[Senate Hearing 115-15]
[From the U.S. Government Publishing Office]
S. Hrg. 115-15
ASSESSING U.S. SANCTIONS ON RUSSIA: NEXT STEPS
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE EXISTING RUSSIAN SANCTIONS ARCHITECTURE IN TERMS OF ITS
EFFECTIVENESS AND ECONOMIC IMPACT AND ASSESSING WHAT CORRECTIVE ACTION,
IF ANY, THE UNITED STATES SHOULD TAKE IN LIGHT OF RECENT DEVELOPMENTS
INVOLVING RUSSIA'S ACTIONS IN UKRAINE, SYRIA, AND WITH CYBER ATTACKS
TARGETED IN THE UNITED STATES
__________
MARCH 15, 2017
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
John V. O'Hara, Chief Counsel for National Security Policy
Kristine Johnson, Professionl Staff Member
Sierra Robinson, Professional Staff Member
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Colin McGinnis, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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WEDNESDAY, MARCH 15, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Elizabeth Rosenberg, Senior Fellow and Director, Energy,
Economics and Security Program, Center for a New American
Security....................................................... 4
Prepared statement........................................... 32
Eric B. Lorber, Senior Advisor, Center on Sanctions and Illicit
Finance, Foundation for Defense of Democracies................. 6
Prepared statement........................................... 44
Responses to written questions of:
Senator Toomey........................................... 70
Senator Tillis........................................... 71
Rodney D. Ludema, Ph.D., Associate Professor, School of Foreign
Service and Department of Economics, Georgetown University..... 7
Prepared statement........................................... 67
(iii)
ASSESSING U.S. SANCTIONS ON RUSSIA: NEXT STEPS
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WEDNESDAY, MARCH 15, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:23 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
Today we will examine the existing Russian sanctions
architecture in terms of its effectiveness and economic impact
and assess what corrective action, if any, the United States
should take in light of recent developments.
Three years ago this week, Russia solidified its actions in
Crimea by illegally annexing the Ukrainian territory and moving
the fight to its eastern border regions.
In response, the United States, the European Union, and
several other allied countries imposed several rounds of
targeted economic sanctions against Russia. And 2 years ago,
the Obama administration imposed a separate set of sanctions
against Russia in response to its malicious cyber-enabled
information warfare activities.
Today the Committee will hear testimony on the effect and
utility of these U.S.-imposed sanctions and the potential for
next steps.
The existing U.S. sanctions against Russia pertaining to
the Ukraine were designed to change Putin's behavior.
Authority for the sanctions is found in a series of four
Executive orders issued in 2014, as well as in the Ukraine
Freedom Support Act, which was signed into law in December of
that same year.
These authorities prescribe asset freezes and transaction
prohibitions with specific Russian individuals and entities
with ties to the Kremlin, including a bank, businesses tied to
Putin, and a state-owned defense company.
Sanctions also include restrictions on financial
transactions, such as 1- to 3-month restrictions on debt
maturities of Russian firms operating in the financial
services, energy, and defense sectors.
The United States also restricts its individuals and
entities from exporting oil-related goods, services, and
technology in support of deep water, Arctic offshore, or shale
projects in the maritime areas claimed by Russia.
Pursuant to these measures, the United States Department of
Treasury has identified and designated more than 520
individuals and entities for their sanctionable activities.
Those persons designated are subject to the blocking or
freezing of assets under U.S. jurisdiction, prohibitions on
transactions with U.S. persons, and visa denials.
During the last 3 years, Russia was stung by the twin
shocks of international sanctions and low oil prices. This was
compounded by Russia's own ill-conceived retaliatory measures.
As a result, Russia is now challenged by a contraction of
economic growth, capital flight, depreciation of the ruble, a
higher rate of inflation, budgetary pressures, drawing on its
international reserves, and more widespread poverty generally.
Yet Russia remains a hostile, recalcitrant power, deploying
its military, cyber-enabled information espionage activities,
and economic tactics to harm the United States and drive a
wedge between it and its allies.
With all this in mind, I trust the witnesses today will
help the Committee understand the impact of the existing
sanctions generally, and discuss where the real pressure points
are in Russia's economy, the costs of inaction, and any
associated unintended consequences that could arise if
sanctions were imposed either unilaterally or too rapidly.
The extent to which the sanctions on Russia alone
contributed to its economic downturn is an important question
in terms of preserving the existing sanctions or expanding the
breadth of existing sanctions.
One thing is clear: Any reduction to the level of sanctions
in the absence of a corresponding shift in Russian behavior
will be interpreted as a change in U.S. policy on Russia's
involvement in Ukraine, and that would run counter to the norms
of international law and give Russia license to engage in
further adventurism.
Russia must be held accountable for its actions, and if
sanctions are to be a part of that strategy, they must be
targeted and staged appropriately according to a set of
realistic conditions.
With that, I conclude my opening statement and turn to
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Sorry for being
late.
Thanks for calling this hearing. Thanks for your
willingness to explore on a bipartisan basis how the current
U.S. and multilateral sanctions regime is working and possible
next steps to strengthen it while preserving unity with our
allies. Congress has worked together to craft the current U.S.
sanctions regime and to hold Russia accountable for a long line
of misdeeds from its violations of international law and of the
sovereignty and territorial integrity of Ukraine to its role in
the brutal repression of the war in Syria and its cyber attacks
on the United States, including U.S. elections.
More recently, Russia has engaged in efforts to influence
our elections and systematically sowed disinformation here at
home. We should focus now on what the Committee might do to
strengthen our response to Russia for the actions I mentioned
and for its continuing efforts to destabilize states in Europe,
including the Balkans and beyond.
Russia's interference in our election, confirmed
unanimously by the U.S. intelligence community in a
declassified report, as we know, in early January, poses a
problem that goes far beyond foreign policy and strikes at the
core of our democracy. As the joint report makes clear, there
is no disagreement within the U.S. intelligence community about
what happened here. None. Zero. They wrote:
Russian efforts to influence the 2016 U.S. Presidential
election represent the most recent expression of Moscow's
longstanding desire to undermine the U.S.-led liberal
democratic order . . . these activities demonstrated a
significant escalation in directness, level of activity, and
scope of effort compared to previous operations.
We assess Russian President Vladimir Putin ordered an influence
campaign in 2016 aimed at the U.S. Presidential election.
Russia's goals were to undermine public faith in the U.S.
democratic process, denigrate [Democratic candidate] Secretary
Clinton, and harm her electability and potential presidency. We
further assess Putin and the Russian Government developed a
clear preference for President-elect Trump. We have high
confidence in these judgments.
Those were words from the U.S. intelligence community.
The report went on to note that similar efforts would
likely be undertaken by Russia against U.S. allies and others.
``We assess Moscow will apply lessons learned from its Putin-
ordered campaign aimed at the U.S. Presidential election to
future influence efforts worldwide, including against U.S.
allies and their election processes.''
While we have begun to impose sanctions for Russia's cyber
attacks, we have not yet responded to the interference with our
electoral process. The Ukrainian community, rather large in
Ohio, and around the world, knows firsthand the dangers of
unchecked Russian aggression. We should strengthen, not weaken,
Russian sanctions, and the President must work with Congress on
a Russia
policy that is clear-eyed about our adversaries and their
behavior.
In Syria, the U.N. and others have charged Syrian military
units and allied Russian forces with war crimes, including
attacks on hospitals and an aid convoy, and indiscriminate
bombing of civilian populations in eastern Aleppo.
The recent escalation of violence by Russian-based
separatists in eastern Ukraine and the lack of a consistent
policy to deter further Russian aggression is also dangerous.
Since Putin's illegal annexation of Crimea in 2014, 3 years
ago this week exactly, there have been at least 10,000 dead,
20,000 wounded, 2 million internally displaced, according to
the U.N. The situation remains unstable with some 300,000
cease-fire violations in 2016, according to the Organization
for Security and Cooperation in Europe.
It seems clear from the surge of violence since the U.S.
elections that Russia is testing our resolve to support the
Ukrainian Government and people. We must leave no doubt that
Russia must comply with the Minsk agreement. Until it does,
Russia deserves no sanctions relief for the conflict it created
and continues to fuel.
I hope the President ends any ambiguity in our policy in
both his words and the vigorous enforcement and strengthening
of current sanctions. All of us in both parties are very
concerned about what the President has done or not done so far.
So far, he has sent mixed signals. On the one hand, he raises
questions about moral equivalence between the United States and
Russia and flirts publicly with relaxing Russian sanctions. On
the other hand, he has said he intends for now to maintain U.S.
sanctions, and U.N. Ambassador Haley has condemned Russian
aggression in Ukraine.
Today we are joined by three sanctions experts who will
help us assess where we are and what effects the current
sanctions regime is having on the economy and the behavior of
Russia. We will also discuss how stricter sanctions
enforcement, closing administrative loopholes, strengthening
statutory requirements where appropriate, and other measures
can send a clear, unambiguous signal of our resolve.
I welcome the witnesses and thank the three of you for
joining us.
Chairman Crapo. Thank you very much, Senator Brown.
I would like to remind all of our Senators today to try to
stay very close to the 5-minute time limit. We have a hard stop
at about 5 minutes to 12, and I think we will have a lot of
interest in this hearing, and so I encourage us all to pay
close attention to the time restrictions.
And to our witnesses, I ask you to please pay attention to
the 5 minutes as well. I know that you are not going to be done
with everything you have to say in 5 minutes, but you are going
to have a lot of opportunity with questions to get into it all.
Today we are joined by three excellent witnesses. First we
will receive testimony from Ms. Elizabeth Rosenberg, who is the
Senior Fellow and Director of the Energy, Economics, and
Security Program at the Center for a New American Security.
Next we will hear from Mr. Eric Lorber, who is a Senior
Advisor at the Center on Sanctions and Illicit Finance at the
Foundation for Defense of Democracies.
And, finally, Dr. Rodney Ludema, Associate Professor of
Economics at Georgetown University, will give us his assessment
of the economic impact of the current sanctions regime.
Ms. Rosenberg, you may proceed.
STATEMENT OF ELIZABETH ROSENBERG, SENIOR FELLOW AND DIRECTOR,
ENERGY, ECONOMICS AND SECURITY PROGRAM, CENTER FOR A NEW
AMERICAN SECURITY
Ms. Rosenberg. Thank you. Chairman Crapo, Ranking Member
Brown, and distinguished Members of this Committee, thank you
for the opportunity to testify today on Russia sanctions.
U.S. and European sanctions imposed on Russian entities and
individuals since 2014 have been remarkably innovative and
forceful. Responding to Russia's aggression in Ukraine, they
powerfully demonstrate transatlantic unity, and they have
delivered economic leverage. Their impact was augmented, as was
noted, by an oil price collapse and Russia's resulting loss of
hard currency.
Additional recent U.S. sanctions have exposed Russia's
human rights record, its destabilizing involvement in Syria,
and its insidious cyber intrusions into U.S. institutions and
political processes.
The recent record of Russian economic performance
demonstrates a period of distress. From the beginning of 2014
to December 2016, Russian external debt shrank from $729
billion to $519 billion, and officials drew down the Reserve
Fund from $87 billion to $16 billion. Russian officials slashed
state spending in education, health care, and defense, and
allowed the ruble to plunge in value. Capital fled Russia,
roughly $210 billion in 2014 and 2015 combined, and GDP
contracted from 0.7 percent in 2014 to negative 3.7 percent in
2015. It recovered last year but remained negative.
Russian officials, including President Putin, have
acknowledged that sanctions hurt Russia. They were a meaningful
contributor to Russia's agreement to the Minsk accords, and
Russia, arguably,
refrained from more expansionist territorial aims because of
sanctions pressure.
