[Senate Hearing 118-359]
[From the U.S. Government Publishing Office]
S. Hrg. 118-359
ADVANCING NATIONAL SECURITY AND FOREIGN POLICY THROUGH SANCTIONS,
EXPORT CONTROLS, AND OTHER ECONOMIC TOOLS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE ECONOMIC TOOLS AVAILABLE TO ADVANCING NATIONAL SECURITY
AND FOREIGN POLICY
__________
FEBRUARY 28, 2023
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov/
_______
U.S. GOVERNMENT PUBLISHING OFFICE
56-152 PDF WASHINGTON : 2024
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chair
JACK REED, Rhode Island TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey MIKE CRAPO, Idaho
JON TESTER, Montana MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA LUMMIS, Wyoming
TINA SMITH, Minnesota J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania STEVE DAINES, Montana
Laura Swanson, Staff Director
Lila Nieves-Lee, Republican Staff Director
Elisha Tuku, Chief Counsel
Amber Beck, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Assistant Clerk
(ii)
C O N T E N T S
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TUESDAY, FEBRUARY 28, 2023
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 35
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 3
Prepared statement....................................... 36
WITNESSES
Daleep Singh, Former Deputy National Security Advisor for
International Economics, and Former Deputy Director, National
Security Council and National Economic Council................. 5
Prepared statement........................................... 38
Responses to written questions of:
Senator Scott............................................ 85
Senator Cortez Masto..................................... 85
Senator Warnock.......................................... 86
Senator Fetterman........................................ 86
Senator Kennedy.......................................... 86
Clay Lowery, Former Assistant Secretary for International
Affairs, and Former Director of International Finance,
Department of the Treasury and National Security Council....... 7
Prepared statement........................................... 47
Responses to written questions of:
Senator Scott............................................ 87
Senator Cortez Masto..................................... 88
Senator Warnock.......................................... 88
Senator Kennedy.......................................... 89
Kevin Wolf, Former Assistant Secretary of Export Administration,
Department of Commerce......................................... 9
Prepared statement........................................... 51
Responses to written questions of:
Senator Scott............................................ 90
Senator Cortez Masto..................................... 90
Senator Warnock.......................................... 91
Senator Kennedy.......................................... 91
Additional Material Supplied for the Record
Letter submitted by American Securities Association.............. 93
(iii)
ADVANCING NATIONAL SECURITY AND FOREIGN POLICY THROUGH SANCTIONS,
EXPORT CONTROLS, AND OTHER ECONOMIC TOOLS
----------
TUESDAY, FEBRUARY 28, 2023
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room 538, Dirksen Senate
Office Building, Hon. Sherrod Brown, Chairman of the Committee,
presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. Good morning. The Committee on Banking,
Housing, and Urban Affairs will come to order. Today's hearing
is in the hybrid format.
[Unidentified Voice.] This is James Brady with Senator
Vance. I have Senator Vance here.
Chairman Brown. Good. These Ohioans are getting a little
uppity, don't you think? I am glad he is here, one way or the
other.
Today's hearing is hybrid. Our witnesses are in person but
Members have the option to either appear in person or
virtually.
Last week marked 1 year since Vladimir Putin unleashed his
brutal, criminal war on Ukraine. Putin wanted to jeopardize the
future of sovereign democracy and in the process to threaten
the world order, an order based on freedom and democracy and
the rule of law. Putin has been surprised by two things: the
resilience of the Ukrainian people and President Biden's
ability to put together and keep together a broad, consistent
international coalition to support the Ukrainian people as they
defend their country.
Last week I again met with Ukrainian Americans in greater
Cleveland, one of the most vibrant, largest Ukrainian
communities in our country. My State is proud to have that
vibrant, active community. Ohioans' message to me was clear: we
maintain our resolve, and we must continue to hold the Russian
government accountable along with all of those who enable its
war on Ukraine. We cannot waver in our commitment to Ukraine. I
am glad that President Biden and Senator Schumer and Leader
McConnell all made clear their support last week.
Many of our colleagues of both parties were overseas last
week, all showing united, bipartisan support. Our commitment to
the Ukrainian people, our resolve to stand up to Putin has
never been partisan. We must recognize that Putin's brutal war
is the most recent assault that authoritarians are launching
around the world. All their eyes are on our response in Eastern
Europe right now.
The NATO General Secretary said last month if President
Putin wins in Ukraine this would send a message that
authoritarian regimes can achieve their goals by brute force.
Beijing is watching closely and learning lessons that may
influence its future decisions. It is what the Administration's
National Security Strategy outlined as, quote, ``a strategic
competition to shape the future of the international order,''
unquote.
Today's hearing is about how we use economic tools,
sanctions, export controls, investment screening to advance and
protect U.S. national security and foreign policy. In addition
to the humanitarian and military assistance, the United States
and our allies have provided Ukraine our response to Putin's
war centered on the significant sanctions and export controls
we have imposed to ensure that Russia, not the rest of the
world, bears the full cost of Putin's illegal criminal
invasion. These measures are imposing real costs on Russia.
Treasury Deputy Secretary Wally Adeyemo put it pretty well last
week: ``Our actions are forcing Russia to mortgage its economic
future to save face today.''
We, of course, recognize that not all economies are the
same. Our work is complex as we confront the challenges posed
by President Xi and the Chinese Communist Party in Beijing.
Twenty-five years ago Senator Lindsey Graham and I led efforts,
as House members, to oppose China's accession to the World
Trade Organization. Corporations in search of ever-growing
profits shut down manufacturing in Ohio and in South Carolina
and across the United States and moved production to China. It
contributed to the industrialization of China, and it has
funded the buildup direct link. It has funded the buildup of
the Chinese military.
I have challenged that failed China policy of
Administrations of both parties, Presidents in both parties,
all the way from the first Bush up through Trump. Presidents of
both parties have failed us on China in that way. It was
obvious to some of us then, what all of us see now, that China
poses a real threat to our economic security. Look at
Columbiana County in Ohio, the home of East Palestine. Look at
Clarendon County in South Carolina.
Now the serious national security threats are also obvious.
The Chinese government made its aims clear, to dominate
advanced technology and global supply chains. The Chinese
Communist Party civil-military fusion policy erases the line
separating commercial and military use of finished goods and
the technologies that go into them. And we have seen Beijing
ramp up its activities in the South China Sea and Taiwan Strait
while oppressing its own citizens. Now we are even seeing
Chinese Communist Party officials meeting with Putin and
consistently refusing to condemn his invasion of Ukraine.
Whether in Beijing or Moscow, whether in Iran or North Korea,
whether it is to address IP theft, human rights abusers,
foreign traffickers of illicit fentanyl, we need a robust
economic policy to deter and disrupt behavior that hurts U.S.
national security interests.
On this Committee I have worked with colleagues in both
parties to restrict U.S. technology or financing from being
used in ways that harm U.S. national security interests. On a
bipartisan basis, this Committee led reforms to strengthen our
investment screening process, conducted by CFIUS, the
Committee on Foreign Investment in the United States. We
have provided permanent statutory authority for the Bureau of
Industry and Security, the BIS, to administer and enforce our
export control system. And last Congress, Ranking Member Toomey
and I led this Committee's work to prohibit the importation of
Russia gold, to impose sanctions regarding human rights abuses
by Iran, and to expand BIS's authority to limit exports to
foreign militaries' intelligence services and security forces.
We took action last year--many sitting at this table remember--
to remove most-favored-nation trade status from Russia. Actions
have economic consequences.
I hope we will continue this strong history of bipartisan
work on important national and economic security issues in this
Committee's jurisdiction over the next 2 years with Ranking
Member Scott, and I am confident we will.
Today in this hearing we have a chance to take that first
step by examining how we use our economic toolkit to advance
the breadth of issues that impact our U.S. national security
and foreign policy. We must use these tools we have to deter or
disrupt behavior that undermines our economy. We need to do
that while we strengthen our partnership with countries that
share our values for democracy and free markets. We need to do
that while not harming U.S. economic and technological
leadership.
Senator Scott.
OPENING STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you, Mr. Chairman. Before I start with
my comments I just want to acknowledge the challenges and the
tragedy in East Palestine, Ohio, that you and both Senator
Vance represent. My prayers are certainly with the folks there
and hope that we continue to see an all-of-government approach
to solving the problems and certainly holding those folks
accountable as well.
Chairman Brown. Thank you for saying that.
Senator Scott. Yes, sir.
Last year marks the 1-year anniversary of Russia's invasion
of Ukraine. Over this past year we have seen the horrors of war
and brutal loss of life. But we have also seen the strength of
the Ukrainian people. Their fight against tyranny and
oppression to seek and maintain their independence is
inspiring, and reminds me of our own intrinsic values that
inform American patriotism, the hope for a better future.
We are fortunate enough to live in the greatest nation on
Earth, and must always be vigilant to protect and promote
national and economic security, the underpinnings of our
Nation. Preserving or status as a world leader requires the
continual honing and sharpening of our economic security tools
in order to preserve and protect the role of America at home
and abroad.
These tools are often pushed beyond our everyday
conversations. Folks do not always bring up sanctions at the
dinner table, at least not in my house. But they are important
to protecting and promoting American interests. We have seen
firsthand, whether it was with Russia or North Korea, that the
tailored use of sanctions can be an effective foreign policy
and economic security apparatus.
Unfortunately, these same tools have been wielded as
hammers instead of scalpels, resulting in pushing our
adversaries toward closer cooperation with each other and
further away from us. Much like the Obama administration's
famous red line, the Biden administration's failure to enforce
existing sanctions manifest weakness, which is an unacceptable
abuse of our Nation's global leadership and signals to friend
and foe alike that when we are saying something we may not
actually mean it.
Recent reports of Chinese and Iranian support for Russian
weaponry, flouting U.S. sanctions, is just another example. If
there was ever a time to kowtow to our adversaries, and their
supporters, I assure you it is not today nor ever. National
security efforts should support, not detract, from American
industrial leadership, a commonsense principle. However,
instead of using American oil and natural gas resources to aid
our European allies in their efforts to cut ties with Russian
oil, the Biden administration restrict American energy
production to promote liberal climate change policies,
punishing not only our allies but everyday families stuck with
higher and higher energy bills.
When looking at tools like export controls and our
investment security review process, our goals should be a
holistic one that combats malign economic aggression.
Specifically, the Chinese Communist Party has enacted laws
facilitating the theft and unfair treatment of American
innovation. We must use our export controls to ensure sensitive
technologies are not being shared with foreign adversaries,
much like we must use the CFIUS process to ensure bad actors
are not granted undue access under the guise of benign foreign
investment.
Economic security requires precision and strength. We must
champion American economic opportunity. Hard work and ingenuity
are two of the main drivers of the American dream, the same
dream that our adversaries are working to stop.
I look forward to hearing from our witnesses on this
important topic. Thank you.
Chairman Brown. Thank you, Senator Scott, and thank you for
your comments about East Palestine. I was there again
yesterday----
Senator Scott. Excellent.
Chairman Brown. ----and I appreciate the work that Senator
Vance has done there. And the local congressman, Bill Johnson,
has been there at least a couple of times a week, and he has
really stepped up. So thank you.
Senator Scott. Yes, sir.
Chairman Brown. I will introduce today's witnesses.
Daleep Singh is the former Deputy National Security Advisor
for International Economics at the National Security Council
and former Deputy Director of the National Economic Council.
Welcome.
