President Donald Trump’s March 30 grand-jury indictment on business-fraud charges.¹⁷ Partly because of Washington’s massive arms support for Ukraine, its deliveries of key weapons and munitions already sold to Taiwan have been significantly delayed.¹⁸

But one momentous strategic implication of Russia’s invasion is probably already clear to Xi and the CCP. For the first time since the end of the Cold War, the prospect of major-power military conflict, and even nuclear-weapons use, is again a characteristic of the global order. Russia’s gamble in Ukraine that it could quickly defeat a non-NATO European neighbor and secure its near abroad has so far failed, but US-led Western unity and imposition of sanctions against Moscow have the earmarks of a protracted conflict that could drive new instability. If Beijing concludes that this is a characteristic of geopolitics and great-power competition in the twenty-first century, it could increase Chinese preparations for military conflict in Asia with either the United States or its proxies.

The deepening enmity of US-China strategic rivalry since 2017 has already eroded core CCP assumptions that competition would remain bounded by nuclear deterrence, deep economic integration, shared stewardship of financial stability, and cooperation on global challenges such as pandemics and climate. The Western reaction to the Russian war against Ukraine is likely to reinforce these judgments, and may be amplifying Beijing’s assessment that the United States is on a trajectory to pursue overthrow of the CCP as a strategic goal.

Even China’s February 24 “Position on the Political Settlement of the Ukraine Crisis” seemingly centers most around its affirmation of “sovereignty” as the key thing to be respected—crucially, without ever mentioning Ukraine’s sovereignty in particular, nor calling Russia’s invasion of Ukrainian sovereign territory an invasion, let alone illegal, despite this being a peace template for the Ukraine war.¹⁹ This implies the text has more to do with reaffirming China’s position on Taiwan and offering support to Russia than being an actual attempt to mediate. In calling to freeze the conflict, it would cement Russian territorial gains; ending the “unilateral” sanctions would again benefit Russia; and “promoting post-conflict reconstruction” would presumably benefit Chinese infrastructure companies. Beijing’s proposal on its face seems decidedly tilted toward Moscow or self-serving goals.

US assumptions and lessons learned

While dealing with the Russian aggression against Ukraine, the US government has not reduced its attention on the strategic challenge posed by China. At the time of the invasion, the Biden administration was aggressively focused on continuing and expanding Trump-era strategic competition with China. Even as Washington openly warned of intelligence regarding Moscow’s intentions, it continued adversarial policies and alliance building directed at China. It has since announced multiple rounds of technology restrictions on Chinese companies, and signed the CHIPS and Science Act to revitalize US semiconductor leadership.²⁰ Moreover, the president has personally eroded US strategic ambiguity on US military commitments to Taiwan—despite National Security Council (NSC) staff “clarifications” after each repeated instance that US policy has not, in fact, changed.

While dealing with the Russian aggression against Ukraine, the US government has not reduced its attention on the strategic challenge posed by China.

President Joe Biden talks to workers as CEO of TSMC C. C. Wei and Chairman of TSMC Mark Liu look on during a visit to TSMC AZ’s first Fab (Semiconductor Fabrication Plant) in P1A (Phase 1A), in Phoenix, Arizona. (REUTERS/Jonathan Ernst)

In its National Defense Strategy (NDS) released last year, the Biden administration focused on homeland defense challenges posed by Russia and China, rather than simply on military contingencies in the Indo-Pacific or Europe.²¹ This sends a strong message that the world is actively contested now, and that the Department of Defense and all of the US government are not just preparing for potential kinetic conflict, but engaged already in active operations to disadvantage China—tantamount to a new Cold War. Moreover, the NDS’ emphasis on “integrated deterrence” with allies and partners will underscore the threat to China of the United States designating Taiwan as a “key non-NATO ally,” potentially breaking existing US policy barriers to a virtual defense guarantee.

The United States is likely to apply the following lessons learned from the Ukraine war as it prepares for potential future conflict with China.

The United States sees public intelligence disclosures of Russian plans to invade Ukraine since November 2021 as a major success, despite failing to deter Russia or realize major pre-war Alliance (or Ukrainian government) preparation for the attack.²² The credibility that Washington gained when Russia invaded in February helped drive the immediate post-invasion international reaction (the reverse of the 2003 Iraq weapons of mass destruction (WMD) fiasco) and resulted in even more comprehensive sanctions than were threatened pre-invasion to deter Russia. Senior US military and administration warnings of Beijing’s “2027 plans” echo US intelligence warnings about Ukraine, albeit without the same specificity and high confidence.²³

Similarly for the United States, a Russian military “paper tiger” perception can be applied to the PLA in a Taiwan scenario that draws on the usual tropes.

• “China hasn’t fought a major war since 1979” and, therefore, its military operational abilities may be more limited than expected.
• “Amphibious invasion across 100NM Taiwan Strait is far more challenging than Russian land invasion of Eastern Ukraine,” due to the enormous inherent complexity of a Normandy-style amphibious landing and the PLA’s insufficient lift capacity for the task.
• “Economic sanctions work, imposing a heavy burden for Moscow, thereby increasing regime insecurity, which can deter Beijing from taking action on Taiwan.”²⁴

The key lesson Washington probably finds applicable to a Taiwan 2027 scenario is the importance of providing both conventional and non-conventional support, including intelligence sharing and equipment, in the runup to, and during, any conflict. In the case of Ukraine, Kyiv’s ability to blunt Moscow’s invasion was enabled by the strengthening of Ukraine’s resilience and resistance post-2014. While the United States and its NATO allies have not directly intervened in Ukraine, they maintain military equipment, intelligence, and economic/communications lifelines that have helped deny Russia its original war aims. Specifically, deliveries of new weapons (Javelin, Stingers, artillery/HIMARS, antiship missiles), near-real-time battlefield intelligence and targeting, and initial success in the public-relations/propaganda/information domain seemed to have blunted Russian hybrid warfare and aligned developed world/Global North opinion behind Ukraine and NATO. However, it is far from clear how well Taiwan could be resupplied in the event of a blockade, if at all. As an island nation, Taiwan has no cross-border sanctuaries for stockpiling and delivery of key military and civilian supplies. And while Russia has been restrained from striking NATO members on Ukraine’s western and southwestern borders, US bilateral allies in the Pacific have no NATO-like structure for collective defense.

A lesson the United States so far seems resistant to learning from Ukraine is that nuclear deterrence by the aggressor (Russia in the case of Ukraine, China in Taiwan) enables conventional war and blunts outside major-power intervention.²⁵ The United States and its NATO allies are strongly united in resisting pressure from pundits to enforce a no-fly zone over Ukraine, break the Russian blockade of Ukraine’s Black Sea ports, or other ideas that could risk direct NATO-Russian war. China could very well conclude that inducing self-deterrence in Western capitals has worked well in Ukraine, and is a promising approach for Taiwan.²⁶ On the other hand, nuclear deterrence works both ways. One could speculate how things would stand today had Ukraine been given a security guarantee akin to NATO’s Article Five in time, and whether this would not have effectively deterred a Russian attack.²⁷ When President Biden conversely ruled out military intervention on behalf of Ukraine during the lead-up to the attack, deterrence was arguably weakened rather than strengthened. Rather than appreciating the transparency and reliability displayed by the United States, and accepting the olive branch it represents, an authoritarian aggressor might see preemptive self-constraint as a weakness to be exploited.

The more the United States talks up the prospect of a 2027 Taiwan war scenario, the more it will turn to buttressing Taiwan’s “resilience”—regardless of whether Taiwan wants this, given the island’s failure to buttress its own defense during twenty-five years of rapid PLA modernization and growing tensions on the strait.²⁸

The more the United States talks up the prospect of a 2027 Taiwan war scenario, the more it will turn to buttressing Taiwan’s “resilience”—regardless of whether Taiwan wants this

US Senate Majority Leader Chuck Schumer (D-NY) announces that he will unveil a new package of legislation to address competition with China. (REUTERS via Craig Hudson)

So far, the drumbeat in US media, from Congress, and among some members of the current administration is to be prepared for direct US military intervention to defend Taiwan from a Chinese military attack. The United States, and its allies and partners, should assume that China would be at least as determined as Russia to wield its rapidly expanding nuclear-capable forces (and space/counterspace and cyber capabilities) to deter direct US intervention. China has stated numerous times that it would be prepared to declare a state of war today if it saw Taipei, Washington, or Tokyo violate the understandings that have preserved the peace since at least 1979. The main potential triggers for this are: Chinese perceptions that Taiwan is moving irrevocably away from the possibility of unification and toward the founding of a new state under the moniker “Taiwan” at some future point; a renewed Taiwanese effort to acquire nuclear weapons; or a return to a quasi-formal US military-security relationship with Taiwan, including through stationing US forces on the island or integrating Taiwan into the US alliance sphere through actions such as inviting it to participate in regional or bilateral military exercises or in Alliance intelligence-sharing arrangements. At the same time, China itself through its threatening actions has been doing the most to upend the understandings that constituted the peaceful status quo in the Taiwan Strait, forcing Taiwan, other regional actors such as Japan, and the United States to reposition themselves.

Europe’s lessons learned

Europe as a whole—comprising not just the EU, but also the United Kingdom, Norway, and other key non-EU states—has rather divergent regional security cultures. Former Eastern Bloc countries, for instance, have been far more alert to the risks posed by a belligerent Russia than have Western European countries that have never been under Russian occupation. European lessons learned from the Ukraine war, therefore, differ markedly in each region. For countries with a traditional Russia-friendly outlook—in particular, Germany, France, and Austria—the Ukraine war came as a shock and was met with initial disbelief and disorientation, giving way to a painful process of finding a new security paradigm.²⁹ Other countries—such as the Nordics, Baltics, and Central and Eastern European (CEE) countries—were not as surprised, and indeed felt vindicated after decades of open disregard for their warnings.³⁰ With the exception of Finland, most European countries discovered that their previous strategies of reaping a “peace dividend” by shrinking the armed forces and neglecting societal preparedness for crises and war had backfired.³¹ Collectively, Europe has learned (or is learning) five primary lessons.³²

First, a real effort to bolster collective defense through tangible capabilities was urgently required, after countries paid only lip service to NATO commitments (such as the pledge to commit 2 percent of gross domestic product (GDP) to defense spending). This includes the need to ramp up production of defense goods in support of Ukraine during what could be a long struggle.³³

Second, Europe learned the dangers of energy dependence on Russia. Prior to the war, Germany had dismissed concerns voiced by its eastern neighbors, the United States, and especially Ukraine that Nord Stream 2 would make Germany dependent and vulnerable to coercion, while also massively weakening Ukraine’s geopolitical situation. These warnings were proven right and have led to a painful reorientation process in Germany (dubbed the “Zeitenwende”) that is still in full swing more than a year after the war started, and is far from concluded.³⁴ Intense debates still surround the questions of rebuilding German military capability, lethal arms supplies for Ukraine, and the future orientation of Germany’s Russia policy. As Germany is a key member state of both the EU and NATO, due to its size and geographic location, its unresolved security-political identity crisis negatively impairs both these organizations, leading to impatience—particularly among the Eastern European states—and a diminished German stance.³⁵

China’s dubious role in the Ukraine war definitely has the potential to make China “lose Europe,” even if China refrains from delivering arms and ammunition to Russia.

German Foreign Minister Annalena Baerbock and Chinese Foreign Minister Qin Gang attend a joint press conference at the Diaoyutai State Guesthouse in Beijing, China. (Suo Takekuma/Pool via REUTERS)

Third, Europe has recognized China’s apparent role in the Ukraine war as a covert supporter and enabler of the Russian aggressor, and the consequences this realization has for the security of critical infrastructures in Europe that were built with Chinese technology.³⁶ Rather than supporting Ukraine and using its influence on Russia to stop the war, China has bolstered Russia diplomatically and economically, stopping just short of violating Western sanctions that would endanger China’s economy, while failing to condemn the invasion and effectively calling in its February 2023 “Position” for a freezing of the conflict that would reward Russia’s aggression with territorial gains.³⁷ Particularly among the post-socialist EU and NATO member states in the Baltics and in CEE, this has led to intense distrust of China and disillusionment regarding the official EU formula of China as a “partner, competitor and rival” of the EU.³⁸ The final outcome of this reevaluation will largely depend on China’s further actions of support for Russia—or its refraining from such support, as it may be. Against the backdrop of negative experiences with Chinese “wolf warrior diplomats” during the pandemic, and following coercive diplomacy, China’s dubious role in the Ukraine war definitely has the potential to make China “lose Europe,” even if China refrains from delivering arms and ammunition to Russia.³⁹ Previous Chinese Foreign Minister Wang Yi’s hostile stance during the February 2023 Munich Security Conference, and a rather aggressive first speech by China’s new Foreign Minister Qin Gang, do not seem to offer much hope in this regard.⁴⁰

Moreover, Europeans have come to realize that war over Taiwan could break out, despite the risk of nuclear escalation and despite the huge economic constraints in place, and regardless of the political risk such a war would pose to China’s leaders.⁴¹ Given Putin’s complete disregard for such constraints when following through with his attack plan, Europeans have had to accept that their assumptions about the economic rationale as a deterring factor in security-political decision-making of autocratic countries can no longer be relied upon, and that military forms of deterrence are ultimately more meaningful.⁴² The notion that China’s even greater degree of economic dependence on the outside world than Russia’s would serve as sufficient deterrent against military adventurism, therefore, might not hold. Consequently, there has been a palpable uptick in European analyses and discussions surrounding the risk of escalation in the Taiwan Strait, possible military and economic consequences, and Europe’s role in such a scenario, while exchanges with Western and South Pacific NATO partner states have markedly increased. French President Macron’s initiative during his early April 2023 China visit of implying that Taiwan is not Europe’s problem was quickly rebutted across European capitals, and Germany’s Foreign Minister Annalena Baerbock made it a point during her subsequent China visit to name war over Taiwan a “horror scenario” that would send “shock waves” around the world and deeply affect Europe.⁴³

Finally, European countries in general, and NATO members in particular, have a newfound appreciation of the United States as the ultimate security provider for European NATO member states. Particularly in Germany and France, the realization that a European “strategic autonomy” remains a pipe dream for the foreseeable future due to lack of capabilities, and the fact that Ukraine’s defense effort would likely not be viable without massive US support, has been an unwelcome, yet necessary, reality check.⁴⁴ Finland and Sweden’s applications for NATO accession are a testament to the indispensability of the nuclear umbrella provided by US forces to frontline NATO states. Russia’s decision to withdraw from the New Strategic Arms Reduction Treaty (New START), the nuclear blackmail it employed to keep Western countries from intervening on behalf of Ukraine, and China’s massive expansion of its nuclear arsenal all run counter to European hopes of creating effective arms-control regimes and working toward nuclear threat reduction.⁴⁵ Six years after the International Campaign to Abolish Nuclear Weapons (ICAN) was awarded the Nobel Peace Prize, Europeans are needing to accept that there is currently no substitute for nuclear deterrence in the face of the Russian—and, potentially, the Chinese—threat, and that the global trend points toward more nuclear-armed states in the medium term rather than successful arms reduction.⁴⁶ This also implies a newfound sense of European vulnerability to exposure, should the United States become tied down in a conflict with China. All in all, Europe is still reeling from the shock of the war and the challenge it poses to long-held assumptions of economic interdependence and institutionalism as the effective and civilized way to resolve conflicts. Regardless of the war’s ultimate outcome, it is already clear that its humanitarian, economic, political, and security consequences massively complicates the way European states will calibrate their exchanges with China going forward.

Implications of conflicting lessons for deterrence

The collision of these conflicting “lessons” could result in a deterrence trap. If the US increasingly acts on its conviction that China plans to attack on its own initiative in the next few years, the United States is likely to put enormous pressure on Taiwan to prepare to become the next Ukraine, and its self-imposed restraints on security assistance will further erode. US fear of a Chinese attack would increasingly drive a deepening cycle that is bound to cross at least some of China’s red lines.

Deterrence traps, of course, usually have more than one moving part; for its part, China’s actions drive this dangerous dynamic more strongly than those of the United States. China keeps moving the red lines, conducting increasingly provocative military operations around Taiwan, creating provocative situations (such as its “blockade drill” after Speaker Nancy Pelosi’s August 2022 visit to Taiwan, which included the unprecedented shooting of ballistic missiles over the island), and intensifying efforts to choke off Taiwan’s international breathing space.⁴⁷ Honduras’ switch to China leaves Taipei with only thirteen formal diplomatic partners as of April 2023, demonstrating that Beijing’s “checkbook diplomacy” threatens to flip others soon and making Taipei more reliant on the United States, Japan, and the EU to prevent greater isolation. And, crucially, if war over Taiwan ever breaks out, it will have been because China chose to use lethal force against Taiwan for the first time since 1958, not the other way around.

Upping the military ante to some degree seems necessary as long as China is changing its military posture and behaving aggressively.

An F/A-18E Super Hornet flies over the flight deck of the Navy’s only forward-deployed aircraft carrier USS Ronald Reagan in the South China Sea. (US Navy)

The key question, therefore, is what steps Washington, Taipei, and others can take to preserve a stable status quo without fueling tensions. Upping the military ante to some degree seems necessary as long as China is changing its military posture and behaving aggressively. The United States is far from alone in seeing a military threat from China, as that perception is shared within much of the region (including Japan, Australia, Vietnam, the Philippines etc.), and even Europeans are becoming increasingly worried, despite remaining relatively inattentive to the military details of China’s behavior.

The Ukraine war, therefore, offers all sides a chance to learn how such a situation can be avoided: signaling weakness and indecisiveness on the part of the West before February 24, in any case, was not helpful in avoiding the Ukraine war. In the case of China, there is no reason to assume that signaling weakness and indecisiveness will yield any better outcome. In other words, there is a chance to drive home to China the great risks of going to war, and to signal allied resolve in aiming to avoid a second scenario of the same type as that in Ukraine. However, the Ukraine example has limits when applied to Taiwan, where China’s decision to use force—either to convince Washington or Taipei to reverse actions that cross Beijing’s long-established “red lines” (formal independence, a US military alliance) or to compel unification—likely would not be as opportunistic, or as lacking in constructive strategic aims, as Moscow’s decision to invade Ukraine.

Policy recommendations

The collision of these conflicting “lessons” identified by the United States, China, and Europe could result in a deterrence trap, and China’s actions drive this dangerous dynamic more strongly than those of the United States. However, Washington, Taipei, Brussels, and others can still play important roles in preserving stability without fueling tensions.

• Allies must analyze, and urgently address, the reasons why deterrence failed in Ukraine. A key lesson to draw from the Ukraine war should be the realization that deterrence failed for a number of reasons, including naiveté and wishful thinking; a willingness among allies to make themselves overly dependent on Russian energy supplies; a lack of resolve in showing a unified front before aggression; and disregard for basic military preparedness among most of the allies.
• Non-kinetic scenarios might be China’s favored option for subduing Taiwan, and could be difficult to effectively address as allies. In light of the military difficulties Russia is experiencing in Ukraine, which came as a surprise to the Chinese leadership, it can be assumed that China might prefer non-military or less decisive options of coercing Taiwan if at all possible, short of a PRC perception that Taiwan has taken actions tantamount to a declaration of independence or an explicit US defense commitment. Allies should wargame and prepare for such non-kinetic scenarios, including blockades, hybrid attacks, and subversion, because a less than clear-cut case of aggression might prove far more difficult to react to as united allies than a clearly attributable violation of the United Nations (UN) Charter as in the case of the Ukraine war.
• Information warfare over Taiwan presents a key challenge for allies. Just like Russia, China is highly effective at using information and psychological warfare to its advantage. Likeminded countries in the transatlantic and Indo-Pacific communities should identify and address, in a timely fashion, any false narratives China is spreading to sow discord among them or to shape perceptions in the Global South that are detrimental to the goal of upholding the UN Charter and the principles of the rules-based international order.
• “Anti-colonial” and “anti-hegemonial” self-justifying narratives by aggressor states targeting audiences in the Global South should be countered more effectively. China and Russia are jointly positioning themselves as “anti-hegemonial” champions of a multipolar world order and, in some cases, are successful despite the fact that Russia is fighting to regain a former colony, or that the PRC threatens war as it seeks “reunification” over Taiwan, which it has never controlled. Transatlantic allies should, therefore, make sure to correct this self-representation by publicly addressing China’s violations of its own 2013 Friendship and Cooperation Treaty with Ukraine, signed by Xi Jinping himself, in which China reinforced the security guarantee extended to Ukraine in recognition of its voluntary relinquishment of its nuclear arms via the Budapest Memorandum (Article 2); pledged to assist Ukraine in the protection of its territorial integrity (Article 5), promised not to take any action prejudicial to the sovereignty, security or territorial integrity of Ukraine (Article 6), and is bound to hold “urgent consultations” with Ukraine to develop measures to counter a threat in case of a crisis (Article 7).⁴⁸ Despite China’s obligations under this treaty, Xi didn’t reach out to Zelenskyy until more than a year after the Russian invasion began.⁴⁹ Ukraine, for its part, has always upheld its treaty obligations to China.⁵⁰
• Allies should not put too much hope in a “wedge” strategy. Though some political leaders still harbor hopes of driving a wedge between China and Russia, and incentivizing China to work against Russia, there is currently no reason to believe such an approach might yield viable results. Rather, based on recent Chinese leaders’ consistent actions and rhetoric, allies should assume that Beijing continues to share Russia’s strategic vision of challenging, and fundamentally revising, the international rules-based order (as laid out in their joint statement of February 4, 2022). China can, at best, be hindered from throwing its full weight behind Russia in this war, but not weaned from Russia as long as Xi Jinping is in power, due to the countries’ mutual synergies and shared geopolitical interests.⁵¹
• Sharing intelligence can bolster credibility and unity among allies and beyond. The US strategy of sharing intelligence prior to the Ukraine war, and the accuracy of that intelligence, was highly effective in foiling a Russian surprise attack and bolstering US credibility among allies. This approach should also be continued with regard to China’s military actions in the Western Pacific. Care should be taken, however, not to repeat the mistake of sharing unreliable assessments, as in the infamous Iraq “weapons of mass destruction” analysis, which damaged US credibility in Europe at the time.

Although NATO is chiefly concerned with the European theater, its member states represent a sizeable share of global GDP, and the economic deterrence they can provide toward China is not to be discounted.

French President Emmanuel Macron talks to other European leaders during the second day of the European Union leaders summit in Brussels, Belgium October 18, 2019. (Aris Oikonomou/Pool via REUTERS)

• Frustrations notwithstanding, European allies make valuable contributions to security. From the US perspective, notwithstanding its predilection toward working with the United Kingdom and its existing frustrations with large EU and NATO partners Germany and France, Europe as a whole should not be discounted as a valuable security partner—including as a partner for routine engagement to better understand and track China’s capabilities and intent toward Taiwan in the military, economic, information, and political domains. In particular, the Nordic, Baltic, and many CEE states, and NATO as an organization, have proven capable of quickly drawing meaningful security-related conclusions from the Ukraine war. NATO accession by Finland, soon followed by Sweden’s, can be expected to improve NATO’s effectiveness as a whole, since at least Finland is going to be a net security provider—for instance, in a scenario of the Baltic states coming under threat. Although NATO is chiefly concerned with the European theater, its member states represent a sizeable share of global GDP, and the economic deterrence they can provide toward China is not to be discounted.

Conclusion

The lessons that Washington and Beijing appear to be learning from Russia’s February 2022 invasion of Ukraine and Ukraine’s resistance and counteroffensive, in terms of military effectiveness and deterrence, could set the stage for a crisis over Taiwan in the next few years if those lessons are not accompanied by simultaneous efforts to defuse tensions where that is possible. European allies, just like US allies in Asia, can—and should—play a key role in this. For that, it is necessary to think of Eastern Europe and the Western Pacific not as two distinct theaters, but as interlinked theaters where events in one will inevitably have repercussions in the other. In other words, despite the cost, supporting Ukraine is not a detraction from deterring China if it leads to an outcome in which Russian aggression is thwarted, as that also enhances deterrence regarding Taiwan. At the same time, when the United States is focusing more strongly on the Western Pacific, Europeans need to cease seeing this as “abandoning Europe,” and instead step up their own game to bolster the rules-based international order both at home and abroad, with the means at their disposal.

Understanding more closely why deterrence failed in Ukraine, and exploring how these lessons could be applied to enhancing deterrence, bolstering diplomatic initiatives, and, thereby, hopefully defusing tensions over Taiwan should be high on the agenda of the entire Alliance. After all, all members share the same interest, as does China: finding out how to avoid sleepwalking into a global war.

Acknowledgements

This publication was produced under the auspices of a project conducted in partnership with the Norwegian Ministry of Foreign Affairs focused on the impact of China on the transatlantic relationship.

About the authors

Fellow

John K. Culver

Nonresident Senior Fellow

Global China Hub

China East Asia

John K. Culver is a nonresident senior fellow with the Atlantic Council’s Global China Hub and a former Central Intelligence Agency (CIA) senior intelligence officer with thirty-five years of experience as a leading analyst of East Asian affairs, including security, economic, and foreign-policy dimensions.

Previously as national intelligence officer for East Asia from 2015 to 2018, Culver drove the Intelligence Community’s support to top policymakers on East Asian issues and managed extensive relationships inside and outside government. He produced a large body of sophisticated, leading-edge analysis and mentored widely on analytic tradecraft. He also routinely represented the Intelligence Community to senior US policy, military, academic, private-sector and foreign-government audiences.

Culver is a recipient of the 2013 William L. Langer Award for extraordinary achievement in the CIA’s analytic mission. He was a member of the Senior Intelligence Service and CIA’s Senior Analytic Service. He was also awarded the Distinguished Career Intelligence Medal.

Fellow

Sarah Kirchberger

Nonresident Senior Fellow

Scowcroft Center for Strategy and Security Scowcroft Strategy Initiative

China Defense Industry

Dr. Sarah Kirchberger is a nonresident senior fellow with the Scowcroft Center for Strategy and Security. She serves as head of Asia-Pacific Strategy and Security at the Institute for Security Policy at Kiel University (ISPK) and vice president of the German Maritime Institute (DMI). Her current work focuses on maritime security in the Asia-Pacific region, emerging technologies in the maritime sphere, Russian–Chinese military-industrial relations, China’s arms industries, and China’s naval and space development.