However, the force of sanctions has diminished over time as
investors have adapted to lower oil prices, the Russian economy
stabilized and U.S. and EU leaders have not kept up sanctions
pressure. In 2016, Russian capital flight was one-tenth of the
2014 record. Russian economic growth is expected to rebound to
just over 1 percent in 2017. Russia expanded its already
massive energy output by 4.4 percent between January 2014 and
January 2017, taking advantage of higher prices to draw in
critical new revenue streams.
A primary reason for declining sanctions effects is a lack
of their maintenance by the United States and the European
Union. In particular, European leaders have struggled over the
last 2 years to hold the line on sanctions, doubting their
utility and advisability in some instances.
Now, political signals from the new U.S. administration as
well as from nationalist political leaders in Europe that a
warmer relationship with Russia may be forthcoming indicate to
the private sector that sanctions are weakening further. Russia
has actively taken advantage of this crumbling resolve on
sanctions. Through military posturing, media and cyber
manipulation, and economic interventions, President Putin has
been transparently engaged in a reproach of Western interests
and Western unity.
U.S. leaders are now contemplating policy toward Russia,
including sanctions measures. The White House has not yet
outlined a definitive strategy with the Kremlin or European
allies. Congress is in the position to enhance pressure on
Russia in response to
increasing aggression in eastern Ukraine and Russia's cyber
interference in the United States.
Legislators can lead on the direction for an updated
sanctions
response and set the tone for diplomacy toward European allies
and Russian counterparts. To maintain effective sanctions, U.S.
and European leaders must closely coordinate. This will be
difficult, but the alternatives--stasis or conflicting
sanctions policy, delivers economic and political benefits to
President Putin and undermines U.S. interests. It is far
preferable to maintain Western economic leverage with Russia
and negotiate from a position of strength. In this context,
U.S. leaders, with Congress at the fore, must proactively
update sanctions and forge new transatlantic coordination on
this critical policy challenge.
Thank you for the opportunity to speak with you this
morning, and I look forward to your questions.
Chairman Crapo. Thank you very much.
Next we will hear from Mr. Lorber.
STATEMENT OF ERIC B. LORBER, SENIOR ADVISOR, CENTER ON
SANCTIONS AND ILLICIT FINANCE, FOUNDATION FOR DEFENSE OF
DEMOCRACIES
Mr. Lorber. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Senate Committee on Banking,
Housing, and Urban Affairs, I am honored to appear before you
today to discuss U.S. sanctions on Russia.
I would like to focus my testimony on the effectiveness of
the current U.S. sanctions targeting Russia, as well as what
the United States can do to responsibly ramp up economic
pressure to convince Moscow to cease destabilizing activities
in eastern Ukraine, stop committing human rights abuses, and
reduce malicious cyber
activities targeting the United States and its allies.
To date, U.S. sanctions on Russia have a mixed record of
success. Many macroeconomic indicators and recent studies
suggest that the sanctions have had an impact on overall
Russian economic health. Likewise, Russian Government officials
repeatedly push for sanctions relief, both in public statements
and by trying to undermine EU sanctions, suggesting that Russia
is feeling the pinch.
Nevertheless, the United States has not achieved many of
the core objectives it sought when deploying these tools, and
Russia continues to engage in threatening activity across a
range of areas.
In eastern Ukraine, Russian-backed forces continue to
violate the cease-fire, routinely attacking Ukrainian villages
and military personnel. Moscow also continues to target
opposition leaders, often with lethal means.
In the cyber realm, Russia has continued its efforts to
influence and undermine U.S. allies, in recent months focusing
these efforts on upcoming elections in Western Europe.
Beyond the activities for which the United States has
imposed sanctions, in Syria, Russia continues to support
President Bashar al-Assad with direct military intervention,
including during the Syrian Government's brutal assault on
Aleppo.
This Committee should make no mistake; Russian activity in
these areas poses a serious threat to U.S. interests, and the
United States should be prepared to use all elements of its
national power--including its economic power--to blunt Moscow's
ability to undermine U.S. interests at home and abroad.
Additional, responsibly crafted U.S. sanctions can be a
powerful tool to impact Russia's decisionmaking. Specific types
of sanctions that, if properly calibrated, could be
particularly effective in increasing the pressure on Russia
include:
The codification of certain executive orders, as well as
additional statutory designations under these EOs;
Establishment of a FinCEN-led task force to identify and
seize assets of targeted Russian persons, including those with
close to ties to Russian President Vladimir Putin;
Certain restrictions related to the purchase or
facilitation of Russian sovereign debt;
And certain primary and secondary sanctions on elements of
Russia's oil and gas industry.
However, any new sanctions on Russia must take into account
four important considerations.
First, while additional sanctions are appropriate, Congress
should be wary of imposing sanctions that are too powerful. If
the United States attempts to impose broad, Iran-like sanctions
on Russia that target large swaths of the Russian economy, this
could limit critical European willingness to participate in our
sanctions campaign.
Similarly, such sanctions could do serious damage to the
Russian economy in ways that actually threaten our interests.
While we want to pressure Russia to cease its activities,
destroying the Russian financial system or cratering its
economy would have worldwide impact, threatening markets across
the globe.
Second, Congress should think through how it can unwind
sanctions pressure in the case that Moscow--even partially--
changes its behavior. As we have learned over the past few
years, unwinding sanctions can often be a difficult and fraught
process. Any such new sanctions legislation could include
built-in ``off ramps''--namely, elements of the sanctions
regime, such as specific designations or directives--that could
be undone in a situation of partial Russian compliance with its
various obligations, such as those under the Minsk agreements.
Such partial sanctions relief could be traded for Russian
fulfillment of these obligations, and this approach, while not
achieving all of our objectives certainly, could help the
United States limit challenges to U.S. interests.
Third, any such sanctions must be nested in a larger
strategy of pressuring Moscow, including aggressive diplomacy
and responding in kind to malign Russian activities such as
offensive cyber operations. Sanctions are a means to an end,
and Congress and the
Administration must be clear as to what that end is and how
they intend to achieve it. Ramping up economic pressure on
Moscow without clear objectives, the employment of other
coercive tools, and buy-in from the Administration is unlikely
to be effective in getting Moscow to fully change its behavior.
Fourth, the United States must be prepared to address
Russian retaliation for these sanctions, including in the form
of countersanctions, increased cyber attacks, and even kinetic
action in ways that threaten U.S. interests.
Congress has a key role to play in ramping up pressure on
Moscow, and the various sanctions proposals put forth in recent
weeks are excellent steps in this direction. I look forward to
discussing these proposals during the question-and-answer
session.
Thank you.
Chairman Crapo. Thank you very much.
Dr. Ludema.
STATEMENT OF RODNEY D. LUDEMA, Ph.D., ASSOCIATE PROFESSOR,
SCHOOL OF FOREIGN SERVICE AND DEPARTMENT OF ECONOMICS,
GEORGETOWN UNIVERSITY
Mr. Ludema. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Committee, thank you for the
opportunity to testify at today's hearing assessing U.S.
sanctions on
Russia. My name is Rodney Ludema, and I am a Professor of
Economics at Georgetown University.
Earlier this year, my co-author Daniel Ahn and I published
a
report titled, ``Measuring Smartness: Understanding the
Economic Impact of Targeted Sanctions,'' and I would like to
take this opportunity to share some of the conclusions of that
study with you.
As you know, Russian intervention in Ukraine in early 2014
prompted the United States and the European Union to impose
series of targeted sanctions aimed at specific individuals,
companies, and transactions believed to be involved in the
illegal annexation of Crimea and the ongoing crisis in eastern
Ukraine. Sanctions of this type are often referred to as
``smart,'' and their defining
feature is that they seek to impact their intended targets with
minimal collateral damage.
Our study seeks to understand just how ``smart'' these
sanctions have been in practice, and what we find is that the
sanctions have indeed inflicted significant damage on the
intended targets, with relatively little short-run impact on
the overall Russian economy or on neighboring economies such as
the European Union.
Just to put sanctions a little bit in context, decades of
experience with economic sanctions indicate that sanctions are
most effective at altering the behavior of the targeted
government when they are multilateral, focused, sustainable,
and clearly contingent on an achievable goal.
Smart sanctions are meant to achieve these ends. They are
focused because they target the government and its domestic
constituencies responsible for the offending policy rather than
the general population, which may have little political
influence.
They are sustainable because by minimizing collateral
damage, they lower the cost to the countries imposing them, and
this is
especially important when we are talking about a target country
that is large and internationally integrated, such as Russia.
So how do we go about assessing the smartness of Russian
sanctions? First, we look at the sanctioned companies
themselves. All told, we were able to find 584 companies that
are either listed by the United States or the European Union in
one or more of their sanctions lists or are associated with
individuals on those lists. In addition, there are another
2,000 or so subsidiaries of these companies.
Our method is to compare the performance of sanctioned
companies to nonsanctioned peer companies before and after the
sanctions were imposed. Our main finding is that sanctioned
companies are indeed harmed by sanctions relative to their
nonsanctioned peers. On average, a sanctioned company loses an
estimated one-third of its operating revenue, over half of its
asset value, and about one-third of its employees after being
sanctioned compared to nonsanctioned companies. These estimates
suggest that the targeted sanctions do indeed have a powerful
impact on the targets themselves.
The second part of our study estimates the collateral
damage. In particular, we consider the impact that the
sanctions have had on Russian GDP and on Russia's imports from
the European Union. The challenge in doing this is the fact
that the conflict coincided with a series of powerful
macroeconomic shocks, most notably an enormous decline in the
price of oil, which is Russia's main export.
We find that the vast majority of the decline in Russia's
GDP and the vast majority of its import demand from the
European Union is caused by the decline in the price of oil and
other
long-term trend factors, with very little left to be explained
by sanctions or other short-term factors. Thus, we conclude
that either sanctions have had only a small negative effect on
Russia's GDP, as they were designed to do, or other positive
factors coincident with sanctions largely canceled out their
effect.
Finally, we find that sanctions have had only a small
effect on the economies of most European countries. Adding
together the impacts of sanctions imposed on Russia along with
Russia's retaliatory countersanctions on agricultural products,
we find that EU exports declined only slightly, causing less
than two-tenths of 1 percent reduction in the GDP of the median
EU country.
Those are the results of our study, and I am happy to
entertain questions about that in the Q&A session. Thank you.
Chairman Crapo. Thank you very much, Dr. Ludema.
Let me go first to you, Ms. Rosenberg. Moscow remains
undeterred in its Ukraine ambitions despite at least 2 years of
sanctions, which were even compounded by an oil shock. What are
the limits of employing sanctions against a large economy like
Russia's? And what sanctions tend to be the most effective to
deter Russian aggression?
Ms. Rosenberg. Thank you for the question. As you note,
Russia is a massive economy, and even in the period from 2014
to now, when we have seen the Russian economy shrink somewhat,
it still represents one of the largest economies globally.
Furthermore, it has a tremendous volume of external assets that
are traded
actively, including by U.S. financial entities and individuals.
So the cautionary note on sanctions is to be careful about
collateral damage for the United States. Going after Russia,
particularly in the financial services realm, in ways that
could affect U.S. institutions may be damaging to U.S. economic
interests. Also, if the United States oversteps and goes too
far on sanctions, in addition to the consequences my colleague
laid out, it could invite retaliation.
I would offer the same cautionary note about aiming too
aggressively at its energy sector given the effect that that
could have for consumers globally, including in the United
States.
Chairman Crapo. Thank you very much.
Mr. Lorber, some proposals put forth for increasing
sanctions against Russia include various sanctions on Russian
sovereign debt. Could you please explain what placing sanctions
on entities transacting in issuances of Russian sovereign debt
would have on the Russian economy and on global financial
markets?