Clay Lowery served as Assistant Secretary of International
Affairs at the Department of Treasury. Mr. Lowery, welcome.
And Kevin Wolf served from 2010 to 2017 as the Assistant
Secretary of Commerce for Export Administration at BIS at the
Department of Commerce. Welcome to you, Mr. Wolf.
We will now begin Mr. Singh's testimony. Thank you.
STATEMENT OF DALEEP SINGH, FORMER DEPUTY NATIONAL SECURITY
ADVISOR FOR INTERNATIONAL ECONOMICS, AND FORMER DEPUTY
DIRECTOR, NATIONAL SECURITY COUNCIL AND NATIONAL ECONOMIC
COUNCIL
Mr. Singh. Thank you Chairman Brown, Ranking Member Scott,
distinguished Members, for inviting me to testify, which I am
doing so today in my personal capacity.
I will make three points on the Russia sanctions program:
goals, impact, and lessons learned.
First on goals. Sanctions serve a geopolitical purpose.
Before February 24 of last year that purpose was to help
preserve the peace. How? By signaling to Putin our readiness to
impose the most severe economic sanctions ever deployed if he
invaded. Of course, the rest is history. Once the invasion
began, the objective of sanctions evolved. Short term, maximize
the costs on Putin for continuing the war; medium term, degrade
Putin's ability to exert influence and project power on the
world stage; long term, generate a negative demonstration for
any autocrat that might consider redrawing borders by force.
In pursuing these objectives, we unleased the arsenal of
sanctions we warned Putin about, itself the product of intense
collaboration with nearly 40 countries. Our shared mindset was
to attack pressure points, where our collective strengths
intersect with Russia's vulnerabilities.
Five channels stood out. Channel one was the delivery of a
capital account shock. Together with more than half the world's
economy, we denied capital to and blocked any transactions with
the largest Russian banks. To Putin's surprise, we then
immobilized almost half of his central bank's foreign reserves,
disarming the financial fortress he had built for this war.
Channel two was the denial of cutting-edge technology to
Putin. Semiconductors, AI, quantum, robotics, biotech, these
are the foundational technologies for every modern economy and
military. Denying these inputs meant we could degrade Putin's
war machine in Ukraine and anywhere else for generations to
come.
Channel three was the removal of Russia's privileges in the
global economy, its ability to receive a bailout from the IMF
or the World Bank, its most-favored national trading status,
thanks to this Committee, its reputation as an investment-grade
borrower.
Channel four was the downgrade of Russia's position as a
leading energy supplier, by shutting down his prized Nord
Stream 2 pipeline, by banning our imports of Russian energy, by
undercutting his revenues with a novel oil price cap, and by
speeding our transition to renewables.
Channel five was our launch of a global campaign to expose
and hold to account Russia's kleptocrats. The Russian people
have been getting ripped off by Putin and his cronies for a
long time, and they deserved to see it for themselves.
In terms of impact, I would say sanctions are doing their
job. First, Russia's economy is contracting, and for years to
come its growth prospects are bleak. It is true that last
year's recession is smaller than expected, but do not mistake
this for resilience. To limit the depth of the current
recession, Putin sacrificed Russia's economic potential, with
capital controls, by weaponizing energy, and depleting his
national savings.
But let us be clear. The exit of more than 1,000
multinational companies will bite. So will the flight of up to
1 million of Russia's best and brightest. So will the loss of
leading-edge technology. So will the loss of half of his
customer base for energy. So will default. The Russian
government itself expects that GDP will bottom 8 to 12 percent
lower than its 2021 baseline, equivalent to almost $200 billion
in lost income.
Second, the crippling effects of our export controls on
Russia's military-industrial complex are both profound and
underappreciated. I have given you a sampling of these impacts
in my written testimony, but the bottom line is that without
leading-edge technology we have put the Russian military at a
disadvantage on the battlefield and denied Putin's ambition to
project power on the world stage.
Third, Russia's dominant role in global energy markets will
never be the same. Our strategy to minimize Putin's energy
revenues while protecting households at the gas pump is
working. Russia's oil and gas revenues were down almost 50
percent from last year as of January. Here at home, prices at
the pump are 15 cents a gallon lower than when the invasion
began. Overseas, European gas and electricity prices have fully
retraced.
As a caveat, let me repeat that sanctions are just one of
many tools. They work when they are embedded in a broad
strategy, most importantly, doing all we can to support
Ukraine's fight for freedom, fortifying NATO's eastern flank,
doing all we can to help the world deal with the spillovers of
Putin's war, and working to finance Ukraine's future as a
successful alternative to Russian kleptocracy. Executing on all
these fronts and staying the course is what will create
leverage for Ukraine if and when it chooses a diplomatic
settlement.
Reflecting on lessons learned, I am enormously proud of the
unity we have forged with Europe, the G7, and beyond, within
hours of the invasion, to move in lockstep with unprecedented
force, but I have to admit many more countries have stood aside
and sounded caution about sanctions. So in my judgment we need
to take four actions to win the global narrative and prepare
for what is ahead.
First, we should articulate a doctrine of economic
statecraft, at the highest levels of government. We have spent
hundreds of years crafting military doctrine, only a small
fraction of that time doing so for economic statecraft.
Second, we should continue building an analytical
infrastructure that takes economic statecraft seriously.
Third, we should stress-test the tools economic statecraft
against conflict scenarios.
And last, we need balance. Sanctions receive enormous
attention as a coercive device. If you do not change behavior
it will cause you pain. But this message rarely wins hearts and
minds, so it is on us to balance the increased use of sanctions
which are designed to cause pain with an even greater emphasis
on statecraft that offers mutual economic gain, our true
competitive advantage. Infrastructure finance, supply chain
partnerships, technology alliances, debt relief, revitalizing
the World Bank can all serve this purpose, and in doing so
demonstrate the incomparable promise of American economic
strength as a force for global good.
Thank you.
Chairman Brown. Thank you, Mr. Singh.
Mr. Lowery, welcome.
STATEMENT OF CLAY LOWERY, FORMER ASSISTANT SECRETARY FOR
INTERNATIONAL AFFAIRS, AND FORMER DIRECTOR OF INTERNATIONAL
FINANCE, DEPARTMENT OF THE TREASURY AND NATIONAL SECURITY
COUNCIL
Mr. Lowery. Chairman Brown, Ranking Member Scott, and
Members of the Committee, I would like to thank you for the
opportunity to testify.
As requested by the Committee, I will discuss briefly the
economic impact on Russia due to the sanctions regime put in
place in 2022. I will try not to repeat what Mr. Singh said.
Two is some of the lessons that can be drawn when you are
thinking about China. And three, and a little bit different,
the idea of an outward-bound investment screening mechanism
using the prism of CFIUS to judge it.
The United States, along with a number of allies, imposed,
arguably, the most robust financial sanctions package in
history. A year later, this has had a substantial economic and
financial impact. But it has neither been as dramatic nor as
sweeping as was estimated last year. Although the sanctions
regime was expansive, there were still major carveouts, for
natural gas, oil, petroleum products. The exports of these
products enabled Russia's current account surplus to nearly
double in 2022, which means an extra $100 billion, which helped
Russia provide much-needed liquidity to their economy and
revenue to prop up their fiscal position.
Second, while the Biden administration quickly and
successfully put together a significant multilateral coalition
for sanctions, this coordination, in some respects, has not
been broad enough, and let me just provide an example.
Russian oil export volumes fell across the EU, Japan,
Korea, and several other countries, yet Russian oil export
volumes overall were still up in 2022, as countries such as
China, India, and Turkey increased their purchases.
And finally, Russia also adapted to the sanctions. The
Central Bank of Russia, for instance, took swift and decisive
measures that allowed the exchange rate and the banking system
to stabilize.
Now, Russia's economic and financial resilience, in the
face of such a major sanctions program, does not mean that the
program was a failure. In fact, it seems to be having an
impact, as Mr. Singh said, on Russia's ability to obtain
warfighting materials, has led to a brain drain, and is likely
to lead to a slow but steady decrease in both productivity and
economic activity for years to come.
So you have asked me to consider how such a sanctions
program would look like in the case of China. The key
difference, of course, between China and Russia is China's
economy and overall engagement in the world economy is simply
magnitudes bigger than Russia, in both scope and in scale, and
to an extent, we would really be comparing an apple to an
orange. However, there may be three insights from Russia as
they relate to China that are worth thinking about.
First is China, like Russia, has a significant current
account surplus. But instead of being a major commodity
exporter, they are the top exporter of manufactured goods. In
fact, China's share of global manufactured exports are more
than twice the share of Russia's share of energy and fuel
exports.
Second, international coordination may be more difficult as
it relates to China. China's much broader and deeper engagement
in international economics system suggests that choosing to
implement sanctions, frankly, will be a much more difficult
decision for jurisdictions around the world.
And third, there is implementation risk. Even if
international coordination is high, sanctions regimes are quite
complex, and executing on them and implementing them is not
like flipping a switch, and China will be even more complex
than Russia.
So the bottom line is that sanctions regimes are difficult
to implement, multilateral cooperation is quite complicated,
particularly for larger economies, you cannot plug every leak,
and countries adapt.
Now, let me switch to thinking about outward-bound
investment and its relationship to CFIUS.
One of the tools that the Administration and Congress has
been considering to influence our economic relationship with
China is an outward-bound investment screening mechanism, and
some have referred to it as a reverse CFIUS. As an individual
who oversaw CFIUS, let me try to think about what the key
lessons from CFIUS are that could be applied.
The first is understanding the objective of CFIUS. It is to
ensure national security while promoting foreign investment. It
is not a balance. It is both. To me, this means you have to
minimize the opportunity for politicizing transactions, you
have to keep CFIUS narrowly focused on national security, and
you need to ensure accountability of the executive branch.
The lessons that I think can further be drawn for trying to
come up with legislation or executive branch action on an
outward-bound investment are avoid the temptation to use vague
and ill-defined terms; do not duplicate existing authorities;
understand that there is a resource burden on the executive
branch that makes implementation difficult; and realize that
placing such government controls on private sector
transactions, particularly in cases that have nothing to do
with national security, is likely to harm our competitiveness
and may prove to be counterproductive to our national security.
Thank you again for the opportunity to testify today, and I
would be pleased to take any questions.
Chairman Brown. Thank you, Mr. Lowery.
Mr. Wolf, you are recognized. Thank you for being here.
STATEMENT OF KEVIN WOLF, FORMER ASSISTANT SECRETARY OF EXPORT
ADMINISTRATION, DEPARTMENT OF COMMERCE
Mr. Wolf. Chairman Brown, Ranking Member Scott, and other
Members of the Committee, thank you for asking me back. The
views I express today are my own.
As requested, I am providing a description of export
control policy in historical context with recommendations for
how to make export controls, particular with respect to China
and Russia, more effective and less counterproductive.
To level set, unlike sanctions, export controls are the
rule that govern the export, reexport, and transfer of
commodities, software, technology, and occasionally services to
specific destinations, end uses, and end users to accomplish
various national security or foreign policy objectives.
My prepared remarks set out a lot more detail, but really
the current discussion that is taking place is what is the
contemporary national security objective to be achieved with
respect to a system that was originally created to be focused
on identifying items for use in producing or developing weapons
of mass destruction or conventional weapons. And the post-cold
war era system, a system created in the 1990s, that largely
governs the laws of our allies, and is the foundation for the
U.S. system, although the U.S. system is broader, means that
the allied export control systems do not have generally the
legal authorities or the cultures to address contemporary
national security issues such as strategic competition
concerns, military-civil fusion policies, human rights abuses,
in particular involving commercial technologies, supply chain
security, and the need to promote democracy over
authoritarianism.
