|Russia is strong despite being bombarded with sanctions from the West|
It has been more than three months since Russia invaded Ukraine. Since the invasion of Ukraine, Russia has been heavily sanctioned by the West. The sanctions are meant to destabilize the Russian economy. However, the sanctions imposed on Russia seem to have no effect. Russia has not collapsed since the sanctions were imposed until now. The ruble had recovered and was now worth even more than before the invasion. The Kremlin's coffers overflow from record oil and gas sales. Even a new McDonald's has reopened in Russia, renamed under the ownership of the Siberian billionaire. Meanwhile, the Russian military continued to pound Ukraine with a steady supply of tanks and artillery. However, within the Ministry of Finance, a team of sanctions experts view resilience as a mirage. In an exclusive interview with CNN, top Treasury officials said they remained confident their sanctions would work.
They believe that beneath the surface, a far more dire story is unfolding in the Russian economy, where they argue that real and lasting damage is being done. "The US government has witnessed the narrative of 'Look at Russia -- look at the high value of the ruble, wow, Russia has really beaten these sanctions!' and we were like, 'No!' That's the wrong message to take,'" said a senior Treasury official, detailing the results of months of work they had put into sanctioning Russia. As top US military officials at the Pentagon watch the heated war unfold in Ukraine, a new era of economic warfare is underway.
The new era of war was waged by government lawyers, accountants, economists, and financial experts who worked hard behind a safe room without worrying about getting hit by a bomb. "They're like our nerdy warriors," said a senior administration official, smiling admiringly. Compared to extreme measures such as confiscating oligarchic yachts and sanctioning President Vladimir Putin's girlfriend, the elaborate maneuvers meant to destroy pillars of Russia's economy are carried out with less fuss. While the Kremlin has moved to show signs of economic stability, Treasury officials have taken more aggressive action, including a series of subtle moves late last month that froze trading in Russian bonds.
The move would almost certainly see Moscow default on its government debt for the first time since the Russian Revolution in 1918. However, Putin continues to call the sanctions unsuccessful.
He said in a speech on Friday that Western efforts to destroy the Russian economy were "unsuccessful." "There's a lot of energy to say this is all a hoax," said Andrea Gacki, director of the Treasury's Office of Foreign Assets Control, which serves as the spearhead for US economic governance. "But it's all smoke and mirrors," Gacki said in an interview from his office. "All real indicators point to weakness." Just before midnight on February 23, shortly before the first Russian missiles began landing in Ukraine, Elizabeth Rosenberg was still at her computer.
As the Treasury's top official for terrorist financing and financial crime, Rosenberg had spent weeks in a non-stop cycle back and forth between the safe rooms of the Treasury, rushing several hundred yards away to attend meetings at the White House or travel to finalizing technical details in European capitals. He is drafting a confidential memo outlining the final decision points and considerations for Treasury Secretary Janet Yellen to bring to a National Security Council meeting a few hours later. As Rosenberg was making edits to the document, a close aide looked over his shoulder. Soon, others walked straight towards Rosenberg with a solemn message: the first Russian missiles had entered Ukrainian airspace.
Moments later, the briefer returned. There are now over 30 recorded attacks, displayed on a heatmap for Rosenberg to view.
Soon, the briefer returned for the third time. There are now too many missiles to count. "Day zero," as US officials called the Russian launch day in their preparatory months, has arrived. Rosenberg rushed to put the finishing touches on the memo that would form the basis of what would be the most massive sanctions package ever targeting an economy as big as Russia. After months of arduous planning, overseas diplomatic negotiations and hours of technical discussion, the time has come for the sanctions to be rolled out.
The Treasury's sanctions experts are overseen by its Office of Terrorism and Financial Intelligence. Created after 9/11 to concentrate efforts on disrupting terrorist networks and their financiers, the office has grown to become a key tool of the government's national security apparatus. Unlike other countries, the US Treasury has its own intelligence apparatus in the Office of Intelligence and Analysis, meaning top Treasury officials have access to the same classified intelligence that drives decision-making for US military operations. Over the years, the mission of the Office of Terrorism and Financial Intelligence evolved, from targeting terror networks, international crime syndicates, and arms traffickers to rogue states and more dynamic threats to US national security.
However, nothing has matched the efforts made since Russia's invasion of Ukraine. Of the hundreds of people working inside the office, about two-thirds of them are assigned to deal with Russia, according to an official familiar with the unit's work. Along with examining classified intelligence, Treasury officials scrutinize a range of raw economic and market intelligence to guide and inform their strategy, which is rare in a world of sanctions, which have traditionally focused on closed economies or isolated from bad players.