Before joining ISPK she was assistant professor of contemporary China at the University of Hamburg, and previously worked as a naval analyst with shipbuilder TKMS Blohm + Voss. She is the author of Assessing China’s Naval Power: Technological Innovation, Economic Constraints, and Strategic Implications (2015). Her earlier work includes a monograph on informal institutions in the Chinese and Taiwanese political systems as well as studies of reform discourses within the Communist Party of China and of Mainland Chinese perceptions of Taiwan’s post-war transformation. She completed undergraduate and graduate studies in Sinology, Political Science and Archaeology in Hamburg, Taipei, and Trier and holds an MA and a PhD in Sinology from the University of Hamburg.

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How are these growing economic ties impacting Moscow’s ability to withstand G7 sanctions and maintain its invasion of Ukraine—and where do Beijing’s interests diverge from Moscow’s? 

Below we outline six trends that have defined the two countries’ relations since the invasion of Ukraine. Russia’s access to the yuan has bolstered its wartime economy. However, when it comes to trade and financial support, Beijing has been less accommodating. 

Chinese yuan is Russia’s friendliest currency.

China is mitigating the impact of sanctions on Russia by providing Moscow an alternative currency for transactions. Chinese yuan supplanted the dollar as Russia’s most traded currency in early 2023. The switch came after the United States imposed sanctions on a few banks in Russia that were still allowed to make cross-border transactions in dollars. As the Group of Seven (G7) sanctions constrain Russian financial institutions’ ability to transact in the world’s leading reserve currencies, like dollars, euros, and yen, the yuan is arguably the only relatively stable, widely traded currency issued by a non-sanctioning authority that enables Russia to make international transactions.

Central bank currency swap lines play a major role in increasing the circulation of the yuan in the Russian economy. Although China’s capital controls make it difficult for foreigners to obtain yuan, Beijing has supported Russia’s growing yuan marketplace by backing currency swap facilities. Through these swaps, Russia and China’s central banks exchange rubles for yuan. Major Russian commercial banks then tap into their central bank’s accounts to introduce the yuan into the Russian economy. Furthermore, as China’s banks have accumulated Russian assets, they have also likely increased the amount of yuan in local circulation.

Russia’s linkages to the Chinese financial system also allow it to mobilize its currency reserves. G7 countries froze most Russian reserves held by sanctioning jurisdictions. However, Russia has been able to access its central bank reserves held in China (nearly 18 percent before the conflict), which are largely denominated in yuan. As a result, Russia has been able to use yuan-denominated reserves to conduct foreign exchange transactions to manage the value of the ruble. Moreover, Russia increased the permitted share of yuan in its National Welfare Fund up to 60 percent last year and plans on selling more yuan from the wealth fund to make up for the lost energy revenues and cover budget deficit. 

Vital trade links

Russia has compensated for lost market share in the West by exporting more energy to China. Beijing has increased spending on Russian energy from $57 billion in the year prior to the invasion to $88 billion in the year after and allowed Moscow to make up for the lost revenues in the EU market. Russian crude oil exports to China could increase even further in 2023, as China’s state-run refiners have been increasing purchases of Russian oil, and Beijing has signaled that it may allow a further ramp-up. However, China maintains informal quotas on crude oil imports to limit exposure to any individual energy exporter. These sit at 15 percent of overall imports or around two million barrels a day per country. Another component of China’s energy imports from Russia is natural gas. Natural gas is more dependent on existing infrastructure and is thus harder to rapidly increase in imports. Russia is expected to deliver 22 billion cubic meters of natural gas to China through the Power of Siberia pipeline in 2023, eventually increasing to full capacity of 38 billion cubic meters in 2027. However, even though Russia has pushed for the construction of the Power of Siberia 2 pipeline, Beijing has shown hesitation and has, in fact, negotiated a new pipeline through Central Asia. Whether Russia keeps exporting more oil or natural gas to China will depend on Beijing’s decisions on quotas or new pipelines, making Russia asymmetrically dependent on its economic partnership with China.

Russia has imported electronic equipment from China to offset the effects of export controls but is struggling with obtaining advanced technology—even from Beijing. Integrated circuit imports from China have increased from $67 billion in 2021 to $170 billion in 2022, but most electronics exports from China to Russia are made up of basic computers and transport equipment. Notably, Beijing has banned the export of advanced Loongson microprocessors. The West’s imposition of export controls on advanced semiconductors against China in October 2022 signals that Beijing will become even more protective of advanced technology and less likely to transfer them to Russia. 

China is not the only country whose trade with Russia has increased. Although Beijing has provided a lifeline to the Russian economy, countries such as India and Turkey have also expanded trade with Russia. In fact, India has become the second largest destination of Russian crude oil exports after China. Meanwhile, Central Asian and Caucasus countries’ exports of electronic equipment to Russia ballooned in 2022 and Serbia, Turkey, and Kazakhstan have provided semiconductors to Russia throughout the last year. China might be the largest economy supporting Russia but other countries’ trade relations with Russia should be as closely monitored as Beijing’s. 

Limits in the ‘no-limits’ partnership

China has generally avoided steps that could trigger secondary sanctions or that greatly increase its own strategic dependence or risk exposure to Russia. For example, Chinese banks have not become creditors to the Russian government. Likewise, China has hedged against dependence on Russian energy imports and has restricted the flow of advanced technology to Russia. The notion of a “no limits” partnership remains rhetorical for now.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Phillip Meng is a young global professional at the Atlantic Council’s GeoEconomics Center.

Jessie Yin is a young global professional at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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However, such sanctions did not stop human rights violations against the Syrian people nor did they push the Bashar al-Assad regime to commit seriously to a political solution. In fact, sanctions failed to bring anyone responsible for war crimes to justice. Even worse, the lack of sanctions enforcement and the overall ineffectiveness of the approach encouraged a number of Arab countries to normalize relations with the Assad regime and rejoin it in the Arab League on May 19.

As the conflict enters its twelfth year, the Assad regime wishes to escape its crimes by counting on the statute of limitations and the introduction of new military and security figures that pledge absolute loyalty. The Assad regime is also cynically leveraging the February 6 earthquake, which killed more than 56,000 people, claiming that sanctions obstruct the delivery of humanitarian aid to those affected.

Changing the guard to evade sanctions

At the beginning and middle of each year, Assad issues a bulletin detailing new appointments and promotions in his army. This involves pensioning off officers who reach retirement age and appointing others in their place. Some officers are also moved up the ranks.

At the beginning of 2023, a confidential and unpublished bulletin of appointments and promotions for the Syrian army was issued, which I obtained from various sources and cross-referenced with public information. Of the thirty Syrian army and security officers in leadership positions, only two—General Suheil al-Hassan and General Saleh Al Abdullah—are blacklisted by Western countries. This indicates a significant gap in the sanctions system, revealing that it does not keep pace with the shifting reality of regime personnel.

There are further examples of this. For instance, at the end of April 2022, Assad made General Ali Abdul Karim Ibrahim the chief of the general staff—a position that had been vacant since the beginning of 2018—and appointed General Ali Mahmoud Abbas as defense minister. Neither of them have been included in any Western sanctions lists.

Even when Western countries do issue sanctions against individuals, they often arrive years after the fact. Notably, the United States waited until October 2022 to blacklist three officers involved in the chemical attack on Eastern Ghouta in August 2013, which killed about 1,400 people. Ironically, those three officers had retired several years ago. Additionally, it took about a decade—March of this year—for Warrant Officer Amjad Yousef, who committed the Tadamon Massacre in April 2013, to be added to the sanctions list.

These delayed responses indicate a lack of motivation on the part of the United States and its Western partners to sanction regime officers with the same pace and enthusiasm as before.

Why sanctions take so long

Theoretically, it takes the US no more than twenty-four hours to place any person on its sanctions list, according to Matthew Tuchband, a former senior US government sanctions attorney, who believes the system is fast. However, he acknowledged to me that certain factors need to be met before such action can be taken.

First, there must be the political will to issue the sanction. Second, the relevant authorities must collect incriminating evidence on the actions that the individual or entity has committed, including matching witness accounts, videotapes, letters, dissidents, and evidence collected by non-governmental organizations and intelligence services. This also includes collecting the necessary biographical data—using public information, university records, and travel data—to ensure that the right person is targeted and cannot win any judicial appeal against the sanctions. Finally, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) must coordinate with other US agencies—the same applies in the case of European sanctions—to take the necessary legal measures.

The process of obtaining personal and public information, in addition to incriminating evidence, is challenging and risky, especially for those in regime-controlled areas who are contacted by non-governmental organizations, civil society organizations, or activists interested in obtaining sensitive information regarding the regime’s military and security structure.

Sanctions strategies need to evolve

When the sanctions do come into place, they have proved to be of little help to the Syrian people. The United States likes to close off their borders to those they target while freezing their bank accounts, but most of these individuals do not have bank accounts at home or abroad and few would even think of traveling to nearby Lebanon, let alone the US.

Furthermore, it is known that regime officers receive money in dollars and gold—not in Syrian pounds, which has lost its worth—by extorting detainees and their families, which is usually done through cancerous networks that are linked to many officers, especially in the security services and military judiciary.

The current sanctions policy—like the Caesar Act and the Captagon Law—is not responsive to the reality on the ground, including the personnel changes that Assad is making. Western countries, led by the United States, should develop a new mechanism to impose sanctions on Syrian institutions committing human rights abuses, which would make it easier to target individuals at a later stage.

Adopting a more effective sanctions policy requires investing in the Syrian bureaucratic workforce and expanding communication and knowledge sharing with Syrian civil society organizations and violation documentation centers.

However, regardless of how effective and refined sanctions become, they alone will not alter the behavior of the regime’s leaders—most of whom boast sanctions as medals of victory. At present, sanctions have not prevented the Assad regime from bombing schools and hospitals, nor have they led to a political solution. Meanwhile, the Assad regime continues to pose a threat not only to the Syrian people but also to the region as a whole. Changing the Assad regime’s behavior is complicated and arduous, but it requires a comprehensive policy strategy that utilizes sanctions in a nuanced manner, and as one of many tools.

Muhsen AlMustafa is a research assistant at Omran Center for Strategic Studies and a nonresident fellow at the Tahrir Institute for Middle East Policy (TIMEP). Follow him on Twitter: @MuhsenAlmustafa.

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On Wednesday, June 5, 2023, Carla Norrlöf, a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, testified to the US House Committee on Financial Services Subcommittee on Financial Institutions and Monetary Policy. Below are her prepared remarks for the committee on preserving the US dollar’s status as a global reserve currency. Some charts and figures in the original prepared testimony are not included in this version.

Dear Committee Members, thank you Chairman Luetkemeyer and Ranking Member Beaty for inviting me to testify on the important topic of dollar dominance and the preservation of the dollar’s status as a global reserve currency. I am honored. Despite numerous challenges, dollar dominance has persisted for nearly eighty years. Why does the dollar continue to play such a prominent role, is the dollar likely to reign supreme over the long term, and what are the most important threats on the horizon?

The extent of US dollar dominance and its preservation has become a principal theater for the great power struggle between the United States, China, and Russia—placing the future of liberal international order in the balance. The dollar is the only truly global currency in the world, and is widely used for transactions, pricing, settlement, and investment by governments and private actors outside the United States. These roles offer the United States economic, political, and social privileges. Economically, Americans benefit from the ease and convenience of transacting in dollars, from seigniorage, monetary flexibility, and safe-haven benefits in times crisis. Politically, the dollar offers the United States a non-military instrument of coercion with which to police international order. Socially, the United States gains status and prestige. Preserving the dollar’s status as the global currency is therefore in the United States’ interest, and potentially in other countries’ interest.

Dollar dominance refers to the disproportionate use of dollars in the world economy, a condition which has prevailed during the entire postwar era. The absolute dominance of the dollar is unlikely to change in decades to come, though the dollar’s relative dominance has receded from peak levels. Even though the dollar remains dominant, a relative weakening of the dollar’s status is considered a harbinger of the long-term power shift to the East, hastening the onset of a multipolar order in which the United States is less capable and less influential.

Assessing dollar dominance

The precise meaning of dollar dominance in this regard remains unsettled. How strong must the dollar be relative to other currencies used for international purposes for the international currency system to be characterized by dollar dominance? This question is rarely tackled head on. The lack of a common focal point makes it very difficult to determine whether dollar dominance is truly threatened and how to discern a multipolar currency system if, and when, one comes to pass. Using metrics over the various functions of an international currency, for example the reserve currency function, it is possible quantify dollar dominance according to established criteria—for instance polarity or systemic concentration. Polarity is a term traditionally used by international-relations scholars to assess the international balance of power based on military might. But the concept is sometimes used to describe the international distribution of economic power. Polarity is particularly well-suited for characterizing the international currency system because great-power currency capabilities can be used to enforce international agreements and police international order.

Strictly speaking, polarity is the number of great powers in the international system. In a unipolar currency order, one great power enjoys preponderance and has no close rival. In a bipolar currency order, two great powers predominate and have distant rivals. And in a multipolar currency order, more than two great powers wield relatively equal influence. Yet this still leaves open the question of how to measure polarity.

Over the course of half a century, the dollar’s reserve currency role was strongest in the years following the collapse of the Bretton Woods dollar standard when President Nixon abandoned the promise to convert dollar reserves into gold—the 1971 Nixon shock. Regardless of which measure of dominance is used—polarity or systemic concentration—the dollar is significantly lower today than it was in 1973. However, the dollar’s reserve currency role is stronger than it was in 1990 when the Cold War ended. In a fifty-year perspective, the dollar reached a low point at that time, a period otherwise considered to mark the onset of America’s unipolar moment. Clearly, the level of reserve currency holdings in a single year, or within a limited time frame, is not a good predictor of US ascendancy or decline in any broader sense. Point estimates of reserve currency holdings are not a good predictor of dollar dominance either. That is because the liquidity creating role, assumed by the issuer of the first international currency, requires adjustment of expansionary policies, resulting in cycles of trade deficits when demand for dollar assets is typically high and deficit adjustment when dollar demand tends to fall. Depending on the measure used to assess dollar dominance, the most recent downward dollar cycle began in 2016 (polarity) or 2017 (concentration). According to both measures, an upward cycle began in 2020 and stabilized despite the 2022 sanctions against Russia.

The dollar’s many international roles

The dollar’s reserve currency role is used synonymously with the dollar’s ability to fulfill the range of currency functions—as medium of exchange, unit of account, and store of value—for governments and private actors. This shorthand reflects the view that governments’ willingness to accumulate dollar reserves is a condition for the longevity of the dollar system. For example, in times of crisis, when dollar shortages occur, private actors rely on their central banks to supply them with dollar assets, sometimes via swap lines extended by the Federal Reserve. Private actors’ willingness to use and hold dollars is necessary for the dollar system’s reach and entrenchment, but private entities coexist within a decentralized system. Their actions are not as consequential as those of official actors because each single entity typically holds a small slice of dollar assets. Even the considerable dollar assets held within large financial institutions consist of deposits by separate entities without any means or incentives to coordinate actions apart from inadvertently via the price mechanism. Unlike official actors, private actors’ choice of foreign currency is exclusively an economic decision. Moreover, they are unlikely to act collectively with the aim of disrupting the system. The reserve currency role is where the United States has the biggest lead relative to its nearest currency rival, the euro-zone.

How the dollar became dominant

The dollar rose to the top of the international currency hierarchy after World War I, superseding the British pound which regained its number one position in the interwar years before permanently losing currency primacy to the United States after World War II. After World War I, devastated European countries began relying on the United States for loans to rebuild their war-torn economies. The United States gradually became banker to the world with New York emerging as a financial center on a par with London. The stock market crash of 1929 and the ensuing Great Depression hit the United States hard, and the international role of the dollar declined between the two world wars. The 1944 Bretton Woods Agreement created a dollar-based system in which all currencies were pegged to the dollar and the dollar was pegged to gold, convertible at the rate of thirty-five dollars an ounce. World War II decimated European industry, which the United States helped rebuild through the Marshall Plan with large-scale investments and merchandise exports to Europe.

The United States’ strong economic lead after the two world wars, Europe’s dependence on the United States to resuscitate its ailing economies, along with the 1944 Bretton Woods agreement on the dollar-gold standard created the conditions for dollar dominance. Dollar primacy continued even as the United States broke away from the system which established the dollar’s prominent role. The Bretton Woods system capped US trade deficits at levels compatible with the United States’ ability to liquidate foreign dollar holdings through gold conversion. When the United States shook off the constraints reflected by gold conversion, the dollar system did not end. The 1971 Nixon shock simply decoupled the dollar from gold and replaced the gold constraint on US trade deficits with inflation and dollar depreciation.

The role of trade and oil

The dollar’s international role initially coincided with US trade surpluses as European countries absorbed American goods. As the European economies grew, demand for US assets grew, and the trade dynamic was reversed. US trade deficit pressures started to undermine the Bretton Woods dollar standard as predicted by the economist Robert D. Triffin. In his testimony to the US Congress, Triffin pointed to the contradiction between the United States’ liquidity provision and confidence in the dollar. The United States exported dollar assets, which were held abroad as foreign reserves, creating the liquidity needed to fuel economic growth. Dollar exports generated foreign investment in the United States leading to trade deficit pressures. In this case, the large supply of dollars undermined confidence in the dollar, particularly the United States’ ability to honor dollar conversion into gold, potentially jeopardizing the dollar standard. On the other hand, had the United States not accepted to run trade deficits the main source of international liquidity would run dry, which risked undermining international economic growth with destabilizing consequences. The United States’ liquidity provision was required for continued growth but in conflict with the long-term prospects of the dollar’s international role. Triffin predicted the breakdown of the Bretton Woods dollar system, and the dilemma remains relevant for the relationship between the United States’ liquidity creating role and confidence in the dollar. In the 1970s, oil and other commodities began to be priced in dollars, creating incentives for official and private actors to settle payments in dollars and therefore store value in dollars.

Threats to dollar dominance

The dollar remains dominant due to economic fundamentals and the history of using dollars, favoring future use because everyone else is using dollars. Supporting the dollar’s international role are factors such as the size of the US economy, its commercial and financial markets, the liquidity, depth, breadth and openness of US financial markets, the dollar’s convertibility, relative stability, and sound macroeconomic policies. The economic policies underpinning issuance of the primary international currency has not been flawless, but the historical record does not need to be perfect for the historical record to support the dollar’s continued use. The network effects of plugging into the dollar system due to the liquidity, depth, and breadth of the market for dollars creates an incumbency advantage, which is hard to overcome. In the absence of major economic or geopolitical upheaval, inertia disincentivizes a major switch to alternative currencies. Political factors could also impinge on the dollar’s role. For example, strong political institutions and property rights protection contribute to shoring up confidence in the US economy. Security ties to the United States are also said to have favored dollar use in the early Cold War days. US sanctions to uphold the liberal international order invite dollar support from states backing the order. On the flip side, an erosion of US political institutions, a weakening or reduced need for US security guarantees, or alternatively a sanctions backlash would likely reduce dollar support.

Unless political developments within the United States or US foreign policies radically shake confidence in the United States and access to dollars, economic factors are more likely to determine the fate of the dollar system.

US decline

The United States’ relative economic decline has been debated for at least sixty years. In the 1960s, Organski predicted China’s inevitable rise as a systemic leader and noted India’s likely emergence as a great power. In the 1980s, Paul Kennedy famously predicted that the United States would lose the superpower competition with the Soviet Union due to military overstretch. And an emphasis on competition in the era of economic interdependence led to repeated warnings about the United States’ ability to maintain its edge over rising economic powers, notably Europe and Japan.

The United States has declined relative to other great powers along various dimensions but remains the absolute strongest power across most dimensions. China’s gross domestic product (GDP) is nearly eighty percent of US GDP, and its goods imports are roughly equivalent to US goods imports. However, China’s financial markets are nowhere near the size or sophistication of US financial markets and China’s yuan accounts for less than three percent of foreign exchange reserves. The euro area is a closer competitor to the dollar. Euro area GDP is approximately sixty percent of US GDP, goods imports account for some ninety percent of US goods imports, and euro area financial markets are both advanced and large. The euro is the second strongest reserve currency, accounting for approximately twenty percent of foreign exchange reserves compared to the dollar’s sixty percent share.

US domestic economic policies

While the dollar enjoys an extraordinary lead over other international currencies, it is not invincible. Poor domestic policies could shake confidence in the dollar. Structurally, the United States’ liquidity-creating role—providing dollar assets to the rest of the world—and the ability to invest in the United States can interact unfavorably with low savings in the United States, resulting in large deficits, rising public and/or private debt. Unlike the euro-zone, however, the United States does not face the prospect of involuntary sovereign default because the dollar is a convertible sovereign currency. The recent specter of US default, a possibility which arises periodically, is entirely voluntary and due to a self-imposed debt ceiling. In the United States, the upper bound of the debt limit is rather determined by foreigners’ willingness to hold dollars, at worst resulting in inflation and depreciation. Although the United States cannot be forced to default, such an adjustment process may not be benign.

Geopolitical challenges

There have been few deliberate attempts to unseat the dollar as the first international currency. In the early twenty-first century, Iraq and Iran discussed switching oil pricing from dollars to euros with a view to reducing dependence on the dollar system, a response to US sanctions and interventions in the Middle East. More recently, an anti-dollar counter-coalition centered around the BRICS countries has emerged. The inclusion of China and Russia, and large emerging economies, presents a more potent challenge to dollar dominance than in the past. If sanctions, or some other development, leaves other countries dissatisfied, the counter-coalition could grow and pose a more acute defiance against the dollar system.

Rising US public debt, high inflation, and other key developments are unfolding in a strategic setting reminiscent of the Cold War environment. The most striking parallel is the return of great-power rivalries and policymakers’ preoccupation with security concerns, which are taking precedence over economic efficiency. Fears about economic decoupling, deglobalization, and fragmentation abound. On the monetary front, the worry is that countries anticipating US sanctions will move preemptively to reduce their dependence on the dollar.

China and Russia have been especially energetic in pushing alternative currencies and building a multinational financial infrastructure for trade and investment in renminbi and rubles. For example, China’s Cross-Border Interbank Payment System (CIPS) acts as a clearing house similar to the US Clearing House Interbank Payments System (CHIPS). CIPS processes a mere fifteen thousand transactions per day, amounting to the dollar equivalent of fifty billion, whereas CHIPS processes twenty-five thousand transactions per day, with a value exceeding $1.5 trillion. The CIPS initiative has nonetheless laid the groundwork to clear and settle more cross-border exchange in renminbi. When China launches a financial messaging system capable of working independently from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), it will have its own complete, autonomous architecture for settling cross-border transactions denominated in its own currency.

For its part, Russia has already taken steps to bypass SWIFT, creating its System for Transfer of Financial Messages (SPFS) after its illegal annexation of Crimea in 2014. Russia’s central bank claims that demand for SPFS has increased significantly since last year’s full-scale invasion of Ukraine. At the time, however, the system had only around four hundred users.

Still, owing to new payments infrastructure and various bilateral agreements, pursuing trade and investment in non-Western currencies has become somewhat easier. Russia and China have agreed to trade in renminbi; and, reviving the Cold War-era rupee-ruble mechanism, Russia and India were planning to trade in their own currencies following Russia’s invasion of Ukraine. However, that effort was recently discontinued, with both countries settling on using the United Arab Emirates’ dirham instead. All told, such use of alternative currencies by third countries remains small. While the renminbi is being used to settle a Russian investment in a nuclear-power plant in Bangladesh, other examples are scarce.

Governments are also making plans to move away from pricing oil in dollars, although the significance of this development is easily overstated. Oil may be one of the world’s leading export products, but it ultimately accounts for a small share of global trade.

More broadly, because international currencies are, by definition, used by third countries, adopting a trade or investment partner’s currency will not necessarily raise that currency’s international role, even if it does reduce the greenback’s relative role in cases where those transactions were previously denominated in dollars.

Those predicting the end of dollar hegemony also point to China’s own use of bilateral swap lines to allow foreign central banks to acquire renminbi in exchange for their own currency. Making renminbi available to foreign governments is a prerequisite for its use by public and private actors, and the ability to act as lender of last resort in times of crisis is a key reserve-currency function.

China has also been maneuvering to expand its institutional footprint, such as by introducing an emergency renminbi liquidity arrangement under the auspices of the Bank for International Settlements (BIS). Similarly, the basket of currencies underpinning the International Monetary Fund’s special drawing rights (SDR, the IMF’s reserve asset), now includes the renminbi, alongside the dollar, yen, euro, and pound sterling. And the BRICS (Brazil, Russia, India, China, and South Africa) have also discussed ways to push back against dollar hegemony, such as by issuing a joint reserve currency to bypass the dollar and other major Western currencies (as well as offering an alternative to SDR).

Finally, one of the most eagerly anticipated technological developments in this area is China’s creation of digital payment alternatives. China’s central bank introduced a digital currency, the e-CNY, in 2016 and offered this payment option to participants at the 2022 Olympics in Beijing. When fully implemented, the e-CNY will function independently of other payment and financial-messaging systems. By offering cheaper, faster, and safer transactions, a Chinese digital currency could make the renminbi more attractive and therefore more widely accessible and liquid. Promoting the e-CNY for trade and investment could accelerate renminbi internationalization.

But underlying trade and investment patterns must change before the global currency hierarchy does. Here, the China-centered Regional Comprehensive Economic Partnership, as well as China’s Belt and Road Initiative, could help internationalize the renminbi by multiplying economic interactions and encouraging renminbi use in third-country trade and investment. Still, in the medium term, renminbi internationalization is likely to encounter substantial hurdles, owing to China’s maintenance of capital controls and broader balance-of-payments constraints.

Why sanctions are an unlikely tipping point for dollar dominance

Following Russia’s invasion of Ukraine, geopolitical blowback is widely seen as threatening dollar dominance. To fully grasp what today’s turbulence means for the dollar system, we must however move beyond the motivations of countries targeted by sanctions. Many countries benefit from US currency coercion because they share the core principles behind US sanctions. Countries supporting sanctions on Russia have strong geopolitical incentives to continue holding and using dollars for international reserve and payment purposes. Supporting the dollar reinforces the constraining impact of the sanctions and helps ensure their future effectiveness. The economic incentives these governments previously had to diversify away from traditional currencies, particularly the US dollar must now be weighed against their geopolitical incentives to hold dollars. Together, the coalition arrayed against Russia accounts for more than ninety percent of global currency reserves, approximately eighty percent of global investment, and sixty percent of world trade and world economic output. Overcoming that dominance would be difficult even if every country that has declined to sanction Russia fell in line behind an organized anti-dollar coalition. Moreover, countries not participating in sanctions against Russia do not necessarily disagree with the goals behind them: ending the war in Ukraine and deterring future territorial aggression. The coalition behind the sanctions against Russia is broad, wealthy, and militarily powerful, and its objective of ending Russia’s barbarous war is widely shared, even by those not participating in the sanctions. Geopolitically induced dollar support is rather likely to stabilize dollar holdings.