Mr. Lorber. Absolutely, Senator. The macroeconomic impact
of going after prohibiting purchase or facilitation of Russian
sovereign debt is fairly uncertain. However, what the impact
likely would do is it would put additional pressure on those
SSI designated entities from 2014 that have effectively been to
an extent propped up by the Russian Government. So it would
continue to target entities that we have gone after previously.
But the unknown about what the overall impact of
sanctioning Russian sovereign debt would be is part of the
reason that in my testimony I suggest ways that you can, in
effect, ratchet up that pressure in a graduated manner so that
you can, in effect, see what that impact is; and if the
economic impact on those entities is not what we want it to be,
you can sort of come back and have a second bite at the apple.
Chairman Crapo. Thank you very much.
Dr. Ludema, your study finds that while targeted firms are
impacted by sanctions, Russia's GDP is largely unaffected,
noting that the most plausible candidate factor for this would
be the Russian policy response.
Explain what you mean by the ``Russian policy response,''
and how do you think the Russians responded to the sanctions
within this context?
Mr. Ludema. Thank you for the question. I would say that
there are actually two reasons why the sanctions have had very
little effect on the Russian GDP. One is that they were
designed to not have an immediate effect. The biggest companies
that are under sanctions are sanctioned under the SSI regime
which simply restricts their borrowing of long-term debt and
certain technologies. That is designed to kick in later as
these companies start to roll over their debt. They are not
likely to have a short-term effect, and we find that they
generally do not.
But, yes, you are right; there are things that the Russian
Government can do and has done to also counter the effects. For
example, the biggest thing that they did was allow the ruble to
depreciate quite dramatically in 2014.
Another thing that they can do is bail out certain firms,
so they have a list of firms that they refer to as
``strategic,'' that are strategic by virtue of their economic
or national security importance, and these firms qualify for
state largesse in the form of state loan guarantees, capital
participation, extra government contracts, tax breaks, and so
on.
I would point out, however, that all of these policy
responses are costly to the Russian Government, so even if you
see a company that is not obviously affected by Russia
sanctions, if it is being bailed out, that cost is being
imposed on the Russian Government in a different way. We have a
saying in economics, which is that ``There is no free lunch.''
And there is no free lunch for the Russian Government when it
comes to dealing with sanctions.
Chairman Crapo. Thank you very much.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Ms. Rosenberg, if I could start with you, you described
four principles you think policymakers should observe:
maintaining broad support of allies; using sanctions as a tool,
while including other diplomatic, political, economic, and
military measures; tying sanctions relief tightly to specific
policy goals; and, fourth, crafting a policy that is tough and
constructive and also flexible enough to be workable.
What are the greatest obstacles to maintaining these
principles on Russia policymaking in this environment?
Ms. Rosenberg. Thank you for the question. One of those
principles that is most vulnerable is finding unification and
multilateralism on Russia sanctions. The reason why I say that
is because of the conflicting political suggestions that we
have seen coming out of the current U.S. administration, as has
been mentioned by you. They suggest that there is an interest
in pulling back or reversing sanctions measures. Also signaling
from within Europe, including from a couple of the leaders on
European sanctions, France and in Germany, not to mention the
Brexit vote, which suggests movement toward strong nationalism
and away from the project of EU unification and transatlantic
unity that has underpinned these sanctions on Russia.
The difficulty in holding together that coalition is the
greatest challenge to advancing further strong, cogent,
meaningful, and strategic sanctions policy.
Senator Brown. You are suggesting, as I think you mentioned
in the response to Chairman Crapo's question, that there is a
danger--you may not have used the word ``danger,'' but you said
if we are too aggressive, especially on energy, when you think
of how bound so many countries, especially those that were
long-time Soviet--a long time part of the Soviet Union, how
bound they are, especially on energy. Talk about that effect
with our allies and how other proposed measures imposing
secondary sanctions on those who facilitate Russia Soviet debt
transactions, how that plays out and what concerns you have and
which countries are most affected that way.
Ms. Rosenberg. On energy in particular, the challenge here
about being too aggressive, I would like to condition that and
say there are two challenges: one is being too aggressive too
fast. It would be appropriate to move incrementally toward a
more aggressive posture. The second one is that sanctions
should always aim at what is realistically achievable. This is
particularly important on energy where aiming too aggressively
is infeasible ultimately. It would be impossible for the United
States to implement aggressive sanctions on the Russian energy
supply. European leaders would not join the United States on
something that aggressive. For them, it would constitute a
decision to cutoff some of their most significant energy supply
sources. Literally, the lights go out, the heat goes off. That
is a very difficult thing for many countries, particularly in
Russia's near abroad, its periphery, that rely so heavily on
Russian refined products and natural gas in particular. The
energy market is so large and so many nodes and relatively
unregulated globally that it would be near to impossible to
achieve broad implementation; and even if it were, what it
could do--even if there was to be broad implementation of
strong sanctions that go after Russia's energy supply, it would
have the effect of increasing prices, which some may welcome in
the current oil price environment. But, of course, that
benefits producers, including Russia, and disadvantages
consumers, such as those in the Baltic States and all of us as
consumers.
Senator Brown. Thank you.
Real quickly, Mr. Lorber, talk about what conditions you
think Russia should have to meet besides abiding by Minsk and
stopping cyber attacks before any future relaxation of
sanctions.
Mr. Lorber. Thank you, Senator. I actually think that the
Minsk II agreement does provide for 13 very specific
obligations that Russia should meet and, frankly, is not
meeting at the current time. And so it gives us, in a sense, a
road map for sanctions relief. If Russia meets these
objectives, then we should be willing to provide them at least
partial relief as----
Senator Brown. They are meeting none of them now of the 13?
Mr. Lorber. That is my understanding, so the major ones,
for example, allowing Ukraine to have control over the Ukraine-
Russia border; the removal of heavy weaponry; the allowance of
OSCE monitors into the country; the return of Crimea to
Ukrainian control. My understanding is that they have not met--
they have certainly not met those, but they have not met many
of the others of the 13.
Senator Brown. Thank you.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Mr. Lorber, I am just curious. We have talked a little bit
about the issuance of sovereign debt and the challenges that we
may place on the Russian economy and so forth if we were to
restrict, either in a primary or primary and secondary basis,
the purchase of Russian sovereign debt. How would that impact
the individuals who are the decisionmakers or the impacters
within Russia today? Would we be able to actually impact those
individuals who are the decisionmakers?
Mr. Lorber. Thank you, Senator. I think so, yes. The
rationale behind the sovereign debt restriction is basically
that when Russian entities were designated as SSIs, they were
unable to secure new debt or in some cases new equity. And so
the Russian Government injected capital assets into them to
basically keep them going, in effect. And then Russia turned
around and wanted to offer sovereign debt issuances so that it
could then continue injecting more funds into those SSIs and
SSI entities.
To the extent that you can hurt those of the largest
companies in Russia, the CEOs and major leaders of whom many
are within Vladimir Putin's close inner circle, I do think that
will have an impact on their decisionmaking.
Senator Rounds. How practical is the imposition of both
primary and secondary attempts, anyway, at limiting the
purchase of that debt? Would we have any support in the
European Union?
Mr. Lorber. So I think that is actually a fantastic
question because I think that in terms of the imposition of
primary sanctions that would prohibit U.S. persons, or any
transaction with a U.S. nexus, from going forward, from doing
transactions in that debt. That would not directly impact
foreign financial institutions in the European Union, for
example, but there would still be a significant market impact.
So many of the sort of top-line European banks, financial
institutions, would be unwilling to transact in that debt for
fear that they might accidentally run afoul of U.S. sanctions.
So I do think that there would be a practical effect of it,
yes.
Senator Rounds. Thank you.
Ms. Rosenberg. Senator, may I speak to this issue?
Senator Rounds. Yes.
Ms. Rosenberg. Thank you. I wanted to point out something
that all policymakers contemplating this kind of a sanction
should bear in mind going forward, which is, of course, that
aiming at Russian sovereign debt is a major escalation. It may
be appropriate as circumstances merit, but particularly because
you are going after the ability of the sovereign to raise
money, there will be a major public perception in Russia and
elsewhere that this will constrain the ability of Russia to
provide social services. This has worked to President Putin's
favor in bolstering his domestic popularity and support, and so
this has to be carefully calibrated in order not to have the
reverse effect, which is to say empowering President Putin at
the expense of the pressure it is supposed to create.
Senator Rounds. I think your point is well made, and the
reason why I asked the question is specifically that. Does the
emphasis actually fall on the decisionmakers, or does it fall
on the general Russian economy itself?
Let me just continue on, and I do have a question for Dr.
Ludema. A significant portion of your testimony focused on
smart sanctions and minimizing collateral damage, specifically
as we just discussed with regard to the imposition of any
sanctions on the purchase of sovereign debt.
As you know, the United States has implemented a ban on the
investment and now prohibits essentially all trade with Crimea,
which is, in essence, an embargo on Crimea.
To what extent does the U.S. trade and investment embargo
on Crimea cause collateral damage on the average citizen of
that Ukrainian population? And what role does this policy play
in the grander strategy, of course, in Russia and Russian-
supported groups to cease their malicious and destabilizing
activity in the region? And does the value of this coercion
outweigh the collateral damage to the majority of Crimea'
Ukrainian citizens now under Russian rule? A three-part
question.
Mr. Ludema. Thank you for the question. I think that if by
collateral damage you mean damage to the general population in
Crimea, I would say that there is collateral damage, certainly.
Crimea is a relatively small entity so it does not have
substantial impact on the European Union or the United States.
And so in that sense, I think sanctions of that type would,
nevertheless, remain sustainable.
I think the idea behind the sanctions on Crimea is that it
will make it difficult for the Russian Government to solidify
its control in the area, and I think that is the purpose of it.
Whether it succeeds is something that is beyond that.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman, and I want
to thank the panel for their presence here today and their
testimony.
Senator Rounds brought up the European Union, and I have
just three general questions I would like to pose to everyone,
beginning with Ms. Rosenberg. What is their role today? Second,
can that role be enhanced to benefit the doing--and I presume
they are--to undermine the European Union as they are trying to
undermine so many institutions? So if you could generally
respond to those questions. Ms. Rosenberg?
Ms. Rosenberg. Thank you for the question. The role of the
European Union as counterpart to the United States in
imposition of these sanctions is significant, primarily because
it has great economic integration with Russia--trade,
investment, et cetera, for banks, companies, and the like. So
the EU's holding the line on these sanctions constitutes a
bigger economic sacrifice for them in many respects,
particularly for those countries heavily linked to Russia
through trade on Russia's periphery.
The sanctions can be enhanced by the European Union, and,
in fact, they are well placed to do so. There are a number of
what have been referred to as loopholes in the European
sanctions on Russia by comparison to the United States
sanctions, involving the grandfathering of certain business and
the availability of certain Russian firms to raise funds in
European capital markets. That could be closed off. That would
be at a great sacrifice to the European economy, one which many
in Europe believe is worth it.
And what is Russia doing to undermine the European Union?
What we witnessed in the United States in terms of Russia's
malicious cyber intrusion into our electoral process in 2016 is
occurring in Europe. It is active. It is well documented,
including support for political parties and disinformation
campaigns.
Senator Reed. Just let me qualify. The European Union is an
institution itself with an elected President, et cetera. Are
they targeting the European Union as an institution as well as
the countries?
Ms. Rosenberg. I think it would be fair to characterize the
effort by Russia primarily aimed at individual countries
because giving rise to nationalist political currents in these
individual countries undermines the project of European
unification, which is Russia's aim, and undermines
transatlantic unity.