And the rise of the military-civil fusion policies that you
referred to is particularly significant because this classical
dual-use system was created on the premise that one could tell
the distinction between an item for civil and military
applications.
And so to address these issues I put together and described
a series of recommendations, and the first is to, for the
Committee and the Congress to support the Administration
efforts to work with allies to develop and articulate together
a significantly expanded vision for export controls to address
these contemporary common strategic national security and human
rights objectives that are outside the scopes of the post-cold
war era multilateral export regimes.
And second, to ensure that this vision can be implemented
and updated in domestic regulations of our allies, to work with
the Administration to create a new, multilateral export control
regime, again, with two mandates: to address classical export
control issues that cannot be addressed by the current regimes
given Russia's ability to veto any program in the regimes, and
then the second mandate would be to address these items that
are of contemporary strategic security issues, particularly
with respect to China and Russia.
Third, to work with the allies to create and announce
standards for the legal authorities that each of the allied
governments should have in their export control systems in
order to implement either a new regime or short-term
plurilateral arrangements to address nonclassical export
control issues.
And then also the Congress should work with or require and
support the Administration efforts to work with the allies in
order to develop, with their legislatures and executive
branches, the legal authorities and the funding for their
export control agencies to be able to have these authorities
and to work with the United States.
Fifth, to echo in a regular and a bipartisan way that this
new vision for export control thinking about strategic controls
is in the common security interests of each of the allies, and
to overcome what is quite significant skepticism among the
allies, make it clear on a regular basis that this is not a
mercantilistic effort by the United States to promote economic
advantage of U.S. companies over companies in allied countries.
And as an incentive for participation, to create incentives and
benefits for allies to cooperate with this new vision for
export controls, particularly in the form of the reduction of
unnecessary trade barriers caused by export controls as a
result of history by and among and between the close allies.
With respect to the enforcement side, to significantly
enhance the Administration's efforts and the allied country
efforts to data mine, to conduct investigations, to work
together, and to coordinate on global enforcement efforts.
Seventh, as part of the AUKUS initiative, Congress should
support Administration efforts to radically harmonize and
simplify the defense trade and dual-use rules by, among, and
between close allies--Australia, the U.K., Canada, the United
States of course.
All of these recommendations and others that I listed are
going to be really quite hard. I admit that. But success will
require inspired, inspirational, long-term, fact-based, and
bipartisan leadership. So all other alternatives are worse.
So with that I will stop and answer any questions you might
have.
Chairman Brown. Thank you, Mr. Wolf.
I will start with Mr. Singh. The world watched with horror
as Putin initiated an illegitimate war, a criminal war against
the people of Ukraine. I know that Ukrainian Americans in my
home State support the United States and the global coalition
imposing sweeping sanctions and export controls in response to
the invasion.
Describe the effect of this, if you would, Mr. Singh, of
our response, and what metrics we should look at when
determining whether sanctions and other economic measures are
having an impact.
Mr. Singh. Thank you, Mr. Chairman. Thanks for those
sentiments as well. So let us start with the facts. Russia is
in a recession. It was growing at 4.7 percent in 2021, the year
before the invasion. Last year it contracted 2.2 percent. That
is a fairly sizable swing.
Now it is true, the depth of the recession is not as large
as many expected, including me, but I would not mistake this
for resilience. It is not strength. It is more like a Potemkin
facade. What Putin has done is prop up the current growth of
the economy in exchange for sacrificing long-run growth
potential, and there are three ways in which he did that.
First, he slapped on capital controls. If you a have capital
controls that means if you have rubles you cannot sell them for
dollars. That arrested the freefall of the ruble, but it meant
that it was much more difficult for Russia to actually import.
Imports are priced in dollars, and that has led to a depletion
of the goods Russia needs to modernize its economy, to
diversify its economy.
Second, he weaponized energy, and that, of course, spiked
energy prices worldwide, it flattered his trade surplus, it
lifted GDP growth, but at the cost of losing half of his
customer base, the G7, and it led to a price cap which will
crimp his revenues even outside the G7. The latest budget
figures in Russia showed a 46 percent decline in oil and gas
revenues in January, relative to last year.
The third thing he did is he spiked Government spending by
60 percent as of the last month. Of course, much of that money
went into the war machine, and that lifted GDP growth, but at
the cost of hundreds of thousands of Russian lives that have
been lost, to say nothing, of course, of the lives that have
been lost in Ukraine. It also depleted his national savings. It
pushed up inflation and interest rates.
So look, the Russian government's own analysis shows that
its economy will bottom 8 to 12 percent lower than in 2021, and
I actually think that is an aggressive estimate. He has lost
1,000 multinational companies. He has lost a million of his
best and brightest. He has lost his technology base. He has
lost his access to capital markets, and he is in default. That
is the end game for Putin.
Chairman Brown. Thank you.
Mr. Wolf, that was the all-positive response about what
export controls and sanctions have done. Take the other side a
little bit. Describe the limitations of current export control
regimes and how the global response to the invasion of Ukraine
is presented in both assessing an opportunity for a new
multilateral export control regime.
Mr. Wolf. Terrific. Thank you. As I mentioned, the current
export control system of our allies was established in the
1990s to focus on items of direct relevance to producing or
developing or using weapons of mass destruction or conventional
weapons, and so it does not address any of the contemporary
national security issues that have been mentioned earlier,
including the strategic security issues, human rights
objectives, and country-specific issues, or the civil-military
fusion policies that you mentioned in your introduction. Also,
the way the regimes work is that each member has a veto over
any change or progress, and Russia is a member of three of the
four regimes and is apparently vetoing significant process.
And so as a structural matter, to enhance the effectiveness
of the controls and to reduce counterproductive impacts on U.S.
industry to level the playing field I have been advocating for
the creation of a new regime to address both of those mandates,
and for the United States to lead that effort to create it. I
have got much longer versions of the description in my
testimony, but that is the essential answer.
Chairman Brown. Thank you.
Back to you again, Mr. Singh. Given the economies of Russia
and China are very different, you talked about commodities
versus manufacturing as sort of the trademark, if that is the
right word, of each, and have different levels of
interconnectedness with the United States and our allies, what
lessons may be learned from the Russia response that would be
helpful in understanding the challenges in using our economic
toolkit with China?
Mr. Singh. So first on the differences, you are right, and
Mr. Lowery alluded to this. China's economy is 10 times larger
than that of Russia. Its banking sector is 30 times larger than
that of Russia. It is the largest manufactured goods exporter
in the world by a very large margin. It has a dominant position
in many different critical supply chains--solar panels, EV
batteries, machine tools, 5G, even parts of the semiconductor
supply chain like assembly and packaging.
It also has nearly a peer status with us on foundational
technologies like AI, biotech, and even quantum. And then last,
it has accumulated a lot of soft power since the Belt and Road
Initiative was initiated in 2013. It is the largest lender to
developing countries, two times as much as all other Western
governments combined, and much more than the World Bank.
Now, how do we confront the circumstances? Well, I think,
you know, drawing from the lesson of Russia, we have to start
with objectives and strategy. What is the objective? Is it
deterrence? Is it to degrade the target's ability to project
power and exert influence? Is it to maximize costs? Is it a
demonstration effect? Is it to fire a warning shot? Depending
on the objective and the strategy we can then have, I think, an
analysis-driven understanding of how our strengths intersect
with the target's vulnerabilities.
And it is from that point that you choose tools. Some of
these will be negative coercive devices like sanctions, export
controls, tariffs, any delistings. Others can be positive
inducements, to win the narrative with countries that would
have to join a coalition, and that is what I was making
reference to in terms of infrastructure finance and debt relief
and bilateral assistance, and using the institutions we have
built, like the World Bank and the IMF, to build a coalition
that can make a difference.
Chairman Brown. Thank you. Ranking Member Scott.
Senator Scott. Thank you, Mr. Chairman.
During implementation of our sanctions on Russia many
experts predicted a collapse of the Russian economy, turning
the clock back to the 1980s Soviet Russia. However, it now
appears that Russia has been able to work to mask the full
impact of sanctions by spending against their future spending
now.
Putin has decided that his life is more valuable than the
lives of Russia's children and its future. It is business as
usual there and the IMF is even predicting the Russian economy
will grow next year. If this prediction holds true, that is
troubling to me. It is like driving with your ``check engine''
light on. The car keeps going but you know sooner or later it
is going to be on the side of the road.
To no one's surprise, Russian oil revenues are the one
thing keeping their war machine going. Mr. Lowery, could you
describe how the Russian economy is currently functioning and
what impact you would expect if the United States sought more
expansive sanctions on Russian energy?
Mr. Lowery. Thank you, Senator Scott. So I agree with both
you and Mr. Singh that this is not necessarily purely about
Russian resilience. It is also about Russia basically, you
know, selling its future for the here and now. But, of course,
the here and now is what we are dealing with now, and you are
correct. The IMF basically is predicting a flat, maybe slight
growth in Russia's economy next year. There are others out
there that predict a slight decline. But whatever it is, it is
not that dramatic.
Now Mr. Singh made a really valuable point, which was that
we have seen a falloff in oil revenue over the last few months.
So while the summer and the early fall for Russia was actually
dramatically positive, from a revenue perspective, it has
fallen off. This could start having more of an impact on the
overall economy than even in the IMF has predicted.
Now, could there be more that is done? I think the answer
is yes, but it is all in. Again, it is difficult, right? So the
areas that it seems like we could do a bit more, and we are
starting to see it, Europe has now put in place essentially an
embargo on Russian oil and Russian petroleum products, not
natural gas. The G7 has tried to put in a price cap on those
very same products. We are trying to figure out how well that
will work. The jury is still out on that.
The key area is can we get more countries to join in, and
that, as we have seen, has been very complicated, and also
could we do more on natural gas area, which again is a nice
revenue provider for Russia.
So those are some areas in the petroleum area. There are
other areas that we could probably discuss, but that hopefully
answers your question.
Senator Scott. It does, Mr. Lowery. Another question on the
same topic of energy perspective. Would you imagine that if
America started increasing its exports of energy because we
increased our energy production, that would also give us
another tool in the toolkit as it relates to--I mean, you just
described, really, a blanket going over much of Russia's
production, and yet we still see our allies struggling in
Europe. If we had more production would we have a stronger
toolkit?
Mr. Lowery. Yes. I mean, I do not think there can be any
doubt about that.
Senator Scott. I like asking questions I think I know the
answer to on this point.
[Laughter.]
Senator Scott. If your response was different I would be
really surprised.
Mr. Lowery. Yeah, no. Look, the United States is an energy
provider and an exporter, and one of the most fascinating parts
we have seen--I had mentioned Russia's adjustments. It is also
the adaptability of some of our allies. Germany was not able to
take in natural gas from a number of countries except for
Russia. They have put in a massive investment to try to change
that, so that they can diversify where they get their natural
gas, whether it is from Qatar, Norway, or the United States.
And so I think that boosting our ability to export in those
areas seems like something that could be helpful to our allies
as well as, obviously, to our own economy.
