By Daniel Silverberg, Capstone Managing Director and head of Capstone’s National Security Team
February 28, 2022
Putin’s reckless invasion of Ukraine has surprised observers not only for the fact it happened, but because it has unfolded so poorly for Russia. Mismanaged supply lines and undisciplined military maneuvers have hampered what most experts thought would be an immediate and outright onslaught. The Ukrainian military has proven far more resilient than expected, and the western reaction has been far more unified and forceful than Putin likely predicted. This unity was highlighted by a coordinated announcement by Western powers over the weekend that they would expel Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). However, with a massive invasion force still at Putin’s disposal and a continued surge of troops into Ukraine, we expect Kyiv to fall in coming days and the likely detention or murder of its leadership if Putin continues his military operations.
Developments of the past week have led us to make five predictions about the impact of Russia’s invasion on the policy response of the Biden administration and its allies in Europe and around the world.
1. Oil and Gas Sanctions Not In The Cards, Yet
Despite the expectations of many analysts that the US and its European allies would sanction Russian oil and gas, Biden officials made clear on Friday that the allies aren’t ready to take that step yet. There are three key reasons:
- European partners are dependent on Russian oil and gas, and the US could not secure their support for the unprecedented strength of the sanctions in place today without guaranteeing them stable energy access. This is also why European sanctions did not include the two major Russian banks: the European subsidiaries of those banks will need to process European oil and gas revenue.
- Disruptions to the global energy supply would directly hurt the US economy.
- Sanctioning Russian energy could lead to a spike in the price of oil, which would benefit Putin rather than punish him, at least in the short term.
Remarkably, the global energy supply has yet to face disruptions since the invasion began, with the price of oil stabilizing Friday below $100 a barrel after briefly spiking above that closely watched threshold. Still, Russia will likely take a significant hit as European customers have even greater motivation to diversify from Russian oil and gas. Russia’s pariah status has spooked commodities markets.
Though sanctions aren’t on the table at the moment, the Biden team might be more prepared to target Russian oil and gas once Europe’s gas needs are addressed or start to ebb with the onset of Spring, providing the situation does not improve. White House spokesperson Jen Psaki made clear on Feb. 27 that “energy sanctions are certainly on the table.” While we do not expect energy sanctions in the short term, Russia’s main cash source will take a serious hit regardless.
2. Russia Will Be Excluded From The G20.
The 2014 meeting of the Group of 20 (G20) conference was one of the starkest examples of the West’s failure to hold Putin accountable for his annexation of Crimea from Ukraine. At that time, Western leaders lined up at the G20 (which includes 19 of the biggest economies from all over the world and the European Union) to browbeat Putin for his support of Russian separatists in Eastern Ukraine and expelled Russia from the annual meeting of the world’s largest economies, known as the Group of 8 (G8), but Russia shrugged off these gestures. Russian Foreign Minister Sergey Lavrov stated:
“G8 is an informal organization that does not give out any membership cards and, by its definition, cannot remove anyone…All the economic and financial questions are decided in G20, and G8 has the purpose of existence as the forum of dialogue between the leading Western countries and Russia.”
This time will be different. Russia’s primary banks are under sanctions, and the US and EU announced on Feb. 26 that they will block Russia’s central bank from deploying its currency reserves and sever key Russian banks links to SWIFT. The significance of these actions cannot be overstated. Western leaders are deliberately “disarming” Russia’s central bank and paralyzing its assets. According to Josh Lipsky, director of the Atlantic Council’s Geoeconomics Center, “a G20 central bank has never been sanctioned before. This is not Iran. This is not Venezuela.” Moreover, European countries are putting themselves in direct opposition to Russia in ways we have never seen. Even Germany, which has a ban on sending weapons to conflict zones and has been studiously ignoring instances of Russian intransigence for decades, is overtly supplying stingers and other weapons to Ukraine. Sports leagues, which have typically been friendly to Russian oligarchs, are shunning Russian players and owners; and BP announced it is exiting its 20 percent stake in Russian oil giant Rosneft, a significant loss of revenue.
Some G20 members, such as Australia, are already pushing to eject Russia from the organization. With Russia’s increasing pariah status and unprecedented sanctions on its central bank, we expect the demand for Russia’s removal to gain steam, and we predict Russia’s ejection from the G20 before week’s end.