Having noted the relationship between sanctions and dollar dominance a decade ago, I am not suggesting there is no possible scenario in which sanctions threaten dollar hegemony, simply that the Russia sanctions are highly unlikely to represent such a tipping point. Sanctions should be designed to prevent the unipolar currency order from further eroding. For example, by building broad sanctions coalitions in which participation is strictly voluntary and without forcing countries to choose sides. Sanctions can be costly for third parties. Whenever possible, steps should be taken to alleviate unintended consequences. In addition, sanctions should be reserved for clear-cut cases in which the international order is under threat, as in Ukraine, and should not be used for parochial purposes, as when sanctions were reinstated against Iran in 2018, even though Iran had not broken the terms of the nuclear deal, or when the Trump administration imposed overly harsh sanctions on Cuba. Imposing sanctions to pursue narrow US interests raises legitimate fears among countries that they could be targeted next, motivating them to find alternatives to the dollar. Using sanctions to preserve the central elements of the liberal international order is a goal many countries can subscribe to, or at least tolerate, leaving the dollar as their continued currency of choice.

Other geopolitical drivers

Sanctions risk is not the only geopolitical factor shaping dollar use. In today’s fraught international environment, countries question the wisdom of system-wide economic interdependence and privilege economic ties with friends. As security concerns eclipse economic concerns, the United States and Europe are limiting their economic dependence on foreign adversaries and pushing to relocate manufacturing and supply chains to allied nations in what has come to be known as “friend shoring.” Just as countries are beginning to source goods and inputs from friendly nations, they may very well adopt the currencies of friendly nations. We should therefore expect a return to the Cold War logic in which economic relations more frequently align with security relations. With the United States at the bullseye of the largest security network in the world, the dollar stands to benefit from this shift. As during the Cold War, US security provision may induce allied dollar support.

Concluding remarks

In short, the size of the sanctioning coalition, the number of nonparticipating sanctions supporters, and the number of countries under the US security umbrella, make large-scale currency diversification away from the dollar unlikely, at least in response to the Russia sanctions. To preserve the existing currency hierarchy and limit the long-term trend towards currency multipolarity, the United States must adopt sound economic policies and use economic statecraft to promote the public good of international order from which most countries stand to benefit. The United States cannot afford to alienate key allies, or a large portion of the international community, and simultaneously preserve the unipolar dollar era over the long term. For the first time since the collapse of the Bretton Woods gold standard, we are seeing a systemic limit on the dollar centered economic order and US foreign policy. 

Fellow

Dr. Carla Norrlöf

Nonresident Senior Fellow

Economic Statecraft Initiative GeoEconomics Center

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Playing musical chairs with leadership positions like this provides Washington with opportunities to recalibrate and update its coercive economic measures, with the goal of punishing targets for past bad behavior in order to deter such behavior in the future. Ahmadian is already subject to US and international sanctions. However, there are other areas where the Joe Biden administration can levy targeted penalties against recently appointed but undesignated leaders of already sanctioned institutions in Iran.

The US Treasury has a history of blacklisting leaders for sanctions circumvention and terror finance. This practice should not stop, given that corrupt business practices on behalf of sanctions-busters, which are aimed at handicapping due-diligence efforts—by operating shell companies and fronts, changing company names, or transferring ownership—are also not stopping.

Unless there is a fundamental change of mission, something improbable in the Islamic Republic today, newly appointed individuals will be helping designated organizations further carry out sanctionable activities by simply showing up for work. Moreover, Tehran can use the introduction of fresh leadership to falsely suggest that their organizations are no longer conducting sanctionable activity, which is aimed at tricking the marketplace.

For Washington, holding such leaders accountable can help improve its position in what is likened to a perennial game of “whack-a-mole.” Beyond exercising good sanctions hygiene and keeping its targeting up to date, the move offers Washington several advantages.

First, it better allows the US to credibly signal that it has the capability and intent to enforce older sanctions, as long as a behavioral predicate for each penalty exists. Second, it allows Washington to incentivize prospective leadership candidates to self-select out of contention, as they might want to avoid being subject to restrictive or coercive measures, such as an asset freeze or travel prohibitions. Third, it offers the long-term possibility of bolstering the deterrent aspect of sanctions rather than its punitive side, which enables sanctions to be better leveraged as a threat in crisis bargaining or coercive diplomacy scenarios. Lastly, there is the economic impact, which, admittedly, is likely to be limited when applied to the individual. Nevertheless, it raises the risks of sanctions exposure for foreign financial institutions that may knowingly deal with such individuals.

Luckily for the Biden administration, they can take advantage of all of these benefits by targeting several low-hanging fruit.

For example, early this May, the IRGC’s engineering arm, known as Khatam al-Anbiya (KAA) construction headquarters—a massive economic conglomerate founded in 1989 linked to the IRGC—experienced a leadership shake-up. Following only a two-year stint, Hossein Housh Al-Sadat was removed from the governance of KAA on May 1 and replaced by Brigadier General Abdolreza Abed.

Washington last designated the head of KAA in 2010, when IRGC Brigadier General Rostam Qassemi led the organization. Since then, KAA has remained on the Treasury Department’s sanctions lists, subject to counter-proliferation and counter-terrorism penalties. Since Qassemi departed from KAA in 2011, multiple US administrations have missed the chance to target successive heads of the organization, rendering the likes of Abolqasem Mozafari-Shams, Ebadallah Abdollahi, Saeed Mohammad, and Hossein Housh Al-Sadat sanctions free. President Biden should not miss an opportunity to hold Abed, the latest in a line of IRGC-linked KAA chiefs, accountable.

Additionally, the Biden administration has yet to blacklist new industry leaders helping Iran illicitly sell its oil.

In September 2021, Iran’s energy minister appointed Mohsen Khojasteh-Mehr as the new managing director of the National Iranian Oil Company (NIOC). Khojasteh-Mehr previously served as deputy minister for planning in the Iranian oil ministry and had a leadership position in the sanctioned Tadbir Drilling Development Company, a subsidiary of a larger business network tied to Supreme Leader Ali Khamenei.  

Khojasteh-Mehr replaced Masoud Karbasian, who held the position since 2018. Karbasian was sanctioned by counter-terrorism authorities in 2020 for his leadership role in NIOC, which was assessed to be supporting the activities of Iran’s IRGC Quds-Force through illicit oil sales.

While NIOC was initially sanctioned by Washington in 2012 and determined to be “an agent or affiliate” of the IRGC, NIOC received limited economic relief under the 2015 Iran nuclear deal. In 2020, the NIOC was sanctioned in its entirety under an updated counter-terrorism authority by the Donald Trump administration.

Similarly, the Treasury Department noted in 2020 that the NIOC and the National Iranian Tanker Company (NITC) sold oil and tankers on behalf of the IRGC Quds Force, and that the NITC’s managing director had worked with Lebanese Hezbollah on delivering oil shipments to Syria. NITC and its then-head, Nasrollah Sardashti, were accordingly sanctioned under the same expanded counter-terrorism authority used by the Trump administration to target NIOC and Karbasian.

Fast forward to 2021, only two months after playing musical chairs at NIOC, Iran re-arranged the deck at NITC by swapping out Sardashti for Hossein Shiva as managing director of the National Iranian Tanker Company. Shiva previously served as deputy managing director of NITC, an oil ministry advisor, and secretary of an SNSC subcommittee on economics. To date, Shiva, like Khojasteh-Mehr, has not been designated.

Together, Khojasteh-Mehr, Shiva, and Abed function as essentially un-restricted agents of sanctioned institutions. While targeting this trio—or any other penalty-free actors in Tehran—is unlikely to yield the immediate results needed to crack down on Iran’s illicit oil exports, it would signal that Washington is willing to spend the requisite time and resources to better calibrate its sanctions based on fast-changing facts on the ground.

Beyond the potential deterrent dividends of the move, holding these leaders accountable makes US sanctions policy look more coherent. Furthermore, it would combat the narrative that a more permissive business environment is being fostered within the Islamic Republic—a sentiment regime elites like Khojasteh-Mehr, Shiva, and Abed are likely keen to foster and exploit.

Behnam Ben Taleblu is a senior fellow at the Foundation for Defense of Democracies (FDD) in Washington DC, where he contributes to its Iran Program and Center on Economic and Financial Power (CEFP).

The views expressed are his own.

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Several countries have increased their trade with Russia since early 2022, including non-aligned countries and even some European Union (EU) members. Such surges in trade, however, are not necessarily an indicator of support for Putin’s war. Instead, it is more likely they are predominantly the result of companies—and countries—pursuing legal opportunities for cheaper exports and new gaps in the Russian market.

As you can see from the chart above, China is one of several countries stepping up trade with Russia. Additionally, Russia is not the only country experiencing a rise in trade with China. In 2022, most of Beijing’s top twenty trading partners saw growth of 10 percent or more in their imports from China. Australian and Indian imports of Chinese goods, for example, jumped by around 20 percent in 2022.

It is important to understand what is driving China’s trade with Russia. It is not only about Ukraine. Starting in 2013, Russia initiated a “Pivot to the East,” to China first and foremost. This has paid off for Moscow. Over the previous five years (excluding pandemic-wracked 2020) trade grew by an average of around 23 percent annually. 

While the recent year-over-year trade increase of 27 percent was well above this trend-line growth, other factors make the data seem even more dramatic than it in fact is. In 2022, for example, the yuan depreciated against both the dollar and the ruble, increasing the competitiveness of Chinese exports to Russia.

In absolute terms, Chinese trade dwarfs all of Russia’s other major trading partners. With $188 billion worth of goods exchanged, China was Russia’s top trading partner. However, China’s economy is more than twenty times larger than Russia’s next largest trading partner, Turkey. Accounting for overall economic size, China’s trade with Russia is much less exceptional and is overshadowed by that of many US allies and partners, as the chart below shows. Looking at it from China’s perspective, its trade with Russia is on par with its trade with Malaysia and well below its trade with Vietnam, two economies that are one-fifth the size of Russia’s.

Russia’s trade with US allies and partners

Two countries that have substantially increased their trade with Russia are NATO member Turkey, which has seen trade with Russia surge 93 percent, and US partner India, whose trade has ballooned by nearly 250 percent since 2021. Both nations provide critical lifelines to key aspects of Russia’s economy: India has surpassed the EU to become Russia’s second largest destination for oil exports after China, and Turkey is now a significant supplier of electric machinery and parts, including integrated circuits and semiconductors.

Although Turkish exports of electronic machinery, including critical integrated circuits, fell in the immediate aftermath of Russia’s full-scale invasion, they have since recovered and grown well beyond the pre-invasion average. From March 2022 to March 2023, Turkish electronic exports to Russia jumped by about 85 percent. For comparison, Chinese exports to Russia remained basically flat, only growing half a percent over the same period.

Integrated circuits and electronic machinery are not the only strategic good Turkey continues to supply to the Russian economy. Turkish companies export millions of dollars worth of chemicals, plastics, rubber items, and vehicles, all of which help Russia’s manufacturing sector. To Ankara’s credit, following pressure from the Group of Seven (G7), Turkey has agreed to halt its transit of sanctioned goods to Russia. However, its trade with Russia remains a vital economic lifeline for its businesses as the country recovers and reconstructs from a devastating earthquake earlier this year.

Russia’s economy has avoided catastrophe thanks in large part to revenue from the export of mineral fuels, most notably crude oil. The fastest growing new buyer of Russian oil, however, is not China. It’s India. Since Russia’s invasion the value of Indian imports has grown nearly tenfold from around $4.7 billion in the year prior to Russia’s invasion to around $41 billion in the year following. While Chinese imports have also grown by around 55 percent, this is largely in line with the trend-line growth that predated the conflict. 

However, Indian (and Chinese) import growth is a feature, not a bug of G7 actions against Russia’s oil exports. The United States and its allies were deliberate in imposing their own import ban of Russian oil but avoiding an embargo on general Russian oil exports. An embargo against the world’s third largest oil producer would cause crude prices to skyrocket and would incite backlash against G7 actions from non-aligned countries. To reduce the Kremlin’s revenues, the United States has instead sought to cap the price Russia can charge for its oil exports. So far, both China and India have complied when using the Western infrastructure covered by the price cap. Even when using alternative means of shipment and insurance, they are able to convince Russia to sell them oil at ten-to-twelve dollars per barrel below similar grades from other suppliers.

A one-way street 

There are actually signs that China is exercising some restraint in its economic engagement with Russia, only acting when Beijing has an overwhelming self-interest. Following the February 2022 invasion, Chinese banks halted financing for the purchase of Russian commodities, and there have been no signs that it has resumed. More broadly, throughout 2022 China avoided financing any major new investments in Russia. China has also yet to instruct its state-owned enterprises (SOEs) to enter the Russian market. In fact Beijing has gone so far as to tell its SOEs, such as state-run Sinopec Group, to halt preexisting investment plans for fear of running afoul of G7 sanctions. 

Chinese leader Xi Jinping has also slowed the construction of new infrastructure projects that would further link the two economies, despite Russian enthusiasm for them. During Xi’s March 2023 visit to Moscow, Putin heavily pushed for the agreement of a new gas pipeline connecting Russia to China called Power of Siberia 2. Xi, however, did not oblige and Beijing’s silence on the issue suggests that China hopes to exploit Russia’s inability to export gas to the West to secure the best possible price. 

What support China is providing often falls far short of Russian wartime needs. Chinese businesses have largely only sent basic mobile phones, transport equipment, and computers to Moscow, not the more advanced technology Russia lacks. Last December, Beijing reportedly banned the export of its Loongson chips, one of the higher-performance microprocessors China produces, due to their strategic importance and military sensitivity. This left Russia without a Chinese alternative to advanced Western integrated circuits. 

While there have been examples of Chinese and other foreign companies circumventing G7 sanctions and export controls, they comprise only a fraction of the overall commerce exchanged between China and Russia. In general, China appears to comply with Western sanctions and export controls for fear of subjecting itself to US sanctions or secondary sanctions. For example, major Chinese state-owned enterprises have avoided purchasing the Russian assets of Western companies, such as BP and Shell, over fears of the possibility of Western action. 

None of this is to say China does not favor a Russian victory in Ukraine. A defeated Russia is not in China’s interest, and China continues to lend Russia a massive diplomatic hand at the United Nations, in the Group of Twenty (G20), and with non-aligned countries around the world. China has sold millions of dollars worth of drones and drone parts to Russia in 2022. It is also likely rerouting some shipments to Russia through Central Asia. However, its trading relationship with Russia is not by itself an indication of a concerted effort by the Chinese Communist Party to intervene in the Ukraine conflict on Putin’s behalf. The China-Russia trade uptick seems more in line with one driven by companies acting on behalf of their own interests—just as with recent surges in trade between Russia and US partners and allies such as India and Turkey.

Until China, or any other country, crosses the legally significant line the United States and its partners have drawn around lethal aid, or until there is clear evidence of state support to circumvent G7 sanctions or export controls, any attempt to restrict other legitimate commerce will be ineffective and could risk further alienating non-aligned and fence-sitter nations. If Washington chooses to narrowly focus on China’s trading patterns, it may miss opportunities to convince US allies and partners to reduce their support for Russia’s economy.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund.

Niels Graham is an assistant director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economics and trade.

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In this edition of the Global Sanctions Dashboard, we cover:

• New sanctions packages against Russia released ahead of the G7 Summit.
• How the United States is tackling export controls circumvention and what should improve moving forward.
• The enforcement and effectiveness of the oil price cap.
• The failure of the US sanctions policy towards Sudan, and how to fix it.

New sanctions packages against Russia released ahead of the G7 Summit

The Ukrainian intelligence assessment from 2022 indicated that forty out of fifty-two components recovered from the Iranian Shahed-136 drone that was downed in Ukraine last fall had been manufactured by thirteen different American companies, while the remaining twelve were made in Canada, Switzerland, Japan, Taiwan, and China. The case revealed that it was not enough to impose sanctions and export controls on Russian defense companies. Not only was Iran providing drones to Russia, but also certain entities and individuals in countries such as Switzerland and Liechtenstein have procured materials on Russia’s behalf. This is why the United States released a new sanctions package ahead of the G7 summit, targeting a much wider international network of Russia sanctions and export controls evasion. 

Finland, Switzerland, Cyprus, United Arab Emirates, India, Singapore—these are just a few locations associated with individuals and entities included in the Treasury Department’s newest designations against Russia. Entities and individuals located in these countries have aided Russia’s circumvention efforts or provided materials for Russia’s military procurement. Among the sanctioned individuals are Swiss-Italian businessman Walter Moretti and his colleagues in Germany and India, who have sold advanced technology to Russian state-owned enterprises. Liechtenstein-based Trade Initiative Establishment (TIE) and its network of two companies and four individuals have been procuring semiconductor production equipment for sanctioned Russian entities since 2012. 

Along with the United States, the United Kingdom also imposed sanctions against eighty-six individuals and entities from Russian energy, metals, financial, and military sectors who have been enhancing Russia’s capacity to wage the war. Additionally, the European Union (EU) is developing its eleventh package of sanctions which will reportedly, for the first time, target Chinese entities facilitating Russia’s evasion efforts. Coordinating the designation and enforcing processes among the G7 allies will be key in synchronizing the targeting of Russia’s evasion and procurement networks.

Export controls circumvention: How the US is tackling it and what should improve moving forward

While sanctions aim to cut entities and individuals procuring technology for the Russian military out of the global financial system, export controls are designed to prevent them from physically acquiring components. G7 allies have levied significant export controls on Russia, but enforcing export controls is easier said than done. Third countries from Russia’s close neighborhood have stepped up to fill Russia’s technology shortages caused by other countries complying with export controls. Central Asian and Caucasus countries had a significant uptick in exports of electronic components to Russia, while Turkey, Serbia, and Kazakhstan have been supplying semiconductors to Moscow. Even if exported electronic components are not designed for military application, Russians have been able to extract semiconductors and electronic components for military use even from refrigerators and dishwashers. The sudden boost in electronic equipment exports from Central Asia and the Caucasus to Russia can only be explained by Russia’s efforts of repurposing them for military use. 

In response to Russia’s efforts to obtain technology by all means possible, the US Departments of Commerce and Justice have jointly launched the Disruptive Technology Strike Force. The goal of the Strike Force is to prevent Russia and adversarial states such as China and Iran from illicitly getting their hands on advanced US technology. The Strike Force recently announced criminal charges against individuals supplying software and hardware source codes stolen from US tech companies to China. The Strike Force embodies the whole-of-government approach the United States has been taking in investigating sanctions and export controls evasion cases. The prosecutorial and investigative expertise of the Justice Department, coupled with the Treasury’s ability to identify and block the sanctions evaders from the US financial system, will amplify the impact of the Commerce Department’s export controls and enhance their investigations and enforcement.  

The US Department of Commerce has also teamed up with Treasury’s Financial Crimes Enforcement Network (FinCEN) to publish a joint supplemental alert outliniing red flags for potential Russian export controls evasion that financial institutions should watch out for and report on, consistent with their compliance reporting requirements. The red flags include but are not limited to:

• Payments for dual-use goods to companies located outside of the Global Export Controls Coalition (GECC) countries. 
• A new customer who trades in the nine Harmonized System (HS) codes, is located outside of the GECC countries and was incorporated after February 24, 2022. 
• A consumer who refuses to provide details to banks about end users or company ownership. 

Providing information to the public in the form of alerts and advisories is an effective step to increase awareness, financial institution reporting, and compliance with Western sanctions and exports controls. The Disruptive Technology Strike Force should consider issuing a multilateral advisory on export control evasion with G7 allies to bring in foreign partner perspectives, similar to the multilateral advisory issued in March on sanctions evasion by the Russian Elites, Proxies, and Oligarchs Task Force (REPO)

Regarding third-country intermediaries suspected of supplying Russia with dual-use technology, G7 allies should prioritize capacity building and encouraging political will in these countries to strengthen sanctions and customs enforcement. Building up their capacity to monitor and record what products are being exported to Russia could be the first step towards this goal. For example, Georgian authorities returned goods and vehicles destined for Russia and Belarus in 204 cases. However, registration certificates did not identify the codes of returned goods in fifty cases, and clarified that the goods were sanctioned only in seventy-one cases. Developing a system for identifying controlled goods and making the customs data easily accessible to the public could both salvage Georgia’s reputation and enhance export control enforcement against Russia.

The enforcement and effectiveness of the oil price cap

The US Department of the Treasury recently published a report analyzing the effects of the oil price cap, arguing that the novel tool has achieved its dual objective of reducing revenue for Moscow while keeping global oil prices relatively stable. A recent study by the Kyiv School of Economics Institute backs up this statement with detailed research of the Russian ports and the payments made to Russian sellers. However, Russian crude oil exports to China through the Russian Pacific port of Kozmino might be examples of transactions where the price cap approach does not hold.

In response, the Department of the Treasury warned US ship owners and flagging registries to use maritime intelligence services for detecting when tankers are disguising their port of call in Russia. Meanwhile, commodities brokers and oil traders should invoice shipping, freight, customs, and insurance costs separately, and ensure that the price of Russian oil is below 60 dollars. 

Despite China’s imports of Russian crude oil, the world average price for Russian crude oil in the first quarter of 2023 was 58.62 dollars, which supports the claim about the success of the oil price cap, at least for now. Notably, Russia’s energy revenues dropped by almost 40 percent from December 2022 to January 2023, likely in part due to the price cap combined with lower global energy prices.

Beyond Russia: The failure of US sanctions policy towards Sudan, and how to fix it.

While the world has been focused on the G7 summit, the crisis worsened in Sudan. In April 2023, President Biden issued Executive Order 14098 (EO 14098) authorizing future sanctions on foreign persons to address the situation in Sudan and to support a transition to democracy and a civilian transitional government in Sudan. The use of sanctions to support policy goals in Africa is not new. In the case of EO 14098, policymakers seek to use future sanctions on individuals responsible for threatening the peace, security, and stability of Sudan, undermining Sudan’s democratic transition, as well as committing violence against civilians or perpetuating other human rights abuses. 

Much has been written and studied about the effectiveness of sanctions programs in Africa with many programs suffering from being poorly designed, organized, implemented, or enforced. Sudan faced statutory sanctions from its designation as a State Sponsor of Terrorism from 1993 to 2020 and US Treasury sanctions from 1997 to 2017 both of which produced limited results due to ineffective enforcement and maintenance of the program. A near-total cut-off of Sudan from the US financial system pushed Sudan to develop financial ties beyond the reach of the US dollar.

Sanctions in Sudan can be useful if applied in concert with more concrete action. US policymakers must elevate Sudan on their priority list and engage their counterparts at sufficiently senior levels in the United Arab Emirates (UAE), Egypt, Saudi Arabia, Turkey, and elsewhere to encourage them to apply pressure on the Sudanese generals. This could be done by freezing and seizing their financial, business, real estate, and other assets in these relevant countries. Cutting off those links will impede the two generals’ ability to fight, resupply weapons, and pay their soldiers, which could force them back to the negotiating table.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

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Nevertheless, Russian Central Bank Governor Elvira Nabiullina and other financial elites have been pushing for making even more data available. Specifically, they are asking for data classified shortly after Russia’s full-scale invasion of Ukraine to be released again. This includes data on firms’ financial health and international trade. In part, the financial elites are defending their own technocratic power against backroom deals. More transparency may reassure investors and financial counterparties, be they financial institutions or governments that are not wielding sanctions against Russia.

There was some evidence that Nabiullina and her allies were beginning to win this battle in early March, with the release of very partial customs data and an up-to-date time series on the central bank’s foreign currency reserves—in addition to total reserves including gold, which had remained available and up to date. 

By late March, the European Union had also contributed to this spirit of glasnost. Its self-reporting deadline forced member states to finalize their search for immobilized Russian assets, with the bulk of the much-publicized $300 billion thought to be found in the Belgium-based financial company Euroclear. The Russian central bank had been using safe government bonds as a store of value. As maturities were paid, up to 191 billion euros ($205 billion) accumulated there. There is no suggestion of any wrongdoing by Euroclear.

After these very small steps toward transparency—chosen by or imposed on Russia—it is now clear that the Kremlin is stopping this short-lived data glasnost experiment.

Brought in after the invasion, the “period of non-disclosure of corporate reporting” is meant to lapse on July 1. The usual suspects have been pushing for a return to transparency, arguing that—in addition to the positive signal it would send to investors—it would prevent healthy firms from securing tax breaks and subsidies. But Russian Finance Minister Anton Siluanov ruled out a return to pre-invasion practices on May 11, arguing specifically that this would put firms at risk of falling under Western sanctions merely for fulfilling government contracts.

Siluanov’s argument is somewhat puzzling. Most of the thirty-seven firms listed on the Moscow Exchange (including most metals producers) have published at least some of their 2022 accounts precisely to show that they are not supplying the Russian army—and thus to protect themselves from sanctions. In any case, it is a good reason for Western authorities to pay special attention to the thirteen listed firms that have taken full advantage of the non-disclosure period so far. As seen in data obtained from the Atlantic Council’s Russia Sanctions Database, most of the listed firms are sanctioned by only one or two sanctioning authorities, and some are not at all.

The Kremlin and the technocrats are perhaps readier to agree that Russia is not yet ready for capital controls to be lifted. This year’s much smaller trade surplus means a larger deficit in net investment and transfers would pull the current account into a deficit too. And there are already signs that Russia is worried about its access to currencies it can use to trade. In India this month, Foreign Minister Sergey Lavrov complained that rupees were accumulating in the Indian accounts of Russian exporters and that Moscow was struggling to put them to good use. In March, Nabiullina announced that all restrictions on withdrawing cash currency from bank accounts, money transfers abroad, and restrictions on withdrawals by non-residents from “unfriendly” countries would be extended.

Available data show sanctions are having an impact

Russia’s deficit is already well above the trajectory assumed in the 2023 budget. Figures released on May 10 by the Ministry of Finance show that the deficit from early January to early May has been over 3.4 trillion rubles ($42 billion)—already 17 percent above the deficit planned for the whole year. Lower oil and gas income over the first four months of the year (down 50 percent year-on-year) is partly to blame, but bloated spending and a sluggish 5 percent recovery of income from sources other than oil and gas are also factors.