Senator Scott. Well, I only have 25 seconds left so I will
save my question for the next round, to Mr. Singh. But I will
say that when I was on the Energy Committee back in 2014-2015,
one of the things I saw was, from Lithuania, their minister
came over and said, ``Please, please, please, start exporting
LNG.'' And we were just silent on that decision, and previous
decisions continue to have a domino effect on our ability to be
in a stronger position from a global perspective when you need
it the most.
Chairman Brown. Thank you, Senator Scott.
Senator Menendez is recognized, from New Jersey.
Senator Menendez. Thank you, Mr. Chairman. Thank you for
holding this hearing on the question of sanctions.
So I see that China continues to buy millions of barrels of
oil from Russia, but we do not seem to sanction them. I see
that Turkey is involved. According to Bloomberg, between March
and October of last year, Turkish exporters sent about $800
million worth of goods to Russia, including $300 million in
machinery and $80 million in electronics.
So what more can we do, or should we be doing, to send
countries a message that if you violate the sanctions there are
consequences? Because the sanctions are only as good as their
enforcement, at the end of the day. I have been the architect
of many of them. But without enforcement they are meaningless.
So Mr. Singh or Mr. Lowery, can you talk to the China
question? Why is it that we do not seem to sanction China when
they are getting millions of barrels? I mean, this is not like,
you know, a super state secret. The world knows that they are
doing this yet we do not seem to sanction them. Is there some
impediment?
Mr. Lowery. So will try to start. So it is correct that
China, India, Turkey have been a diversification strategy for
Russian oil exports, and other exports and imports. The issue
will be is that China and India, particularly, never signed
onto the sanctions regime in the first place. And so this is
kind of the point about like Mr. Singh and his team and the
people at the Biden administration worked very hard on building
out a coalition, and it was really difficult. But it was not
perfect, and so you did not get some economies to join in.
So the question then is how do you then do it, and it is
hard to actually come up with mechanisms that do not create
other consequences that are problematic. And so that kind of
leads you toward greater diplomacy and working with countries
that are slightly more adversarial toward us, and somewhat
better, actually, slightly more friendly to us, but they are
countries that we have----
Senator Menendez. We have used secondary sanctions before.
Mr. Singh? We have used secondary sanctions before. We do not
necessarily have to say if you do not sign on you get a free
pass, because then, you know, a lot of the world would not sign
on, right, or they can get the free pass without consequence.
Mr. Singh. So Senator, I mean, I will pick up on Mr.
Lowery's comments. Unlike cutting-edge technology or foreign
capital, in energy we do not have an asymmetric advantage
because of Russia's status as the world's second-largest
producer of oil and third-largest producer of natural gas. And
so we had to take a different approach which was to say how can
we minimize his energy export revenues while maintaining a
steady supply of global energy so we do not hit Americans at
the pump?
So our first effort in this regard was, well, let us shut
down----
Senator Menendez. China does not hit us at the pump.
Mr. Singh. So if Russia exports none of its oil to global
markets and we do not have a replacement, the concern would be
without OPEC+ or domestic producers filling the gap we would
see a spike in prices that would cause even more of an
inflation problem than we were experiencing last year.
And so what we have done with China, India, and Turkey is
said receive the gift of our bargaining power. Ride the
coattails of this cap, and insist to Russia that you pay no
more than the $60 a barrel that we have set. And, of course, we
can reduce that cap to $50, $40, $30, down to the marginal cost
of production for Russia, and that is the way in which we can
gradually tighten the vice grip on Putin's energy export
revenues without hurting Americans, in terms of the cost of
energy, the cost of food.
Senator Menendez. Well, according to the Administration's
own words, where they say that China is considering the
possibility of sending arms to Russia, that has not worked out
too well. You know, it has not worked out too well. They are
considering selling arms to Russia, which dramatically changes
the nature of this conflict if they were to do so. So in my
mind either you are in a fight to win or you are in a fight to
delay a long period of time.
One last question. As Chairman of the Foreign Relations
Committee I have an increasing view that the United States has
to lead the creation of an economic alliance among like-minded
countries that can provide a framework for cooperative action
in response to military aggression, violations to sovereignty,
economic coercion, and retaliation by adversaries. Mr. Singh,
as the coordinator of the international economic response to
Putin's invasion of Ukraine do you believe that something like
this, an economic NATO, so to speak, is something that could be
done?
Mr. Singh. I think it is a fantastic idea to look at where
our collective strengths intersect with the target's
vulnerabilities and to move together, because otherwise we will
be perceived as deploying the unilateral exercise of American
financial force. That is not what we are talking about here. We
are talking about the shared defense of core principles that
underpin peace and security. So I think your idea is very much
on point.
Senator Menendez. Thank you. I understand the Chairman
asked me to recognize Senator Rounds.
Senator Scott. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman. Gentlemen, first
of all thank you for coming before the Committee today. We do
appreciate it.
As you know, there have been numerous reports of suspicious
activity by U.S. adversaries in regard to U.S. agricultural
land purchases. In 2020, a Chinese-linked company planned to
build a wind energy farm project near Del Rio, Texas, only
miles away from Laughlin Air Force Base, where U.S. pilots are
trained, and in 2022, a CCP-linked company attempted to build a
corn milling plant on farmland near a sensitive Air Force base
outside of Grand Forks, North Dakota.
My question to Mr. Singh, to begin with, in your experience
as a former Deputy National Security Advisor for International
Economics, how might foreign investment in U.S. ag land and
companies by adversarial nations, particularly China, Russia,
North Korea, and Iran, how could that impact our national
security, especially if in close proximity to military
installations?
Mr. Singh. Thank you, Senator. Food security is economic
security. Food security is national security. I think it is as
simple as that. The supply chain for food in this country has
to be treated with the utmost importance in the same way that
we do with foundational technologies and the same way that we
do with energy and manufactured goods.
You have added an additional layer of concern, which is
that if the land that is built, or in a Green-Field Investment
is used for the purpose of spying, that raises an additional
level of concern. And so CFIUS has the capacity to require
notification for the acquisition of land above a certain
threshold, it can bring in the experts to determine whether a
national security risk is implicated, and that strikes me as a
reasonable way forward.
Senator Rounds. Thank you. Mr. Lowery, we have bipartisan
legislation. In fact, Senator Tester and I have it together. It
is called the PASS Act, and that would prohibit China, Russia,
Iran, and North Korea from purchasing U.S. ag land and
agricultural companies as well as adding the Secretary of Ag as
a standing member of the
Committee on Foreign Investment in the United States,
CFIUS. The agricultural industry is, in my opinion, a
significant part of not just my home State's economy but
nationally, and making it a true potential target for foreign
investment, particularly when you add in the geographic
specifics that we have identified in the last two specific
issues.
How might legislation like the PASS Act help protect this
very important sector, particularly in these geographic
locations?
Mr. Lowery. Thank you, Senator. I do not know the specifics
of your legislation but from what you just described I think
that the issue to think about is a couple-fold. One is, as Mr.
Singh kind of alluded to, CFIUS does have the ability, under
FIRRMA, the law that was passed to reform CFIUS back in 2018,
and the regulation in 2020, to look at Green-Field Investments
in agricultural spots that provide a national security nexus.
So in terms of a few things, one is if the Department of
Agriculture should be part of CFIUS that is something, I think,
that is a very reasonable idea. Right now if there is an
agricultural aspect to a transaction, Agriculture can be
brought in by CFIUS, and it has been in the past. But that does
not mean it should not be more of a regular operation as
opposed to kind of an ad hoc type of thing.
In terms of a prohibition on specific countries and
investments, I would have to really look at it. I have my
concerns about that because I do believe strongly in the
ability for countries and entities to invest in the United
States, because I think that is actually a positive for the
United States. So I am a little reluctant on suggesting
outward, absolutely prohibitions. But I think that without
seeing the legislation I think that would be my caution, I
guess.
Senator Rounds. Thank you. The reason why I asked is
because the prohibition was specific to those associated with
China and North Korea, Russia in particular right now, and I
think that is a huge part of it, and Iran. And particularly
because I cannot imagine why anyone would want them to be able
to purchase farmland, in particular, particularly if it was an
area that was near a sensitive geographic location. It
surprised us that those particular two areas that I identified
earlier had actually gone as far as they did before they were
stopped.
So I appreciate that, and thank you for your comments.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Rounds.
Senator Tester, from Montana, is recognized.
Senator Tester. Thank you, Mr. Chairman and Ranking Member,
and congratulations to the Ranking Member for taking over this
Committee. It is the first time I have been here in person, I
have been online, so thank you for your leadership.
Senator Scott. Thank you, Mr. Tester. I will extend to you
another 30 seconds, please.
Senator Tester. Perfect. Yeah, keep going. That is perfect.
So Senator Rounds brought up an issue that is near and dear
to my heart because we have a bill on it, so it ain't over with
yet, folks. I want to talk to you more about China, North
Korea, Russia, Iran being prohibited from buying land. No. 1,
let us just take it at that face value. Do we have the ability
to be able to track and stop that sale from happening on
farmland, or an agribusiness, because it applies to both?
Mr. Lowery. Right now my understanding of the rules for
CFIUS is that if a transaction was in a Green-Field transaction
and is within a certain mileage, basically, of sensitive
areas----
Senator Tester. OK.
Mr. Lowery. ----then CFIUS can investigate that
transactions and make a determination on whether or not it is a
national security issue, and eventually, potentially even block
it.
Senator Tester. OK. And so the definition of ``sensitive
area'' becomes pretty damn important.
Mr. Lowery. I would suggest yes.
Senator Tester. And do you have any idea what the mileage
is on that?
Mr. Lowery. So I think that CFIUS has put together
regulations, and they have created an annex, and that annex
actually says which are the sensitive sites.
Senator Tester. I got you. Like an ICBM missile silo would
be a sensitive site.
Mr. Lowery. That seems like it would be.
Senator Tester. And the question is, does that extend 500
miles? Fifty miles? Five miles?
Mr. Lowery. I cannot remember off the top of my head, and I
apologize.
Senator Tester. That is important to know. And this, by the
way, would not only ban that, it would ban it all. Because
quite frankly, and I am going to tell you and I do not want to
speak for Senator Rounds, I do not think China, North Korea,
Russia, or Iran gives a damn whether we exist or not, so why
should we allow them entrance, any entrance, into our country?
Because if you take a look at those countries they are all
affiliated--if a Chinese company comes in, they are affiliated
with the Chinese Communist Party.
So the question becomes--we can have the debate; it does
not matter. Rounds and I already have our minds made up. This
is a good thing to have happen, for not only America's national
security but for our food security, which is you had already
pointed out, are one in the same. The question becomes if we
put it into effect, can you give us the ability so we can
actually enforce it, so we could actually enforce it, number
one. Number two, is it even possible to do this, assuming they
are not going to come in as an oligarch from Russia but use a
shell company that may be a Canadian company?
Mr. Lowery. So right now, under CFIUS, CFIUS has become
expansive in the last few years, and instead of dealing with
100 or so transactions a year it is now dealing with over 400.
OK? So that means you have to have resources. You have to be
able to look. These are national security issues that people
are looking at.
If you expand to the whole of the United States and
basically say every single purchase of any type of land by
anybody from China, whether they are from a private sector or
government sector, or from Russia----
Senator Tester. By the way, unless you can----
Mr. Lowery. ----amount of work----
Senator Tester. If you can prove to me different, private
sector is government sector in China.
Mr. Lowery. That is fine. But the thing is that what we
have to think about is in some respects how big is the issue or
the problem at this point. Is there a lot of ownership, and I
think the answer is probably no. But then if you are going to
look at every single transaction that takes place on farmland
from foreign buyers--because if you are concerned about shell
companies that could be a fairly significant expansion of
CFIUS.