3. Putin’s Next Target Will Be Moldova.
Putin’s recklessness in the last week has put Europe on alert. Like Ukraine, Moldova has struggled with Russian separatists. Despite the stationing of as many as 2,000 Russian troops in Moldova’s breakaway region of Transnistria, Moldova voted last July for western-oriented leadership. According to a regional observer, these similarities point to Moldova as the next target of Putin’s aggression: “With a Russian military base, an unresolved conflict, and the country’s pro-Western government, all the trigger points for the next Russian intervention are present.”
Putin’s restraint having lapsed now, he very well could decide to move against Moldova, which he believes has little western support or attention and whose separatists could provide a similar justification for a Russian “rescue.” This is why President Macron specifically reiterated France’s support for Moldova over the weekend. Bottom line, while all former Soviet republics need to worry, Moldova’s parallel circumstances with Ukraine point to it as Putin’s likely next target.
4. Russia’s Invasion Will Not Disrupt Iran Negotiations.
In 2015, when the US had sanctioned Russia for its annexation of Crimea and its support for Russian separatists in Ukraine’s Donbas region, and its support for the murderous regime of Syria’s Hafez al-Assad in its bloody civil war, US and Russian negotiators worked together to secure the Joint Comprehensive Plan of Action (JCPOA), more commonly known as the Iran Nuclear Deal. The Russian capacity for compartmentalization was extraordinary at that time, as Russian officials worked cooperatively with US officials on Iran while their colleagues were vigorously clashing with the US on several other fronts.
Recently, Russia continued to play a significant role in the current round of negotiations with Iran, which has been crucial. Because the Iranian government will not talk directly to the US, both sides have relied on the Russians as intermediaries. Given this precedent and common interest in constraining Iran’s nuclear program, we predict Russia will continue to participate in the negotiations to resurrect the JCPOA, developments with Ukraine notwithstanding. However, if the price of oil decreases in the coming weeks, Russia could become concerned that a glut of Iranian oil could enter broader markets, depressing global petroleum prices. This could lead Russia to reverse course and undermine the implementation of any deal.
5. No Congressional Sanctions.
We expect Congress to pass a broad bill supporting Ukraine’s efforts in fighting off the Russian invasion, though we do not think a sanctions bill will pass. First, the Biden administration has already taken most of the actions prescribed in the sanctions bill proposed by Sen. Robert Menendez (D-NJ), obviating the need for legislative action. Second, sanctions at this point have become politically weaponized. Sen. Ted Cruz (R-TX) held upvotes on Biden’s State Department nominees over the administration’s refusal to pass mandatory sanctions on Nord Stream 2 (though he praised the imposition of such sanctions earlier this week). Republicans will continue to insist on mandatory sanctions and limited presidential waivers or determinations, to which the White House will likely object. Democrats will likely not want to allow Cruz to use mandatory sanctions as a cudgel against the administration. Democrats might also resist moving a tougher bill than what the White House has already done, since it would imply that the Biden administration’s response has been insufficient.
Finally, a sanctions bill would likely eat up precious floor time in the House and Senate as it tries to address competing priorities such as spending bills, Build Back Better, and judicial nominations. There is little benefit in spending time on a sanctions bill that would have no practical impact. For these reasons, we expect Congress to move a noncontroversial bill providing military and humanitarian assistance to Ukraine rather than take on sanctions legislation.
While Biden Deals With Russia, He Is Not Taking His Eyes Off Of China
As the Biden administration has been managing the global response to Russia’s aggression, the issue of how the US will approach its increasingly competitive relationship with China has been an issue lurking in the background. Last week, the administration released its long-awaited strategy to combat Chinese influence in the Indo-Pacific region, much of which hinges on forging closer ties with regional partners such as India. The administration also made a significant announcement regarding investment in rare earth minerals which are critical for an array of technologies and crucial for economic growth and innovation. We expect that the White House will announce details of the Indo-Pacific economic framework sometime next month. China remains the main US adversary, and White House officials believe Putin’s invasion is a distraction from that challenge. In the short term, the White House’s attention will be on Kyiv, but expect a continued push at the highest levels of government to demonstrate that no one is taking their eyes off China.