Senator Reed. Mr. Lorber and Mr. Ludema, any other comments
that you think would supplement Ms. Rosenberg's comments?
Mr. Lorber. A couple. Thank you, Senator.
On the first point, what is the EU role, I agree with Ms.
Rosenberg and would also like to say that the EU program is
actually very, very similar to the U.S. program. They have an
SSI type of program. They have a list of designations. There
are a number of designations which are different, so they do
not have a number of people on their list that we have on ours,
and vice versa. And so that is one particular area where we
could align better and have them ramp up pressure.
Also building off of her comments in ways that we can
enhance the EU sanctions or have the European Union enhance
their own sanctions, one area in particular is related to
entities that are owned by Russian companies that are operating
in the European Union. In general, these entities are not
subject to the EU SSI sanctions, and that is a European
decision to limit the damage to their economy. That could be a
particular area where we focus on to have them go after.
And then on your last point, the question about what is
Russia trying to do to undermine EU unity, in effect, in
addition to the cyber activity Russia has engaged in and the
empowerment of far right parties, Russia has actively engaged
in trying to pull one or two EU countries out of the sanctions
sort of cooperative regime, because EU voting rules require
unanimity and the sanctions must be renewed every 6 months.
They were actually renewed a couple days ago. And to the extent
that the Russians can basically buy off one or two EU
countries, such as Hungary, that can actually undermine the
entire sanctions campaign from the EU side.
Senator Reed. Doctor, your comments?
Mr. Ludema. Yes. I think that EU participation in this has
been extremely important. The European Union is much more
integrated with the Russian economy than we are. They have
potentially more influence, but, of course, they are also more
sensitive when it comes to collateral damage.
On the question of what is Russia doing, they are
constantly--constantly--filling the airwaves in Europe with
negative news stories about the impact of sanctions on European
companies, claiming way beyond the evidence that these things
are having a
devastating effect on European economies. And part of the
reason that we wrote our paper was to demonstrate that, by and
large, that is not true.
Senator Reed. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Sasse.
Senator Sasse. Thank you, Chairman. Thank you to all of you
for being here.
How rich is Vladimir Putin?
Ms. Rosenberg. We should assume very rich, although the
amount of his assets has been a longstanding question. There is
no full disclosure.
Mr. Lorber. Again, there is no full disclosure, so it is
unknown. My understanding based on public source reporting is
that it is in the billions, if not tens of billions of dollars.
Mr. Ludema. Yeah, I do not have a number on that either,
but certainly his ability to tap into vast sums of money
through his cronies and his network is--well, it is enormous.
Senator Sasse. Can you remind us of his sort of resume, his
work history? How did he get rich?
Mr. Ludema. Corruption.
Mr. Lorber. I am not a Vladimir Putin expert, but,
obviously, he was in the KGB as a colonel for a long time, and
then----
Senator Sasse. They make tens of billions of dollars,
right?
Mr. Lorber. They make tens of billions of dollars primarily
through corruption and proceeds from state enterprises, is my
understanding.
Senator Sasse. So could you bound the illicit economy for
us in Russia? What are its key industries? And how did it
happen? Give us sort of a sweep--you know, Nebraskans, when
they think about the demise of the Soviet Union, we remember
sort of Warsaw Pact versus NATO. And in 1989 the wall falls. In
1991 the Soviet Union dissolves. Nineteen ninety-one (1991) to
1994 or 1995, we have this vision that there is going to be
this sort of rise of democratic capitalism in Russia. That does
not happen. So from 1995 until maybe 2 years ago, give us a 20-
year sweep of the Russian economy and sort of the role that
illicit industries and cronies play. How does this develop?
[Pause.]
Senator Sasse. Not all at once, please.
Mr. Ludema. I will take a stab. I do not know if I would
call them ``illicit industries,'' but certainly crony
capitalism has been on the rise ever since Putin took power.
One of the reasons, despite high oil prices, prior to the
sanctions regime, despite high oil prices, the Russian economy
was underperforming was precisely because of crony capitalism,
that is, almost all of the big industries are controlled by
Putin cronies. They used them as their personal piggy banks.
They failed to invest adequately, and it has significantly
sapped the dynamism of the Russian economy, such that even if
oil prices were to recover and sanctions were to be removed, I
do not think you would see a miraculous rebound of the Russian
economy.
Mr. Lorber. Thank you Senator. Important, I think, to add
to this point as well is that as Putin's cronies were enriched
and took over state-owned enterprises, Putin also privatized--
or, sorry, made public certain Russian Government entities,
oil-producing, and put his individual sort of inner circle in
charge of them to see the proceeds. And then of particular
note, I think, to this Committee, Russian oligarchs set up a
large set of shell companies, of mechanisms for transferring
illicit funds, and, frankly, got a lot of those funds out of
Russia. And so we know now that through Cyprus and other
jurisdictions with lax anti-money-laundering laws and
regulations, Putin and his oligarchs have actually managed to
get all these funds into Western economies, into real estate,
both in the United States and in London and other parts of
Western
Europe.
Ms. Rosenberg. I think my colleagues have offered a number
of strong comments, and so I will not add more.
Senator Sasse. Great. Well, we would love to follow up with
you. My team will reach back out, because I think one of the
core questions we face is the efficacy of the current sanctions
regime, the possibility of a new sanctions regime and its
cooperation with EU and other members, but also to what degree
is it going to be efficacious if we do not have a lot of
clarity about other places where money is housed that is not
actually on the books in ways that can be transparent. Please,
take a final word. We have a couple seconds left.
Mr. Lorber. Thank you. The Counteracting Russian
Hostilities Act of 2017 has a provision in it related, as I
mentioned in my testimony, to a FinCEN-led task force or some
type of task force to assess, identify, and eventually seize
illicit funds that are in the United States. We know they are
here; we just do not actually know where they are. And so I
think that is one good proposal you could walk forward with.
Senator Sasse. We would love to figure out ways to assist
you in the work of being more transparent about those assets.
Thanks.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman, for holding what
I think is an incredibly important hearing, and I appreciate
the testimony of the expertise we have here. I look forward to
Administration witnesses so that we can actually move forward
on developing policy at some point, but certainly this is
incredibly helpful.
As the original author of many of the networks of sanctions
that we have on foreign adversaries and belligerent actors, I
certainly believe that economic sanctions remain one of the
most effective tools we have in our peaceful diplomacy arsenal,
which is rather limited. When you speak about nonmilitary
engagement, it is the use of aid or trade to induce a country
to act a certain way. International opinion, to the extent that
our country is subjected to or willing to be affected by that--
I do not think that Kim Jong-Un really cares that much--and the
denial of aid or trade and/or something that we have used as an
increasingly effective tool, which is financial sanctions to
the most significant economy and financial system in the world.
And so when we do not want to engage militarily, this is
the universe that we have in peaceful diplomacy engagement. So
I do not believe it is a sword to take out all the time, but I
do believe that in certain cases it is incredibly important.
In the case of Russia, they have violated the international
order by invading and occupying sovereign countries,
interfering in elections across the globe to sow distrust in
the foundations of democracy, including here in the United
States, and oppressing their own citizens. And if we want to
ultimately have Russia and send a global message that there are
going to be consequences for violating the international order
and to send it not just in Russia's case but in the case of
others who may consider violating the international order, it
is sanctions that very often can be the tool.
I particularly get concerned about Russia not only
interfering in our elections but violating arms treaties, which
has lost some attention but is incredibly important. So I was
pleased to join my colleagues in sponsoring the Countering
Russian Hostilities Act. Like anything, it can be perfected,
but I think it is a way forward.
So I want to ask our witnesses, I know that some of you
have talked about the reticence of sanctions use and getting
our partners, particularly Europeans, on board. But isn't it
true that when we started the sanctions on Iran, we did not
have European partners on board at the beginning. We brought
them on board. There are times in which the United States must
lead, and in leading, it then creates an international
coalition. Isn't that a fair statement? Any one of you want to
answer?
Ms. Rosenberg. Yes, certainly. Someone has to lead and this
body has in the past very effectively.
Senator Menendez. And if we waited for a coalition to take
place first before we led, we would not have brought Iran to
the negotiating table as we subsequently did. So I get
concerned sometimes when I hear about that we will have
reticence from our partners. Our partners very often will have
reticence, but it is when we lead that we ultimately--and it is
a robust diplomacy that is necessary to assure that and to show
them why it is in their interest as well.
Do you believe that among your discussion--which I have
read your testimony and got a synthesis of what you said--is
that having targets--do you believe, for example, that the
violation of the Intermediate-Range Nuclear Forces Treaty that
Russia recently conducted a violation of by deploying a ground
launched cruise missile system, do you believe that sanctions
play a role in ensuring, for example, Russia complies with
international arms control treaty obligations?
Ms. Rosenberg. Sanctions have not traditionally been a tool
used to address that kind of violation, and as was demonstrated
by the previous U.S. administration. There are other messages
of diplomacy or engagement that have been a first step toward
addressing and disclosing those, and working toward a
remediation of them.
I would offer that I think that kind of diplomatic and
direct engagement and disclosure is a first, most important
step and would reserve the option to consider sanctions, but
not as a first step.
Senator Menendez. Well, I hope that the Administration
engages Russia on its violation of that treaty. That to me is
one of the most significant violations that have taken place
that are a real consequence to U.S. national interest and
security, as well as, of course, what they have done here in
the cyber attack against our own democracy. I consider that an
attack against the United States, one that, if it was in any
other dimension, we would be responding to vigorously. And we
seem not to have been engaged in responding to it vigorously,
and I hope that we look at sanctions, the perfecting of
sanctions in that regard.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Mr. Lorber, do you believe the current sanctions against
Russia have had any meaningful impact on Mr. Putin's behavior?
Mr. Lorber. Yes, Senator, I do. I think that there are
multiple indications of this impact. The first element of this
impact is from a deterrence perspective. So there were
indications, so I have been told, that Russia was persistent to
engage in even more aggressive activity in 2014, and they
stopped short because of the fear of sanctions.
Senator Kennedy. Well, how do you know that? That is like
saying let me tell you how many fish I did not catch on
Saturday
because I did not go fishing. You do not know that, do you?
Mr. Lorber. That is a fair--I do not know that for certain.
Senator Kennedy. It did not stop Mr. Putin from--it did not
stop his aggression in Syria, did it?
Mr. Lorber. No. We did not have sanctions on Russia in
response to Syria, but that is correct. It did not stop his
activities in Syria.
Senator Kennedy. It did not stop him from trying to
influence the American elections, did it?
Mr. Lorber. I do not know--I assume it did not, no.
Senator Kennedy. It has not stopped him from implementing a
disinformation campaign in countries in the European Union, has
it?
Mr. Lorber. I think that is correct.
Senator Kennedy. OK. What would be the most Draconian
sanctions that the United States could impose upon Mr. Putin
unilaterally?
Mr. Lorber. So the United States--I am not recommending to
do this----
Senator Kennedy. I understand. This is just information
gathering.
Mr. Lorber. Yeah, sure. The United States could take a
number of actions. It could basically shut off the Russian
financial system from the U.S. financial system. It could order
all of the U.S. banks to close correspondent accounts on behalf
of Russian financial entities, which would very likely have the
impact of crashing the Russian financial system.
Senator Kennedy. Right. Now, you talked about--the three of
you, any of you could answer this. I do not mean to pick on Mr.
Lorber. You talked about Mr. Putin in response to Senator
Sasse's questions and his net worth. He is only the tallest hog
at the trough. There are others at the trough, right? Do we
know where their assets are?
Mr. Lorber. We have some indications of where some of their
assets are in the United States. That was information that has
been developed through FinCEN, through one of their geographic
targeting orders. But we do not have a broad understanding of
where their assets are.
Senator Kennedy. But you know where some of them are.