The two most obvious resources to tap into—national welfare fund holdings and domestic borrowing—have been used sparingly so far. 

The chart below shows that the ruble value of the fund—which is made up almost exclusively of yuan and gold for its liquid part—has in fact increased since the beginning of the year. The yuan withdrawals from the fund have been more than offset by the appreciation of the yuan and gold prices against the ruble. What has been withdrawn has been added to the central bank’s reserves in exchange for just 450 billion rubles ($5.6 billion), plugging only 13 percent of this year’s deficit so far.

Meanwhile, the finance ministry has issued just under one trillion rubles ($12.5 billion) in new OFZ bonds to the domestic market. Auctions for these remain popular as sanctions prevent Russian banks from investing in reliable assets abroad. On the other hand, this year’s auctions have not been as oversubscribed as the first large auctions late last year. Moreover, creditors are demanding a very high yield—more than 10 percent in annualized rates compared to a key interest rate at 7.5 percent—suggesting that they perceive significant risks ahead.

The remaining two trillion rubles ($25 billion) in the deficit so far have been covered out of the Russian treasury’s current account, which was claimed to be at 4.5 trillion rubles ($56 billion) in late February. The likely reason the government is running the risk of spending this down rather than borrowing or using the national welfare fund more is that it expects its fiscal returns to improve throughout the year. If this is indeed the case, it will have avoided causing an even faster expansion of money balances and sending another signal that inflation will pick up again.

The above chart shows that the shock to prices brought on by the invasion is now out of year-on-year inflation data. But the government and the central bank remain concerned that the weaker ruble and a loose fiscal stance could quickly bring inflation back above the 4 percent target. Also on May 11, Nabiullina commented that rates may have to be hiked again from their current 7.5 percent. Further cuts are now off the table.

Why might revenue improve? The quarterly tax on “extra oil income” introduced in 2019 is a crucial factor. This allows the government to track how exporters are selling into new markets and adjusting to the oil price cap rolled out by the Group of Seven (G7) nations in December and claim its share of the profit with a lag. This already helped recover some of the January and February losses in March. As for April, the government is also using a new formula for oil taxation. Based on the Brent crude index with a discount (which will shrink every month), the new formula shows that the government believes the index for Russian-made Urals crude is underestimating how much exporters are making, either by convincing buyers to disregard the price cap or by using a “shadow fleet” of shipping and insurance providers that are not affected.

It is now clear that this year’s budget deficit will be well above the planned 2 percent. The Russian government has several levers at its disposal to keep it from going out of control. It should be a key goal for Western policy to make sure these levers fail. In short, this means enforcing the oil price cap to exacerbate the deficit and allowing net transfers to keep leaving Russia in order to erode the current account surplus, keep the ruble weak, and exacerbate inflation.

Alongside capital controls, the end of the technocrats’ short-lived attempt at data glasnost is a clear sign that Russia will continue to run a wartime economy. Attractiveness to investors and the commitment to balanced budgets are no longer a priority. This means we could still see the Russian government breaking further economic taboos to keep financing its war. Pensions and other social payments were increased by 10 percent in June 2022 to account for high inflation but, with a growing deficit, even this key plank of Putinism appears to be at risk this year. Economists certainly expect the inflation-adjusted increase to be much more modest. Once the liquid part of the national welfare fund is depleted, the government might also start raiding the central bank’s accessible reserves, removing what remains of that institution’s ability to control inflation at all. At that point, the Russian economy could be in for much worse than a down year or two.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

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Read on to find out how these powerful democracies are tackling some of the world’s thorniest problems.

This post will be updated as news develops and more reactions come in.

Click to jump to an expert reaction:

Daniel Fried: The G7 brought good news for Ukraine and strong new sanctions on Russia

Josh Lipsky: Unthinkable two years ago, G7 countries are addressing China together

John E. Herbst: Hiroshima makes clear the authoritarian high-water mark has passed

Daniel Tannebaum: Continued alignment on Russia sanctions is impressive, but it’s time to finish the job

Kyoko Imai: The Quad crumbles without a corner

Dexter Tiff Roberts: What will the G7 do when China next attempts economic coercion?

Thomas Cynkin: A breakthrough in fighting China’s economic coercion, but the details must be fleshed out

Steven Tiell: The regulators are coming for your AI

Robert Cekuta: G7 leaders should have gone further on energy security

Bee Yun Jo: US-Japan-South Korea trilateral cooperation is back on track

Jessica Taylor: Can US-South Korea-Japan trilateral cooperation endure beyond a photo op?

Parker Novak: Biden skipping Papua New Guinea was a missed opportunity

The G7 brought good news for Ukraine and strong new sanctions on Russia

The G7 summit generated a lot of support for Ukraine, again demonstrating that persistent predictions of eroding support are off. The G7 Leaders’ statement on Ukraine was strong and, critically, did not push Kyiv toward negotiations on Russian President Vladimir Putin’s terms (a common recommendation from a certain school of thought that seems resigned to Russian victory even as the battlefield seems to favor Ukraine). The rapid coming together of a European coalition to provide Ukraine with F-16 fighter jets, an initiative that the United States in a policy reversal has now joined, was a major step in intensifying military assistance for Ukraine—a big G7 deliverable, as the saying goes. 

There were also new sanctions announced, outlined thematically in the G7 statement and in detail by the United States. These were also a big deal, even as the new sanctions did not include some ambitious proposals. For example, there was no lowering of the oil-price cap, no across-the-board ban on trade with Russia with exceptions (a so-called “white list,” as opposed to the current “black list” approach), and no decision to use the immobilized Russian sovereign assets for Ukraine.

But the announced US sanctions package was broad, well-prepared, and impactful. To cite only a few of the new measures, the Biden administration targeted sanctions evaders from around the world, a labor-intensive process that may hinder Russia’s efforts to escape the vise of restrictions on high-tech exports to Russia. It went after future Russian energy production and export capacity, a clever move that seems intended to lock in pressure on Russia’s critical energy sector for the longer term. The new US sanctions also targeted Russian gold sales (and the European Union seems prepared to target Russian diamond exports), good examples of going after Russian foreign-exchange earnings. 

This was solid work. Sanctions theory usually asserts that sanctions are intended to change behavior. The Russian sanctions regime, however, seems intended to weaken the Russian economy generally, and rightly so. The current sanctions recall (and are more sophisticated than) the Cold War–era sanctions that contributed to the decline and fall of the Soviet Union. Putin, who seeks by war to recreate the Soviet and Russian empires, may yet learn that democracies, for all their messiness, are not as weak and feckless as he supposes.

—Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. He was the coordinator for sanctions policy during the Obama administration, assistant secretary of state for Europe and Eurasia during the Bush administration, and senior director at the National Security Council for the Clinton and Bush administrations. He also served as ambassador to Poland during the Clinton administration.

Unthinkable two years ago, G7 countries are addressing China together

China is not mentioned a single time in the G7’s new special statement on economic security—but make no mistake, it is all about China. Japanese Prime Minister Fumio Kishida made the issue of combating China’s economic coercion a priority for Japan’s G7, and with this unified statement the leaders achieved what will likely be the lasting legacy of the summit. The big question coming into Hiroshima was: Could the leaders maintain unity against Russia and harness that collective power in addressing China? The statement is the first concrete sign that the answer is yes. Two years ago, during the United Kingdom’s G7 summit in Cornwall, it would have been hard to believe that European leaders would sign on to a statement that was so specifically directed at Beijing. But after China targeted Lithuania for its support of Taiwan, the calculus on the continent began to shift. Now, all G7 leaders have committed to a new rapid response coordination platform if another country is targeted. They are also speeding up their push for new supply chains and trying to leverage the Partnership for Global Infrastructure Investment as an alternative to the Belt and Road Initiative. 

The statement doesn’t specify what other specific steps the group will take to combat what they describe as the “disturbing rise in the incidents of economic coercion.” And you can be sure that other participants at the G7, including India’s Prime Minister Narendra Modi, will stay away from associating with this statement. Many countries will ask privately, what about the West’s use of sanctions and other tools of economic statecraft? The answer from the G7 is that those tools have a legal basis and are a justified response to violations of international law. The bottom line is that the G7 has shown it will increasingly focus on China and will try to maintain a coordinated policy approach. That’s a major development.

—Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund.

Hiroshima makes clear the authoritarian high-water mark has passed

G7 summits are usually nerd nirvanas, producing long statements on numerous issues that specialists mine to figure out in which direction the world’s leading democracies are moving, usually incrementally. Hiroshima was different. It was rich in substance and symbolism indicating that the world’s great democracies recognize the dangers, geopolitical and economic, posed by the two authoritarian revisionist powers, China and Russia.

In the summit statement and discussion, the G7 leaders seemed to be moving toward the understanding that China is a predatory power that needs to be kept in check. The statement also laid out a host of measures to further support Ukraine and isolate Russia for its war-crime laden aggression; and by hosting Zelenskyy, it gave the world a clear symbol of the world’s great democracies’ determination to enable Ukraine’s successful defense. To underscore this, the Biden administration used Hiroshima to finally allow the transfer of F-16 fighter jets to Ukraine. What’s more, Hiroshima offered a reminder of just how potent the democratic ideal is in also hosting Indian Prime Minister Narendra Modi, a long-time Putin pal and stalwart of the BRICS group (Brazil, Russia, India, China, and South Africa). It would have been nice to be a fly on the wall in the Kremlin as Putin watched the coverage of Modi’s bilateral meeting with Zelenskyy.

Was it really just fifteen months ago that Chinese leader Xi Jinping and Putin issued their lengthy joint statement in Beijing and the world appeared to tremble at the specter of the marching authoritarian great powers? And today, Xi meets with the five Central Asian leaders while the G7 countries sit with India and Ukraine, and International Criminal Court–indicted Putin wonders if he can attend the BRICS Summit in South Africa in August without being arrested. Were these the extraordinary “changes” that Xi told Putin their two nations were driving when they met in Moscow in March?

—John E. Herbst is senior director of the Atlantic Council’s Eurasia Center and served for thirty-one years as a foreign service officer in the US Department of State, retiring at the rank of career minister. He was US ambassador to Ukraine from 2003 to 2006.

Continued alignment on Russia sanctions is impressive, but it’s time to finish the job

The G7 members continued to show their alignment on new waves of Russian sanctions after meetings in Hiroshima over the last few days. The rhetoric continues to be one threatening those who would evade or circumvent sanctions, or those supporting them, with severe penalties. We’ve certainly seen designations of those who have circumvented sanctions to date, but without material enforcement, is the coalition missing the plot? Having served at the Office of Foreign Assets Control (OFAC) in the US Department of Treasury, I know firsthand the time it takes to bring an enforcement case to conclusion. If the goal is further isolation of Russia, then seeing nearly five billion dollars per month of exports from G7 nations (according to the Atlantic Council’s Niels Graham) is evidence of the scale of Russia’s role in the global economy. I do not mean to say that those who have been trading monthly with Russia have been violating sanctions, but perhaps countries and companies do not feel as much that they need to make a choice.

Hopefully, in time, there will be further rounds of sanctions focusing more broadly on export bans, unless otherwise expressly exempted. This would certainly make life more operationally easier for financial institutions which finance the aforementioned trade. For example, as sanctions were built up on Iran, culminating in the Joint Comprehensive Plan of Action (JCPOA), trade with Iran was certainly viewed largely as off-limits, and further enforcement actions against global banks reinforced the consequences for those who would purposefully violate these sanctions. When the JCPOA was enacted and secondary sanctions lifted, as a condition of the deal, there were initial views that Western businesses, where permissible, would flood the market. There were numerous reports of civil aviation, automotive, and consumer products companies who announced plans to reenter the market. Few, if any, global financial institutions would facilitate this trade, even if it was legal. At one point, then US Secretary of State John Kerry and then UK Foreign Secretary Boris Johnson convened the world’s largest banks to remind them that certain trade was now permissible. But the banks did not bite. The fear of potentially being on the wrong side of the remaining Iran sanctions, and the large-scale penalties that went along with those violations, was a painful reminder that it may not be worth it.

Now, Iran is certainly not Russia. The former is, according to the International Monetary Fund, the twenty-second largest economy in the world, while the latter recently ranked as the eleventh largest. However, for these Russia sanctions to be truly effective, more companies need to fear the downside risk to their organizations if things go wrong and they end up violating sanctions. To be clear, I do not wish for enforcement to occur outside of the truly egregious examples of violations. Enforcement has served as an effective deterrent historically to help reinforce a sanctions agenda. In the Iran example, these were some of the largest banks in the world that paid billions of dollars in settlement costs, and billions more in remediating their historical issues. There is another reason why enforcement is critical in a new sanctions regime, especially one as challenging to implement as with Russia. It is at times hard for companies to know whether they’re doing it right. Some of the best guidance out of OFAC used by firms was borne from enforcement actions, where organizations could apply the lessons learned to themselves and ask if they had done something similar. At the most basic level, if continued rounds of new sanctions are launched without material examples of violators, assuming they exist, can we really say they’re effective?

—Daniel Tannebaum is a nonresident senior fellow at the Atlantic Council’s Economic Statecraft Initiative in the GeoEconomics Center and a partner in Oliver Wyman’s Risk and Public Policy Practice, where he leads the firm’s Global Anti-Financial Crime Practice.

The Quad crumbles without a corner

Biden’s decision to abruptly end his Asia trip and pull out of the Quad Leaders’ Summit reflects poorly on US credibility and reinforces doubts about its resolve. The leaders of Australia, India, Japan, and the United States were expected to meet in Sydney on May 24 to enhance cooperation on critical and emerging technologies, climate change, and maritime domain awareness. However, Biden cut his trip short to deal with domestic debt ceiling negotiations, which are undermining US foreign policy at a pivotal moment for the Indo-Pacific region.

The Quad Summit was intended to signal unity in the face of Chinese attempts to challenge the existing regional order. Instead, China will be further emboldened to assert territorial claims, expand naval capabilities, and militarize islands in the South China Sea. This is a diplomatic gift to Xi, and Chinese state media outlets will jump at the opportunity to tear Washington down. In its messaging to the region, Beijing will claim that a country failing to keep its own government afloat is unfit to lead.

China is right about one thing: Building trust requires consistency, reliability, and simply showing up. Withdrawing from diplomatic trips to Asia due to political emergencies has become an unfortunate pattern for the United States, as presidents George H.W. Bush, Bill Clinton, and Barack Obama all did so.

Furthermore, US foreign policies are at risk of a 180-degree shift every four years, as shown by the political re-emergence of Donald Trump—who ditched the 2017 East Asia Summit in the Philippines because it started late.

Nonetheless, the United States has been deemed the unofficial leader of the Quad. Although the four leaders met on the sidelines of the G7 meeting in Hiroshima, the meeting only lasted fifty minutes and was a clear indication that the Quad framework had been pushed to the wayside.

Perhaps another country ought to take control. With India overtaking China as the most populous country in the world, Modi is asserting himself. India’s prime minister is proceeding full steam ahead with his visit to Australia, which includes a public event, a bilateral with Australian Prime Minister Anthony Albanese, and meetings with leaders in the business community. But India’s democratic backsliding under Modi means that other Quad members must exercise caution in their engagement.

While the four countries sought to resuscitate the Quad Leaders’ Summit by bandwagoning onto the G7, it is evident that this was a missed opportunity to not only strengthen Quad partnerships but more importantly signal commitment to Indo-Pacific countries.

—Kyoko Imai is an assistant director with the Indo-Pacific Security Initiative in the Atlantic Council’s Scowcroft Center for Strategy and Security.

What will the G7 do when China next attempts economic coercion?

While some are criticizing the “G7 Leaders’ Statement on Economic Resilience and Economic Security” for lacking detail on how countries intend to respond to economic coercion (coercion from China, of course, even if Beijing is never mentioned by name), just the fact that the disparate G7 members, all of which have significant trade and investment relations with China, were able to put out such a strong statement is a big accomplishment. “We will work together to ensure that attempts to weaponize economic dependencies… will fail and face consequences” is just one of numerous tough lines in the document.

If there was any doubt whether China is taking the statement seriously, just check out its irate response. Late Saturday, Beijing lashed out at the United States, calling it the “real coercer” that “politicizes and weaponizes economic and trade relations” with its use of sanctions. It went on to warn the G7 to stop “bludgeoning other countries” and “stoking bloc confrontation.” We will have to wait to see what concrete steps are taken by the G7 the next time one of its members or partner countries faces business pressure from China (the Coordination Platform on Economic Coercion that the G7 mentions indeed lacks specificity). But the statement released at the close of the Hiroshima summit is nonetheless a big first step toward confronting this growing challenge head on.

—Dexter Tiff Roberts is a nonresident senior fellow with the Atlantic Council’s Indo-Pacific Security Initiative and Global China Hub.

A breakthrough in fighting China’s economic coercion, but the details must be fleshed out

Perhaps the signal achievement of the Hiroshima G7 Summit was agreement on a “Coordination Platform on Economic Coercion” to counter Chinese economic coercion, highlighted through a stand-alone document.

Despite the obvious utility of such a mechanism, this outcome was long in coming. Japan and the United States have urged coordination among the leading industrialized democracies to counter Chinese economic coercion. However, European G7 countries have been reluctant, fearful of antagonizing Beijing. They exceeded expectations by joining consensus not only on a general statement of principles opposing economic coercion, but on a coordinating mechanism to take concrete actions.

Now that the G7 has moved past admiring the problem and reached consensus on the need for a coordination platform, the devil will be in the details of implementation. A good starting point may well be mapping out supply-chain vulnerabilities by industry and sector, alerting countries and corporations that might be affected, and helping them devise and implement “de-risking” strategies that would render them more resilient to supply-chain disruptions by China.

This could be an important means of G7 outreach to Global South countries, sensitizing them to the perils and pitfalls of economic dependence on China and demonstrating the benefits of upholding international order and the rule of law in cooperation with developed industrial countries and multilateral institutions.

Another important element will be devising joint approaches on mitigation via ready-made tools to counter economic coercion by providing support and relief for countries targeted by China. Flexible response options include, inter alia, stockpiling critical materials or commodities that China could restrict, providing export credit insurance to encourage alternative exporters to meet demand when China restricts exports, and enacting temporary tariff reductions to compensate when China restricts imports. Similarly, the G7 could consider retaliatory measures, although that may be a bridge too far at this juncture.

Whichever tools are adopted, the G7 decision to work together through a common coordination platform may be seen in retrospect as a watershed moment for countering Chinese economic coercion.

—Thomas Cynkin is a nonresident senior fellow in the Indo-Pacific Security Initiative and a former career US diplomat, serving in Japan and elsewhere.

The regulators are coming for your AI

The G7 has lobbed the latest of three notable salvos in signaling that governments around the globe are focused on regulating Generative Artificial Intelligence (AI). The G7 ministers have established the Hiroshima AI Process, an inclusive effort for governments to collaborate on AI governance, IP rights (including copyright), transparency, mis/disinformation, and responsible use. Earlier in the week, testimony in the United States highlighted the grave concerns governments have and why these discussions are necessary.

“Loss of jobs, invasion of personal privacy at a scale never seen before, manipulation of personal behavior, manipulation of personal opinions, and potentially the degradation of free elections in America.” These are the downsides, harms, and risks of Generative AI as Senator Josh Hawley (R-MO) recapped after the Senate Judiciary Committee hearing on May 16, saying “this is quite a list.”

Just last week, the European Union (EU) AI Act moved forward, paving the way for a plenary vote in mid-June on its path to becoming law.

Make no mistake, regulation is coming.

Read more here:

GeoTech Cues

May 22, 2023

The regulators are coming for your AI

By Steven Tiell

The Group of Seven (G7) has lobbed the latest of three notable salvos in signaling that governments around the globe are focused on regulating Generative Artificial Intelligence (AI). The G7 ministers have established the Hiroshima AI Process, an inclusive effort for governments to collaborate on AI governance, IP rights (including copyright), transparency, mis/disinformation, and responsible […]

Technology & Innovation

—Steven Tiell is a nonresident senior fellow with the Atlantic Council’s GeoTech Center. He is a strategy executive with wide technology expertise and particular depth in data ethics and responsible innovation for artificial intelligence.

G7 leaders should have gone further on energy security

When it comes to energy security, the G7 Leaders’ Hiroshima Communique falls short. While paying extensive, needed attention to slashing greenhouse gas emissions and rightfully condemning the negative impacts on global energy security stemming from Russia’s expanded invasion of Ukraine, the communique could do better in addressing the changing geopolitics of energy and meeting the world’s need for assured, predictable, and affordable energy.

The communique is strong on the imperative to decarbonize and limit the rise in global temperatures. Fighting climate change requires radical changes in how the world gets and uses energy. However, energy security, affordability, and access are also important.

While last year Europe built oil and gas stocks as the EU, the United States, and others sanctioned Russia, it was the warmer-than-normal winter that was key to the continent avoiding serious energy shortfalls and economic pain. Significant new natural gas supplies to replace Russia’s will not be on stream for another year or more; tight, expensive energy supplies will remain a reality. Next winter may not be as obliging. Continued international action is essential.

Another serious factor tightening the market is rising energy demand. Emerging economies, especially China and India—not the mature, industrialized West—now drive the demand side of the ledger. Their decisions about whether they use coal and other fossil fuels to generate electricity or to decarbonize have global impacts. The G7 needs to keep engaging them.

A third energy security issue demanding attention concerns the billions of people without access to energy today. One of the Sustainable Development Goals is to “ensure access to affordable, reliable, sustainable, and modern energy for all,” but those without it rose by twenty million in 2022 to nearly 775 million. As many as three billion people lack a safe way to cook, leading to millions dying each year from household air pollution. Moreover, another two billion people are expected to join the world’s population between now and 2050. All of them will need access to reliable energy.

While focusing on pushing the energy transition ahead, the 19,000-word G7 communique is too often silent on other pressing realities. Working, as the communique says, “to holistically address energy security, climate crisis, and geopolitical risk including expansion of global use of renewable energy in order to… keep a limit of 1.5°C within reach” is a worthy objective. But it may prove inadequate in meeting other pressing energy security challenges.

It is essential the United States, its G7 partners, and other governments widen the aperture. The realities of a growing world population looking for greater access to energy should be taken into account. Solutions need to be developed, including new technologies. Governments will need to recognize that some countries will remain more dependent on fossil fuels than others. Countries that already face high borrowing costs and other difficulties in obtaining needed financing, for example, will face difficulties financing lower carbon energy solutions. 

G7 leaders need to keep a focus on a changing, dynamic global energy security picture, and push on a wider range of policies and actions.

—Robert Cekuta is a former principal deputy assistant secretary for energy at the State Department and was the US ambassador to the Republic of Azerbaijan.

US-Japan-South Korea trilateral cooperation is back on track

Six months after their previous meeting in November, the leaders of South Korea, the United States, and Japan resumed their talks on the last day of the G7 summit—where highly anticipated topics included enhancing real-time information sharing on North Korea’s ballistic missiles, as well as the possibility of Japan joining the South Korea-US Nuclear Consultative Group announced during South Korean President Yoon Suk Yeol’s visit to Washington last month. Although the meeting was short, given tight schedules at the summit, the brief sideline meeting is the culmination of real progress in getting trilateral relations back on track.

Most importantly, the three leaders did get to discuss “new coordination” over North Korea’s “illicit nuclear and missile threats,” according to the White House statement. This manifests how working-level discussions are ongoing and making real progress. As Biden invited Yoon and Kishida for a formal trilateral meeting in Washington, more fine-tuned outcomes will be available in the near future. Second, their appearance in the setting of Hiroshima was symbolic in and of itself. The leaders of South Korea and Japan put forth “courageous” efforts (as Biden put it) to mend ties during their bilateral meeting just before the trilateral sideline meeting, which showcased their unity and just how much their ties have improved in the past few months.

Moreover, as Yoon clarifies and realigns South Korea’s approach to global issues—agreeing to push back against China’s “coercive behavior” and provide more non-lethal aid to Ukraine—the trilateral meeting signals a resumed heyday of trilateral security cooperation.

— Bee Yun Jo is a nonresident fellow in the Indo-Pacific Security Initiative and an associate research fellow at the Korea Institute for Defense Analyses. She is also an evaluation committee member of the South Korean Ministry of Foreign Affairs and an advisory committee member of the the ministry’s Department of Arms Control and Nonproliferation.

Can US-South Korea-Japan trilateral cooperation endure beyond a photo op?

The decision by Kishida, Yoon, and Biden to meet despite the compressed timeline of Biden’s abbreviated Asia-Pacific trip displayed the leaders’ strong desire to communicate that increasing trilateral cooperation is a priority. However, significant hurdles remain to advancing this cooperation.

Amid North Korea’s efforts to improve its nuclear and missile capabilities, the three countries have notably increased cooperation on combined military readiness and intelligence sharing. However, there is a limit to their working together, as shown by South Korea’s rejection of Japan joining the South Korea-US Nuclear Consultation Group and Seoul’s hesitation to expand the grouping’s military cooperation beyond North Korea.

As anticipated, the G7 Leaders’ Statement on Economic Resilience and Economic Security highlights continued cooperation toward strengthening the semiconductor supply chain. The United States is trying to form a semiconductor alliance (known as the Chip 4) with semiconductor heavyweights South Korea, Japan, and Taiwan. But despite the group’s increased alignment on export controls, this alliance has not yet come together. With US-South Korean-Japanese trilateral military cooperation solely focused on North Korea, it is unclear whether the grouping would be able to coordinate a response in the event of a critical threat to the supply chain outside of the Korean peninsula. For instance, the idea floating around some national-security circles that the United States should blow up TSMC’s foundries on Taiwan in the event of a cross-strait conflict displays a clear lack of discussion of contingency options. Earthquakes and climate change–driven weather events also threaten the supply chain, but it is unclear how the prospective Chip 4 would cooperate to come up with flexible response options as their respective semiconductor industries continue to compete.

The picture also remains unclear for US-South Korea-Japan cooperation on strategic stability. The South Korean public so far appears unmoved in its disapproval for Yoon’s overtures to Japan, and it does not appear that Kishida will expend political capital to match Yoon’s effort. Meanwhile, amid international concerns the United States is becoming even more protectionist, the US public remains predominantly concerned with the economy, making it difficult for either Republicans or Democrats to shift from an increasingly “America First” approach. But perhaps the biggest hurdle for this group is how to balance the need to cooperate among each other on Chinese threats against the need to maintain an off-ramp from tensions to cooperate with China as well.