Senator Tester. Yeah. I think it would be, and I think the
challenge is do we think this is real or do we not think this
is real? And one of our challenges, and this is the scary part,
we do not know how big of an issue it is. We do not know how
big of an issue it is. I can tell you, I had a farm bill
listening session. Montana is a pretty good-sized State. It is
540 miles long and 400 miles wide. I have not had one yet where
this issue has not either been brought up in public or in
private. So there is land transferring all over the place here,
and I think we need to get our hands on it.
You know, the balloon should have been a wake-up call for
us all. It really should have been. Because the truth is if
they own land where I live, which is, as the crow flies,
probably 60 miles from the nearest silo, I would say that that
is of concern for me. So what the hell. I mean, there are
sensitive sites all over the country.
Here is what I hope, guys, and then I am going to turn it
back to the Chairman. I hope you will work with us to make this
workable, and I know it is going to be complicated, and I know
that people are going to say this cannot be done. But I think
this is a huge issue. I think it is a huge national security
issue, and I do not think we should be allowing countries who
do not give a damn whether we exist or not, owning land,
whether it is farmland or agribusiness in this country. They
are not our friends. They are not here to do us good things.
OK?
Thank you all very much.
Chairman Brown. Thank you, Senator Tester, and thank you,
too, for your outspokenness for years, maybe for decades, about
Chinese coming and buying up American farmland. I know that is
especially important because it is how you make your living,
your other living, so thank you.
Senator Kennedy is recognized, from Louisiana.
Senator Kennedy. Thank you, Mr. Chairman. I want to talk
just for a second about sanctions with respect to Russia, which
I support. I think most of us do.
Only a third of the world's population lives in countries
that have both condemned Russia's invasion of Ukraine and have
agreed to join in to the sanctions imposed by the United States
and the West. Mr. Singh, does not the Biden administration need
to do a better job of getting our world's neighbors on board?
Mr. Singh. Senator, thank you. Asian American self-
critique, I wish we had a broader coalition, but I would not
want to make the mistake of conflating population with power.
These sanctions work where we have an asymmetric advantage. The
world's major reserve currency issuers, with the exception of
China, are all part of this sanctions regime. So we
collectively deny foreign capital to Russia. That is what
matters. We collectively have the world's major designers and
producers of cutting-edge technology within the sanctions
regime. It may not represent the majority of the world's
population but it is the group that matters. So we are
delivering----
Senator Kennedy. Let me stop you for a moment, and I
apologize.
Mr. Singh. No problem.
Senator Kennedy. The time goes by so quickly. Why cannot
the Biden administration convince India to help us?
Mr. Singh. We are trying. I tried. I went there and we have
had a steady stream of officials go to India and try to work
with the deal space that we have. I think we have got quite a
bit of leverage because of the relationship that we are
building, across trade, energy, infrastructure, finance,
defense. I think we have got to play the long game with
counties that have historically tried to carve out a non-
aligned stance and want to hedge their bets somewhat.
Senator Kennedy. Well, I understand the long game and I
know sanctions take time, but in the long term here Putin could
win.
As you know, Europe and the United States have designed a
set of sanctions and export controls to basically try to cap
the price of Russia's oil at $60.
Mr. Singh. Yes.
Senator Kennedy. Now we both know that is not terribly
punitive because China and India are paying a whole lot less
than $60 a barrel to China.
Mr. Singh. In part because of the cap, Senator.
Senator Kennedy. I mean, if we really want to cutoff
Putin's cash-flow why do we not set that cap at the marginal
cost of production for Russia, to follow up on what Senator
Menendez said. Now you have done something. Why do you not do
that?
Mr. Singh. I think we can get there.
Senator Kennedy. Well, what are we waiting on?
Mr. Singh. Well, first you have got to build a coalition.
You have got to get enough countries to have a coalition that
has bargaining power, that can actually influence the global
price of oil, because that is what we pay. And now we got a 37-
or-so country coalition that is influencing the price that
Russia can sell its oil to, not only to us but we are not
importing any.
Senator Kennedy. I get it. I understand it, and I
understand the polities of it. You have got to worry about the
price of gasoline too, in America. I get all that. But what are
we waiting on? I mean, the longer we wait--I think it is
becoming clearer and clearer that Putin has misjudged the
people of Ukraine.
Mr. Singh. Yes.
Senator Kennedy. And it is becoming clearer and clearer
that President Xi has misjudged President Putin. He believed
him, that he could roll into Kyiv like thunder on a summer
night. Now, you say on one hand that is good. On the other
hand, that makes both Xi and Putin desperate, which I think is
why Xi is talking about sending arms to Putin. I understand the
politics of it, but why do we not just go to our friends in
Europe and say, ``Look, we are going to either win this thing
or not.''
Now this $60 cap on oil, we both know that is not having a
serious effect. It is having some effect. I do not mean to
criticize your work. But if you really want to strangle them,
reduce that cap down to the marginal cost of production for
Russia and you cutoff their cash-flow.
Mr. Singh. Senator, I think two things can be true. We are
having an effect. His oil and gas revenues are down almost 50
percent, year over year. But you are right that we can do more.
For example----
Senator Kennedy. Why are we not doing it?
Mr. Singh. Well, I am no longer in the administration.
Maybe we are working on it.
Senator Kennedy. Yeah, but you have got friends there.
Mr. Singh. Sure. Maybe we are.
Senator Kennedy. I mean, I do not mean to just pick on you.
But you are a very smart guy and I have learned a lot listening
to you. Gentlemen, do you all have any thoughts on that?
Mr. Wolf. I will defer to Daleep.
Mr. Lowery. I think you make very fair points. Daleep's
point is a very good one, which is it is just hard sometimes to
build a coalition. If you saw the argumentation within the EU
over the $60 price cap was, as far as I can tell, as an
outsider's view, a knock-down-drag-out fight within the EU.
Because I think there were countries, like Poland, who wanted a
much lower cap, but then there were other countries who wanted
a higher cap.
Senator Kennedy. And excuse me for interrupting but I am
about out of time. Let us just face reality, OK? Europe, if we
have learned nothing from we have learned that Europe is
totally dependent on the United States of America for its
security, period, and were it not for the United States of
America Putin would be in Paris right now. I think we need to
get a little tougher and firmer on our friends in Europe.
I am sorry, Mr. Chairman. Thank you for your indulgence.
Chairman Brown. Thank you, Senator Kennedy.
Senator Warner is recognized from his office, from
Virginia.
Senator Warner. Thank you, Mr. Chairman, and I appreciate
you holding this hearing. I think it is critically important.
Many of my colleagues' questions I agree with.
I want to take it in a slightly different direction, from
my role as Chairman of the Intelligence Committee. I want to
talk about how we can limit foreign technology in the United
States, because I do think the technology competition,
particularly with China, over the balance of this century is
going to be where our futures are going to be decided. And my
feeling right now is we have taken kind of a Whac-A-Mole
approach to this issue. A number of years back, on the Intel
Committee, we identified the problem with Russian software
company Kaspersky. We dealt with that. We identified the
challenges with Huawei and we have spent monies to kind of whip
and replace. We have seen activity using the Secretary of
Commerce's tools to go after some of the----
[Audio interruption.]
Senator Warner. ----companies in China on the entities
list, and now many of us are concerned about the notion of
communication firms like TikTok and the potential of taking
American data or being used as a massively used propaganda tool
for the Communist Party of China.
So, Mr. Wolf, I know this is an area of your expertise.
Where do we have limitations? As we think about restraints on
foreign technologies would it not be better to have a broad,
holistic approach that could take on any of these technology
changes? Could you address this?
Mr. Wolf. Sure. Thank you. I am happy to help. What you are
referring to are the Information, Communication, and Technology
Supply Chain Regulations that were published in final form at
the end of the Trump administration, and the current Commerce
Department has continued and has given responsibility to my
former Bureau, the Bureau of Industry and Security. And I think
your bill or others, in order to give congressional voice and
authority and mandate and resources to implementing that is
really quite critical. Right now the authority is under the
International Emergency Economic Powers Act and it would be, in
my view, best that Congress speak directly and clearly as to
it.
The authority addresses a gap between export controls,
which is outbound focused, CFIUS, which is inbound, when there
is an investment, and what you are referring to is to the
extent that there are transactions or activities involving the
communications supply stream.
It is still really in its earliest stages of creating a
whole new bureau and activity and policy and regulations. The
key difficulty is how you scope it because the number of
transactions that would be affected as drafted are in the
millions, and trying to create a licensing structure or a
CFIUS-like safe harbor approach would require the creation of a
whole new department. And there is also the general issue of
ensuring that any type of regulatory authority, if the
discretion is so broad that it will create perpetual clouds
over the use and acquisition of electronics and other
information equipment in the United States.
So the principle and the policy are terrific. It closes the
gap. Congress should speak. But it is about resources, scoping,
and a clear mandate, particularly, by the way, with respect to
protecting personal data, for which there is not a clear
regulatory structure and export controls, and CFIUS and
sanctions really do not have the tools to do that.
Senator Warner. I appreciate that. I have obviously been
working on a bipartisan approach that I will hopefully roll out
shortly. But in some of this terminology from my colleagues,
IEEPA is a bill that goes back to the '60s [unclear]
authorities. But it has been modified by the so-called ``Berman
Amendments'' in the late '80s, particularly around
communication technologies, put some limits on IEEPA. Mr.
Trump's ICTS executive order again has some challenges because
it falls under this IEEPA/Berman framework. I think to get at
an entity like TikTok or other communication entities we are
going to need maybe a higher standard where we do not have the
kind of traditional entity list designation. Or even we have
seen like with the FCC when they went after Huawei, that is a
single entity but it is not a comprehensive interagency
approach.
Mr. Wolf, I know we are down to the last 30 seconds. I just
want to, for my colleagues, point out our current structure
just does not, in a holistic way, particularly take on these
technologies that are in communication states, and I have grave
concerns with the level of investment that China is making. The
challenge of who will be successful will be who controls
communication technologies, who controls satellites, who
controls artificial intelligence, quantum computing, and I do
not believe, unless we continue with the current Whack-A-Mole
approach that we have got the tools at hand. I hope to work
with all my colleagues on how we might more comprehensively
address this.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warner.
Senator Vance, of Ohio, is recognized.
Senator Vance. Thank you, Mr. Chairman.
Mr. Singh, I want to direct my questions to you. I just
want to ask about the Russian sanctions, in particular, whether
they have been effective or ineffective. And I want to just, as
a backdrop here, offer a few pieces of information.
Last March, a month into the war in Ukraine, President
Biden went to the Royal Castle in Warsaw and built a sanction
regime that he said represented a, quote, ``new kind of
economic statecraft with the power to inflict damage that
rivals military might.'' I certainly hope he was wrong because
if he was not then I am a bit more worried about our military
might than I was before I just read this quote. Because look,
the issue here is that the sanctions, if you look at the
numbers, have clearly not matched up with what the Biden
administration predicted.
So a couple of pieces of information. Biden swore that the
Russian economy would be, quote, ``cut in half.'' The White
House predicted that last year the Russian economy would shrink
by 15 percent or more. In fact, it shrank just 2.2 percent.
Biden, I believe, said that the Russian ruble would be reduced
to rubble. In fact, the Russian ruble is one of the best-
performing international currencies in the world today, and
compared to our dollar is worth the same that it was when the
invasion began a little over a year ago.