Mr. Lorber. We have been told that there is information
suggesting that a lot of their assets are New York and San
Antonio and Miami and San Francisco real estate properties.
Senator Kennedy. And you know where some of Mr. Putin's
assets are, do you not? Ms. Rosenberg, did you not say we could
trace some of their assets to real estate in Europe and in the
United States?
Ms. Rosenberg. Well, that may have been Mr. Lorber's
comment, but I would agree that there is a broad perception,
backed up by certain evidence disclosed by the geographic
targeting order from FinCEN indicating that Russian elite
assets, not specifically Mr. Putin's, which----
Senator Kennedy. Do you know where Mr. Putin's assets are,
some of them?
Ms. Rosenberg. I do not know----
Senator Kennedy. Do you think anybody does?
Ms. Rosenberg. Yes, I think someone does.
Senator Kennedy. OK. What would happen if we froze his
assets and those of his participants in the crony capitalism?
Ms. Rosenberg. That I am not sure is--that seems to me a
very challenging proposition, in part because----
Senator Kennedy. Let us assume for a second we could do it.
What would be the consequences of that in terms of the global
economy? And in answering that, what percentage of the world
gross national product is the Russian economy?
Ms. Rosenberg. I can speak to the first one first. So if we
are thinking about this hypothetical situation, the assets of
President Putin and his close associates, what may be
beneficially owned by them directly as well as indirectly, are
talking about a massive amount of money. If it were possible to
go after that, I think there would be profound collateral
consequences across the global economy and certainly in the
United States. This is----
Senator Kennedy. He owns assets of that size that would
affect the global economy if they were frozen?
Ms. Rosenberg. What I said was his assets, both direct
beneficial ownership as well as indirect beneficial ownership,
and those of his associates.
Senator Kennedy. Well, what would be the collateral
consequences other than changing his behavior?
Ms. Rosenberg. Well, I will set aside changing his
behavior, but as far as the economic consequences, I think it
would be profound probably for all large U.S. global banks
which would be in the position of implementing such a sanction.
It would be a compliance and liability nightmare for them, as
well as----
Senator Kennedy. I have got 6 more seconds, so I have to
interrupt you. We have just been nibbling around the edges
here. The man is, your testimony is, worth tens of billions of
dollars. Time Magazine says he is the most powerful man in the
world. You cannot seriously believe that nibbling around the
edges is going to change his behavior; we either put sanctions
on or not.
I went over. I am sorry, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman. And thank you all
for being here today.
Our intelligence community has determined that Russia
engaged in cyber attacks on the United States to interfere with
our election, and several members of the Trump administration
and campaign have questionable ties to Russia. There is good
reason to believe that President Trump himself has substantial
financial ties to Russia, only we do not know the details
because he will not release his tax returns.
None of this is normal. We are not even 2 months into the
Trump administration, and FBI counterintelligence
investigations and congressional inquiries have already been
launched. Senior officials were caught lying to Congress. A
national security adviser resigned in disgrace because he
misled White House officials and the FBI about his Russian
ties. And in the middle of all of this, Donald Trump incredibly
continues to consider lifting sanctions against Russia.
Now, last week, a Senate Subcommittee held a hearing with
Ambassadors from six European countries--Ukraine, Poland,
Georgia, Latvia, Lithuania, and Estonia. Four of these
countries are members of the European and the NATO Alliance.
They are all American partners living on the front lines of
Russia's destabilizing
influences.
At this hearing the Ambassadors agreed that the United
States should not ease sanctions on Russia unless Putin
actually makes some changes. So let me start there.
Ms. Rosenberg, if we ignore our allies and ease sanctions
without meaningful changes in Russia's behavior, does that
increase
or decrease Putin's ability to destabilize countries along its
border, in the rest of Europe, and around the world?
Ms. Rosenberg. Certainly that would increase it. Russia
thrives in that kind of environment. With its information
campaigns and its destabilization conducted through information
and funding of political parties, we would throw our European
allies under the bus. It would be difficult and damaging to
transatlantic unity, which is challenging for the pursuit of
our national interests.
Senator Warren. Yeah, and let us start with that basic
principle that the purpose of sanctions is to discourage and
change bad behavior. If Russia stands firm and we drop our
sanctions in exchange for nothing, we are just weak. So
sanctions work better, as you note, when we coordinate with our
allies and our partners. Right now, the United States and the
European Union coordinate sanctions on Russia's financial,
energy, and defense industries for invading Ukraine's territory
and undermining its sovereignty. These sanctions have taken a
toll on Russia's economy. The EU sanctions must be renewed
every 6 months, and they did just that, renewing them now until
the end of July.
Ms. Rosenberg, is it fair to say that it is not easy for
the European Union to keep doing this given the close economic
ties between Europe and Russia?
Ms. Rosenberg. Yes, I think that is fair to say and
particularly for some more economically exposed countries than
others.
Senator Warren. And yet they keep doing it. Why?
Ms. Rosenberg. For a variety of reasons. I would suggest
that they value their unity with the United States and the
messaging effect that this has. They want to send a clear
signal about what it means to violate Ukrainian sovereignty.
And notwithstanding the economic pain for them, they still
believe that this project and the self-sacrifice economically
is worth it for the political and strategic benefit they may
gain.
Senator Warren. And I understand from what you are saying
here that one of our strongest tools against Russia is joint
EU-U.S. economic pressure, that this is much stronger if we are
working together. But if the United States unilaterally lifts
its sanctions on Russia, which, of course, then encourages the
European Union to do the same, how effective will U.S. and
European efforts be to hold Russia accountable?
Ms. Rosenberg. Well, it may be very difficult to
reestablish a united transatlantic front with economic measures
toward Russia, particularly given the nationalist political
currents that are more prominent now than they were in 2014. So
that is one primary problem that will be an impediment.
Also, I would suggest that the United States and the
European Union will lack credibility if they try and do this
again because we look fickle if we impose and then remove,
particularly with no behavior change on the part of Russia.
Senator Warren. Fickle and weak. Congress must be able to
review any attempts by this President to roll back our
sanctions against Russia. I have cosponsored legislation that
would do just that. We still do not know what is going on with
this Administration's ties to Russia, but as we wait for the
facts to come out, strong congressional oversight is needed to
ensure that the
President does not throw away our leverage against Russia for
nothing. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator
Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Thank you all for
being here.
First and foremost, I think it is an absurd notion to think
that this Administration would act unilaterally to ease
sanctions on Russia knowing what this President knows now. So
that is great for talking points, great for the midnight news
cycle, but not a practical reality. This body would probably
vote unanimously against any of that activity, so we need to
make it very clear that is not on the table, except for the
political rhetoric.
And my answer to Senator Sasse's question is Putin is as
rich as he wanted to be. He is a totalitarian dictator who is
putting the lives of 140 million-plus Russians at risk in terms
of them being able to feed themselves and live a secure
existence.
What I think we need to talk about--look, I am all for
projection of U.S. might, but I happen to agree right now that
Vladimir Putin is probably the most powerful man in the world.
He does not happen to lead the most powerful nation, but either
legally or illegally, he can bring weapons to bear and devices
to bear that the United States would not. And so we have to
recognize him for what he is.
But by the same token, we should not take the bait and
overreact at the expense of hopefully winning the hearts and
minds of the Russian people. Right now, the Russian people--you
know, it is kind of difficult to figure out in the mind of
somebody who you call up and ask what is your opinion of
Vladimir Putin if you live in Russia. You are probably inclined
to say you like him whether you do or not. But the reality is
he is polling at 80 or 83 percent in terms of public opinion.
So if we attack Putin and, I think, to use your words, Mr.
Lorber, our response is too powerful, it could be at the
expense of ultimately achieving what we want to achieve.
So my question to you all is: What would be a more
exquisite, more sustaining regimen of sanctions that--you know,
we can talk about the money laundering, we can talk about their
weapons laundering. We can talk about any number of
manipulative practices that either Putin knew about or should
have known about. We can talk about their sovereign incursions
and everything else. But have you all thought about like an
idealized framework, a multilateral engagement with the EU or
NATO partners, what you would consider to be an idealized
framework to really get to a point where you do not harm the
individuals in Russia who are really, I think, peaceful people
that we would like to develop a good relationship with, but
these greedy, lawless leaders at the top, what sorts of
regimens could we put into place that would make them start
producing a better behavior that is to our mutual best
interest? And in that, we talk about energy policy relating to
sanctions making it harder for them to extract and distribute
their natural gas in particular because there is a heavy
reliance in Europe, and I understand that and the effect that
it would have on our partners, which would make them
apprehensive about going that direction. But I do believe U.S.
energy policy can play a very important role in providing
European nations with a choice that will make them have more
options as we have to move forward and ratchet up sanctions.
So in my remaining time, if you can give us an idea of--let
us cut the politics out of this, let us get to a good,
sustainable place in sanctions--what does that look like from
an idealized perspective, your idealized perspective? We will
just go down the line.
Thank you, Mr. Chair.
Ms. Rosenberg. Thank you for the question. I think this is
a really important question to think about the framework and
the strategy for an incremental and sustainable imposition of
sanctions, escalation of sanctions.
I would offer two principles right at the beginning, and
the first is that sanctions should not be the only policy tool
used to increase pressure on Russia; and, furthermore, that in
addition to pressure on Russia economically, I would suggest
and urge a corresponding outreach to the people of Russia to
try and counteract along the lines that have been used in other
sanctions programs, people-to-people exchanges, encouraging
that to counteract the narrative that will be prominent in
Russia, even more prominent than it is now, that these
sanctions are meant to punish and penalize the Russian people.
The first best step for enforcing and strengthening these
sanctions is to further enforce sanctions already in place,
authorities already on the books, and there is plenty of scope
within the existing authorities. So in your capacity of
oversight of the Administration, urging them to do things like
add additional entities or sectors to the SSI list, further
restrict new kinds of financial products that are restricted
for those entities on the SSI list, and adding more names, that
will all have an economic effect and a strong signaling and
deterrence effect, and that is an area, apropos of Senator
Menendez's question, where the United States can and should
lead partners who can and should do that in addition. There are
opportunities there for Europe along with the United States.
After that is a good opportunity for new sanctions authorities,
as are being considered in the Senate and the House right now.
Chairman Crapo. Our time has expired, and we are going to
be really tight getting through all of our Senators, so if the
remaining two witnesses have anything to add, you could briefly
do so, please.
Senator Tillis. Actually, I would prefer just to defer, and
if you would contact my office, this is particularly important
to me. I sit on Senate Armed Services, so I would like this
feedback. I would like to act on this, not just hear your
comments and wait for the next hearing.
Thank you, Mr. Chair.
Chairman Crapo. Thank you, Senator.
Senator Tester.
Senator Tester. Yeah, thank you, Mr. Chairman, for holding
this hearing, and to you, too, Ranking Member Brown. I think
this is a critically important hearing. It is important for the
American public and all of their elected representatives to
remember this: Russia attacked the United States and sought to
undermine our bureaucracy. It is not a partisan issue. It is
not something we should be playing politics with, though I am
increasingly concerned that we may be heading in exactly that
direction. We all took a solemn oath to this office to defend
our Nation from foreign threats, and we must not lose sight of
that duty.
Before I talk about the sanctions, I want to talk about
where this Nation and Congress is currently. We have become far
too
politicized, which really threatens our national security, and
I am troubled when I see respected voices like John McCain and
Lindsey Graham, hear their voices fall on deaf ears of their
leadership when they call for a bipartisan, transparent
investigation into Russia's action. I am troubled when the
American people are stonewalled from learning more about the
connections between Trump's team and Russia. Just this past
week, we had a close associate admitting that he communicated
privately--a Trump close associate admitting that he
communicated privately with a hacker who was believed to be a
front for the Russian military. Before that, General Flynn lost
his job for misleading the Vice President of the United States
over the contents of conversations that he had with the Russian
ambassador.