—Jessica Taylor is a nonresident fellow in the Indo-Pacific Security Initiative, a logistics officer in the US Air Force Reserve, and a Ph.D. candidate in Princeton’s School of Public and International Affairs Security Studies Program. She served in South Korea from 2019 to 2021 as an international relations strategist for the headquarters command staffs of United Nations Command, ROK/US Combined Forces Command, and US Forces Korea.

Biden skipping Papua New Guinea was a missed opportunity

First, let’s acknowledge the things that the United States has gotten right as it’s stepped up its engagement in the Pacific Islands over the past year. It is following through on promises to expand its diplomatic footprint, opening new embassies in the Solomon Islands and Tonga and reestablishing the US Agency for International Development’s regional mission in Fiji. Senior officials have lavished attention on the region with high-level visits, and last September’s United States-Pacific Islands Country Summit was the first ever hosted in Washington. Crucially, compacts of Free Association with the Federated States of Micronesia and Palau are also being finalized.

US President Joe Biden’s now-scrapped visit to Papua New Guinea (PNG) was meant to be a culmination of these efforts and send a powerful signal to Pacific Islanders about the US commitment to the region. Instead, it underlines skepticism about the United States’ ability to follow through on the promises it has made and its staying power. The concurrent cancellation of Biden’s visit to Australia for the Quad summit only reinforces this; as a headline in the Sydney Morning Herald put it, “Biden’s 11th hour Quad snub a disappointment, a mess, and a gift to Beijing.”

Will this do long-term damage to US efforts in the Pacific? Perhaps not. But, in the immediate term, the optics are dreadful. After the visit to PNG was canceled, National Security Adviser Jake Sullivan said Biden plans to host a major summit with leaders of the Pacific Islands “within this calendar year.” It is important to follow through on that promise. In addition, Secretary of State Antony Blinken announced a visit to Port Moresby on May 22.

This episode showcases a key challenge bedeviling the United States on the world stage—that of internal political dysfunction hindering its conduct of a consistent foreign policy and projecting an unappealing image across the world. If the United States is going to succeed in the Pacific—and elsewhere, for that matter—it not only needs to deliver on its assurances, but also get its domestic house in order. 

—Parker Novak is a nonresident fellow with the Atlantic Council’s Global China Hub.

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It will not be easy. After 15 months of conflict, the G7 have implemented nearly all the economic measures against Russia that garnered consensus within the group. The options they have left will be increasingly contentious and will impose higher costs on the G7 countries’ domestic economies. To understand how the debate over a total export ban will play out, it’s important to start with an analysis of what G7 economies still export to Russia.

The G7’s remaining exports to Russia

Since Russia’s invasion of Ukraine last year, the G7 has implemented the largest sanctions and export controls regime ever imposed on a major economy. Exports from the G7 to Russia have fallen by around $5.7 billion a month from the pre-invasion average, resulting in a 57 percent decline in overall exports. This has led to a substantial slowdown in trade of critical goods such as machinery and mechanical appliances (64.6 percent decline in exports), cars and trucks (77.4 percent decline in exports) and electrical machinery (78.7 percent decline in exports). Aircraft exports have been especially impacted following sweeping sanctions and controls placed on products used by the aviation and space industry with G7 exports declining some 98.6 percent and cutting off an estimated $4.03B in exports. 

However, G7 members, led by the EU, continue to export around $4.7 billion a month to Russia. The biggest export categories since March 2022 are pharmaceuticals, machinery, food, and chemicals. 

The economic impact of an export ban

From March 2022 to Dec 2022, G7 goods exports totaled around $46.8 billion. US officials hope to change this. Frustrated with the existing regime, which Washington views as too porous and which allows Moscow to continue to import western technology, the US has proposed a total export ban with exemptions primarily for food and medical products. If implemented as proposed, such a restriction could further reduce G7 exports to Russia by roughly 67 percent to just $1.5B a month.

For the US, the trade-offs of an export ban are minimal. The $80 million in monthly goods exports it continues to provide Russia are a rounding error for Washington. However, for the EU and Japan, which respectively account for 89 percent and 7 percent of remaining G7 exports to Russia, such an ask may be a step too far. Both government have already signaled such a proposal “may not be realistic.”  

For Japan, pushback stems from fears that Moscow may retaliate by cutting it off from energy imports. Despite an initial drop in Russian liquified natural gas (LNG) imports in the immediate aftermath of the invasion, Japanese imports have recovered with Russian LNG making up an average of 7.8 percent of overall imports—only a slight drop from the pre-invasion average of 9.1 percent. 

This is not the first time Japan’s reliance on Russian LNG exports have thwarted the full implementation of a G7 policy measure. Towards the end of last year, Tokyo was able to secure an exemption from the G7’s oil price cap to ensure Russia could still transport a small quantity of crude oil which is extracted alongside the natural gas it exports to Japan. Japanese resistance to G7 measures is not without reason. The resource-poor nation has the most vulnerable energy security environment of any G7 nation. Japan’s primary energy self-sufficiency rate is just 11 percent, far lower than the US (106 percent), Canada (179 percent), the UK (75 percent), France (55 percent), and even Germany (35 percent). LNG, which provided around 36 percent of the country’s electricity in 2021, is crucial in ensuring its businesses and consumers have the energy they need. However, Japan’s high external energy reliance cannot fully excuse its continued reliance on Russian LNG. Germany, for example, entered the conflict with a significantly higher reliance on Russian LNG but was able to rapidly scale back its imports, dropping them to zero by September 2022.

How the US can respond to hesitance from the G7   

In response to EU and Japanese hesitation, the US may need to scale back its ambitions or offer support that would help minimize the impact of an export ban on the EU and Japanese economies. One option would be to activate the US Export-Import Bank to open access to a line of export credit insurance to impacted European businesses. The insurance line would compensate for the costs European businesses face to find alternative buyers. The US has previously employed similar measures to help Lithuania after it faced sudden export disruptions. 

That still may not be enough—especially for Japan, which is more concerned over retaliation. Instead, Tokyo may agree in name to such a ban conditional on Japan receiving broad exemptions, similar to its approach to the G7 oil price cap.  

The consideration of an export ban speaks to the broader challenge G7 leaders will face in Hiroshima. Leaders have already implemented nearly all the consensus economic measures designed to reduce the Russian military’s fighting capabilities. There is a reason the options left haven’t been undertaken; they are problematic and will strain the G7’s fragile consensus on Russia.

Niels Graham is an Assistant Director with the Atlantic Council GeoEconomics Center focusing on US trade policy and the Chinese economy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The first major milestone in Ukraine’s disillusionment with Germany was the 2008 NATO summit in Bucharest, when German Chancellor Angela Merkel was instrumental in vetoing a membership action plan for Ukraine. At the time, this was justified by the need to avoid provoking Russia. The mood of disappointment in Kyiv grew with Berlin’s subsequent support for the Nord Stream II gas pipeline, which appeared designed to bypass Ukraine and promised to leave the country exposed to the threat of increased Russian aggression. Germany defended this decision on purely economic grounds, but many Ukrainians argued that the economic benefits did not justify the geopolitical risks.

Germany’s involvement in the Minsk peace process from September 2014 further strengthened perceptions in Kyiv that Berlin’s priority was to avoid any decisive split with Moscow, with limited support for Ukraine often balanced by efforts to accommodate the Kremlin. For many Ukrainians, Germany’s position highlighted the inadequacy of the wider European response to Russian aggression. It was yet another example of the West’s reluctance to do anything that might be considered provocative by the Kremlin.

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With the benefit of hindsight, it is now painfully clear that policies designed to avoid provoking Putin are likely to do exactly that. The refusal to grant Ukraine a pathway to NATO in 2008 confirmed the country’s vulnerability, while Germany’s continued commitment to Nord Stream II following Russia’s 2014 invasion of Crimea and eastern Ukraine reinforced the Kremlin’s conviction that hunger for profits outweighed any commitments to European values in Berlin. These developments helped set the stage for the full-scale invasion of Ukraine in February 2022.

Ukrainian frustration toward Germany has remained tangible since the start of Russia’s full-scale invasion, but has been tempered by Germany’s increasing willingness to cut ties with Russia and provide Kyiv with vital military aid. Berlin has faced significant criticism over the speed of weapons deliveries to Ukraine, but has emerged over the past fourteen months as a key partner. The early 2023 decision to provide Leopard tanks was a watershed moment in this process that reflected Chancellor Olaf Scholz’s talk of an historic “turning point” in relations with Russia almost one year earlier in the first days of the invasion.

In additional to military aid, Ukraine counts on German support in other areas. Post-war reconstruction is seen as a more straightforward issue for German involvement, with the Ukrainian authorities already expressing their gratitude for Germany’s readiness to contribute. However, any reconstruction requires a sustainable peace. This is simply not realistic until Ukraine defeats Russia militarily, which will not be possible without the expanded delivery of weapons from key Western partners such as Germany.

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Kyiv officials would also like to see Berlin adopt a more supportive stance on the issue of future Ukrainian EU membership. Germany has previously played this role for other countries seeking to join the European Union, but is still regarded by many in Ukraine as being somewhat skeptical of the country’s EU ambitions and was among the last to back EU candidate nation status for Ukraine in summer 2022. This is unfortunate. After all, Ukraine’s EU membership bid has major geopolitical and security implications for the entire continent.

As part of the EU, Ukraine would no longer be viewed as a potential component part of a revived Russian Empire. Progress toward Ukrainian EU membership would also fit well with Germany’s stated objective of a post-war Ukraine with less corruption, greater rule of law, transparent business climate, and resilient institutions. I am therefore convinced that Germany will match recent statements in favor of Ukraine’s EU accession with practical support.

In addition, there are hopes in Kyiv that German attitudes toward Ukrainian NATO membership will also change. On the positive side, Chancellor Scholz and other German leaders now appear to recognize that Ukraine’s NATO aspirations were not the cause of the current Russian invasion. The challenge is to convince them that the threat of further Russian aggression will continue unless Ukraine receives security guarantees equivalent to NATO membership, regardless of whether Putin himself remains in the Kremlin.

Any lasting peace settlement must also include justice for the Ukrainian victims of Russian war crimes. Kyiv expects Germany to back the push for accountability. Key issues include the establishment of a special international tribunal and the use of seized Russian assets to help finance the reconstruction of Ukraine. It seems highly unfair for the international community to pay for damage caused by Russia. Instead, Russia should fund efforts to rebuild Ukraine.

Rebuilding Ukraine will be an historic undertaking. German companies can be expected to play a major role in what promises to be the largest European construction initiative since the years following World War II. Reconstruction will enable millions of Ukrainian refugees to return home, while creating opportunities for thousands of German businesses.

Despite the disappointments and frustrations of the past fifteen years, Germany remains a key partner for Ukraine with a critical role to play in the twin tasks of winning the war and achieving a sustainable peace. The immediate priority remains weapons; Ukraine desperately needs everything from anti-aircraft systems to tanks and ammunition in order to defeat Putin’s invasion. Looking ahead, Berlin’s backing will be vital as Ukraine seeks to rebuild, integrate further into the EU, and attain the kind of comprehensive security guarantees through NATO membership that can prevent any repeats of Russia’s current invasion.

Alyona Getmanchuk is director of New Europe Center think tank and a nonresident senior fellow at the Atlantic Council’s Eurasia Center. An expanded German-language version of this article was originally published by Aus Politik und Zeitgeschichte (APuZ).

Further reading

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Human wave tactics are demoralizing the Russian army in Ukraine

By Olivia Yanchik

Vladimir Putin’s invasion of Ukraine has not gone according to plan but he still hopes to win a long war of attrition. However, Russia’s reliance on human wave tactics risks undermining morale within his invading army, writes Olivia Yanchik.

Conflict Defense Policy

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NATO poses a threat to Russian imperialism not Russian security

By Peter Dickinson

Russia’s passive acceptance of neighboring Finland’s NATO membership raises serious questions over the Kremlin’s efforts to portray the invasion of Ukraine as a response to NATO expansion, writes Peter Dickinson.

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UkraineAlert May 3, 2023

Ukrainians are inspired by Finland’s heroic past and NATO present

By Andriy Yermak

Ukrainians are inspired by Finland’s record of resisting Russian imperial aggression and encouraged by the country’s recent accession to NATO, writes the head of Ukraine’s Office of the President, Andriy Yermak.

Conflict Freedom and Prosperity

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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The post Ukraine seeks more German support on Russia’s invasion and EU accession appeared first on Atlantic Council.

For roughly two decades, cooperation on sanctions and anti-money laundering and combating the financing of terrorism (AML/CFT) served as a cornerstone of US relations with the countries in the Middle East, particularly in the Gulf. Over that time, successive US administrations invested heavily in bolstering institutional capacity to identify and disrupt terrorist financing in the Middle East. The United States provided technical assistance to local financial regulators and law enforcement partners and encouraged them to comply with international standards and best practices on AML/CFT. Washington has also supported efforts to strengthen policies and enforcement mechanisms needed to fight financial crime, with the goal of building sustainable, effective partnerships in the region that could enhance the scope and power of its own sanctions programs and AML/CFT efforts.

Years of deep collaboration proved to be more than just diplomatic show—the United States took coordinated action with Qatar against a network of Hezbollah financiers, stood up a Gulf-wide coalition to formalize cooperation on countering terrorist financing, and worked jointly with the Iraqi government to prevent leaders of the Islamic State of Iraq and al-Sham from accessing the global financial system.

Despite assurances from the Biden team that the United States remains committed to the Middle East, however, US engagement—and with it, US influence—is waning. The changing international playing field, with Russia’s war in Ukraine and the United States’ simmering tensions with China, has driven much of this change. Washington has limited bandwidth to prioritize Middle East policy, even on issues like AML/CFT and sanctions that once drove the regional agenda. And clumsy missteps and miscalculations under the current White House, such as US President Joe Biden’s widely criticized visit to Saudi Arabia last year, have likely reinforced this geopolitical realignment.

Beijing waits in the wings

Ironically, as the Biden administration rebalances its strategic priorities to focus on allies in the Asia-Pacific region—with the hopes of countering China—it has left the back door unguarded in the Middle East. China has stepped in to fill the void, building on its trade and investment-centered international playbook but with none of the same commitment to international norms and standards surrounding counter-illicit finance that the United States demands of its allies. It’s a development that further weakens US relationships in the Middle East but also puts US national-security interests at stake.

Most notably, China’s recent diplomatic outreach to the region has chipped away at US geopolitical leverage in the Middle East. For example, in March, China brokered a deal in which long-standing rivals Saudi Arabia and Iran agreed to restore relations. While it remains to be seen how committed Riyadh and Tehran are to rapprochement over the longer term, Beijing’s role in brokering the deal has elevated its diplomatic profile in the region and sidelined Washington in the process.

The deal also raises important questions about whether the Biden administration will be able to maintain a sufficiently broad coalition against Iran, as Saudi Arabia is one of the coalition’s key members. With no signs of progress on talks to reenter the landmark Iran nuclear agreement, the United States will continue to rely on sanctions to try to force change in Tehran. But China’s diplomatic rise—and its role in these talks—may weaken the effectiveness of US sanctions on Iran, as isolating Iran from the global economy becomes more difficult.

This is already happening: For instance, the Treasury Department recently sanctioned a China-based network for selling and shipping aerospace components to Iran that could be used in unmanned aerial vehicles. One Iranian company receiving the parts produces a type of unmanned aerial vehicle that has been exported to Russia for use in the invasion of Ukraine. Procurement networks like these will be increasingly difficult to target effectively as China extends its reach in the Middle East.

Officials in the Middle East have taken note of Washington’s pivot away from the region and are exploring expanded economic ties with Beijing. In February, the Central Bank of Iraq announced that it would allow trade with China to be settled directly in yuan in an attempt to improve access to foreign currency. The move comes after reports last year indicated that Saudi Arabia was in talks with China about pricing some of its oil sales in yuan. The yuan is still far from being internationalized, and most global trade—especially in the energy and commodity markets—remains dollar-pegged. But a gradual shift toward yuan settlement in the Middle East is a concerning trend. This should give the Biden administration pause before further retreating from the region; while China’s ability to create a parallel financial system that doesn’t rely as heavily on the US dollar is far from a foregone conclusion, even modest steps in this direction could erode the effectiveness of US sanctions globally.

Beijing’s desire to use the yuan as a foreign-policy tool with Middle East partners has extended even into the digital realm. In 2022, the Digital Currency Research Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates, along with two other central banks, launched a pilot through the Bank of International Settlements to develop a prototype for an interoperable wholesale central bank digital currency (CBDC). The project, called mBridge, is exploring whether CBDCs can facilitate inexpensive and immediate cross-border transactions and address frictions in today’s cross-border payment systems. Yet the long-term geopolitical motivations cannot be ignored. Although China’s own CBDC—the digital yuan, or e-CNY—is mainly used for domestic retail payments and is only in its early stages of development, Beijing is laying the groundwork to influence how international standards around digital currencies are shaped, potentially edging out the United States from playing a leading role in this effort.

A legacy at stake

The Biden administration’s shift away from the Middle East is, at least in part, a necessary correction from the Donald Trump presidency—a period in which US fawning over autocrats in the region held Washington back from addressing thorny human-rights and governance challenges. But the pendulum may have swung too far: Washington’s current approach threatens to chip away at a critical piece of its bilateral relationships across the Middle East, undo years of meaningful progress on developing effective counter-illicit finance regimes in the region, and weaken US AML/CFT and sanctions efforts globally.

US national security is dependent on a robust, global infrastructure to protect against illicit finance threats. That infrastructure relies on cooperative action, information sharing, and joint standard setting. Yet as Beijing courts countries in the Middle East with its “no strings attached” approach, there is increasingly less incentive on the part of governments in the region to uphold and enforce US sanctions programs or support counter-illicit finance efforts. It’s a trend that should be deeply concerning for US national-security interests.

In public remarks last month, US Treasury Secretary Janet Yellen said the United States is seeking “healthy competition” with China. But that will take more than enhancing US hard-power capabilities and increasing diplomatic engagement in China’s backyard. To maintain its global leadership position, the United States must adopt a broad strategic effort, both geographically and functionally. In this case, that means remaining engaged with Middle East partners who were main characters in the United States’ alliances in the post-9/11 years. And it means investing in all forms of engagement, particularly economic statecraft.

Otherwise, future US administrations may look back decades from now, wondering how and why partners in the Middle East built stronger bridges to Beijing, leaving Washington without an invite to the majles.

Lesley Chavkin is a nonresident senior fellow with the Economic Statecraft Initiative of the Atlantic Council’s GeoEconomics Center and served as the US Treasury Department’s financial attaché to Qatar and Kuwait from 2017 to 2020.

The post The United States is leaving an economic-statecraft vacuum in the Middle East appeared first on Atlantic Council.

Putin first announced his intention to transfer part of Russia’s vast nuclear arsenal to Belarus in March. The news sparked an international backlash, including a thinly veiled rebuke from China. Preparations for the stationing of nuclear weapons in Belarus are expected to be complete by the beginning of July. The move is part of an expanding Russian military presence in the country that has been likened to an “creeping annexation,” with Tsikhanouskaya declaring in late 2022 that Belarus was under de facto “military occupation.”

Moscow’s growing military footprint in Belarus reflects a broader expansion of Russian influence in the country that has been underway since the Kremlin intervened in August 2020 to rescue the regime of Belarusian dictator Alyaksandr Lukashenka amid nationwide protests over a rigged presidential election. In exchange, Lukashenka has pledged total loyalty to Moscow while permitting Russia to increase its economic, political, and military dominance over Belarus.

The strategic significance of this unequal alliance between Lukashenka and Putin increased considerably during the buildup to Russia’s February 2022 full-scale invasion of Ukraine. Lukashenka acquiesced to the transportation of Russian troops and military equipment across Belarus, which served as the gateway for Moscow’s failed Kyiv offensive during the initial weeks of the war. The country has continued to play an important role in the ongoing conflict, providing logistical support, training Russian troops, and supplying weapons, while also serving as a launch pad for Russian airstrikes across Ukraine.

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Belarus’s involvement in the invasion of Ukraine has led many to brand Lukashenka as Putin’s last remaining ally. While other leaders have refused to condemn the Russian dictator, Putin’s Belarusian counterpart remains one of the few still prepared to publicly defend him. However, while much of the outside world sees Belarus as Russia’s little brother, notions of a passive population fail to recognize the significant opposition Belarusians have already expressed over their country’s contributions to Russia’s war.

Since the full-scale invasion of Ukraine began on February 24, 2022, Belarusian opposition groups have employed a wide range of tactics to disrupt the Russian war effort. This has included a campaign to sabotage Belarusian railroads being used to transport Russian troops, equipment, and ammunition to Ukraine. Hackers have also accessed Russian military networks and logistical operations. In February 2023, Belarusian anti-war partisans claimed responsibility for an attack that caused significant damage to a Russian spy plane based at an airfield close to Minsk.

Belarusians are also fighting shoulder to shoulder with Ukrainians against the Russian invasion. Although exact numbers are difficult to determine, the Belarusian contingent is believed to be among the largest of the foreign volunteer forces fighting for Ukraine, and includes the Kastus Kalinouski Battalion. Many of the Belarusians currently fighting alongside the Ukrainian military believe that defending Ukraine is a stepping stone toward a free Belarus and are convinced that victory over Russia in Ukraine will lead to the fall of Lukashenka in Belarus.

Meanwhile, exiled Belarusian opposition leader Tsikhanouskaya remains an outspoken opponent of Lukashenka and has proven a staunch critic of his role as Putin’s junior partner in the invasion of Ukraine. Tsikhanouskaya has repeatedly underlined that Ukrainians and Belarusians share a common enemy in their struggle to shake off Russian authoritarianism and embrace European democracy. “The war won’t be over until both our countries are free,” she declared in March 2023.

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Moscow and Minsk are both well aware of the dangers posed by public opposition in Belarus to their country’s involvement in the invasion of Ukraine. Lukashenka’s violent suppression of anti-regime protests in 2020 succeeded in forcing activists to retreat from the streets of Belarus’s major cities, but discontent still simmers just below the surface. If Putin pushes Lukashenka to become more directly involved in the war, it could spark a new round of unrest with unpredictable consequences for both dictators.

Potential triggers include the planned deployment of nuclear weapons in Belarus. The presence of Russian nukes would deepen existing Belarusian concerns over Moscow’s increasingly overt military presence in the country. This could potentially destabilize the Lukashenka regime at a time when Russia already finds itself overstretched in Ukraine and lacking the spare resources to rescue its ally once again.

Meanwhile, speculation continues over the possibility of Belarusian troops joining the invasion. So far, Lukashenka has resisted Kremlin pressure to send his army across the border into Ukraine, but Putin’s patience may eventually run out. Any attempt to force Belarusian troops to enter the war would represent a huge gamble for the two authoritarian rulers. Numerous commentators have questioned whether the Belarusian military could be relied upon to follow orders, with some arguing that many soldiers would be likely to mutiny or switch sides and fight for Ukraine.

Direct Belarusian participation in the Ukraine invasion would also dramatically increase the chances of domestic instability inside Belarus. Alyaksandr Azarau, who leads the BYPOL organization of exiled former Belarusian military and security service officers, believes wartime realities would rapidly reignite the flames of the 2020 protests. “If small Belarus starts getting coffins from Ukraine, it will inevitably stir up protests that the authorities barely managed to stifle with mass repressions,” he told the Associated Press in late April.

This represents something of a conundrum for Putin. Faced with mounting international isolation and struggling to advance in Ukraine, he is understandably eager to strengthen his grip on neighboring Belarus and force Lukashenka to join his faltering invasion. However, if Putin pushes too hard, the outcome could be disastrous for his last remaining ally.

Olivia Yanchik is a program assistant at the Atlantic Council’s Eurasia Center.

Further reading

UkraineAlert Apr 8, 2023

Human wave tactics are demoralizing the Russian army in Ukraine

By Olivia Yanchik

Vladimir Putin’s invasion of Ukraine has not gone according to plan but he still hopes to win a long war of attrition. However, Russia’s reliance on human wave tactics risks undermining morale within his invading army, writes Olivia Yanchik.

Conflict Defense Policy

UkraineAlert Apr 6, 2023

NATO poses a threat to Russian imperialism not Russian security

By Peter Dickinson

Russia’s passive acceptance of neighboring Finland’s NATO membership raises serious questions over the Kremlin’s efforts to portray the invasion of Ukraine as a response to NATO expansion, writes Peter Dickinson.

Conflict Disinformation

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Placing Russian nukes in Belarus could destabilize Putin’s last ally appeared first on Atlantic Council.

Commentators have urged major countries to clearly identify the high-tech areas which require heightened government control to safeguard national security, and to ensure that, as Wolf writes, “security-oriented interventionism should be as precise and non-protectionist as possible, with a view to continuing to gain from the economies of scale granted by cross-border trade.”

Those concerns and proposals are well intended but will likely remain aspirational until policymakers can come up with economically credible and politically acceptable policies to deal with the root causes of fragmentation. The two most important are the resentment and resistance of the people left behind by globalization and the crisis of trust between major countries.

Globalization won’t work until we assist those left behind

Globalization has significantly lifted overall economic growth and helped many emerging market countries develop, bringing hundreds of millions of people out of poverty, but it has had a mixed impact in developed countries.

In developed economies, globalization has greatly benefitted consumers, owners of capital, and technologically skilled workers while depressing wage growth, exacerbating income inequality, and displacing low-skilled workers. It has hollowed out manufacturing sectors and communities which used to be the bedrock of the middle class and social stability. The numerous so-called losers have become the springboard for populist political movements that are pushing back against globalization. Some of the ire against globalization mistakes the true cause of job loss—technology has played a bigger role than trade—but that doesn’t change what needs to be done.

It is wrong-headed to blame the dismal outcome in developed countries on globalization. Instead, the blame should be put on the failure of national efforts to educate, train, and generally prepare workers to be able to compete internationally in a technologically driven world. In particular, many developed countries have implemented trade adjustment assistance (TAA) programs when they concluded free trade agreements to mitigate labor displacement impacts. In the US, the TAA program was launched in 1962. However, TAA programs, especially in the US, have been grossly inadequate, not well conceived and poorly executed, difficult for intended beneficiaries to access, and generally ineffective.

The US TAA program focused in its earlier years on workers able to document their displacement by trade with countries that had a free trade agreement with the US. It was later expanded to cover the impact of outsourcing—but it was always inadequate relative to the scale of the problem. In the US, 8 million manufacturing jobs were lost from a peak of 19.5 million in 1979 to a trough in 2010.