You were the architect of these sanctions, so I would like
to better understand the approach that you advised President
Biden to take. But first I would like your candid assessment.
Do you think that these sanctions have been effective?
Mr. Singh. Thank you, Senator. I think the sanctions are
doing their job. They are not the only tool we are deploying.
The most important ones are helping Ukraine fight for its
freedom, enlarging and fortifying NATO's eastern flank, helping
the world get off of Russian energy, welcoming the millions of
refugees flowing into Europe. And, you know, these are the
tools that, in tandem, can make a difference. But when it comes
to sanctions, yes, I think they are doing their job.
You are correct, sir, that the decline in Russia's GDP, 2.2
percent last year, is lower than what many expected, including
me. But as I mentioned previously, I think what Putin has done
is created the Potemkin facade. He has propped up this year's
growth by sacrificing his long-term growth potential. How?
Capital controls. If you have a ruble in Russia it is very
difficult to convert that to a dollar. If you cannot access
dollars you cannot import anything. Without imports, Russia
cannot modernize or diversify its economy. Russia weaponized
energy. That, of course, pushed up energy prices. That
flattered net exports. That flattered GDP growth. But he has
lost half of his energy customers, and oil and gas revenues are
down 50 percent, year over year.
And then the last thing he did is he spiked government
spending by 60 percent. You can do that to prop up GDP growth,
but you will deplete national savings. You will drive up
inflation. You will drive up interest rates.
We have degraded his military-industrial complex. We have
cutoff Russia from its major energy consumer in Europe.
Senator Vance. Let me unpack a couple of points there. So
certainly take the point that perhaps the Russian long-term
economic damage has been there, but it is a little concerning
for us as policymakers when the Administration says that these
sanctions are going to effectively a military-grade deployment
into the Russian economy. And then you look at the top-line
data and that just has not been borne out, and I worry about
that. I also worry--I spoke to an international relations
scholar yesterday who really expressed some concern about
whether America's deployment of sanctions in this particular
context and the failure to see obvious short-term benefit to
the Americans, obvious short-term damage, or at least nearly as
significant as short-term damage to the Russians, actually
causes some credibility issues with our own government.
Just a couple of other questions here. I wonder when you
guys were thinking about designing these sanctions if you maybe
underweighted and understated the importance of manufacturing,
mining, the sort of real sectors of the economy that are much
more important when you are developing a war economy than, let
us say, finance or technology, or at least digital technology.
I am sort of curious there. How do you think about that,
because you mentioned the Russian industrial base being
degraded. But when I look at Russians having a 6-to-1 artillery
advantage against the Ukrainians, and being able to, apparently
as far as the eye can see, develop artillery munitions in a way
where already America's stocks are being depleted. It looks, on
the ground, as if the Russians continue to have not just an
artillery advantage today but will plausibly have an artillery
advantage 6 months in the future.
Did you guys underweight the importance of manufacturing,
mining, sort of the older economy according to a lot of people,
but the economy that actually matters when you are fighting a
war?
Mr. Singh. Thank you, Senator. It is a good question. You
know, look. We designed the sanctions to apply pressure where
we have a strength that intersects with Russia's vulnerability.
So foreign capital is one of those areas. Cutting-edge
technology was a second. And yes, we have gotten into supply
chains where we feel like we had collective leverage over
Russia.
But, you know, look. I think as it relates to the
battlefield impact, we will never know because the intelligence
on the ground in Russia is so sparse. But every indication that
I have seen is that he is running out of precision-guided
munitions, running out of avionics, night-vision goggles,
satellites, tank production, car production, and he is having
to rely on industrial goods like dishwashers and breast pumps
to actually function his equipment in his military. He is
relying on North Korea and Iran to substitute for the kind of
technology you need to prosecute a war of this scale.
Meanwhile, we are supplying the most sophisticated weaponry
that we can to Ukraine.
So I think we are giving leverage to Ukraine on the
battlefield. That is really where it matter most. Sanctions
will never be a substitute for that kind of support.
Senator Warren [presiding]. Thank you. I have been left
with the Chairman's gavel so I recognize Senator Warren.
So ransomware has hit everywhere. In the past 3 months
alone, ransomware attacks have shut down four public schools in
Nantucket, Massachusetts, affecting 1,700 students and their
families, they have exposed the health records of over 3
million patients in California, and they have shuttered all
four of Dole's food production plants in the United States,
halting food shipments to grocery stores and disrupting our
already vulnerable supply chain. That is just in the last 3
months. Let us do the last 24 hours. Just yesterday we learned
that ransomware attackers stole sensitive investigative
information from the U.S. Marshal's Service.
According to FinCEN, in the first half of 2021 along,
ransomware attackers likely received $5.2 billion--that is in
half a year--in payments from American businesses, hospitals,
school systems, and public utilities. Before 2016, the majority
of cybercrime attacks involved small-scale credit fraud and
bank fraud. Ransom payments ranged from about $75 to about
$750. Today the average ransomware attacker demands about $5
million.
Mr. Singh, you are an expert on international economics and
national security. These large-scale attacks and large ransom
payouts, would they be possible without crypto?
Mr. Singh. No, Senator. I think digital assets are central
to the business model of ransomware.
Senator Warren. OK. And, in fact, do you know what
proportion of ransomware attacks are paid off by crypto?
Mr. Singh. It must be close to 100 percent.
Senator Warren. Exactly right, right at 100 percent. The
most active ransomware gangs are affiliated with or based in
Russia, North Korea, and Iran. Mr. Singh, does that put our
national security at risk?
Mr. Singh. Absolutely.
Senator Warren. Thank you. In fact, in 2021, about three-
quarters of all ransomware revenues--that is now measured in
billions and billions of dollars--three-quarters of it went to
Russia-linked ransomware gangs. In the year since Russia
invaded Ukraine, Russian criminal organizations have doubled
down on using crypto to hold American businesses, American
schools, American hospitals hostage. Some have even declared
allegiance to Vladimir Putin, vowing, quote, ``to strike back
at critical infrastructures of Russia's enemies.'' And just
last week a Russia-affiliated ransomware gang called Black Cat
attacked 13 hospitals in eastern Pennsylvania.
Mr. Singh, I have one more question for you. You helped
craft the sanctions that our country imposed on Russia, that
you were just talking about with Senator Vance. You helped
craft this in response to the Ukraine invasion. Is crypto
allowing Russian ransomware gangs to extort American businesses
and potentially evade those sanctions?
Mr. Singh. Senator, I do not believe it is allowing for the
evasion of sanctions at scale, but even a dollar of evasion is
not something we ought to tolerate. And I think as I reflect
upon the experience one of the efforts we made in parallel was
to launch the executive order on digital asset regulation and
also trying to push our government to launch a digital dollar,
which I think is the single best step that we could take
because it would crowd out the ecosystem of crypto that allows
national security adversaries like Russia to exploit our
deficiencies, our weaknesses in terms of our critical
infrastructure, and yes, I think to some extent we will not
know exactly for sure, to evade the impact of our sanctions.
Senator Warren. Actually, let me just drill down just a
little bit on this. In March 2022, FinCEN issued an advisory
warning about Russian attempts to evade sanctions. The
guidance, and I am going to quote, ``Sanctioned persons,
illicit actors, and their related networks or facilitators may
attempt to use crypto and anonymizing tools to evade U.S.
sanctions and protect their assets around the globe,'' end
quote.
And in September 2021, OFAC issued an advisory highlighting
the sanctions risks associated with ransomware payments. And if
I am not mistaken, you were serving in the White House at this
time. Do you agree with these statements from FinCEN and OFAC?
Mr. Singh. Yeah, I do.
Senator Warren. Good. You know, crypto is being used to
hold American businesses for ransom, it is being used to
threaten American towns, it is being used to evade American
sanctions, and it is being used to enrich America's
adversaries. We have got to stop helping these guys by letting
crypto go unchecked.
Senator Roger Marshall and I are reintroducing our crypto
anti-money laundering bill to protect our Nation from
ransomware attacks by stopping the flow of dirty money. It is
something we need to do for our national security.
Thank you. Thank you, Mr. Chairman.
Chairman Brown [presiding]. Thank you, Senator Warren.
Senator Hagerty, from Tennessee, is recognized.
Senator Hagerty. Thank you, Mr. Chairman, and welcome to
our guests today.
Over the past year we have seen the blatant disregard of a
nation's sovereignty by Russia's brutal invasion of Ukraine.
And right here in the United States we have seen an invasion of
our own sovereignty, as a CCP spy balloon was allowed to float
over our Nation for a number of days, including over sensitive
military sites in my home State of Tennessee. In the case of
Russia, I was pleased to see the Administration apply sanctions
to key Russian sectors such as its finance and energy sectors,
sectors which were used to fuel Russia's aggression in Ukraine.
In contrast, China has simply received a slap on the wrist,
at best, for its complete and illegal violation of our U.S.
sovereignty. To date, only six--again, just six entities from
China have been added to the Department of Commerce entity
list, and zero sanctions have been applied to the PLA, to the
state-owned enterprises, and to the other entities that
supported developing this balloon and its payload.
It is well known that China's space sector writ large is
entirely administered by, or at least works in close
coordination with the CCP's People's Liberation Army. If that
is not damning enough, the Administration was forced to
sanction a Chinese space entity, Spacety, for providing support
to the Russian military. I would note that if you just took a
look at Spacety's website you will see that they directly
partner with China's nuclear weapons manufacturers, their
defense universities, and the state-owned enterprises that
directly support the PLA.
Mr. Singh, my first question is for you. Do you believe the
Administration should be doing more to hold the People's
Republic of China, to include its space sector, accountable for
violating our sovereignty and our national security? I would
appreciate a yes or no answer, please.
Mr. Singh. Senator, I will be concise. I mean, to the
extent that we have evidence of which entities were involved
with the violation of our sovereignty, we have any number of
tools that we can consider deploying.
Senator Hagerty. Should we do more?
Mr. Singh. I have not seen the forensics but we certainly
have the capacity.
Senator Hagerty. I think it is clear to the American public
more is needed to be done.
Mr. Singh, I will stay with you on this. You are one of the
chief architects of the economic sanctions imposed by the
United States on Russia, as Senator Warren just highlighted.
Under what conditions would you recommend this Administration
consider sectoral sanctions against other adversaries like the
People's Republic of China?
Mr. Singh. Senator, so the conversation about what tools to
use has to start with the strategy. What is the objective? So
for any target the question is are we trying to deter an
activity? Are we trying to impose maximal costs? Are we trying
to degrade their ability to project power? Are we trying to
create a demonstration effect? Once we have identified our
objective and our strategy then we get into a discussion about
tools, and different tools take advantage of our strengths than
others. And we have to think about this in terms of a
multiplayer repeated game. We have moves we can make. So do our
adversaries.
The kind of analysis that I think is needed is to simulate
how a conflict scenario plays out. How do we use economic
statecraft, how do we use our military, our military channels,
what kind of diplomatic avenues are available. And it is
looking at the totality of the options available to use that
will, I think, guide, should guide the way in which we approach
targeting countries like Russia.
Senator Hagerty. I understand that. My interest right now
is on the People's Republic of China, though. You have been
aggressive with respect to Russia and the sanctions applied
there. I certainly encourage you to take a damn hard look at
what the PRC is doing, particularly after they violated our
sovereignty as they have.
