Episode 526: A Planet Money War

Mar 21, 2014

There are reportedly tens of thousands of Russian troops on the eastern Ukrainian border. The Russians have already taken control of the Crimean Peninsula; what was once Ukraine is now Russia. But, the United States and the rest of Europe refuse to recognize this. There might be an actual war soon, but not this week. For now, the battle is financial.

On today's episode: how to use money as a weapon. Can you stop one of the biggest militaries in the world with sanctions?

Music: Kanye West's "Power." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2016 NPR. To see more, visit http://www.npr.org/.

ROBERT SMITH, HOST:

You know, Zoe, this week has made me feel like a reporter back in the Cold War. Like, just following the news - there are tens of thousands of Russian troops on the eastern Ukrainian border. There are tanks, artillery, special forces.

ZOE CHACE, HOST:

The Russians have already taken control of the Crimean Peninsula. What was once Ukraine, it is now Russia. The United States and the rest of Europe refuse to recognize this. Ukraine has moved their own tanks towards the new Russian border.

SMITH: It looks like the Cold War out there on the Black Sea.

CHACE: There might actually be a war soon, but not this week. This week, the battle is financial. The maneuvers are economic. Right now, the United States is fighting a Planet Money war. Hello. Welcome to PLANET MONEY. I'm Zoe Chace.

SMITH: And I'm Robert Smith. Today, how do you use money as a weapon? Can you stop one of the biggest militaries in the world with sanctions?

(SOUNDBITE OF SONG, "POWER")

KANYE WEST FT DWELE: (Singing) Oh, hey, oh, hey, oh...

CHACE: So Russia moves into Crimea. They have guns. They have tanks. They have big scary army guys.

SMITH: The United States has a list. Yeah, I have it right here. This is a blacklist. You do not want to be on this list.

CHACE: This is a list of names of people that the United States will no longer do business with. So people like Viktor Ivanov - he's now director of the Federal Drug Control Service of the Russian Federation. But he also was Putin's chief of staff when Putin was mayor of St. Petersburg in 1994. And all of those details are on the list. And there's people like Vladimir Yakunin. He is head of the Russian state-owned company Russian Railways.

SMITH: The list includes Vladimir Putin's circle of best friends. There's an energy trader on there, a pair of brothers who got billions of dollars in contracts for the Olympics in Sochi. And this list is how the process of putting sanctions on a country begins. When you hear the word sanctions, you might think, oh, yeah, Cuba, North Korea, a total ban on everything that comes out of a country. But sanctions don't usually start as an all-or-nothing proposition.

CHACE: It's more like a game, a chess match. There are moves and counter moves. So we're going to begin with the Obama open.

SMITH: A classic.

CHACE: This is the list. And this is step one - punish just the people who actually did the thing that you're mad about. For instance, Sergey Aksyonov. He is the first guy on this list. He actually goes by an alias, Goblin. He is a former boxer. He's a reported wrestling enthusiast. He's also the guy the Russians backed to take over as Crimea's prime minister. And he was psyched about that.

(SOUNDBITE OF ARCHIVED RECORDING)

SERGEY AKSYONOV: (Foreign language spoken).

CHACE: "We are going back home to Russia, my comrades," he says.

SMITH: So the Goblin is first on the list of sanctioned individuals. And that means that any bank accounts he has in the United States or really around the world will be frozen. He can't travel here. He can't do any business with the United States. So when the Goblin runs out of cash and goes to the Crimean 7-Eleven to pull out some money, what happens?

TREVOR HOUSER: If he was to go to a Crimean ATM that had a Visa logo on it and try to access cash that was held in an American bank, it would say access denied.

CHACE: This is Trevor Houser, energy analyst. He says this move makes life pretty inconvenient for the Goblin. If he's like most of the guys on this list, he probably does have money stashed away somewhere that is not Russia that he can no longer get to.

SMITH: So the Obama opening - 11 names on a first list, 60 names on a second list. European Union has their own set of names. The Putin defense was to put out his own list. And I have it here. These are Americans that are no longer welcome in Russia.

CHACE: Our own Goblin.

SMITH: Speaker of the House John Boehner, Senate Majority Whip Dick Durbin, Senator John McCain.

CHACE: Here's what McCain had to say about that. I guess this means my spring break in Siberia is off, my Gazprom stock is lost and my secret bank account in Moscow is frozen.