Americans deserve an independent, transparent view of these
types of relationships, and that will strengthen our democracy.
Failure to do so would play into the hands of nations like
Russia and Putin, who seek to do us harm.
I believe that the sanctions that are in place in response
to Russia's attacks on our democracy and aggression in Ukraine
are a starting point, but I believe more needs to be done.
I will cut right to the chase. We have put sanctions on a
lot of different folks out there. I need to know from the folks
here--and I thank you for being here, by the way--your opinion
on what would be the impacts if we sanctioned Putin. How would
that be viewed? Anybody can jump in on that.
Ms. Rosenberg. I think that would be an incredibly
aggressive step, particularly as a next step. And as I was
suggesting in my previous comments, I think there is a range of
appropriate steps that could and should be considered before
then.
There are very powerful implications of going after a head
of state in this way that I think may not be the next step
amongst the variety of tools that Congress should consider.
Senator Tester. And before we get to you, you have laid out
your steps--you do not have to do it again, but you have laid
out the steps that this Committee should be looking at?
Ms. Rosenberg. I have laid out a number of them in my
testimony and would be happy to discuss them further.
Senator Tester. OK. Go ahead.
Mr. Lorber. I agree with Ms. Rosenberg's assessment. I
think it would be a very aggressive action that might not have
economic effect on Vladimir Putin, but certainly would send a
very strong, and perhaps too strong, diplomatic signal.
Senator Tester. OK. Good.
Mr. Ludema. I think that, putting aside the wisdom of
taking such an action from a political point of view, the
economic effect of doing that would be--according to our
research, would probably be quite negative for Mr. Putin and
probably would not have a substantial economic effect on the
United States or the European Union.
Senator Tester. OK. Could you just quickly go through--and
then I will give up the rest of my time--the steps you think we
need to be considering, Elizabeth?
Ms. Rosenberg. I would offer that the first of those would
include encouraging the Administration to enforce--as well as
EU counterparts--existing sanctions further. That may mean
adding new entities----
Senator Tester. OK.
Ms. Rosenberg.----or sectors to the SSI list, restricting
different kinds of financial services that are----
Senator Tester. OK.
Ms. Rosenberg. Right. And then perhaps additional
authorities, some of which have been discussed or proposed in
legislation before the Congress right now having to do with
financial services and
energy.
Senator Tester. OK. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
You know billions and billions of dollars, if you were just
into this for money, you would take the money and go someplace
else. Obviously, this accumulation of Putin's is really related
to power and continuing and maintaining power. And, obviously,
what you get from this Committee and the discussion that we are
having today is that sanctions on Russia do not necessarily
curb behavior when someone is accumulating enough power that he
can, in fact, continue to behave with impunity on the world
stage in ways that all of us should find reprehensible,
including the absolutely brazen attacks on our electoral
system.
And so we continue to be concerned about the amount of
power that Putin has accumulated, especially given that he has
made this seemingly in the interest of the Russian people. It
makes this really complicated on how you deal with changing his
behavior.
There are two things I want to talk about. Number one is
this sense that if we cooperate with Russia, if we turn the
page and have a different relationship with Russia, Russia will
be on the same page in the fight against ISIS. That was one of
the expressed theories of this Administration going forward. I
would like to hear your comments on whether you think that is a
wise course, even assuming that we have the same interest as it
relates to ISIS.
Mr. Lorber. Do you mind if I take that first? So putting
aside whether or not Russia would be a good partner in the
fight against ISIS, which I know there is a lot of debate
about, I still think it would be a mistake to trade sanctions
for cooperation in the fight against ISIS, in large part
because that would signal to Russia--for example, if we said,
``Well, you know what? We are going to drop sanctions against
Crimea that we have imposed,'' it would signal to Russia that
they can go ahead and continue their types of destabilizing
activities in Eastern Europe, and it would also signal frankly
to the rest of the world that principles of international law
such as sovereignty are not as important to the United States
as are other potential norms.
Ms. Rosenberg. If I could add to that, I think it is
important to bear in mind that the bilateral relationship we
are talking about with the United States and Russia is very
broad. It, of course, includes a variety of different files
even in just the security domain. It is completely feasible to
envision a relationship with Russia that may involve some
element of cooperation or coordination in,
perhaps, the Syria file where there could be some kind of
transactional politics and agreement, and simultaneously
envisioning in, for example, the Ukraine file a maintenance of
current sanctions and a relationship of pressure. That was the
case with Russia in the last Administration, for example, when
we saw the amplification of Russia sanctions while seeing
simultaneously coordination with Russia on the Iran file to
remove sanctions. I think that principle of a variegated
relationship is one we should hold forefront.
Senator Heitkamp. We have spent a lot of time talking about
the European Union. We have not looked much into Asia and the
relationship that Putin has with China, that Russia has with
China, and the opportunity that he sees right now with the
Arctic opening up and the challenges that we have in the
Arctic. I would like just a quick--I only have about a minute
left, but anyone who feels comfortable talking about how we
need to engage with China in this discussion and also what
opening up the Arctic has meant to his potential expansion on
energy.
Ms. Rosenberg. Speaking to the Russia-China relationship,
this is one in which Russia is the junior partner to China,
which has been very aggressive with Russia in its contractual
demands for energy, for example. It has not, as some feared it
might, been the backfill for European and U.S. sanctions,
providing lots of capital where it was not available from the
United States and European Union.
Senator Heitkamp. We want China to continue to drive really
hard bargains.
Ms. Rosenberg. And for that reason, this Administration and
Congress should set a tone of communication with China rather
than antagonism in order for China to continue to set those
hard bargains.
Senator Heitkamp. I am out of time, and I want to respect
the Chairman's desire that this move along. But I did want to
maybe follow up with you on the Arctic question. I think it is
critical.
Chairman Crapo. Thank you, Senator.
Mr. Ludema. Can I just give a quick answer on that one? I
think the ability of the Russian energy companies to take
advantage of the Arctic is already being severely limited by
the existing SSI sanctions because that is precisely the
technologies that are being restricted.
Senator Heitkamp. Thank you.
Chairman Crapo. Thank you.
Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. I think that
weakening sanctions against Russia is like saying that we
support their invasion and occupation of Crimea, of Eastern
Ukraine, of their actions in Syria, of their destabilizing
Eastern Europe, of their attack on our election system and our
country, and their cyber attacks as well. And so I think to
even discuss that is astonishing to me for any Government
officials to be talking like that.
Mr. Lorber, the question I wanted to ask you is that you
noted in your testimony the fact that large sums of Russian
money have been flowing into U.S. real estate markets. Russian
oligarchs close to Putin are likely laundering funds through a
network of shell companies and depositing them in the United
States through real estate investments.
How can we work with the Financial Crimes Enforcement
Network to discover these suspect investments and to better
find them and to seize them?
Mr. Lorber. Thanks, Senator. So the Financial Crimes
Enforcement, or FinCEN, has over the past 2 years established
geographic targeting orders which track cash payments or cash
purchases of high-end real estate in a variety of markets, and
that has provided FinCEN with information as to who is actually
making these purchase. And often in cases it has turned out
apparently to be Russian oligarchs. That is kind of the first
step, which would be not only identifying that information but
then having FinCEN work with the Department of Justice and with
OFAC to identify who those individuals are, if any of those
individuals are sanctioned entities, sanctioned persons, to
seize those funds----
Senator Donnelly. Have any of these real estate purchases
been seized here in the United States?
Mr. Lorber. Not to my knowledge, but I----
Senator Donnelly. So why would they be hesitant to continue
to launder their money through this if zero have been seized at
this time?
Mr. Lorber. So I do not have particular knowledge of where
FinCEN is in terms of the information that they already have.
If I had to guess, it would probably be to say that they are
developing cases against particular individuals. But I do not
know that.
Senator Donnelly. I think a very cursory effort could
provide them with about 100 quick targets throughout the United
States, don't you? I mean, you know, the joke in New York is
all you have to do is walk through Midtown at night, and you
can see all of the luxury developments where, you know, floor
after floor after floor are completely dark.
Mr. Lorber. I agree. I think that these targets are sort of
low-hanging fruit or ones that we probably have readily
available to us to be the subject of enforcement.
Senator Donnelly. So what do we have to do to get FinCEN to
move on these?
Mr. Lorber. Again, I do not know where FinCEN is
specifically in terms of this process. They could be just at
the cusp of going after them, though.
Senator Donnelly. Well, my next question is: There are
public reports indicating that the FBI may be investigating in
one way or another Alpha Bank, which is a Russian bank. My
understanding is Alpha Bank and its key stakeholders are not on
the U.S. or EU sanctions list. Is that correct? That is for any
of you.
Mr. Lorber. I do not know off the top of my head. I can run
their names through the SDN list and come back to you with an
answer.
Senator Donnelly. OK. Elizabeth?
Ms. Rosenberg. I believe that is correct.
Senator Donnelly. OK. Are any of you familiar enough with
Alpha Bank to assess its relationship to the Russian Government
and to the network of oligarchs tied to Putin?
Mr. Lorber. Unfortunately, I am not, no.
Senator Donnelly. OK. It seems the most effective sanctions
are the ones against the financial sector. I mean, that is just
what it seems to me. What can we do to make those sanctions
against the financial sector more effective? If you had one
suggestion--I just have a minute to go--I would love to hear
each of your suggestions about what we can do to make financial
sector sanctions more effective. You each have 20 seconds.
Ms. Rosenberg. Broadly expand the entities targeted by SSI
sanctions and certain of the financial products restricted to
them.
Mr. Lorber. Increase the OFAC and relevant European Union
and EU member state enforcement authorities so that they clamp
down and make sure that no sanctions violations are occurring.
Mr. Ludema. Well, you could ban holding of existing paper
rather than just new issues of paper.
Senator Donnelly. OK. Thank you all, and I just want to say
one other thing, Mr. Chairman. I want to thank Adam Szubin for
his service to this country over the years. He did an
extraordinary job at great sacrifice to his family, and we are
much safer and better off because of his efforts.
Chairman Crapo. Thank you, Senator.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I want to
thank all the witnesses. My State of Maryland is home to the
U.S. Cyber Command, and I think we all know that cyber attacks,
cyber warfare, cyber interference is sort of the new dimension
of international conflict. So I just have a few questions with
respect to how we can use sanctions to deter that kind of
interference. We see it, of course, on the commercial side as
well as on the political side.
On the commercial side, my understanding is that the
Department of Justice actually just announced that it is going
to indict two Russian Government officers for the cyber
hacking, wire fraud, and trade secret theft regarding Yahoo's
breach of about 500 email accounts. That has obviously been an
ongoing investigation. Under President Obama, we also had the
sanctions targeted against certain Chinese individuals who were
engaged in cyber theft.
But I want to just focus for a second on using sanctions
with respect to cyber interference for political purposes. We
have all talked about how the Russians interfered in our
elections. There is no dispute about that. They use cyber, they
use fake news. They did it to support Donald Trump's candidacy.
That is the unanimous verdict of our intelligence agencies. And
we also know they are doing it on an ongoing basis to interfere
in the elections of our European allies--France, Germany--and
we are going to get the results later today of the Netherlands
elections. And they are doing it for the purpose of trying to
undermine cohesion in the NATO Alliance, trying to undermine
the European Union, because they want to encourage these
nationalist sentiments that try to disrupt the unity that has
been the cornerstone of our defense and our economic
relationship. So we know what their strategy is.