Mr. Wolf, I want to turn to you. The question is being that
you are the only witness here today that has worked at BIS, do
you think it is appropriate for this Administration to allow
U.S. technologies to be exported to China, technologies that
advance the People's Liberation Army's military modernization
efforts, including its near-space and its space programs?
Mr. Wolf. No, of course. There has been a comprehensive
embargo on the export of such items to China for decades. And
with respect to otherwise commercial civil items, that is
actually sort of at the essence of my testimony, to increase
the effectiveness of the concern you are describing, to get
items that are made outside the United States, without U.S.
technology subject to comparable controls for the same reasons.
Senator Hagerty. How would you suggest the BIS step it up
and stop the flow of technology that is going to China right
now?
Mr. Wolf. One is the regular investigation that is
described in parties that you are referring to and using the
entity list aggressively once the evidence is identified of
somebody providing support to what you have just described. And
second, I think more importantly, since the United States does
not have a monopoly on the inputs that are needed for that
activity is to continue working with the allies to share
information, evidence, declassified intelligence so that they
understand and share the same threat, and more importantly have
the legal authorities under their systems in order to be able
to impose controls their countries, over their items. And that
will dramatically enhance the effectiveness of the concern you
rightly point out.
Senator Hagerty. Got it. Thank you, Mr. Wolf. Thank you,
Mr. Chairman.
Chairman Brown. Thank you.
Senator Van Hollen, of Maryland, is recognized.
Senator Van Hollen. Thank you, Mr. Chairman. I thank you
and the Ranking Member for holding this hearing. Thank you to
all of our witnesses.
Mr. Singh, you made the point earlier that we have a lot of
positive incentives to offer countries in terms of our global
interaction, diplomacy, development, incentives for more
economic investment by America's private sector, security
assistance, but that sanctions are an important tool. I think
we all recognize that we have to put sanctions in context that
it is one tool but a very important tool, and I think all of
you have made those points.
I would like to follow up on the issue of the price cap. I
thought this was an innovative approach, taken by the Biden
administration with our G7 partners. I want to applaud the
Europeans for recognizing the importance of moving off of
Russian oil after too long of a dependence of many of those
countries on Russian oil. And I did hear your testimony, Mr.
Singh, pointing out that the Russian revenue year over year has
dropped 50 percent from the export of crude oil. And, of
course, this was only put in place in December, so we have not
yet seen the reduction in oil revenues captured in Russia's
overall GDP figures. We will have to see what impact that has
over the next year. And, of course, they just put in place the
refined petroleum products.
But as with all sanctions there are people who are already
fast at work trying to evade them, and obviously Russia has an
interest in selling above the price cap. Can you talk about
additional enforcement measures you might take? Former Senator
Toomey and I were looking at a number of secondary sanctions
options. They have plusses and minuses. But we also know that
there are efforts to circumvent the price cap. Can you talk
about additional measures we can take on the enforcement side?
Mr. Singh. Yeah, thank you, Senator. So you are right.
Russia absolutely has an incentive to sell oil above the cap,
but its customers do not. So we have really given them the gift
of bargaining power. We have said to them, ``Look, if you pay
above $60 a barrel you have got to find your own oil service
providers, for shipping, for insurance, for trade finance. That
is quite costly.''
Now, what can we do if there is evasion? You know, look. I
think over time we can find ways to reduce the price at which
the cap is set, just to clamp down further on Russia's ability
to sell at prices that flatter its budget revenues. If lowering
the cap does not work, and you still have a lot of evasion from
countries that are importing from Russia, I think we have two
options. Either we can offer a better price to those countries
and allow them to meet their energy needs with domestic
production or maybe from production in third countries. The
other option is to use quiet, private diplomacy and say,
``Look, if you are continuing to purchase oil at levels that
benefit Putin and go against the goals of the cap, which are to
minimize his revenues while keeping global energy supplies
constant, we have options, and we can use them.''
Now I do not think we should threaten countries in public.
I would use that as a last defense, as a last resort. And I do
not think we are quite there yet.
Senator Van Hollen. Well, I agree with you, we should be
steadily reducing the cap, tightening the cap, because I think
there is still a long way to go to get to that marginal cost of
production for Russia. Obviously, we want to bring along our
coalition as part of that.
Let me turn to China for a moment, and Mr. Wolf and anybody
else who wants to comment with respect to the Commerce
Department actions. I was a supporter of the actions that the
Trump administration took with respect to Huawei, putting them
on the entities list. I think that did have an impact on
Huawei, and I really appreciate the Biden administration's
effort to really broaden the export control list so it does not
focus just on one company but deals with the exports of highly
sensitive chips and semiconductors that can be used in China's
military, and taking a very broad approach, using our sort of
long-armed power based on origin and U.S. IP to apply these
restrictions to other countries.
How effective do you think that has been to date? What can
we do to further encourage its enforcement? And what is your
assessment of how we can use that model going forward?
Mr. Wolf. No, excellent question, and I think today it has
been very effective because the Commerce Department used an
all-of-the-above strategy of controlling exports from the
United States, controlling activities of U.S. persons,
controlling foreign-made items that are made with U.S.
technology and software, and it has been extraordinarily
effective.
The main essence of my prepared remarks is to make such
controls more effective, and as importantly, less
counterproductive for U.S. industry to convince the allies, who
also produce similar technologies and have people that can
provide similar services, to adopt in their systems the same
types of prohibitions, to level the playing field for U.S.
industry and to deprive the end users in China that you are
referring to of the items of concern. And your question is
evidence of this broader than classical strategic export
control concept that I referred to at the beginning, of a new
way of thinking that is needed, and the United States should
take the lead in articulating with its close allies.
So it has been very effective but there is a lot more to be
done. And on the enforcement it will be inherently difficult
because you are dealing with essentially commercial items that
are very small, that are foreign made, that are outside the
United States, and getting corporate into commercial items. And
again, this is where an equal degree of coordination and
alignment of allied export control enforcement authorities,
which trail behind the licensing and policy officials, is
absolutely critical.
Senator Van Hollen. Thank you.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Daines, from Montana, is recognized.
Senator Daines. Chairman, thank you. Thanks for being here
today.
Earlier this month Larry Summers, of course the former
Secretary of Treasury in the Clinton administration, Director
of Economic Policy there under Obama--by the way, it was Larry
Summers that we were recording right here in this room 2 years
ago, when we were debating the $1.9 trillion purely partisan
spending package, where Larry Summers said, ``That is going to
cause inflation.'' We were raising the alarm bells then. So I
listen when Larry Summers speaks. I listen because he was
certainly a prophet on what happened after that massive
spending bill passed in this Senate 2 years ago.
But he was discussing Russia's seizing of German assets
after World War II, and the seizure of Iraqi assets to help
rebuild Kuwait after the Gulf War, and he was discussing with
Bloomberg. And he said this, and I quote, ``I believe that if
this sets a precedent that continues, that countries that
engage in naked, cross-border aggression will lose their state
assets. That is a precedent that I think is a very healthy
precedent to set,'' end quote, and I agree with Larry Summers.
Yesterday I reintroduced legislation that would do just
this and repurpose frozen Russian assets to help pay for U.S.
aid provided to Ukraine as a result of Russia's invasion. And I
look forward to working with my colleagues on advancing this
and/or related legislation to hold Russia accountable and make
it pay for the war they started.
A question for each of you. Research shows that Russia's
crude fetched an average of roughly $74 a barrel in the 4 weeks
that followed a price cap of $60 per barrel. Please tell me,
are you aware of any sanctions or enforcement mechanisms that
have been put in place regarding the Russian oil price cap, and
if so, what penalties have been collected?
Start with you, Mr. Singh.
Mr. Singh. Senator, I will answer your question. I first
want to say I agree with you. We need to look at all creative
ways possible to make Russia pay its fair share for the
reconstruction of Ukraine, which is probably going to be in the
hundreds of billions of dollars. And if that means using the
central bank reserves that we immobilized as collateral for
Ukraine to issue debt, I think that is something we ought to
pursue.
Senator Daines. What are the odds of us prevailing,
actually collecting that? I mean, talk is cheap, but actions
here----
Mr. Singh. I agree. One idea, Senator, would be to use the
reserves that we have immobilized at the New York Fed. They are
in our possession. Transfer them to Ukraine. Allow Ukraine to
put up those assets as collateral to raise new money, in
amounts that would far exceed our capacity to provide, or that
of our allies, or the World Bank or the IMF, for that matter.
To me that is a twist on the Brady plan that worked in the
early 1980s, and it should be re-imagined for today's
circumstances.
Senator Daines. Thank you. Mr. Lowery, thoughts?
Mr. Lowery. So on the price cap question, Mr. Singh
mentioned earlier, has there been evasion, so to speak? So in
some respects the answer is yes and the answer is no. The
answer on the no part is obviously not every country said,
``Hey, we are going to go on with this cap.'' There were a
number of countries who have said they are willing to do it,
but there are a number of countries who said they are not
willing to do it.
On the yes is the will there be evasion? Absolutely there
will be. So how does the price cap work? The price cap works
through an insurance mechanism, basically. And so there are
other insurers out there that are not necessarily part of
Europe. There are insurers that are going to be created that
are not part of Europe. There are ships that will be able to
take the cargo to countries and be able to evade the sanctions.
Now at this point in time, Russia has been offering discounts
anyway prior to the price cap that kind of brought the price
down below $60 a barrel, on aggregate. That does not mean there
are not individual parts where they are not.
So at this point there probably has been some sanctions
evasion. I think most of that sanctions evasion is happening
from those that are saying, ``We are not willing to put in
place this price cap.'' And has there been enforcement
mechanisms? The price cap is very, very new. It has only been
in place for a couple of months, on oil shipments, not on
petroleum products, which has only been in place for a couple
of weeks.
So I think that enforcement is a very important point. It
is an important point for all of the sanctions conversations we
have been having throughout this conversation.
Senator Daines. Yeah. Thank you. I am out of time here, but
just 2 days ago Secretary Summers, in fact, was cited in
Bloomberg indicating that current economic sanctions were
failing to provide a deterrent to Russia's aggression and seems
to indicate that more aggressive limits or further measures may
be needed. So I am out of time. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Daines.
Senator Britt, of Alabama, is recognized.
Senator Britt. Thank you, Mr. Chairman, and thank you,
gentlemen, for being with us today.
Before we start talking about sanctions I wanted to take a
moment to talk about the Committee on Foreign Investments in
the United States. In 2021, the U.S. Department of Agriculture
noted that foreign investors now owned over 40 million acres of
our farmland. This has occurred since 2015, at a tune of about
2.2 million acres a year.
I have heard from many Alabamians as I have traveled across
the State, and this is a concern for them, specifically the
Chinese Communist Party and their willingness and their efforts
and deliberate and intentional attempts to buy up fertile U.S.
farmlands.
I believe food security is national security. Food security
is economic security. So I believe that one acre of our
farmland owned by the Chinese Communist Party is one acre too
many. Additionally, I think there is another layer of national
security concerns that we are allowing China to buy up farmland
near our military installations. It is completely and totally
unacceptable.
So my question, Mr. Lowery, for you, as a former chair of
CFIUS, when it comes to ensuring we have a strong agriculture
voice at the table when these decisions are being made, do you
agree that it is reasonable that the Secretary of Agriculture
should be involved as a member of CFIUS?