SMITH: As you could tell, nothing changed after these opening moves. Russian officials made fun of the list. Putin did not blink on Crimea. He said all those people there, they're all Russians now.

CHACE: OK, so you might think, well, that didn't work at all. But remember, this is just the first move. This is the first step in a very long game.

HOUSER: Yeah, this is what puts people on notice. The second step is to expand the list and to expand it either to include more individuals or to include companies.

CHACE: Step two - go after the companies. Put the names of businesses on the blacklist. It's harder to hide a company than it is a secret bank account. And a business can also be complicit here, say, a Russian company that's making military equipment used in Crimea.

SMITH: So the theory is that you stop not just the individuals but the way that they make their money. And this is actually a really powerful tool. It's a powerful tool when wielded by the United States. And that's because the U.S. plays a very particular role in the financial system. The majority of international trade is conducted in dollars. So once you put a Russian company on a sanctions list, it's not easy for them to trade anything anywhere in the world.

HOUSER: So let's say I'm a Russian nickel manufacturer and I'm exporting some nickel to a consumer in Latin America, it's entirely possible that I'm going to do that trade in dollars and I'm going to settle that trade through a U.S. bank, right? Now, even though there's not an American consumer on the other end of that deal, the bank facilitating that trade is not going to be willing to do it if one of the entities involved is on the sanctions list.

CHACE: Because they're not supposed to handle any dollars.

HOUSER: Correct.

CHACE: The power of the U.S. dollar is the big stick. And as we were putting this show together, this week, Obama pulled out that stick. Obama decided to go after more than just the individuals, the cronies.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT BARACK OBAMA: The United States is today moving, as we said we would, to impose additional costs on Russia.

SMITH: Obama added more names to the blacklist, and then the very first company.

(SOUNDBITE OF ARCHIVED RECORDING)

OBAMA: As well as a bank that provides material support to these individuals.

CHACE: This is Bank Rossiya in St. Petersburg. This is a notorious bank. It is not an ordinary bank. One of the guys who used to work there actually left a few years ago and leaked a bunch of documents to The Financial Times, so there's a fair amount of reporting out there about Bank Rossiya. And apparently this bank basically serves to funnel money from the huge Russian oil company Gazprom straight into Putin's pocket via one of Putin's best friends, this guy Yuri Kovalchuk. He's the largest shareholder in the bank, and he is also on the blacklist.

SMITH: Now, here's the message that Obama is sending - this is just the first company on the list, the very beginning of step two. The way this works, the threat is that Obama will put another company on there next.

CHACE: Then tighten the screws and add more companies.

SMITH: First, your personal bank, Mr. Putin.

CHACE: Then whole sectors of the economy.

SMITH: And we hear from White House officials what those sectors might be - financial services companies, energy, the mining sector.

CHACE: Don't make me do it.

SMITH: This is what Obama seems to be saying. He's basically saying to Mr. Putin, it would be really unfortunate if something bad were to happen to your beautiful mining sector.

(SOUNDBITE OF ARCHIVED RECORDING)

OBAMA: I signed a new executive order today that gives us the authority to impose sanctions not just on individuals but on key sectors of the Russian economy. This is not our preferred outcome. These sanctions would not only have a significant impact on the Russian economy but could also be disruptive to the global economy.

CHACE: President Obama is hoping that this threat is enough. He essentially says, if you keep gobbling up Ukraine, we will take more and more of your dollars away. If you back off, we'll ease the pain.

SMITH: But is this enough? I mean, do these sanctions actually stand a chance of working? If you followed U.S. history, world history, you know that sanctions don't have the greatest reputation as a policy tool.

CHACE: Just look at Cuba, North Korea, Iraq, countries that either haven't changed in 50 years or only change when there was an actual war.

SMITH: And I actually did a podcast a couple years ago with Adam Davidson about this subject. And we talked to this guy Gary Hufbauer at the Peterson Institute. And Gary had just written a book about a hundred years' worth of sanctions, the entire 20th century. And he looked at each one, what the goals were, and did they accomplish them? And he found that sanctions work about 30 percent of the time. And the kind of places where they work, they're small countries with conflicts you probably haven't heard much about, like Guinea. Sanctions, he says, are much more difficult to impose on big, powerful countries.