Only about a third of manufacturing workers who were displaced between 2001 and 2008 were eligible to apply for TAA benefits (including income assistance to extend unemployment benefits for up to 130 weeks and training for up to one year). Of those who applied, about one third actually received benefits.

Inadequate as it was, the US TAA program was better than nothing. Sadly, it was terminated in July 2022. By contrast, the European equivalent program has been expanded into the European Globalization Adjustment Fund to deal with all displacement effects of globalization. Active labor market adjustment programs in Europe have been much better funded than in the US—for example Germany spends 0.66% of GDP and France spends 0.99 percent, while the US spends only 0.11 percent. While Europe has done better than the US, it has not done nearly enough either. And its programs have been criticized as “narrow, piecemeal… hard to access at scale” and “reactive”.

Until there are credible efforts in developed countries to enable the people left behind by globalization and technological changes to participate in the benefits of inclusive growth, popular resentment and resistance to open and free trade will persist, especially in the US—leading to more protectionism, not less.

How to deal with the crisis of trust

The world is also suffering from a crisis of trust. As ably demonstrated by the NYT’s Thomas Friedman, that is especially true between the US and China and it is pushing them further apart. This collapse of trust has several dimensions. As China and several other emerging market countries have developed their economies, they want to reshape the rules facilitating international relations, including trade, which were established decades ago by developed countries. Today, those developed countries account for less than half of the global economy. The US as an incumbent leading power has viewed these developments with an increasing sense of national insecurity and has tried to protect its position.

Furthermore, international trade in goods has progressed from benign “shallow goods” like textile and garments, footwear, and similar consumer items to high-tech “deep goods” like electronics/IT and telecom enabled by semiconductors which have dual uses—civilian and military. Naturally cross-border trade and investment in such high-tech dual use goods have become areas of competition and conflict between the two superpowers.

Fundamentally, the problem is the absence of a mutually agreed framework allowing for the peaceful coexistence between two different and largely incompatible political and economic systems—represented by the US and China. Clearly the postwar institutions, especially the World Trade Organization, have shown signs of fractures and dysfunction, and need to be changed. Until the issues causing the crisis of trust are addressed, it is futile to simply call for international cooperation to restore the practices of global open free trade.

As the world becomes more fragmented politically and economically, the costs will mount and the risk of military conflict will rise. There will be calls to reverse such a dangerous trend. The way to do that is to address domestic challenges and build more inclusive economies in order to create the necessary internal political support for international cooperation. This will allow countries to figure out how to reconcile their different political and economic systems. The fact that these two challenges are interrelated makes their solutions much more difficult to conceive and implement. But there is no alternative but to try.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The root causes of geopolitical fragmentation appeared first on Atlantic Council.

When one counts the major financial markets in Iran, it includes the gold market alongside the foreign currency exchange and stock exchange markets. Like any other investor, the average Iranian seeks a low-risk portfolio where the value of their savings is not diminished by inflation. In the past four decades, Iranians have continually increased their belief and trust in gold as a method of reducing risk, since Iranian officials have failed to reduce uncertainty in the markets and have intervened in ways that have only made things more confusing. 

On April 26, the officially minted gold coin, known as an Imami, cost 318,850,000 rials (about $611). An Imami coin weighs 8.14 grams (0.29 ounces) and is of 0.90 purity. Its price has increased by 169,610,000 rials compared to six months ago, signaling an increase of 113.6 percent as Iranians began to take to the streets to demand justice for Mahsa Jina Amini, the twenty-two-year-old Kurdish-Iranian woman who was killed by the so-called morality police for “violating” mandatory hijab. In contrast, gold prices began a rapidly increasing trend in Iran. It is noticeable that, prior to Amini’s murder, gold prices had been growing slowly. For example, between spring 2022 and fall 2022, gold prices increased by approximately 28 percent or 17,910,000 rials. However, from September 2022 to March 2023, the change in gold prices jumped by a factor of nine. 

Iranian officials blame the increasing gold prices on US imposed sanctions, a breakdown in the Joint Comprehensive Plan of Action (JCPOA), and on social networks where gold market prices are reported based on market transactions, not official prices. In an effort to tame the market, the police arrested 241 gold dealers in December 2022, charging them with distorting the market and causing abnormal volatility in the gold market. Some, like Mohammad Reza Farzin, the governor of the Central Bank of Iran (CBI), claim gold prices in Tehran do not reflect the realities of the Iranian economy. However, Iranians are ignoring such proclamations. They are witnessing rising prices while their nominal income is diminishing. The CBI has announced that prices have increased by 43.6 percent from February 2022 to February 2023. However, many Iranians are paying twice more for food and shelter. 

As volatility and confusion about the future increase, Iranians want to avoid risking their livelihoods by keeping their savings in cash or deposit accounts in Iranian banks. Market analysts and observers of the Iranian economy are also baffled by government officials’ contradictory statements. On April 5, a month after claiming that gold prices and currency exchange rates were inaccurate, Farzin confirmed that the government continued to borrow from CBI and Iranian banks. In other words, President Ebrahim Raisi and his ultra-conservative allies were printing money to pay for public expenses. As a result, the monetary base is expanding in Iran, with many expecting the inflation rate to rise during 2023 and well into 2024. (The Statistical Center of Iran reported that the point-to-point inflation rate reached 63.9 percent in March 2023 compared to March 2022.)

While some argue that lifting sanctions or freeze-for-freeze measures might help Iranian consumers, Iranians know that government policies are the most significant factor influencing the economy. Unfortunately, government policies have gone from bad to worse, being overwhelmed by domestic opposition and lacking the skills and foresight to implement effective policies. As authorities hope to crush Iranian calls for Women, Life, Freedom using brute force, gold prices and currency exchange rates tell a different story. Iranians do not believe in the ability of the Islamic Republic to bring either economic stability or prosperity as a governing body, which is why they are looking for ways to reduce financial risk. In the coming years, history may refer to Iran’s financial markets as predictors of a significant structural change in Iran’s politics.

Ali Dadpay is an associate professor of finance at the University of Dallas. Follow him on Twitter: @ADadpay.

The post Tehran’s gold market is a reminder that Iranians have lost confidence in a future with the Islamic Republic appeared first on Atlantic Council.

Accra is hardly alone in its enthusiasm for gold. Since 2008, emerging-market and developing countries have more than doubled their central bank gold reserves, led by Russia, China, Turkey, and India.

The end of gold demonetization?

Developing and emerging-market countries’ growing gold purchases have reversed a selloff in gold reserves—led by advanced economies—since the 1990s.

Starting in the mid-1940s, the Bretton Woods system linked most advanced economies’ currencies to gold, so treasuries and central banks accumulated large reserves to back them. But the system’s collapse in 1971 eliminated gold’s direct monetary purpose as a guarantor of currency value. Meanwhile, central banks’ success in controlling inflation in the late 1980s suggested that gold was no longer needed to rapidly raise capital for currency market interventions. And as interventions became less frequent, it became harder for central banks to justify large reserves in the 1990s.

Consequently, advanced-economy governments (which held 85% of all government-held gold in 1990) offloaded nearly one-fifth of their gold reserves from 1990 to 2007. Some, like the United Kingdom, swapped gold for foreign currencies. Others tried to get more creative: the Swiss government proposed establishing a foundation for Nazi-era victims with sale proceeds, although they eventually filled state coffers after voters rejected the idea. Apart from additional revenue, the sales offered practical benefits like reduced holding costs and lower exposure to gold’s notoriously high price volatility.

Emerging-market and developing economies largely followed advanced economies in demonetizing gold, though they had less of it to sell. Their gold reserves grew less than 10% during this period, even as their non-gold reserves expanded 25-fold.

Emerging markets’ new gold rush

What explains emerging-market and developing countries’ increased enthusiasm for gold since then?

First, the Global Financial Crisis weakened their confidence in the dollar-backed financial system’s stability—catalyzing a trajectory shift in gold purchases. In 2009, for example, China’s State Council announced that it had quietly expanded its gold stockpile by over 70% in previous years. Although China times its disclosures strategically—sometimes years apart—the announcement signaled an accelerated purchase program that persists today.

Second, the logic of returns may explain some diversification into gold. Years of rock-bottom interest rates on advanced-economy bonds increased the attractiveness of assets like gold, which can generate meaningful long-term returns. More recently, some central banks have reasoned that gold’s scarcity preserves its value as elevated inflation erodes Dollar- and Euro-denominated assets—although past returns suggest that gold is not an effective inflation hedge over shorter horizons.

Third, some countries have sought to reduce sanctions risk with gold reserves. Transacting with gold offers key advantages for sanctions evasion: anonymity, low traceability (especially if gold is mixed into alloys), and alternatives to Western financial centers where the US and its allies can more easily restrict trade flows. For example, Russia embarked on a major gold purchase program after US and EU sanctions for its annexation of Crimea in 2014. Since then, Russian entities have conducted gold-denominated transactions through hubs like Dubai to evade sanctions. Although gold’s bulkiness makes it an imperfect medium of exchange, several heavily-sanctioned countries have followed Russia’s lead in increasing gold’s share of foreign reserves.

Greater ambitions for gold

More broadly, countries with fractious US relations trust the dollar-backed financial system less, so it is unsurprising that gold purchases increase with geopolitical distance. Grouping countries by their degree of alignment with the US (represented by votes at the UN General Assembly, where “most aligned” states are in the top quarter of countries by voting alignment, “more aligned” are the next quarter, and so forth) shows that all but the “most aligned” countries have grown their gold reserves since 2008.

An important question is whether China and Russia will employ gold in their efforts to foster alternatives to the dollar—for example, by aiding the internationalization of the Chinese yuan. Outside of China, use of the yuan is hampered by Beijing’s capital account controls; foreign investors are reluctant to hold or trade yuan-denominated contracts without firmer guarantees of its convertibility. However, gold-backed yuan contracts could promise greater convertibility without requiring China to loosen capital controls. The Chinese government has already moved to promote the gold trade, establishing a yuan-denominated gold benchmark index in 2016 that makes it easier for Chinese market participants to exchange gold and influence prices, although further steps have been limited.

For now, emerging markets’ growing interest in gold is more a feature of the existing monetary system than a seismic shift away from it. Gold reserves still make up only 7% of emerging and developing countries’ reserves, and central banks may eventually decide that its clunkiness and price volatility are not worth the trouble. Diversifiers into gold believe that they can reduce their risks, improve their returns, or both. Whether these countries keep buying after inflation subsides will offer a clue into the staying power of gold’s appeal.

Phillip Meng is a Young Global Professional with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Why emerging markets are stocking up on gold appeared first on Atlantic Council.

Days earlier, Putin had made global headlines by announcing an agreement with Minsk to station Russian tactical nuclear weapons on Belarusian territory. This was widely viewed as a further escalation in Putin’s nuclear saber-rattling tactics as he attempts to discourage the West from continuing to arm Ukraine.

At the same time, the move to place nuclear weapons in Belarus will also advance the Kremlin goal of consolidating informal control over the country. While Putin was at pains to stress that the decision to move nukes across the border came in response to a direct request from Lukashenka, few were convinced. Instead, news of the planned deployment has served to underline Belarus’s status as a client state of Russia.

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While Belarus likely had little say in the matter of hosting Russian nuclear weapons, the country will experience significant consequences if Moscow proceeds as planned. Brussels has already warned Minsk of further sanctions due to what it terms as an “irresponsible escalation and threat to European security.” Belarus could also find itself a target for retaliatory strikes if the war in Ukraine spreads to neighboring NATO member states. In such circumstances, Belarusian nuclear weapons storage facilities, military airfields, and other military infrastructure could become potential targets.

Lukashenka has often been critical of his country’s early 1990s decision to hand over the nuclear arsenal it inherited from the USSR, and has suggested the international community would treat Belarus differently if it was still a nuclear power. Nevertheless, until the full-scale Russian invasion of Ukraine in February 2022, he had consistently stated that nuclear weapons would only be based in Belarus in response to similar threats from the West.

The Russian attack on Ukraine has led to a dramatic change in Lukashenka’s position on the issue of nuclear weapons. Days after the start of the invasion, he staged a sham referendum on changes to the Belarusian Constitution which scrapped the country’s official nuclear-free status. This was followed by news that Russia was modifying Belarusian military aircraft to carry nuclear warheads and transferring nuclear-capable missile systems to the country.

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By agreeing to host Russian nuclear weapons, Lukashenka has strengthened perceptions of his country as an indivisible element of the military threat posed by Putin’s Russia. This is shaping attitudes toward Minsk throughout the democratic world. For much of Lukashenka’s almost three decades in power, Western policymakers had sought to cultivate ties with him in order to counter Russian influence in Belarus. That era now appears to be over. Instead, Lukashenka is seen as a Putin proxy who must be treated as such.

Lukashenka’s status as junior partner in Putin’s Ukraine War has also brought the curtain down on his clumsy attempts to act as peacemaker between Moscow and Kyiv. During the early stages of Russian aggression against Ukraine following the 2014 seizure of Crimea, Lukashenka positioned himself as a neutral figure and offered his country as a venue for peace talks. However, these claims to neutrality were undermined by Lukashenka’s growing dependence on the Kremlin, which intervened to rescue his regime in August 2020 following nationwide protests in Belarus over a rigged presidential vote. Lukashenka repaid Putin for his support by allowing Belarus to become a platform for the invasion of Ukraine.

The deployment of nuclear weapons would be the latest in a series of steps since 2020 to expand Russia’s military presence in Belarus. Russian troops are already stationed across the country, with Lukashenka neither willing nor able to force their departure. The establishment of a fully-fledged Russian military base complete with nuclear weapons would significantly increase Moscow’s leverage over Belarus and cement Putin’s grip on the country. In such circumstances, any subsequent attempts by Lukashenka to distance himself from Putin or assert his independence from the Kremlin would be political suicide.

Although Lukashenka himself appears obliged to accept the gradual takeover of his country, the deployment of Russian nuclear weapons in Belarus could have negative domestic consequences that neither he nor Putin can entirely disregard. While opinion polls are notoriously difficult to conduct in dictatorships, research carried out by Chatham House in 2022 found that around 80% of Belarusians opposed the idea of hosting Russian nukes. This tallies with other anecdotal evidence indicating strong opposition to the growing Russian military presence in Belarus and emphatic rejection of any Belarusian involvement in the invasion of Ukraine.

The terror tactics employed by Lukashenka in recent years make it unlikely that Belarusians will take to the streets in protest over Russian plans to place nuclear weapons in their country. However, this latest strengthening of Moscow’s already dominant position will further erode the legitimacy of the Lukashenka regime while highlighting Russia’s creeping annexation of Belarus. This could help fuel a new wave of Belarusian opposition, especially if Russia suffers further military setbacks in Ukraine.

Hanna Liubakova is a journalist from Belarus and nonresident fellow at the Atlantic Council. She tweets @HannaLiubakova.

Further reading

UkraineAlert Apr 8, 2023

Human wave tactics are demoralizing the Russian army in Ukraine

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Vladimir Putin’s invasion of Ukraine has not gone according to plan but he still hopes to win a long war of attrition. However, Russia’s reliance on human wave tactics risks undermining morale within his invading army, writes Olivia Yanchik.

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UkraineAlert Apr 6, 2023

NATO poses a threat to Russian imperialism not Russian security

By Peter Dickinson

Russia’s passive acceptance of neighboring Finland’s NATO membership raises serious questions over the Kremlin’s efforts to portray the invasion of Ukraine as a response to NATO expansion, writes Peter Dickinson.

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UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Russian nukes in Belarus: Putin’s creeping annexation continues appeared first on Atlantic Council.

The post Nikoladze quoted in El Pais on Russia’s shadow fleet of tankers and sanctions evasion appeared first on Atlantic Council.

The general consensus is that private military companies (PMCs) like Wagner Group must be countered because they advance Kremlin interests and help the Putin regime to project Russian power internationally. But a closer look suggests the Wagner Group and other Russian mercenary organizations may ultimately be liabilities and not assets for Putin.

For Wagner chief Yevgeny Prigozhin, 2023 already looks to be a tumultuous year. He has accused senior Russian military leaders of “treason” for allegedly holding up logistical and material support to Wagner mercenaries battling for control of Bakhmut in eastern Ukraine, and recently complained of being cut off altogether from the Kremlin.

Some commentators believe Prigozhin’s frequent jabs at members of the Russian elite could presage a contest for political power that may reach the heights of the Kremlin towers. Indeed, Prigozhin now says that he plans to remold Wagner into “an army with an ideology,” suggesting that he seeks to officially re-brand himself as an out-and-out political operator.

For all the speculation regarding the potential threat Prigozhin poses to the stability of the Putin regime, few have explored the Wagner leader’s relationship to the power structures that Putin himself depends upon for the perpetuation of his rule. In reality, the Wagner Group is as much a product of this system as it is a tool of Kremlin foreign and military policy. Western policymakers seeking to understand the role of Russian private paramilitaries should treat them as a symptom of the institutionalized corruption at the heart of Putin’s regime and not as just another instrument in Russia’s hybrid warfare toolbox.

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Prigozhin has managed to carve a niche for himself by leveraging opaque corporate networks to facilitate Russian hard and soft power projection in Ukraine, Syria, and various conflict zones across Africa. This appears to be profitable work; his companies have reportedly raked in hundreds of millions of dollars from mineral extraction alone. White House officials have even claimed in recent months that Prigozhin directed Wagner fighters to capture the Ukrainian town of Soledar in order to secure access to nearby salt and gypsum mines. The notion that Prigozhin personally benefits from enabling the Kremlin’s foreign policy adventures appears to be a feature rather than a bug of Putin’s particular approach to governance.

Political scientists generally characterize Putin’s rule as a corrupt patron-client system in which elites are compensated for their allegiance with access to resources. Vladimir Gel’man of the University of Helsinki contends that Putin accepts bad governance by trusted elites to cultivate a loyal, informal power base separate from those formal institutions which might challenge his authority. Russia analyst Mark Galeotti likens this arrangement to a public-private “adhocracy” in which informal networks of enterprising business and political elites, rather than formal institutions, end up taking the initiative in divining and executing official policy.

The Wagner phenomenon reflects a political ecosystem that rewards the stewards of government policy with official as well as illicit perks in exchange for loyalty. Wagner benefits Putin by providing deniable cover for a wide range of military operations outside of Russia. In exchange, Prigozhin is allowed to pursue commercial ventures in the countries where his forces are active.

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Prigozhin’s trajectory is an indication that the Russian state’s claim to a monopoly on violence may be the next frontier to be challenged by Kremlin elites. The Wagner Group’s example appears to have encouraged everyone from Chechen strongman Ramzan Kadyrov to Russian natural gas giant Gazprom to organize PMCs of their own, a trend that some analysts argue could portend a “descent into warlordism.” Recent reports of a company owned by longtime Putin associate Gennadiy Timchenko hiring another PMC outfit not affiliated with Wagner to secure oil and gas infrastructure in Syria further suggest that Prigozhin is not the only person vying to supply PMC services to regime insiders.

International efforts to counter the Wagner network will require many of the same mechanisms used to combat corruption more generally. This will require governments to reflect on how their own institutions play into the interests of figures like Prigozhin, who has pursued journalists through the British courts despite being the subject of UK sanctions. Critics claim transnational imbalances in financial transparency that allow offshore jurisdictions to provide a veil of corporate secrecy to American and European nationals also help to obscure the Wagner network’s operations.

Efforts by the US Treasury’s Office of Foreign Assets Control to target Wagner-linked shell companies registered in tax havens are a step in the right direction. But Western governments should also aim to hold accountable those individuals responsible for managing the network of corporate entities behind Wagner’s more mundane business operations.

One may reasonably question why Ukraine and its allies should go after Russian PMCs at all if their continued presence has the potential to undo Putin. Why not let them multiply and further weaken the foundations of the Putin regime? While potentially tempting, such an approach would involve considerable risks. If and when Putin leaves office, this is likely to create a power vacuum in which Russia’s nascent PMC class would flourish. Such an outcome could return Russia to a state of lawlessness reminiscent of the “wild nineties,” a period characterized by a proliferation of organized crime groups whose mercenary enforcers were often veterans of military campaigns in Afghanistan and Chechnya.

Putin often invokes the chaos of the 1990s to justify his authoritarian rule. Tolerating the presence of PMCs like the Wagner Group in the hope that they could unseat Putin risks reducing Russia to new depths of disorder and thereby facilitating the rise of aspiring autocrats in the years to come. Combating Russia’s private paramilitaries is essential not just in order to contain Putin, but to preempt the empowerment of future Russian leaders molded in his likeness.

Allen Maggard is a Russia analyst and specialist in the intersection of Russian political economy and the defense industry at C4ADS.

Further reading

UkraineAlert Feb 20, 2023

‘You cannot outlast us’: Biden’s Kyiv visit sends strong message to Moscow

By Peter Dickinson

US President Joe Biden’s bold surprise visit to wartime Kyiv sent a strong message to Moscow that time is not on Putin’s side and Russia should not pin its hopes on a weakening of Western resolve to stand with Ukraine.

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UkraineAlert Mar 19, 2023

Putin the Pariah: War crimes arrest warrant deepens Russia’s isolation

By Anders Åslund

The ICC decision to indict Putin for war crimes is a highly consequential step that will deepen Russia’s international isolation while weakening Putin’s personal position both at home and abroad, writes Anders Åslund.

Conflict Human Rights

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Russia’s Wagner Group is a feature not a bug of the Putin regime appeared first on Atlantic Council.

A joint March 2023 International Partnership for Human Rights and Independent Anti-Corruption Commission (NAKO) report found Western components critical in the construction and maintenance of drones, missiles, and communications complexes in weapons used by Russia in Ukraine. Also in March, the Atlantic Council’s Eurasia Center convened a panel of experts for a virtual event to discuss how to stem the flow of dual-use technology to Russia. Moderated by Ambassador John Herbst, panelists described how sanctioned Western tech gets to Russia and offered concrete recommendations to better implement and enforce export bans on Moscow.

Panelists noted that companies and manufacturers could simply be unaware their products are entering the Russian market. Though distributors may believe they are selling dual-use components to non-sanctioned consumer markets, many components are resold through secondary markets such as Hong Kong or Turkey and end up in Russia. Urging more due diligence, Olena Tregub, executive director of NAKO, explained, “if a company has a client from Turkey, for example, it should ask if the product is for Russia. They should study the supply chain.”

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While the West should be lauded for the speed and breadth of sanctions and export controls imposed on Moscow, compliance offices are still catching up. “Western companies and countries still seem to be finding their footing when it comes to compliance, implementation, and maintenance of these restrictions,” said Jack Crawford, research analyst at the Royal United Services Institute (RUSI). According to Crawford, Western governments lack the capacity to effectively monitor and act against Russian sanctions evasion. This results in delays, not only in dealing with sanctions breaches but also in terms of identifying them in the first place.

As for the private sector, Sam Jones, president and co-founder of the Heartland Initiative, noted that investors and companies have increased responsibility when conducting business in respect to conflict-affected areas such as Ukraine. Jones said companies should be more diligent in determining the end use of their products, as outlined in the UN Guiding Principles on Business and Human Rights, and argued that “companies would be well advised to take the findings in these reports seriously and consider the potential material risk in terms of future investments.”

Western companies and investors also do not always appear to recognize dual-use components as belonging to the same category as other heavily restricted military technology, such as cluster munitions and anti-personnel landmines. This puts dual-use components in a sanctions gray area. Jones suggested that future steps could include increased restrictions on dual-use components through conduct-based exclusion, which would target repurposed components in terms of how they are actually used and not through their intended use.

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Another key element in efforts to successfully control Russian access to critical Western tech is effective monitoring and enforcement of sanctions. This is an area in which governments can cooperate effectively with civil society, NGOs, and think tanks.

Benjamin Schmitt, senior fellow at the University of Pennsylvania Department of Physics and Astronomy and Kleinman Center for Energy Policy, noted that Western companies and NGOs “have easily available open-source intelligence tools at their fingertips, whether they’re commodity trading platforms or automatic identification system-based vessel tracking websites.” These tools empower watchdog organizations and risk assessment committees in governmental and non-governmental organizations to monitor malign transfers of products and technologies that would undermine sanctions efficacy.

Panelists pointed out that the implementation of sanctions oversight depends in large part on increased interoperability between business, government, and civil society powered by information exchange, open dialogue, and cooperation with emerging intelligence technology and organizations.

Schmitt cautioned that Western hesitancy toward sanctioning Western-based entities could be a real threat to an effective sanctions regime. He pointed out that Nord Stream AG, the company behind the Nord Stream 2 pipeline from Russia to Germany, evaded Western sanctions despite majority ownership by Russian state-owned Gazprom, because the company was based in Switzerland. Considering that Russia’s brutal war against Ukraine aims to fracture Western political and financial stability, it is key that Western countries work in concert and take every step possible to slow the Kremlin’s efforts to control Ukraine and threaten European security.

Tregub put it more bluntly: “War crimes are a Russian strategy. To implement this strategy, Russia needs to build weapons. Without Western components, Russia wouldn’t be able to accomplish its war aims.”

Aleksander Cwalina is a program assistant at the Atlantic Council’s Eurasia Center.

Disclaimer: The purpose of the International Partnership for Human Rights and NAKO report is to explain and illustrate how Western-made components are used by Russia to commit suspected war crimes in Ukraine. To achieve this, the report identifies several companies and governments who are believed to be involved in the manufacturing of components which have been acquired by the Russian military and are used in their military hardware. For the avoidance of doubt, the authors of the report do not allege any legal wrongdoing on the part of the companies who manufacture the components and do not suggest that they have any involvement in any sanctions evasion-related activity. Furthermore, the authors of the report do not impute that the companies which make the components are involved in directly or indirectly supplying the Russian military and/or Russian military customers in breach of any international (or their own domestic) laws or regulations restricting or prohibiting such action. Where a link is drawn between manufacturers and the weapons being used in suspected war crimes, this is done solely to highlight ethical and moral concerns. The existence of counterfeit components is a recognized global problem. The authors of the report recognize the possibility that components featuring the logos and/or branding of named entities may not have indeed been manufactured by said entities. However, given a) leaked Russian “shopping lists” showing the intent to acquire components manufactured by such companies in order to support its military, and b) the history of Soviet and Russian military procurement efforts targeting leading global technology companies, the authors of the report have worked on the assumption that the components they and third parties have identified are genuine.