My question is--and I could not agree more with my
colleagues that not only should we make sure we pass
legislation to prevent the rolling back of any sanctions
currently in place by the United States and others, but I think
we also need to join with our
European partners to respond with sanctions to the interference
in our elections, these cyber attacks.
My question for all of you is: What do you think the
appetite of our allies would be to ratcheting up sanctions
against Russia
specifically for their interference in our elections through
cyber attacks and interference and hacking? And how would we
best go about doing that, persuading our European partners that
it is in our collective security and economic interest to do
that?
Ms. Rosenberg. Thank you for the question. In answering
this, I want to step back for a second and say I think that
there would be appetite in Europe and here to use policy
instruments to
respond to malicious cyber activity. However, in the framework
of cyber deterrence, I would suggest that these are still very
early days, and the development of a broad strategic doctrine
for cyber deterrence may take decades, as it did for nuclear
deterrence during the cold war. And there are no set rules of
the road or a concrete escalation ladder for deterrence. And
once those are in place, there will be an opportunity to
discuss in more specific terms which measures would be amenable
or advisable for European colleagues as well as in the United
States.
However, I would just say in this hybrid warfare, including
cyber activity and others, there is certainly a place for
sanctions amongst other tools.
Mr. Lorber. I agree with Ms. Rosenberg. I think the first
step here is deciding for ourselves what the rules of the road
are, and then once we have made that decision, then we target
actors in a public way that we feel step outside those bounds.
And the sanctions for cyber activity in many cases may not have
as much of an economic pinch as they do sort of a symbolic
deterrence effect. And so I think that making sure that we have
established those rules first will send clear signals to our
adversaries that this activity is outside the bounds of what we
consider to be acceptable.
Mr. Ludema. We have already identified quite a number of
cyber companies and individuals associated with the cyber
attacks and singled them out for sanctions. I would say that we
would need to continue to find them and continue to sanction
them.
What our analysis shows is that when you impose blocking
sanctions upon these individuals, it does have a significant
effect and will degrade their ability to conduct further
action.
Senator Van Hollen. Thank you. I think that the
prosecutions we brought against the Chinese actors certainly
helped establish the U.S.-China cyber agreement. So I
appreciate your testimony. I know time is limited, but I look
forward to following up with you. Thanks.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you. Thank you, Mr. Chair. I
appreciate the opportunity to participate in this important
discussion. Thank you to the panelists. I apologize for my
tardiness. I have a competing Commerce Committee meeting going
on at the same time. But thank you for the discussion, and I
have had the opportunity to review your written testimony as
well.
Let me turn to the G-7. As we all are aware, Russia was
suspended from the G-8 after their incursion into Crimea in
disregard for international law. Has Russia's suspension from
the G-8 had any meaningful impact on their economy, their
security, or their influence? And I am going to open that up to
the panel. And then along with that, what can the coalition of
G-7 countries do to be most effective in influencing Russia to
abide by international norms and the laws moving forward?
Ms. Rosenberg. I can start. I think that it may be
difficult to disaggregate the effect of removing Russia from
the G-8 from other effects taken effectively and
simultaneously, including sanctions, U.S. and EU sanctions, and
a reinvigoration of NATO with respect to the Russia threat.
However, I think that a primary effect of this removal had to
do with signaling and the message that it sent to Russia and
the global community about the interest of this group in
holding to norms, particularly global norms, sovereignty, and
what it means for Russia to no longer be welcome in that group
of nations holding these norms.
Senator Cortez Masto. Thank you.
Mr. Lorber. I agree. Thank you for your question. And I
think that the primary thing that the G-8, now G-7 could do is
offer as a carrot for Russia's reintegration in the case is
that Russia fulfills its obligations laid out under Minsk or
reduces its cyber activities, et cetera. So I think that is a
very serious carrot that we can offer.
Senator Cortez Masto. Thank you.
Mr. Ludema. Yeah, I would say that it was a political move
and not an economic one. I do not think that there is a great
deal of economic benefit per se to being part of the G-8 or G-
7, despite the fact that it is an important body for
coordinating economic policy.
Senator Cortez Masto. No, and I agree, it is a symbolic
move, like the hearing we are having today I think is a
symbolic move that is important for the United States.
You have also discussed expanding sanctions or improving on
the current sanctions regime in some way. And while there
certainly must be repercussions for Moscow's actions and they
cannot be allowed to act with impunity, how is this not just
more of the same? In other words, what in Putin's behavior or
in Russia's current standing makes you believe that this will
produce any of the behavioral changes we are seeking from
Moscow?
Ms. Rosenberg. I do not think it is redundant to engage in
the active reaffirmation of principles, particularly when
political circumstances change, including in the United States
and in Europe. So reaffirmation of the posture toward Russia
and condemnation of its aggression and foreign adventurism has
political and messaging merit, and it may have economic effect
as well. So I see it more as a reaffirmation rather than
redundancy.
Mr. Lorber. And I think there is some indication--as I was
speaking about with Senator Kennedy, there is some indication
that the sanctions have had an impact on Russian
decisionmaking. So, for example, you see Vladimir Putin and
Foreign Minister Lavrov coming out on fairly regular occasions
saying, ``We want to get the EU sanctions off of us; we want to
get the U.S. sanctions off of us. They must be pulled down.''
And so I do think to an extent it is impacting their choices.
Senator Cortez Masto. OK.
Mr. Ludema. I would say that standing pat is not the same
thing as standing still. The existing sanctions that we have,
particularly the SSI sanctions, will tighten over time as more
companies roll over their debt, as the Russian energy companies
are forced to move out of conventional drilling and into more
exotic drilling. These things are going to slowly and
systematically degrade the long-term growth prospects for the
Russian economy. So I do not think that we should think that
just because we have not imposed new sanctions up to this point
that these sanctions are not going to have a continued effect.
Senator Cortez Masto. Thank you. My time is running out,
and I just want clarification on one thing you were talking
about, Financial Crimes division, FinCEN. And as the Attorney
General of Nevada, I had the opportunity to work with them. So
let me just clarify. It was not that you were saying they were
not taking action with whatever information they are gathering
with respect to real estate purchase by Russian oligarchs,
correct?
Mr. Lorber. That is correct.
Senator Cortez Masto. You just do not know of the action.
Mr. Lorber. That is absolutely correct. I do not know what
action they are taking, but I do not----
Senator Cortez Masto. That does not mean they are not
taking that action----
Mr. Lorber. That is correct.
Senator Cortez Masto.----as a body that gathers that data
and working with those law enforcement agencies, correct?
Mr. Lorber. That is correct, Senator.
Senator Cortez Masto. Federal law enforcement. Thank you. I
appreciate it. Thank you so much for the comments today.
Chairman Crapo. Thank you very much, Senator. And I want to
thank all of our Senators and our witnesses for following the
time. We made it almost by 5 minutes to 12. We just ran over a
little bit.
To our witnesses, I want to say thank you again also for
coming. I do ask that you respond promptly to questions that
you will receive from the Senators who have 7 days to submit
follow-up questions to you. You have been very helpful to us.
When I hit the gavel, I am going to be heading out the door
fast because I am already late to another meeting. But once
again, we appreciate this. It is a critical issue, and we will
be working together to try to move forward on making sure that
we develop the right policy for this country.
This hearing is adjourned.
[Whereupon, at 12:01 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF RODNEY D. LUDEMA, Ph.D.
Associate Professor, School of Foreign Service and Department of
Economics, Georgetown University
March 15, 2017
Introduction
Chairman Crapo, Ranking Member Brown and distinguished Members of
the Committee, thank you for the opportunity to testify at today's
hearing assessing U.S. Sanctions on Russia. My name is Rodney Ludema,
and I am a professor of economics at Georgetown University. Earlier
this year, my co-author Daniel Ahn and I published a report titled,
``Measuring Smartness: Understanding the Economic Impact of Targeted
Sanctions,''\1\ and I would like to take the opportunity to share some
of its conclusions.
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\1\ The public link to the report can be found at https://
www.state.gov/documents/organization/267590.
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As you know, Russia's intervention in Ukraine in early 2014
prompted the United States and the European Union to impose series of
``smart'' sanctions--sanctions against specific individuals and
companies, primarily in Russia and Ukraine. The sanctions began in
March 2014, and the list of targets has grown steadily, now affecting
several hundred companies explicitly and thousands more by association.
Our study seeks to understand just how ``smart'' these sanctions have
been in practice. That is, have they hit the intended targets with
minimal collateral damage? We find that, with a few notable exceptions,
the sanctions have inflicted significant damage on the intended
targets, with relatively little short-run impact on the overall Russian
economy.
Smart Sanctions in Context
While broad economic sanctions and trade embargoes have long been
used as instruments of foreign policy, targeted sanctions focusing on
specific individuals, companies, and transactions are relatively new.
They are an outgrowth of a recognition that the effectiveness of an
economic sanction in gaining compliance from a target government does
not depend on the overall economic damage the sanction causes but on
whether the target government itself and its key domestic
constituencies feel the economic pain from noncompliance. Thus,
sanctions are considered ``smart'' if they target responsible parties
while minimizing collateral damage. For this reason, assessing the
smartness of targeted sanctions on Russia is essential to assessing
their efficacy.
Clouding the picture, however, is the fact that the conflict in
2014 roughly coincided with a series of powerful macroeconomic shocks,
especially a dramatic decline in the price of oil (Russia's main
export), which jolted both the Russian and world economies. The Russian
economy slowed dramatically in 2014 and entered recession in 2015. This
makes it difficult to determine with the naked eye whether the poor
economic performance of a sanctioned company is due to sanctions or to
the broader economic problems of the country. Likewise, it is difficult
to determine whether the broader economic problems of the country are
due to the oil shock or to collateral damage from sanctions.
The difficulty inherent in attributing Russia's poor economic
performance following sanctions to a single cause has allowed for a
wide range of conflicting claims regarding the economic costs of the
sanctions to Russia and to neighboring economies. Opponents of
sanctions, in particular, claim that sanctions have caused little pain
to the specific targets, while inflicting untold economic damage on the
Russian people and on neighboring countries (principally members of the
European Union).
Effects on Sanctioned and Associated Companies
The first part of our study examines whether the sanctions impacted
the intended targets. We assemble all companies listed on the Specially
Designated Nationals and Blocked Persons (SDN) List and Sectoral
Sanctions Identifications (SSI) List, along with all companies
associated with individuals on the SDN list. Together with overlapping
targets from a similar set of sanctions by the European Union, this
comprises 584 unique targets. (In continuing research, we have also
considered some 2,000 subsidiaries of these targeted companies and
found similar results.)
Our method is to compare the performance of sanctioned companies to
that of nonsanctioned peer companies before and after the sanctions
were imposed. As sanctioned and nonsanctioned companies all face the
same macroeconomic environment, comparing the two groups is a way to
isolate the effect of sanctions. Our main
finding is that sanctioned companies are indeed harmed by sanctions
relative to their nonsanctioned peers. On average, a sanctioned company
loses an estimated:
one-third of its operating revenue
over one-half of its asset value
about one-third of its employees
after being targeted compared to nonsanctioned companies. These
estimates, which are large and appear highly statistically robust,
suggest targeted sanctions do have a powerful impact of the targets
themselves.
Beyond the broader strategic implications, these sanctions may
therefore be tactically impairing the ability of the Russian Federation
through these companies to further the illegal annexation of Crimea and
the ongoing crisis in Eastern Ukraine.
Macroeconomic Impacts
The second part of our study examines collateral damage. In
particular, we consider the impact the sanctions have on Russian GDP
and on its imports from the European Union. In contrast to the firm-
level approach, it is not possible to cleanly separate out the effect
of sanctions from the effect of other macroeconomic factors in the
aggregate analysis. Instead, we pose a much simpler question: How much
of the post-sanction performance of the Russian economy can be
explained either directly or indirectly by falling oil prices?