CHACE: We called Hufbauer back this week, and he said, you know, there is a recent example - very recent - of sanctions working, a model of sorts for how the West could get what they want from Russia. This is the sanctions against Iran to encourage them to get rid of their nuclear program.

GARY HUFBAUER: Well, frankly, I'm somewhat surprised that they have been as successful as they have. And so why - or how can we explain that? It's successful in terms of changing the popular mood or solidifying the popular mood in favor of a new approach. Well, what we really want is an end to the nuclear program.

SMITH: What the U.S. did in the case of Iran, what really surprised Gary Hufbauer was that the U.S. was much more effective than it's been in the past at wielding financial sanctions.

HUFBAUER: Basically blocked virtually all Iranian banks from the Western banking system. Make it very hard for Iran to buy or sell anything from the rest of the world.

CHACE: The key, Hufbauer says, was the worldwide cooperation to enforce these sanctions. Few countries will deal with Iran directly. And because Iran is fully cut out of the dollar, it's actually hard practically speaking to sell its oil. So Iran barters oil for other stuff, which turns out to be this very expensive workaround to have to maneuver around the dollar in every step of a big transaction. And the U.S., Europe, China, South Korea, even Russia, they have all been cooperating on this.

SMITH: And as a result, this very week in fact over in Vienna, Tehran sat down with Washington and the EU and Russia - even though they're occupied with other concerns right now - and everyone discussed the mechanics of winding down parts of Iran's nuclear program. I mean, this showed at least some measurable success from sanctions.

CHACE: One advantage that the U.S. has with Russia right now is that Russia knows how much sanctions can hurt.

SMITH: They look at Iran.

CHACE: Because they're right on the other side of the table from Tehran at the same time. Now, Hufbauer says he has some hope that sanctions can work in a similar way with Russia. All those guys on the blacklist, they were chosen in part because they're tight with Vladimir Putin. They have Putin on their speed dial, for sure. The last thing they want is the kind of financial pain that Iran has.

HUFBAUER: And, you know, they're not going to suffer a great deal for being on the list. But if Russian shares drop another 20 percent and if the ruble goes down another 15 percent, if they can't sell anything in the West, well, then they are really going to hurt. And they know it. And so they would be, I'm sure, whispering or urging him, you know, we've done a great job at Crimea. Let's just...

SMITH: Let's stop here.

HUFBAUER: Enjoy that - yeah, enjoy our success.

SMITH: Because nobody wants to get to step three in the sanctions game, the Cold War - a total trade embargo. The U.S. and Europe would stop buying all Russian stuff - Russian oil, Russian vodka, Russian caviar. Russia would presumably respond in the exact same way. They wouldn't buy American electronics or American airplanes. This result, this total economic Cold War is so painful that no one is even talking about it right now. But that is the logical end of the sanctions game.

CHACE: Hufbauer says that sanctions work best to stop something bad from happening in the future. It's much harder to get a country to reverse its actions. Like Crimea, that is Russia's now. Sanctions probably cannot get them out. But sanctions could be more successful at keeping Putin out of the rest of Ukraine.

SMITH: There is another way this could play out, too. Vladimir Putin could ignore all of these sanctions - step one, two and three - and move further into Ukraine anyway. And if that happens, Hufbauer says that sanctions might actually help Putin's cause because U.S. sanctions would become this sort of rallying cry for Putin against the West and for Russia to stand up to Western powers.

CHACE: Remember Napoleon.

SMITH: Remember Stalingrad.

CHACE: And if that's where this standoff goes, then sanctions only accelerate Putin. They do not slow him down.

(SOUNDBITE OF SONG, "POWER")

KANYE WEST FT DWELE: (Singing) I'm living in that 21st century, doing something mean to it. Do it better than anybody you ever seen do it. Springsteen...

CHACE: As always, we want to hear what you thought of the show today. You can email us - planetmoney@npr.org.

SMITH: Or you can find PLANET MONEY on Facebook or Twitter.

CHACE: I'm Zoe Chace.

SMITH: And I'm Robert Smith. Thanks for listening.

(SOUNDBITE OF SONG, "POWER")

KANYE WEST FT DWELE: (Singing) I see you in the morning. Huh? I see you in the morning. This is way too much. I need a moment. Transcript provided by NPR, Copyright NPR.