Further reading

UkraineAlert Feb 20, 2023

‘You cannot outlast us’: Biden’s Kyiv visit sends strong message to Moscow

By Peter Dickinson

US President Joe Biden’s bold surprise visit to wartime Kyiv sent a strong message to Moscow that time is not on Putin’s side and Russia should not pin its hopes on a weakening of Western resolve to stand with Ukraine.

Conflict Freedom and Prosperity

UkraineAlert Mar 19, 2023

Putin the Pariah: War crimes arrest warrant deepens Russia’s isolation

By Anders Åslund

The ICC decision to indict Putin for war crimes is a highly consequential step that will deepen Russia’s international isolation while weakening Putin’s personal position both at home and abroad, writes Anders Åslund.

Conflict Human Rights

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post How to keep Western tech out of Russian weapons appeared first on Atlantic Council.

Russia’s economic woes are a result of the faltering Ukraine invasion, which is now in its second year with no end in sight. Western countries have responded to the war by imposing unprecedented sanctions on Moscow while also seeking to dramatically reduce their dependence on Russian energy.

The Kremlin now finds itself caught in an east-west vice, with the democratic world steadily cutting Russia off economically while China and India take advantage of Moscow’s weakened position to import Russian fossil fuels at deeply discounted prices. With access to Western technologies blocked and European customers turning away, Russia looks to be heading toward a future as a resource colony supplying energy and commodities to Asia’s biggest economies.

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Putin’s public acknowledgement of possible looming economic problems suggests the situation may already be far worse than previously thought. Just a few weeks ago on March 14, he was dismissing the impact of Western sanctions and boasting that Russia’s “economic sovereignty” was stronger than ever. Putin’s rosy assessment has been echoed by many international observers in recent months, but critics claim this is due to dubious data that creates an overly optimistic impression of Russia’s true economic health.

“The Russian economy is in a tailspin,” commented Yale University School of Management Professor Jeffrey Sonnenfeld in a recent interview with Germany’s DW. Sonnerfeld claimed that Russia has stopped submitting the required economic information to international financial organizations and accused the Kremlin of “pumping out false data,” which is then recycled by the media. “What we do know is that every key industrial sector in Russia is down,” he noted, before dismissing Russia’s employment figures and the country’s ruble currency exchange rate as “invented numbers.”

Meanwhile, economist Janis Kluge of the German Institute for International and Security Affairs (SWP) calculates that Western sanctions alone have “basically shrunk Russia’s economy by 10 percent,” a larger impact than the 2008 financial crisis. “The way I think about sanctions is that we are shaking the tree on which the regime sits,” said Kluge. “We can’t really tell what’s going to come out of it, what’s going to happen. We are not shaking it enough for it to fall down. But we’re creating problems for them. It consumes a lot of political energy in Moscow. And it makes it clear to everyone, to all insiders, that it was a huge mistake to start this invasion.”

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The key engine of the Russian economy has long been energy exports. Many economists now believe the impact of price caps imposed by the G7 group of nations on Russian energy exports has been underestimated. These caps replaced earlier energy sanctions that proved counter-productive because they caused oil prices to jump and delivered windfall profits to Russia in 2022. In contrast, there are indications that price caps, coupled with Europe’s switch from Russia to other energy suppliers, spell disaster for the Kremlin.

In February 2023, Russia’s oil export revenues fell to the lowest level in more than a year as buyers mostly complied with price caps and sanctions, according to the International Energy Agency (IEA), reported Bloomberg. Monthly revenues were reportedly down more than 40% year-on-year, despite Russia’s relative success in sustaining volumes. This is good news for China and India, with both countries seeking to take advantage of Russia’s drastically reduced bargaining power.

China and India are the key drivers behind rising demand for Russian energy exports that is helping to prop up the country’s besieged economy despite Western-led sanctions, Al Jazeera reported in February. The two Asian economic powerhouses became the biggest buyers of Russian crude oil last year as Western countries restricted imports and imposed sanctions.

While Indian and Chinese energy purchases are welcome news for the Kremlin, it takes capital to keep a commodity-based economy going. This is reportedly becoming a major issue. In March, Russian billionaire Oleg Deripaska warned that Russia is now in danger of running out of cash. “There will be no money next year, we need foreign investors,” the businessman told an economic conference.

More can be done to impose further costs on Russia for the ongoing invasion of Ukraine. In a recent report, the Kyiv School of Economics recommended reducing the current oil price cap to $50 or lower. Russia’s revenues from exporting hydrocarbons are already set to halve this year to about $180 billion, according to Jacob Nell, one of the authors of the KSE report. “Squeezing oil and gas revenues will put Russia on the back foot and shorten the war,” the report concluded.

German economist Kluge believes the impact of sanctions on the Russian economy will be long term, and points to the loss of access to Western technologies such as computer chips as particularly damaging for the country’s future prospects. “The business case for producing something sophisticated in Russia is gone, and it’s not coming back,” she noted.

The Russian economy is not yet in full crisis mode and still has significant resources in reserve to call upon. However, with most avenues for Western partnership now indefinitely closed and dependency on China growing rapidly, Putin’s talk of “economic sovereignty” is starting to sound very hollow.

Diane Francis is a nonresident senior fellow at the Atlantic Council’s Eurasia Center, editor-at-large with the National Post in Canada, author of ten books, and author of a newsletter on America.

Further reading

UkraineAlert Feb 20, 2023

‘You cannot outlast us’: Biden’s Kyiv visit sends strong message to Moscow

By Peter Dickinson

US President Joe Biden’s bold surprise visit to wartime Kyiv sent a strong message to Moscow that time is not on Putin’s side and Russia should not pin its hopes on a weakening of Western resolve to stand with Ukraine.

Conflict Freedom and Prosperity

UkraineAlert Mar 19, 2023

Putin the Pariah: War crimes arrest warrant deepens Russia’s isolation

By Anders Åslund

The ICC decision to indict Putin for war crimes is a highly consequential step that will deepen Russia’s international isolation while weakening Putin’s personal position both at home and abroad, writes Anders Åslund.

Conflict Human Rights

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Russia faces long economic decline as isolated Putin turns to China appeared first on Atlantic Council.

Russian oligarch assets should be used now to support Ukraine

The European Commission estimates that Russian President Vladimir Putin’s war has caused an estimated $650 billion (converted to dollars from the original source) of damage to the Ukrainian economy. There is broad international agreement that Russia should pay for the damage it has caused. However, the debate remains as to how and when Russia should pay. It is important to distinguish between immobilized Russian state assets and blocked Russian oligarch assets. Currently, the authority does not exist to seize state assets and transfer them to Ukraine. It would require new legislation or amendments to existing law. It could also erode non-Western countries’ perception of the United States as a safe place for parking their reserves. Meanwhile, the United States and European Union (EU) member states already have the legal authorities and mechanisms to seize and transfer sanctioned oligarch assets. 

What are the immediate steps? 

Seize the blocked fifty-eight billion dollars’ worth of sanctioned oligarch assets and expedite their transfer to Ukraine. The multilateral Russian Elites, Proxies, and Oligarch (REPO) Task Force, run by finance and justice ministries of Western ally states, recently reported that REPO member states have blocked fifty-eight billion dollars’ worth of sanctioned Russian oligarch assets. Fortunately, in the United States the legal process for seizing sanctioned assets is already in place: a judge in Manhattan federal court recently ordered the confiscation of $5.4 million from sanctioned Russian oligarch Konstantin Malofeyev. The forfeited funds will be transferred to the State Department to provide assistance to Ukraine. 

Additionally, last month, the US Department of Justice’s (DOJ) KleptoCapture Task Force filed a civil forfeiture complaint against six properties owned by sanctioned Russian oligarch Viktor Vekselberg, worth seventy-five million dollars. DOJ is aggressively moving forward with its civil and criminal forfeiture tools and new authorities to seize sanctioned Russian assets to make them available to Ukraine. The same steps should be repeated across REPO member states with asset seizure authorities for the rest of the fifty-eight billion dollars held in their jurisdictions on an expedited timeline. 

There is also likely more Russian oligarch money abroad that has not yet been identified and frozen. Western authorities should use existing mechanisms and processes to locate these assets, freeze them, seize them, and transfer them directly to Ukraine.

One potential challenge to this plan is that prosecutors will need to provide evidence of oligarch assets’ involvement in international money laundering and sanctions violations. This could limit the pool of forfeitable money. However, the successful transfer of millions of dollars from Malofeyev and Vekselberg to Ukraine will prove that this path is worth going down. 

Make Russia pay for reparations. Not seizing Russian state assets right now does not mean that Group of Seven (G7) allies will simply transfer them back to Russia once the war is over. The United Nations (UN) General Assembly has already adopted a resolution calling on Russia to pay reparations for its damage to Ukraine. State assets can remain immobilized until Russia agrees to pay and if Moscow fails to do so, sovereign assets can then be seized as collateral. 

Further, it is important to remember that allies have rightfully provided significant amounts of funding to support Ukraine in its efforts to fight back against Russian aggression. The top ten contributors have pledged approximately $131 billion in military and financial assistance. The reparations discussions should include requirements for Russia to pay the United States, EU, and other contributors back. 

Leverage the International Monetary Fund (IMF) and its existing channels for funding Ukraine. Just this week, the IMF moved forward with a $15 billion loan package for Ukraine, the first ever lending to a country at war in the seventy-seven year history of the institution. This significant step provides Ukraine with an amount nearing 10 percent of its total gross domestic product. Due to the existing transmission and oversight mechanisms between the IMF and Ukraine, the loan can be delivered and administered quickly. This is the kind of aid which can make an immediate difference, and more aid can—and should—be given through these existing channels. Further, Russian state assets could be used as a collateral on Ukraine’s IMF loans. 

Concerns with immediate confiscation of Russian state assets 

Legal obstacles cannot be dismissed. At a time when Western unity is key in countering Russian aggression, the potential value gained from seizing Russian state assets may not be worth the internal disagreements and tensions it would cause within the EU and the United States. EU member states can confiscate assets only if there is evidence of a specific criminal offense. This rule does not cover blocked sovereign assets. Seizing Russian state assets in this instance would require new legislation and while not insurmountable, gaining consensus among twenty-seven EU member states will be a challenging and lengthy process at a time when other coordination between Western allies is needed including on military aid.

Similar legal challenges exist in the United States. Former senior US officials and Atlantic Council colleagues argue that the United States has legal justification for moving forward with seizing Russian sovereign assets. They cite the implementation of the International Emergency Economic Powers Act (IEEPA) through Executive Order (EO) in 1992 in response to Iraq’s invasion of Kuwait. EO 12817 directed US financial institutions to transfer any Iraqi state funds they held to the Federal Reserve Bank of New York in compliance with a UN resolution, and to eventually disperse those funds to affected countries. 

However, this precedent does not apply today. In 1991, the United States Congress authorized the use of military force in the Gulf War consistent with a UN Security Council (UNSC) Chapter VII Resolution. It was “engaged in armed hostilities” with Iraq, triggering the IEEPA authorities that allowed the President to confiscate foreign-owned property. Today, the United States is not engaged in armed hostilities with Russia, Russia has not attacked the United States, and there is no UNSC Chapter VII Resolution because Russia and China hold veto power. These distinctions matter. While the moral case for transferring Russian sovereign assets now to support Ukraine is strong, the legal case is more nuanced. The legal challenges cannot be dismissed because they will potentially delay delivery of aid for years. 

Third-party states might perceive the United States as an unsafe destination for parking their reserves in the future. Meanwhile, Washington worries about discouraging other central banks from using the dollar as a reserve currency. That is one of the reasons why the Biden administration is resisting proposals from congressional lawmakers allowing seizure of sovereign assets in certain cases. Central banks choose locations for parking reserves based on a risk-based approach and their perceptions of how secure and accessible those assets are going to be. If non-Western countries are worried about getting sanctioned by the United States one day, they will work toward diversifying their portfolios with non-dollar and digital currencies. This could accelerate the recently emerged dedollarization trend and weaken the power of US economic statecraft tools in the future. While countries in the Global South have viewed the blocking of assets warily, it is likely they would view the seizing of assets as a significant escalation.

Private banks would likely be involved in the Central Bank of Russia (CBR) asset seizure process. In 2021, CBR held most of its reserves in the form of government securities. Currently, we don’t know the location of about two-thirds of the blocked $300 billion Russian state assets. There is a likelihood that at least a portion of these assets is still kept as government securities in European commercial banks. All of this will require extra steps and a new directive from the government to the private sector in any forfeiture action.

Georgia on the radar

Finally, let’s zoom in on a country we have never covered in the Global Sanctions Dashboard before: Georgia. Several days ago, experts in Washington called on the United States and Europe to sanction members of the ruling Georgian Dream party if they pass the proposed foreign agent law. The controversial draft legislation, which would require organizations to register as “foreign agents” if they received 20 percent or more of their funding from foreign donors, passed the first parliament hearing. This triggered massive protests in Tbilisi and the Georgian Dream, under pressure, stated it would pull the draft law. 

The draft legislation, based on a similar infamous law in Russia, is yet another sign of Georgia’s democratic backsliding under the rule of the Georgian Dream party. It goes against the aspirations of strongly pro-Western Georgian people and if passed, could tilt Georgia’s future away from the West and closer to the Kremlin. 

Although the Georgian Dream said that it will withdraw the draft law, many strongly pro-Western Georgians are continuing demonstrations to ensure the ruling party delivers on the promise. The situation in Tbilisi remains volatile, and whether we will see individual sanctions against Georgian Dream members may depend on how they vote during the second parliament hearing.

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The blockade of Ukraine’s Black Sea ports began on the eve of Russia’s full-scale invasion in February 2022. It aims to break Ukraine economically by undermining the country’s position as one of the world’s leading agricultural exporters. The impact of the blockade goes beyond Ukraine and is global in scale. By preventing the free passage of merchant shipping in the Black Sea, Russia deprives world markets of vital Ukrainian agricultural produce while also challenging the core principles of international maritime law.

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From the very beginning, Russia’s attack on Ukraine has always gone beyond the boundaries of conventional military operations and attempted to strike at Ukraine’s very ability to exist as a functioning state. Russian troops have systematically destroyed vast swathes of farmland and made Ukraine the most mined country in the world. For the past six months, Russia has conducted a campaign of airstrikes targeting Ukraine’s civilian infrastructure in a bid to deprive Ukrainians of access to heating, electricity, and water supplies. The maritime blockade is another element in this war against Ukrainian statehood.

The suffering inflicted by Russia’s brutal invasion is not restricted to Ukrainians. According to the country’s Ministry of Infrastructure, more than 400 million people in Asia and Africa face the prospect of mounting food insecurity as a result of Russian efforts to restrict Ukrainian agricultural exports. While the current Grain Deal goes some way to countering this threat, it offers only a partial and short-term solution. Much more is needed in order to improve global food security and reaffirm the right to free passage for merchant shipping in international waters.

It is clearly in the interests of the international community to work toward ending Russia’s Black Sea blockade. First and foremost, this would lead to dramatically improved food security for many of the world’s most vulnerable communities. The resumption of maritime trade in the Black Sea would also provide the Ukrainian economy with approximately $20 billion in additional annual revenues. This would significantly reduce the economic burden on Ukraine’s partners and international financial institutions, which are now being asked to prop up the struggling Ukrainian economy indefinitely. Renewed merchant shipping would also be good for other economies, allowing Ukraine to resume imports worth tens of billions of dollars in 2021.

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Ukrainians understand that there is no international appetite for any direct military intervention to break Russia’s Black Sea blockade. Nevertheless, there are numerous other tools available to the international community that could be used to pressure Moscow. The most obvious measures would include additional sanctions and restrictions targeting Russian shipping.

This approach has yet to be fully explored. At present, Russian ships are not subject to the same checks and inspections that Ukrainian vessels must undergo in line with the terms of the Grain Deal. Instead, they are free to continue their international trade unhindered. Over the past year, Russia has reportedly increased its maritime exports by more than a quarter. At the same time, there have been numerous accusations made against Russian vessels for allegedly shipping military cargoes, including in contravention of the 1936 Montreux Convention governing maritime passage through the Bosporus and Dardanelles Straits in Turkey.

By blockading Ukraine’s Black Sea ports, Russia is violating the United Nations Convention on the Law of the Sea (UNCLOS) and the UN Charter. In response, Ukraine is calling on the International Maritime Organization (IMO) to force Russia to unblock the country’s sea ports. The IMO must use its powers as a UN agency to hold Russia accountable for violating the UNCLOS, and must be ready to impose suitable sanctions measures if Moscow refuses to comply.

Russia’s invasion of Ukraine has created a wide range of fundamental challenges to the rules-based international order that first emerged from the ashes of World War II. This is very much part of Putin’s plan. He wishes to return the world to an era when a handful of major powers were able to dictate to their weaker neighbors.

One of the many front lines in this geopolitical confrontation is the maritime front. Putin seeks to bankrupt Ukraine and overcome international opposition to his war by weaponizing agricultural exports. He does so in clear violation of international maritime law. If he succeeds, other autocrats will take note and adopt similarly aggressive tactics, with potentially catastrophic consequences for global trade. Ending Russia’s Black Sea blockade will not be easy and will require considerable political courage, but failure to do so will lead to rising costs in the years to come.

Oleksiy Goncharenko is a Ukrainian member of parliament with the European Solidarity party.

Further reading

UkraineAlert Feb 20, 2023

‘You cannot outlast us’: Biden’s Kyiv visit sends strong message to Moscow

By Peter Dickinson

US President Joe Biden’s bold surprise visit to wartime Kyiv sent a strong message to Moscow that time is not on Putin’s side and Russia should not pin its hopes on a weakening of Western resolve to stand with Ukraine.

Conflict Freedom and Prosperity

UkraineAlert Mar 19, 2023

Putin the Pariah: War crimes arrest warrant deepens Russia’s isolation

By Anders Åslund

The ICC decision to indict Putin for war crimes is a highly consequential step that will deepen Russia’s international isolation while weakening Putin’s personal position both at home and abroad, writes Anders Åslund.

Conflict Human Rights

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

Read more from UkraineAlert

UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Russia’s Black Sea blockade is part of Putin’s war on international law appeared first on Atlantic Council.

This is not just a matter of winning UN votes and scoring political points at international forums. The reluctance of countries throughout the Global South to join Western sanctions significantly undermines efforts to isolate Russia, while providing Moscow with the financial and material lifelines to maintain the war in Ukraine indefinitely.

Attitudes in the Global South toward Russia’s Ukraine invasion are being shaped by a range of factors including economic and geopolitical interests along with widespread suspicion of American foreign policy and historic anti-Western sentiment dating back to the colonial era. Russia has skillfully exploited this post-colonial perspective by framing the invasion of Ukraine as a reaction to what it terms as yet more expansionist Western interference. As the war enters its second year, Ukraine should be doing much more to engage these non-Western audiences and make its voice heard.

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Ukraine has limited experience of rallying international support and has previously focused its efforts almost exclusively on the West. In the three decades since the country regained independence, Ukrainian politicians, activists, and journalists have spent comparatively little time communicating with people in Latin America, Africa, and Asia, where awareness of Ukraine is still often minimal. Ukraine now needs to develop a strategy that can rally the nations of the non-Western world to its side.

First of all, it is absolutely crucial to keep Ukraine at the heart of the debate. Across the Global South, it is common to witness public discussions about the Russian invasion that barely address Ukraine at all. Instead, the focus is frequently on Western colonialism, globalization, and other broad geopolitical themes. Ukrainians should not hesitate to insist that conversations about their country’s plight not get sidetracked by extraneous historical grievances.

Over the past year, Ukraine’s limited efforts to influence opinion in the Global South have concentrated on highlighting the imperial ambitions underpinning Putin’s current invasion while raising awareness of Russia’s own long history of colonialism as a major European empire. This approach certainly makes some sense, but too much emphasis on Russia’s colonial past risks shifting the conversation away from today’s Ukraine.

Another important ingredient shaping the debate in the Global South is the role played by the Soviet Union as a supporter of anti-colonial liberation movements during the second half of the twentieth century. Putin’s Russia has made much use of this favorable Soviet legacy, using it to garner goodwill and to emphasize its own anti-Western credentials. This ignores the obvious imperialism of the USSR itself, and overlooks the fact that Soviet-era Ukraine also contributed significantly to liberation movements throughout Africa and Asia.

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While it is essential for Ukrainians to correct the historical record regarding Russian imperialism, it is also vital to stress Ukraine’s current importance for the Global South. First and foremost, this means highlighting Ukraine’s status as one of the world’s emerging agricultural superpowers and a major prewar contributor to global food security.

As Ukraine seeks to influence opinion among non-Western audiences, the country must make maximum use of its limited resources. For example, officials in Kyiv should be doing much more to engage with the thousands of professionals throughout Africa, Asia, and Latin America who studied at Ukrainian universities before going on to have careers in their homelands. This pool of alumni is a potentially significant but largely untapped resource that could bring a degree of authenticity to the debate due to their personal experience of Ukraine.

Ukrainian nationals with family ties to the Global South can also contribute to greater international understanding of the issues at stake in today’s Ukraine. As one of the most prominent members of the Afro-Ukrainian community, politician and Olympic champion wrestler Zhan Beleniuk traveled to Africa in late 2022 as part of Ukraine’s fledgling outreach efforts. Others with similar backgrounds should be encouraged to speak up on behalf of Ukraine.

Ukraine’s success in shaping opinion throughout the Global South will hinge largely on the country’s ability to engage with the media. This is one area where the Kremlin enjoys overwhelming advantages. While Russia’s RT and Sputnik platforms have limited reach and minimal credibility among Western audiences, they enjoy considerable prominence and are often well-received in much of Asia, Africa, and Latin America.

Ukraine cannot hope to compete with the Kremlin’s billion dollar media budgets and must instead build relationships with existing local mainstream media. Brazil’s TV Globo is the second-largest commercial TV network in the world and can bring Ukrainian perspectives to huge domestic Brazilian audiences. Likewise, engagement with Spanish-language channels can help reach millions across Latin America. A comprehensive media strategy is needed in order to close the information gap and counter the current dominance of Russia’s narratives in the non-Western information space.

Ultimately, the truth is on Ukraine’s side. The good news it that there is very little evidence of actively anti-Ukrainian sentiment in today’s Global South. It should be entirely possible to persuade far more people that Ukraine’s cause is righteous and worthy of support. However, this will require a concerted effort that is currently lacking. Simply telling non-Western audiences that the Russians are also imperialists may be satisfying, but it is not nearly enough.

Mitchell Polman is a public diplomacy and international relations commentator.

Further reading

UkraineAlert Feb 20, 2023

‘You cannot outlast us’: Biden’s Kyiv visit sends strong message to Moscow

By Peter Dickinson

US President Joe Biden’s bold surprise visit to wartime Kyiv sent a strong message to Moscow that time is not on Putin’s side and Russia should not pin its hopes on a weakening of Western resolve to stand with Ukraine.

Conflict Freedom and Prosperity

UkraineAlert Jan 28, 2023

Poland is leading Europe’s response to the Russian invasion of Ukraine

By Diane Francis

Poland was the unsung hero of the recent landmark decision by Berlin and Washington to provide Ukraine with tanks as Polish leadership continues to shape the European response to Russia’s genocidal invasion.

Conflict Economic Sanctions

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

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Today, Zelenskyy is lauded as a national hero and brilliant wartime leader, Putin is increasingly isolated around the world, and Ukrainian troops have stymied the military of a supposed superpower, albeit at great cost in terms of the lives and livelihoods of Ukrainians.

The chief reason for this turnaround is the bravery of Ukraine’s people, followed by the massive military aid that the West has provided to help narrow Moscow’s advantages in military hardware.

But next down that list of factors are sanctions and export controls against Russia. This conflict will be won on the battlefield, not in financial hubs across the world. The West’s sanctions, however, have hampered Russia’s economy and degraded Russia’s military capabilities, and are a crucial component of the strategy to contain Putin and his aggressions beyond just this war.

Evaluating the impact of the 2022 sanctions

The initial spurt of sanctions imposed on Russia included the Group of Seven (G7)’s decision, mere days into the conflict, to restrict the foreign exchange reserves of the Russian Central Bank. This dramatic escalation of pressure had immediate impact on Russia’s financial system. Russians queued up to pull cash out, the Russian stock markets and currency crashed, and the Russian Central Bank quickly implemented harsh capital controls to arrest the slide. This drama, however, led to some over-optimism regarding the effects of sanctions, with US President Joe Biden famously claiming he intended to reduce the ruble to “rubble.”

That clever play on words hasn’t held true, nor was it a great measure of sanctions’ effectiveness. Russia largely was allowed to continue selling energy products to the world and the foreign exchange from those sales allowed it to stabilize the ruble’s value, which today is close to pre-war levels.

The focus on a narrow measure like the status of the ruble or the oft-used red herring “Putin is still in Ukraine,” however, makes for lazy criticism of Western sanctions on Russia. Russia’s economy has in fact been battered by those sanctions, and things are only going to get worse.

The West has used all of the tools of economic statecraft at its disposal to inhibit Russia’s economy, which by extension degrades the Kremlin’s military capabilities. The key areas targeted have been Russia’s financial system, with almost all of the country’s largest banks banned from Western-dominated financial markets; its energy sector, where Moscow faces reduced revenues due to a combination of Western prohibitions on investment and limits on the price of its energy sales through a price cap system; its technology sector, where enterprises critical to economic growth and military capacity have been cut off from Western technology; and important state-owned enterprises subject to blocking sanctions that freeze their assets and cut them off from Western technology and services.

The effects have been dramatic, even if the hit to the Russian gross domestic product (GDP) has been less severe than some predicted at the start of the conflict. Russia’s GDP contracted in 2022 between 2.2 percent and 3.9 percent, compared with World Bank predictions prior to the invasion of 2.4 percent growth for that year. The World Bank and Organization for Economic Cooperation and Development predict even larger contractions in 2023 of between 3.3 percent and 5.9 percent (although the International Monetary Fund predicts marginal 0.3 percent growth). Russian inflation has run at 14 percent year on year.

Russian oil revenues, the key driver of state income, fell dramatically in January 2023 following the European Union’s cessation of most oil imports from Russia and the imposition of the G7 price cap. In 2022, tax revenue not involving income from oil and gas came in 20 percent lower than expected. Indeed, amid plunging imports and the withdrawal of most major Western firms from the country, Russian consumers and the economy they support have suffered. Automobile sales, for example, were off more than 50 percent in 2022 compared with the prior year, and the cars Russians have available to buy include new Ladas without airbags or anti-lock braking systems (but still with high prices!) as the Kremlin scraps regulations left and right to cover up for its weakening economy.