The world oil price (Brent) fell from over $100 in 2013 to under
$60 by the end of 2014, and declined further in the second half of
2015. A common rule of thumb for oil exporters suggests a $40 drop in
the world price of oil should shrink energy-dependent Russia's GDP by 4
to 5 percent. Indeed, we find that the oil price change explains the
vast majority of the decline in Russia's GDP and import demand, with
very little left to be explained by sanctions or other factors. We
conclude that either sanctions had only a small negative effect on
Russia's GDP or other positive factors largely canceled out the effect
of sanctions.
There is good reason to believe that sanctions have had only a
small negative macroeconomic effect in the first 2 years of their
imposition. By far the largest companies on the sanctions list (energy
companies, banks and defense companies, which make up a large fraction
of the Russian economy) were not subject to blocking sanctions. Rather,
they were subject to limitations on long-term borrowing and new
technologies that, by design, should have a delayed effect. The reason
for this design was to mitigate the potential negative impacts on U.S.
companies and those of our allies.
As for positive factors that may have countered the effect of
sanctions, the most plausible candidate factor would be the Russian
policy response. Notable policy responses were the large depreciation
of the Ruble in 2014, and government bailouts certain ``strategic''
firms. The government of Russia designates certain firms as strategic
because of their economic and national security importance to be
prioritized to receive state largess in the form of state loans
guarantees, capital participation, more government contracts, and tax
breaks. It is important to note that such policy responses are costly
to the Russian government, and thus this constitutes an indirect avenue
by which the sanction effect is felt.
Finally, we find that sanctions have had a small effect on the
economies of most EU countries. Adding together the impacts of
sanctions and Russia's agricultural countersanctions on EU exports
gives a median impact across EU countries of just 0.13 percent of GDP
(though with considerable variation across the EU members). The reasons
for this are: (1) Russia generally accounts for a small share of total
EU countries' exports; and (2) most of the decline in Russian imports
is explained by lower oil prices and trend factors.
Conclusions and Implications for Future Sanctions
Economic sanctions are meant to signal international disapproval,
deter further aggression, and create leverage in negotiations with the
targeted country aimed at reversing the offending policies. Whether the
current set of sanctions against Russia will ultimately accomplish
these goals is unknown, but good sanctions design gives the United
States and its allies the best chance of success.
History teaches that sanctions are most effective when they are
multilateral,
sustainable, focused, and clearly contingent on an achievable goal. The
current sanctions on Russia were designed with these principles in
mind. While not fully multilateral, they include the European Union,
which is a region of great importance to the Russian economy. They were
designed to cause minimal collateral damage in the short term and thus
have proven sustainable so far. Our study largely confirms the success
of this design element. Any new sanctions, if targeted at the broader
Russian economy, could easily cause collateral damage and thus should
be approached with caution. The current sanctions were designed to
focus their impact on the companies and individuals involved furthering
Russia's illegal annexation of Crimea and ongoing Ukraine policy. Our
study largely confirms the success of this design aspect as well. Any
new sanctions targeting different policies should be similarly
targeted.
Finally, current sanctions are contingent on certain Minsk II
milestones, and while they have yet to be reached, they are clear.
Sanctions policies that tie the hands of negotiators in such a way as
to prevent achieving the goal should be
avoided.
RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM ERIC B.
LORBER
Q.1. Following the imposition of sanctions, many Russians may
have believed that sanctions were a cause of Russia's economic
downturn. How could sanctions be better targeted to restrict
Russia's capabilities without encouraging anti-American
sentiment?
A.1. Sanctions that focus on Russian President Vladimir Putin
and his cronies' corruption could be particularly effective at
putting pressure on Russia while not encouraging anti-American
sentiment.
President Vladimir Putin is adept at manipulating state-
controlled media sources to put the blame for Russian's
economic struggles squarely on Western sanctions. While
factually untrue, large swaths of the Russian population
believe the United States is the cause of the economic anguish
they feel. Additional, broad-based sanctions that target
Russia's economy or particular sectors within that economy
(such as sectoral sanctions) may exacerbate this problem, and
while putting additional pressure on Vladimir Putin, may also
increase anti-American sentiment within Russia.
Sanctions--and sanctions-like tools--could be better
targeted to pressure Russia's elites and ruling class while
limiting the impact on the Russian population more generally.
One way to do this--as I mentioned in my written testimony--
would be to identify, track, and as appropriate, seize assets
of sanctioned Russian elites in the United States and in
certain foreign jurisdictions.
Russian oligarchs are well known to launder money coming
out of Russia through high-end real estate purchases in urban
centers, often paying cash for these properties. Recently, the
Financial Crimes Enforcement Network at the United States
Department of the Treasury has collected information related to
high-end real estate purchases by anonymous parties through its
recent Geographic Targeting Order.\1\ It is widely believed
that FinCEN's information collection has produced substantial
relevant information on these flows and where some of these
individuals' assets are. Identifying these assets in the United
States and partner jurisdictions (such as the United Kingdom,
where Russian oligarchs have purchased large amounts of luxury
real estate in London) and seizing them if necessary (e.g., if
they belong to designated Russian persons) could put additional
pressure on individuals within Vladimir Putin's circle of
cronies in ways that would not directly impact common Russians.
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\1\ See, e.g., ``FinCEN Renews Real Estate `Geographic Targeting
Orders' to Identify High-End Cash Buyers in Six Major Metropolitan
Areas,'' Financial Crimes Enforcement Network Press Release, Feb. 23,
2017, available at https://www.fincen.gov/news/news-releases/fincen-
renews-real-estate-geographic-targeting-orders-identify-high-end-cash.
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An additional benefit of such action would be that it
directly plays into one of the primary grievances ordinary
Russians do have against the Putin government and Russia's
oligarchs more broadly: corruption. As recent street protests
have illustrated, significant elements in Russia are frustrated
with the substantial level of corruption at the highest levels
of government.\2\ To the extent that U.S. sanctions and
sanctions-like measures focus on the Russian elites' corrupt
activities, they will in turn be less likely to produce anti-
American sentiment. Congress should therefore consider focusing
its legislative authority on measures--such as setting up a
Russian corruption task force at FinCEN--that target Russian
corruption and that freeze illicit Russian assets in ways that
hurt the bank accounts of key Russian oligarchs. While such a
task force would put pressure on Putin and his cronies,
Congress should remain clear eyed that such measures--while
powerful--would be unlikely to change Russian activity if not
situated as part of a well-developed strategy using all means
of U.S. statecraft.
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\2\Andrew Higgins, ``Aleksei Navalny, Top Putin Critic, Arrested as
Protests Flare in Russia,'' New York Times, Mar. 26, 2017, available at
https://www.nytimes.com/2017/03/26/world/europe/moscow-protests-
aleksei-navalny.html?_r=0.
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RESPONSE TO WRITTEN QUESTION OF SENATOR TILLIS FROM ERIC B.
LORBER
Q.1. Can you please outline what a sustained regimen of Russia
sanctions might look like. I am interested in your opinions on
what an idealized sanctions framework looks like, one where the
United States potentially has a multilateral engagement with EU
or NATO partners, so that we move toward a goal of isolating
Russian leaders (oligarchs? Putin's cronies?) and bad actors as
opposed to harming innocent Russian civilians. What concrete
policies could the United States put in place that would make
Russian leaders start to produce a mutually beneficial behavior
over the long term? How does U.S. energy policy influence the
ability of the United States and other nations to exercise
effective sanctions?
LPlease outline a framework and strategy for
exercising and implementing incremental and sustainable
sanctions, and what other policy tools should be used
to couple sanctions. At what point is an escalation of
engagement appropriate? What are the next steps when
sanctions and other diplomatic avenues in controlling
malign activities? How do you counteract negative
messaging about sanctions in Russia--to win the hearts
and minds of individuals in Russia?
A.1. One of the core tenets of a sustainable sanctions program
to effectively pressure Russia is close U.S. and EU
cooperation. The EU sanctions have been instrumental in
ensuring that Russia cannot offset much of the economic pain
imposed by U.S. sanctions. To the extent that the United States
and European Union can continue to closely coordinate their
sanctions programs, those programs will be more effective. Any
new U.S. sanctions should--at the very least--take into account
whether the European Union will be willing to join with its own
regulations.
With that as background, an idealized sanctions program is
one that gradually ramps up the pressure on Russia and in
particular on Russian oligarchs and cronies, specifically by
targeting their
corrupt activities. Such gradual pressure--where the United
States tightens the vice slowly but deliberately--will be
significantly more likely to achieve EU buy-in than a fast,
powerful escalation of sanctions (such as imposing broad import
restrictions on Russian energy products). Likewise, such
gradual and deliberate pressure can help U.S. diplomats make
the case for additional sanctions; if Russia refuses to change
its behavior as a result of limited escalation, the United
States can argue to our European counterparts that more means
are necessary.
My written testimony lays out a number of options for
incrementally increasing the pressure on Moscow, and I
reproduce them at a high level here:
LThe codification of certain executive orders
(``EOs''), including EOs 13660, 13661, 13662, 13685,
and 13694, as well as additional statutory designations
under these codified EOs;
LEstablishment of a task force, potentially led by
the Financial Crimes Enforcement Network (``FinCEN''),
to identify and seize assets of targeted Russian
persons, including those with close ties to Russian
President Vladimir Putin;
LCertain restrictions related to U.S. and European
financial institutions' purchase or facilitation of
Russian sovereign debt, which has been a way for Russia
to prop up Russian state-owned enterprises and
financial institutions in the face of
sectoral sanctions; and
LPrimary sanctions on elements of Russia's oil and
gas industry, with possible carve-outs for certain
countries particularly dependent on the Russian energy
sector.
Note that, as I explain in my response to Senator Toomey's
question above, the FinCEN task force and its focus on Russian
corruption may be the tool least likely to engender anti-
American sentiment. Most of the more powerful sanctions options
will likely have macroeconomic effects on Russia's economy, and
Putin will be more able to use them for propaganda purposes.
In terms of coupling sanctions with other policy tools,
these economic measures must be nested in a larger strategy of
pressuring Moscow, including aggressive diplomacy and
responding in kind to malign Russian activities such as
offensive cyber operations. Sanctions are a means to an end,
and Congress and the Administration must be clear as to what
that end is and how they intend to achieve it. Ramping up
economic pressure on Moscow without clear objectives, the
employment of other coercive tools, and buy-in from the
Administration--is unlikely to be effective in getting Moscow
to change its behavior. While it imposes sanctions, the United
States should be actively combating Russian aggression in cyber
space, for example.
Finally, Congress should think through how it can unwind
sanctions pressure in the case that Moscow--even partially--
changes its behavior. Current sanctions bills, including the
Counteracting Russian Hostilities Act of 2017 (``Counteracting
Russian Hostilities Act''),\1\ ramp up the pressure on Russia
significantly. Yet, as we have learned over the past few years,
unwinding sanctions can often be a difficult and fraught
process, and Congress should think about how and when it will
unwind sanctions even as it builds pressure. Any such new
sanctions legislation should include built-in ``off-ramps''--
namely elements of the sanctions regime, such as specific
designations or specific Directives--that could be undone in a
situation of partial Russian compliance with its various
obligations, such as those under the Minsk agreements. Such
partial sanctions relief could be traded for Russian
fulfillment of these obligations, and this approach would
increase the chances the United States could limit--though not
completely eliminate--Russian challenges to U.S. interests. I
have explained how to construct a sanctions framework that
focuses on ``smart unwinding'' in my written testimony.
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\1\ S. 94, ``Counteracting Russian Hostilities Act of 2017,'' 115th
Cong. (2017).