Combined with unmatched cooperation across coalitions of Western allies, officials say they have an unprecedented real-time view of Russia's activities. "Because there is a significant priority of Russian concern in all of these jurisdictions in the world, what we have is a major acceleration in our operational capacity to work together, to share data, to share intelligence and law enforcement," Rosenberg said.
Rosenberg has been part of a team of US officials who have crossed the globe since the invasion to shore up sanctions compliance and enforcement with governments and the private sector. Within the Treasury's Office of Foreign Assets Control, some officials on the Gacki team focused solely on finding and preparing targets inside Russia. The targeters, as they are called, track companies and supply chains, cruise ships and aircraft, foreign currency reserves, and offshore assets. Then they find the most significant way to destroy them. "It's a very target-rich environment, and you can't say that about every sanctions program," said Gacki, who has served since 2008 and was twice awarded the Treasury's top honors for service.
For the Gacki team and their colleagues in the Treasury, the pace of work was relentless for months. Each new round of sanctions, which goes faster and further than the previous one, is immediately followed by new directions to find new targets, new options, new strategies to create pain for Putin. "I think what people here really feel is that this is our moment -- that this is where we can really make a difference in what we do," said Gacki.
Putin has spent years building his defenses, accumulating hundreds of billions in foreign currency reserves, bringing Russia's many industrial bases under state control and selling Russia's vast energy resources to the world. Putin also has a secret weapon: a 58-year-old Russian economist named Elvira Nabiullina, who has headed Russia's central bank since 2013.
US officials reluctantly admit that Nabiullina has done an effective job of managing Russia through this early phase of sanctions, as she did in 2014 after Putin's annexation of Crimea sparked a round of far lighter sanctions from the West. This time, Nabiullina deftly raised interest rates, imposed capital controls, and looked for holes and solutions to float the beleaguered economy. Above all, those measures have strengthened the ruble in recent months after it fell into free fall during the first days of the invasion. Among Biden administration officials, Nabiullina is perhaps seen as the most effective of all of Putin's top lieutenants. Treasury has something of a secret weapon of its own in Yellen. As chairman of the Federal Reserve between 2014 and 20018, Yellen overlapped for a term with Nabiullina.
While the two had no relationship beyond a brief interaction or two at the conference, Yellen was well aware of her background and work. More critical, however, was Yellen's unparalleled understanding of the central bank itself, which led to her deep involvement on the front end of the sanctions design. As negotiators work through the potential options, Yellen gives her views on what will have the most acute and immediate impact. Yellen also delivered a critical message to her foreign counterparts as they consider a dramatic escalation to their sanctions plans.
The US has information that Russia is trying to move assets to escape possible sanctions, the source said. Speed is very important. Yet, as amazing as many officials have seen the scale of the initial attack on the Russian economy, Nabiullina's ability to engineer a display of stability has raised new questions about the true extent of the sanctions touted by leaders across the trans-Atlantic alliance.
High-stakes play, that's what sanctions experts at the Treasury say. Looking beneath the surface, they argue, reveals real and lasting damage designed to accelerate over time. Gacki and his colleagues also believe there are limits to what Nabiullina can do to stop the bleeding. They deliberately build equal triggers -- plus the power to withdraw them without even launching new sanctions -- to undermine actions they deem possible. They have been observing every response and methodically, and over the course of several months, taking steps to counter Russia's actions and tighten their gaze on key economic levers.
New sanctions in recent weeks have targeted things like accounting and management consulting services, which come as U.S. officials say they have tracked Russia's efforts to set up third-party shell and vehicle companies as solutions to procure much-needed components for their defense industry. "There's a cat and mouse aspect to this," said Glaser, a former Treasury official. "Your adversaries respond and then you have to respond to them. The debate over how to increase economic suffering continues within the Biden administration." The US has prepared secondary sanctions, which would be a significant escalation, but so far the US has not pulled the trigger amid internal debates weighing the economic consequences and fractured alliances.
A list of top financial, political and military officials who have not been sanctioned is also ready, people familiar with the matter said. Some are the subject of inter-agency debate weighing complex realities such as whether "pulling the trigger" will be "harming certain markets or the jobs of US workers." Finance officials have been quietly, but deeply, engaging with their European counterparts to devise mechanisms to reduce Russia's soaring oil and gas revenues, officials said. There is a particular US focus on the technical aspects of EU countries coming together to impose price caps on Russian income.
While the short-term effects of a sovereign debt default will likely be limited, the move would cut Russia off from international financial markets - locking in acute isolation just as Western sanctions begin to cut Russia off access to critical components like microchips.
It would also send a strong political message meant to counter Putin's claims to weather the storm of sanctions - and undermine his former pride that Russia always pays its debts. "Basically, we're trying to make a hole in the Russian public narrative that keeps trying to say they're strong when they're not," said a senior Treasury official. "It's kind of like pulling back the curtain and saying really, the Russian economy is not healthy."