To cope, the Russian government has spent money hand over fist in 2022 to prop up the economy and try to neutralize the worst impacts of Western sanctions. Even with a large financial buffer in the sovereign wealth fund to continue fiscal stimulus, the Russian economy has begun to look like a leaky ship. All hands are on deck bailing it out, but at some point, they won’t be able to keep up.

While sanctions and export controls should not be thought of as military tools to influence the battlefield, they clearly have impaired Russia’s ability to field a competent military force, especially given the country’s supposed superpower status. The Kremlin has been forced to cope with major supply chain shortages that have hampered Russia’s air force and tank production, and compelled to turn to Iran and North Korea for drones and other military equipment. Russia’s military has even been cannibalizing microchips from washing machines and breast pumps to repurpose them for military use given a lack of reliable domestic production or external sources of chips.

Forecasting what comes next

The anniversary of Russia’s invasion will reportedly bring with it a robust sanctions package across the G7 nations leading the sanctions charge. Expect such a package to cover the waterfront of sanctions that have been imposed over the last year and reinforce the measures already in place. The package will likely contain sanctions against banks, energy companies, oligarchs, military procurement, and, crucially, evasion efforts of those already sanctioned by the West. It beggars belief to imagine that the major Russian banks are not hiding transactions in non-sanctioned banks, and the United States in particular has already imposed several rounds of sanctions targeting Russian efforts to evade sanctions. Of particular interest will be whether additional export control restrictions are applied to companies outside of Russia assisting in procuring banned technologies.

The year ahead will likely bring more of the same in terms of sanctions, barring a significant escalation by Russia such as the use of a nuclear or chemical weapon. Russian sanctions evasion is a state-wide endeavor and will be a major focus for the West as it seeks to preserve the impact of the sanctions it has already imposed. US Treasury Department Deputy Secretary Wally Adeyemo made that clear in remarks delivered for the anniversary of the invasion, framing the choice for other countries as “us or them.” That stark framing, reminiscent of the sanctions push prior to the nuclear deal with Iran, was notable given reports that China is considering direct military support to Russia and the reluctance of much of the Global South to condemn Russia for its brutal assault in Ukraine. It will be important for Western policymakers to diplomatically engage the Global South in isolating Moscow while also cracking down on sanctions evasion.

The G7 nations may also seek to make sanctions across jurisdictions more consistent, since the differences can create unequal playing fields for Western companies and give bad Russian actors the opportunity to exploit the variations. Such an effort would include more sanctions on high-profile Russian oligarchs and, by extension, their companies, as oligarch sanctions is the area of greatest discrepancy across the United States, the European Union, the United Kingdom, and Canada.

The most high-profile sanctions of the last few months—the price caps on Russian crude oil and refined products—will garner much attention and handwringing. Whether or not the price cap mechanism “works” is a difficult thing to measure, but ultimately the success or failure of the policy may lie in oil markets themselves and not necessarily the mechanism. If crude spikes to $110 per barrel or higher, there will be enormous pressure on a very complex and questionably reliable attestation process for compliance with the price cap—a process that is crucial to the mechanism’s effective functioning. But if markets remain soft, then it seems likely that the dual goal of reducing Russian revenue and keeping Russian product on the market will more or less be met. It’s a cliché but in this case also a reality: Only time will tell.

Several other areas of Russia’s economy have yet to come under substantial sanctions, including the metals and mining and shipping and transportation sectors. And there are many Russian banks, energy firms, and military-related entities that could make good sanctions targets. Part of the playbook for implementing economic statecraft is the notion of broadening and deepening sanctions—the former involving targeting new sectors of an economy and the latter entailing imposing more sanctions on sectors already under sanctions. This broadening and deepening approach will likely guide Western sanctions over the course of 2023.

Assessing the strategic outlook

Sanctions will not achieve military victory for Ukraine. They are unlikely to cause regime change in Russia. But they nonetheless have important goals. Stronger enforcement of and compliance with sanctions, for example, can help continue to degrade Russia’s military capabilities since there is no substitute for Western technology; Adeyemo claimed that 40 percent of the microchips Russia imports from China are defective. Continued stress on the Russian economy also will reduce the amount of money for patronage (or corruption) that Putin has relied on to build and sustain his power base. The longer-term outlook for Russia under sanctions is akin to the terminal decline of the Soviet economy in the 1980s, a grim prospect for Moscow.

Moreover, sanctions on Russia are still, in our estimation, only about 70 percent of the scale of those imposed on Iran or North Korea; there is plenty of room to increase the pain inflicted on Russia’s economy. For Iran and North Korea, with isolated exceptions, all transactions involving the countries are banned. For Russia, by contrast, transactions with the country are not prohibited unless they have been specified as bad. This leaves the West with plenty of tools at its disposal to continue to hinder the Kremlin’s aggression and isolate Putin and his heinous worldview.

Brian O’Toole is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. He is a former senior adviser to the director of the Office of Foreign Assets Control at the US Department of the Treasury. Follow him on Twitter @brianoftoole.

Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. He was the coordinator for sanctions policy during the Obama administration, assistant secretary of state for Europe and Eurasia during the Bush administration, and senior director at the National Security Council for the Clinton and Bush administrations. He also served as ambassador to Poland during the Clinton administration. Follow him on Twitter @AmbDanFried.

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Russia has since pursued alternatives to manage its trade and reserves. Chinese yuan and gold became the stars of the show, but both introduced new vulnerabilities and inconveniences. Yuan makes Russia dependent on Beijing’s goodwill, while gold is not as sanctions-proof as Moscow expected, and Russia has had a hard time scaling up its illicit gold trade.

Yuanization creates new vulnerabilities

In February 2022, heavily sanctioned and isolated, Russia had to find an alternative to dollar-denominated transactions. The new currency needed two characteristics: It had to be relatively stable and minted by a non-sanctioning country. Of the few eligible options, such as the Indian rupee and South African rand, China’s yuan was the only one actively seeking an international role and able to take it on.

Moscow has rapidly intensified its use of yuan in two main ways: increasing the yuan’s share in Russia’s reserves and switching to direct ruble-yuan trade instead of using the dollar as an intermediary. At the end of last year, Russia’s Finance Ministry increased the permitted share of yuan reserves in the National Wealth Fund to 60 percent. Meanwhile, ruble-yuan trade increased eighty-fold from February to October 2022. With each of these actions, Russia created new vulnerabilities and cemented itself as the little brother in the relationship.

Ruble-yuan exchange rate vulnerability. China is Russia’s top trade partner, and its tight control of the yuan-ruble exchange rate creates risks for Russia’s balance of trade. A tightly controlled yuan may inherently seem more stable than a floating dollar, but Chinese authorities have managed the ruble-yuan exchange rate to its advantage before. Specifically, shortly after the invasion began, the Chinese government relaxed yuan controls to allow the rapidly depreciating ruble to fall faster, thus avoiding subsidizing Chinese goods for Russians by giving them more yuan than their rubles were really worth. As a result, it became much more expensive for Russia to buy Chinese goods. In other words, China could choose at any time—for political reasons or otherwise—to make Chinese imports really expensive and Russian exports to China much cheaper.

Chinese bond liquidation risk. The Russian Central Bank might not be able to sell Chinese bonds and convert the proceeds to rubles if Beijing decides to impose restrictions on yuan outflows. The liquidity risk of Chinese bonds is one of the main reasons why central banks around the world avoid purchasing them. In March 2022, the Russian Central Bank and National Wealth Fund were estimated to own 140 billion dollars’ worth of yuan-denominated assets, money that could be not be obtained by Moscow if Beijing decides to impose capital controls.

Currency swap lines elimination risk. Russia is vulnerable to Beijing’s political will when it comes to currency swap lines—an agreement between two central banks to exchange currencies. Moscow has used bilateral swap lines with the Chinese Central Bank to build up its yuan reserves. In 2014, Russia made a three-year currency swap deal worth 150 billion yuan and renewed it for another three years in 2017. In January, the Russian and Chinese central banks agreed to set up a new yuan currency swap instrument. However, such agreements expose Chinese financial institutions to US secondary sanctions for helping Russia’s sanctions evasion efforts. If Beijing determines that the threat of secondary sanctions is becoming substantial, it will soon abandon the swap lines with Russia. 

Last year saw Russia take the first major steps toward the yuanization of its economy, a necessity for Moscow that in turn is increasing Beijing’s clout in international finance. While the yuan helped Russia weather the effects of sanctions in the short term, it also opened a Pandora’s box of new vulnerabilities for Moscow. For as long as sanctions remain in place, Russia will have to stay on the right side of Beijing. 

Is Russia turning to gold-digging?

Moscow has been looking for alternatives to the euro and dollar since its first invasion of Ukraine in 2014. Its gold holdings, for example, have nearly tripled since 2014. Moscow is currently sitting on 150,000 gold bars valued at about $140 billion, mostly stacked in Russian vaults out of reach of Western asset freezes. 

Russia is also the world’s second largest gold producer, and miners are keen to sell excess gold in international markets. Beijing has been an enthusiastic buyer. Russia is reportedly selling gold to China at a discount of up to 30 percent, and gold transfers from Russia to China increased by 67 percent in 2022. 

Nevertheless, we haven’t so far observed a global mass sell-off of Russian reserve gold for four reasons.

1. Legal trade of Russian gold has been mostly blocked off.
2. Illicitly transporting 150,000 gold bars is a logistical nightmare.
3. Moscow has not yet felt an intense need for financing due to its energy export windfall in 2022.
4. Most critically, Russia will struggle to find willing and able partners to scale this illicit trade. Fellow sanctioned countries, the likes of Iran, Venezuela, and Myanmar, are deprived of dollars and euros themselves. Other gold hubs such as China, India, and the United Arab Emirates (UAE) are not interested in mass purchases due to the heightened risk of exposure and Western retaliation. 

Formal channels cut off. The London Bullion Market Association’s decision to suspend all Russian refineries from its accredited list in March 2022 and a gold import ban by Group of Seven (G7) countries in June 2022 meant that Russian gold’s traditional sales routes to the United States and Europe were cut off. Russia also cannot use gold as collateral for loans or for location swaps—a transaction in which two parties agree to exchange gold they have in different locations without physically moving the gold. But no one would want to swap their non-sanctioned gold with sanctioned Russian gold. Moscow has hence turned to illicit means to liquidate its gold.

Illicit channels are also challenging. Gold’s physical nature can make it a hassle-ridden financial asset since transporting gold is more difficult than digital assets. But its advantage is its ability to be moved outside of electronic financial networks. Russia could use gold to bypass sanctions by partnering with non-Western gold hubs including China, the UAE, and India in exchange for cash or barter. Refineries are permitted to list intermediary countries as the source of unrefined gold, meaning its Russian origin is fairly easy to mask. While refined gold is inscribed with the refinery’s name and date, making it readily identifiable as Russian, it can be remelted and then resold as anything-but-Russian gold. 

Recent history is replete with precedents for gold smuggling by sanctioned economies. In 2019, Russia reportedly flew Venezuelan gold around the world and exchanged it for cash dollars which were then flown back to Caracas. In 2012, Iran sold natural gas to Turkey in exchange for gold, which was then sold for cash in Dubai. 

Potential partners will remain hesitant to trade a sanctioned asset in large quantities unless the risk of exposure is alleviated. But as illicit trade of other commodities between Russia and non-Western countries expands, Russian President Vladimir Putin’s shadow fleet of ships grows, and networks become entrenched, risks could be managed and more gold could clandestinely start flowing with it.

China’s global yuanization ambition

Russia and China have partnered in dedollarization since 2014. But Russia’s invasion of Ukraine and the resulting Western sanctions have created an imbalance in the urgency for dedollarization. 

In addition to increasing its yuan reserves and eliminating the dollar intermediary in yuan-ruble exchange, Moscow is planning its own international standard for gold and other precious metals where prices will be fixed to members’ national currencies, likely including the yuan. 

China is all too happy to assist Russia in this process. Beijing has a longer-term goal of competing with the dollar and of advancing the yuan as an international currency. Russia will be a test case as the first large economy to embrace the yuan in this way. With the power dynamic in the relationship strongly tilted in China’s favor, Russia’s urgency will permit the People’s Bank of China to experiment with financial and monetary policies in a controlled environment while easing the yuan into a more international role.

Maia Nikoladze is an assistant director for economic statecraft at the Atlantic Council’s GeoEconomics Center. Follow her on Twitter @Mai_Nikoladze.

Mrugank Bhusari is an assistant director with the GeoEconomics Center focusing on international finance and global governance. Follow him on Twitter @BhusariMrugank.

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This widely anticipated offensive is an attempt by Moscow to regain the initiative following months of battlefield defeats and humiliating retreats in Ukraine that have undermined Russia’s reputation as a military superpower. Vladimir Putin is now desperate to demonstrate that his invasion is back on track and has reportedly massed huge reserves for a new push to overwhelm Ukraine’s defenses. However, after a year of catastrophic losses that has left many of Russia’s most prestigious military units seriously depleted, doubts remain over the ability of untested replacement troops to carry out large-scale offensive operations.

Initial indications are not encouraging for the Kremlin, to say the least. Thousands of Russian soldiers including elite marines and special forces troops are believed to have been killed in late January and early February during a badly bungled attempt to storm the town of Vuhledar in eastern Ukraine. The failed attack sparked widespread dismay and anger among pro-Kremlin military bloggers, with many accusing Russian army chiefs of incompetence. The disaster contributed to what British military intelligence said was likely to be “the highest rate of Russian casualties since the first week of the invasion.”

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One of the key reasons behind the sharp recent rise in casualties is Russia’s growing reliance on mobilized personnel with limited military training. In September 2022, Vladimir Putin responded to escalating losses in Ukraine by launching Russia’s first mobilization since World War II. Most of the approximately 300,000 men who were mobilized last year have now been deployed to Ukraine. The arrival of these additional numbers helped Russia to blunt Ukraine’s advances during the winter months, but it is unclear whether mobilized troops will prove as effective in an offensive capacity.

Many mobilized Russians appear to be less than enthusiastic about their new role as the shock troops of Putin’s faltering invasion. Since the first week of February, a growing number of video appeals have been published on social media featuring groups of mobilized soldiers complaining about everything from a lack of basic military equipment to the suicidal orders of their superiors. In one fairly typical video, the wives and mothers of mobilized soldiers from Tatarstan claim their men are being used as “cannon fodder” in Ukraine.

With hundreds of thousands of mobilized Russians expected to take part in Putin’s big offensive, this emerging trend could pose a significant threat to the Kremlin. If current casualty rates are any indication, the coming attack could result in unprecedented loss of life and spark a complete collapse in morale among Russia’s already demoralized mobilized troops. This would make life very difficult for the Russian army in Ukraine, which would find itself confronted by a breakdown in discipline that would severely limit its ability to stage offensive operations. Nor is there any guarantee that the problems would stop there. Russia’s own experience in 1917 is a reminder of the unpredictable consequences that can follow when an army in wartime stops taking orders.

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It is still premature to speak of mutinous mobilized soldiers, of course. Nevertheless, maintaining military discipline may be the biggest single challenge currently facing the Putin regime. At present, the Russian dictator appears in little danger domestically, with independent polling by the Levada Center continuing to identify strong Russian public support for the war in Ukraine. While some question the validity of this data, there is no escaping the near complete absence of any genuine anti-war activity in today’s Russia. One year since the invasion began, most opponents have chosen to remain silent or have left Russia altogether.

Likewise, Putin seems to have weathered the worst of the economic storm brought on by Western sanctions. The Russian economy has been hard-hit by measures imposed over the past year, but the damage has been significantly less than anticipated and is certainly far from fatal. This may change if the country’s economic outlook continues to worsen, but at this stage there is no indication that shrinking incomes or the departure of Western brands from Russian stores will fuel protests anytime soon. While members of the Russian elite are also feeling the pinch, most owe their positions to Putin and see no realistic alternative to the current status quo, however imperfect.

The relative calm on Putin’s home front contrasts sharply with the precarious position of his army in Ukraine. Putin had initially anticipated a quick and triumphant campaign that would confirm Russia’s Great Power status and extinguish Ukrainian statehood once and for all. Instead, he finds himself embroiled in the biggest European conflict since World War II with his battered army in increasing disarray and his hopes of military success dwindling.

In order to snatch a victory of sorts from the jaws of defeat, Putin must now rely on the overwhelming numbers provided by mass mobilization. This is a tried and tested Russian tactic, but it also carries considerable risks. Sending thousands of untrained men to fight against battle-hardened and highly motivated Ukrainian troops could result in the kind of carnage that breaks armies. If that happens, the fallout would likely reverberate throughout Russia and destabilize the entire regime. Putin may then find that saving his invasion is the least of his worries.

Peter Dickinson is Editor of the Atlantic Council’s UkraineAlert Service.

Further reading

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

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The Atlantic Council’s Eurasia Center is exploring the issue of Russian threats to global financial security, beginning with a virtual event on February 8 moderated by Ambassador John Herbst and featuring Ukrainian Minister of Finance Serhiy Marchenko along with a panel of international experts.

Minister Marchenko began the event by reminding viewers that “for too long, Russia has been allowed to undermine the system from inside.” Ignoring the challenges that Russia’s misuse of the rules-based international order pose will only make this problem worse, he warned.

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Since 2014, the West has sanctioned an expanding list of Russian industries and entities in response to violations of international law. Unprecedented additional sanctions were imposed following Russia’s full-scale invasion of Ukraine in 2022. However, the available sanctions options are not yet exhausted. “Sanctions are having an impact on the Russian economy,” said panelist Brian O’Toole, nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, “but there is still plenty more to be done.”

Russia has created an international network to avoid sanctions and flout the rules governing the global financial sector. This network includes not only Russia’s Wagner Group, which was recently sanctioned as an international criminal organization by the US State Department, but also “the Taliban, Hezbollah, [Syria’s] Assad regime, North Korea, and Iran,” said Marchenko.

“Countless investigations have uncovered Russia’s complicity in money laundering,” reported Marchenko. He noted that Russia’s dependence on illicit financial activity through its network of allies has only increased since the imposition of sanctions.

For Timothy Ash, senior sovereign strategist at Bluebay Asset Management, sanctions are just the beginning of the process of extricating Russian malign influence from global institutions. Moscow is “corrupting [global] systems from within,” while Moscow’s international partners help “regime money exit and then be deployed in Russian state interests,” said Ash.

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John Cusack, founder of the Global Coalition to Fight Financial Crime, noted that “Russia has been gaming the system for more than two decades.” In the case of one global institution, the Financial Action Task Force (FATF), which was set up to police international money laundering, he claimed Russia’s role has run directly counter to the goals of the institution. Cusack accused the Kremlin of weaponizing its standing in the FATF to “[go] after people they don’t like.”

To respond to Russia’s flagrant violations, FATF has the power to place Russia on a “blacklist” that calls on FATF member countries to apply greater due diligence on financial transactions involving Russia. Russia’s placement on the FATF blacklist would, according to Minister Marchenko, “dramatically increase the cost of doing business with Russia.”

O’Toole noted that sanctions are only one aspect of the overall strategy to counter Kremlin aggression in Ukraine and beyond. “Ukraine’s victory relies on the bravery of the Ukrainian people and military supplies from the West,” he commented. At the same time, O’Toole stressed that sanctions “are a complementary policy” limiting the ability of Russia to fund its aggression.

Olena Halushka, co-founder of the International Center for Ukrainian Victory, compared Russian atrocities in Ukraine to the actions of “ISIS, Al Qaeda, or Hezbollah” and called on Western countries to label Russia a terrorist state. Halushka observed that Russia’s blacklisting by the FATF can also help “to close the loophole through which Western-made main components [including] microchips are ending up in Russian or Iranian weapons.” There will be no end to Russian aggression if there is no accountability, warned Halushka.

The global financial system is based on rules, commented Minister Marchenko. “We have powerful mechanisms to enforce these rules,” he noted. “The time has come to use them.”

Benton Coblentz is a program assistant at the Atlantic Council’s Eurasia Center.

Further reading

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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Lukashenka’s support for Moscow covers five key areas: providing logistical and material support for Russian forces; acting as a launchpad for missiles against Ukrainian targets from Belarusian territory; broadcasting propaganda and disinformation against Ukraine; hosting Russian military hospitals on Belarusian soil; and the suspected regime-sponsored orchestration of cyberattacks against Ukrainian infrastructure.

The impact of this support has been significant. Russian troops deployed to Belarus on the eve of the invasion played a key role in the Kyiv offensive during the first month of the war, with the horrendous atrocities in Bucha and other Kyiv suburbs carried out by Russian units which had crossed over from Belarus. During the initial assault on Kyiv, logistical support from Belarus allowed Russia to resupply and replenish its troops as they fought to capture the Ukrainian capital.

Since the Russian retreat from northern Ukraine in late March and early April 2022, Belarus has continued to provide safe harbor to Russian soldiers while supplying Russia with weaponry and other military equipment. Lukashenka has also hosted joint military exercises and provided training facilities for mobilized Russians.

Belarus has helped to spread propaganda and disinformation about the war, often echoing Kremlin narratives defending Vladimir Putin’s decision to invade and backing his false justifications for the conflict. Indeed, the propaganda is so pervasive and the information space so controlled inside Belarus that many Belarusians still do not realize the true scale of the war. Instead, many view it as a “special military operation,” seemingly distant from Belarus.

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The Belarusian pro-democracy movement is fighting back, confident that Putin’s defeat in Ukraine will weaken Lukashenka’s ability to maintain his hegemony over his own people. By disrupting Russia’s war effort and exhausting its resources, the Belarusian pro-democracy movement is chipping away at the edifice of the Putin-Lukashenka axis and eroding the very resources Russia needs in order to prop up its dependent ally.

As Belarusian opposition leader Sviatlana Tsikhanouskaya argues, there is a clear connection between the fate of Ukraine and the fate of Belarus. She contends that when the people of Ukraine prevail over Russia, Belarusians will see Putin’s feet of clay and will be inspired to reject the vassal status that Russia has imposed on their own country.

For this reason, Belarusian democratic activists are contributing to anti-war activities. The Cyber Partisans initiative has disrupted the Belarusian regime’s technical infrastructure, while the railway partisans movement complicated Belarusian logistical support for Russian forces during the early months of the war. Activists are also working to combat disinformation and propaganda by communicating the truth about the war to Belarusian citizens.

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It is imperative that Ukraine’s friends and allies in the West punish Lukashenka’s regime for its role in Russia’s war against Ukraine. Doing so will help support Ukraine’s defense by imposing greater costs on Belarus and forcing Minsk to think twice before carrying out instructions from Moscow. It will also help the Belarusian pro-democracy movement in the battle for the hearts and minds of the Belarusian people by exposing how Lukashenka’s support for the war is directly responsible for growing insecurity and economic hardship in Belarus.

To begin with, the US and other democratic partners should continue to provide robust support for the Belarusian democratic movement, which is making significant contributions to the anti-war effort in Belarus. Historically, resources to support the Belarusian democracy movement have come in peaks and valleys, often surging following key political events only to dwindle in subsequent periods. Support has remained strong since 2020, when a fraudulent presidential election brought hundreds of thousands of Belarusians to the streets in protest. Now that the country’s democratic forces have embarked upon a longer-term movement for change, consistent and strong financial support is all the more crucial.

This investment must be paired with a high-level diplomatic initiative to signal both to the Lukashenka regime and to the Belarusian democratic opposition that the US and EU commitment to a democratic Belarus will not waver and is linked directly to the defense of democracy throughout the region. To this end, the US should assign another Special Envoy for Belarus at the ambassadorial rank to continue the important work of former US Special Envoy to Belarus Ambassador Julie Fisher, who was a steadfast supporter of the democratic movement during her tenure from 2020-2022.

In light of the fact that the Belarusian authorities refused to renew the visa and accreditation of the EU’s former Head of Delegation to Belarus, Dirk Schuebel, the EU should consider appointing a remote-based Special Representative for Belarus instead. These new envoys would serve as crucial interlocutors between Washington, Brussels, and the leaders of the Belarusian opposition.

Targeted support should also be leveraged for Belarusian volunteers fighting against Russia in Ukraine. Greater material support for the more than 1,000 Belarusian volunteers fighting under Ukrainian military leadership would serve to strengthen their ability to aid in the defense of Ukraine at a time of increasing risk of further attacks from Belarusian territory. It would also show members of the Belarusian military that there is an alternative outlet to serve for those who recognize the risks posed to their country and do not wish to be dragged into an unjustified war against a peaceful neighbor.

As the specter of greater Belarusian involvement in the war grows, so too does the imperative for Washington and Brussels to act now to support the Belarusian democratic forces in undermining Belarusian support for Russia’s war machine, countering propaganda and disinformation, and joining Ukrainian forces on the frontline of democracy. The Belarusian democratic movement understands that their fate will now be decided on the battlefields of Ukraine. They have the will and capacity to aid their Ukrainian compatriots in securing victory as soon as possible. They just need the tools to do so.

Stephen Nix is the senior director for Eurasia at the International Republican Institute (IRI). Mark Dietzen is the IRI resident program director for Belarus, based in Vilnius, Lithuania.

Further reading

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Vladimir Putin’s genocidal invasion of Ukraine has exposed modern Russia’s unapologetically imperial identity but could yet lead to the collapse of the Kremlin’s broader imperial ambitions, writes Botakoz Kassymbekova.

Belarus Central Asia

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The post The Belarusian opposition can help defeat Putin in Ukraine appeared first on Atlantic Council.

How does the Western price cap on oil work?

As the G7 and European Union implement their new restrictions on Russian oil and gas exports, Ben Judah spoke with Eddie Fishman, Senior Policy Scholar at the Center on Global Energy Policy at Columbia University and nonresident senior fellow at the Atlantic Council’s Eurasia Center, to discuss the price cap.

Has the price cap already had an impact on Russian oil exports at this early stage? Is the price cap a new tool of economic statecraft? And can the price cap be used in a way to accelerate ongoing efforts to improve renewable energy infrastructure?

You can watch #BritainDebrief on YouTube and as a podcast on Apple Podcasts and Spotify.

Fellow

Ben Judah

Director

Europe Center Transform Europe Initiative

Economy & Business European Union

Fellow

Edward Fishman

Nonresident Senior Fellow

Eurasia Center

Russia Economic Sanctions

Europe Center

Providing expertise and building communities to promote transatlantic leadership and a strong Europe in turbulent times.

The Europe Center promotes the transatlantic leadership and strategies required to ensure a strong Europe.

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