Mr. Lowery. I think it is totally reasonable, yes. And as I
mentioned earlier, if CFIUS needed to bring in Agriculture
right now they can do it on an ad hoc basis. But to the point
that you have made, and a number of Senators have made, it
sounds to me like this probably should be looked at in a more
systematic way.
Senator Britt. Yes. We need a permanent seat at the table
because it is absolutely unacceptable when you look, I believe,
probably say with great confidence that the Chinese Communist
Party is not allowing the United States of America to buy up
their farmland, particularly near their military installations.
So on that line of questioning, under CFIUS it is almost
always national security agreements. They are issued instead of
outright blocking foreign companies from acquiring U.S.
companies or engaging in transactions that are assessed to have
these national security implications. You know, we issued these
agreements first. And my question to you is, how does CFIUS
enforce a national security agreement and what are the
consequences for failing to adhere to the terms of those
agreements?
Mr. Lowery. So if you look at most of the numbers, CFIUS
reviewed, in 2021, which is the last year we have, 275
transactions. Of those 275 transactions, about 10 percent of
them, roughly 30, transactions had what you just described,
mitigation agreements. So that means basically that the
government had concerns about the transaction but they thought
the transaction could go through but they wanted to make sure
that there were specific measures put in place to protect
national security, potentially, in the future.
Those national security agreements can last for a long
time. They are implemented and negotiated by specific agencies
that have the right type of expertise. So if it is a military
type of issue, the Department of Defense will negotiate it. If
it is something on information technology issues, most likely
the Department of Justice or maybe Homeland Security will do
it. They follow these agreements up through monitoring
mechanisms, auditing mechanisms, from third-party auditors, and
if there are violations of the mitigation agreements they do
have the capability to, one, obviously, step in and do
something, including they could actually divest the transaction
way after the fact, or, more likely, they could do something
like, they could do a fine, they could do warnings to basically
see, kind of make sure you get your house in order type of
problem.
So that is kind of how it works, and I think there are
roughly about 200 mitigation agreements from past that are in
effect. Every now and then some of them roll off because there
may be somebody else who comes in and purchases it. There is a
domestic buy.
Senator Britt. OK. So question actually for each of you.
During your time in government, were there violations of these
mitigation agreements? Just yes or no.
Mr. Wolf. No, but there were not the same enforcement
authorities that were created after I left in 2018.
Senator Britt. OK.
Mr. Wolf. So I cannot properly answer.
Senator Britt. OK.
Mr. Wolf. There were violations that we noticed when I was
there, just like Kevin said, that some of this has become
tougher over time. But there had been violation of the
agreements, and usually they were worked out through mechanisms
of--they were not egregious violations, is probably the best
way. They were violations, and there are things that happened
that are just mistakes. So the parties usually would work that
out with the agency that was in charge, who would report it
back to the overall CFIUS committee to make sure that everybody
was aware.
Senator Britt. OK.
Mr. Singh. Much like Mr. Lowery said, I do not recall
intentional egregious violations, but I do believe mistakes
were made that had to be corrected.
Senator Britt. OK. Thank you all for your time.
Chairman Brown. Thank you, Senator Britt.
Senator Cramer, of North Dakota, is recognized.
Senator Cramer. Thank you, Mr. Chairman and Ranking Member,
for having this important hearing. Thank you all for your
expertise and sharing it with us.
I am the one person at the end of the table who has just
lived the long CFIUS nightmare in Grand Forks, North Dakota.
And I cannot tell you how disappointing it was and, frankly,
how consequential it was for CFIUS, after not just the 45-day
review but then another 20 days added to get further
information, all of which sends signals, of course, that were
missed by local leaders, unfortunately, but only to conclude,
clumsily, non-jurisdiction over an agribusiness 12 miles from
an ISR military base and a low earth orbiting satellite ground
station. The outcome of that was the completion of a sale that
should have never taken place. Now, that sale should have never
been begun by local leaders, and they should have, you know,
listened to a lot of people, including me, prior to the Air
Force finally correcting CFIUS's error, and stating
emphatically in a letter this poses a significant risk to the
Grand Forks Air Force Base.
So I am with all of my colleagues who have said that the
Secretary of Agriculture should be a permanent member of CFIUS.
If food supply chain is not a critical supply chain, nothing
is. You know, food is so darn important maybe it should be a
member of the Joint Chiefs of Staff, but that is another
committee I am on.
So anyway, we are deeply disappointed and I hope we can--
and I think we do have strong bipartisan support for
strengthening agriculture's role on CFIUS.
That said, I want to actually talk about something else for
a little bit, and that is the role of domestic energy
production and export as a means to bringing global price down.
I long for the day when the WTI is the global index, and I
think we should do that, and I think we can do that by flooding
the market with American oil, for example, and gas, and selling
it to our friends and frenemies alike, that will bring down the
price for all of us
That said, one of the means that I am interested in, that I
have been working on, is a carbon border adjustment mechanism
that recognizes the high price that our carbon-intensive
companies already pay for a higher environmental standard, as
well as other high standards like labor and workplace
standards, and joining forces with our friends that have
similar standards, and instead of punishing ourselves and
manipulating, hopefully, the behavior of the polluters, which
just also happen to be our adversaries in most cases.
I favor a much simpler approach than a lot of others
because I am a simple guy and I can understand simple things.
But I might just be interested in each of you, and I will start
with you, Mr. Wolf, since you have sort of managed some of
these tariffs--I call this a pollution tariff--what your
thoughts are on the possibility of some sort of a pollution
tariff or a CBAM, that recognizes our high cost of production.
Mr. Wolf. Apologies. It is not an issue I have focused on
or thought about, so I will defer to my colleagues.
Senator Cramer. All right. Mr. Lowery.
Mr. Lowery. I think it is an interesting issue. It does
strike me that you are going to have to then start thinking
about how to come up with a price for carbon, and as we all
know that is a dicey issue. It is hard to do, and we are not
there yet. So in order to have some sort of border adjustment
mechanism I think you are going to have to figure out how to
find a price for carbon.
Senator Cramer. What about what Europe has done to this
point? I wish we could have caught up or we could have done it
in sync with each other. Clearly the price of carbon sends up
all kinds of red flags, especially in my energy-producing oil,
gas, coal-powered State of North Dakota. But this is, again,
where I think, can we find something that does not punish our
own clean producers but changes behavior? Mr. Singh, thoughts
on the possibilities?
Mr. Singh. Senator, yeah, I think there are two approaches
out there. One is do you set the tariff by your cost of
regulatory compliance. That tends to be the European approach.
The one that I think has more appeal is how much have you
actually done to reduce your emissions as a country. That is
what matters, right?
Senator Cramer. Right.
Mr. Singh. And so depending on how much progress you have
made in reducing what actually impacts the environment, that
determines the degree to which you impose a border adjustment
tax. So I think that is a tool--I think you are right, Senator.
This is a tool that we need to think about and refine. To my
mind, the latter approach is the way forward.
Senator Cramer. Excellent. Thank you.
Chairman Brown. Thank you, Senator Cramer.
Before we adjourn I just wanted to say that I thank Senator
Britt for sitting through this whole hearing. It is an unusual
occurrence, and she really did ask incisive questions, and I am
guessing she learned a lot because these witnesses, all three
of them, are so good. She already knows a lot so she learned
even more. So I wanted to call her out for that.
Thanks to the witnesses for being here. Senators who wish
to submit questions for the record, those questions are due 1
week from today, March 7th. For the witnesses, you have 45 days
to respond to any questions.
Thank you. This was a particularly good hearing and the
responses of all three of you. Thank you. We are adjourned.
[Whereupon, at 11:49 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Last week marked 1 year since Vladimir Putin unleashed his brutal,
criminal war on Ukraine.
Putin wanted to jeopardize the future of a sovereign democracy, and
in the process, to threaten the world order--an order based on freedom,
democracy, and the rule of law.
But Putin was surprised by two things--the resilience of the
Ukrainian people, and President Biden's ability to put together, and
keep together, a broad, consistent international coalition to support
the Ukrainian people as they defend their country.
Last week, I met with Ukrainian-Americans in Greater Cleveland.
My State is proud to have a vibrant, active Ukrainian unity. And
Ohioans' message to me was clear: we must maintain our resolve. And we
must continue to hold the Russian government accountable, along with
all those who enable its war on Ukraine.
I agree.
We cannot waiver in our commitment to Ukraine, and I am glad that
President Biden, Leader Schumer, and Leader McConnell all made clear
their support last week.
Many of our colleagues of both parties were overseas last week, all
showing united, bipartisan support. Our commitment to the Ukrainian
people and our resolve to stand up to Putin has never been partisan.
We must also recognize that Putin's brutal war is the most recent
assault that authoritarians are launching around the world.
And all their eyes are on our response in Eastern Europe right now.
NATO General Secretary said last month, ``If President Putin wins
in Ukraine, this would send a message that authoritarian regimes can
achieve their goals by brute force . . . Beijing is watching closely.
And learning lessons that may influence its future decisions.''
It's what the Administration's National Security Strategy outlined
as, ``a strategic competition to shape the future of the international
order.''
Today's hearing is about how we use economic tools like sanctions,
export controls, and investment screening to advance and protect U.S.
national security and foreign policy.
In addition to the humanitarian and military assistance the United
States and our allies have provided to Ukraine, our response to Putin's
war centered on the significant sanctions and export controls we have
imposed to ensure that Russia--not the rest of the world--bears the
full costs of Putin's illegal invasion.
These measures are imposing real costs on Russia. Treasury Deputy
Secretary Wally Adeyemo put it pretty well last week: ``our actions are
forcing Russia to mortgage its economic future to save face today.''
We, of course, recognize that not all economies are the same.
Our work is complex, as we confront the challenges posed by
President Xi and the Chinese Communist Party in Beijing.
Twenty-five years ago, Senator Graham and I led efforts in the
House to oppose China's accession to the World Trade Organization.
Corporations, in search of even bigger profits shut down
manufacturing in Ohio and across the United States, moved production to
China.
It contributed to the industrialization of China. And it's funded
the buildup of the Chinese military.
I've challenged the failed China policy of administrations of both
parties. It was obvious to some of us then, what all of us see now--
that China poses a real threat to our economic security--look at
Columbiana County in Ohio. Look at Clarendon County in South Carolina.
Now the serious national security threats are also obvious.
The Chinese Government made its aims clear: to dominate advanced
technology and global strategic supply chains.
The Chinese Communist Party's civil-military fusion policy erases
the line separating commercial and military use of finished goods--and
of the technologies that go into them.
And we have seen Beijing ramp up its activities in the South China
Sea and Taiwan Strait while oppressing its own citizens. And now we are
even seeing Chinese Communist Party officials meeting with Putin, and
consistently refusing to condemn his invasion of Ukraine.
Whether in Beijing or Moscow, Iran or North Korea--whether it's to
address IP theft, human rights abusers, or foreign traffickers of
illicit fentanyl, we need a robust economic policy to deter and disrupt
behavior that hurts U.S. national security interests.
In this Committee, I have worked with colleagues in both parties to
restrict U.S. technology or financing from being used in ways that harm
U.S. national security interests.
On a bipartisan basis, this Committee led reforms to strengthen our
investment screening process conducted by the Committee on Foreign
Investment in the United States--CFIUS. We provided permanent statutory
authority for the Bureau of Industry and Security, or BIS, to
administer and enforce our export control system.
And last Congress, Ranking Member Toomey and I led this Committee's
work to prohibit the importation of Russian gold, impose sanctions
regarding human rights abuses by Iran, and expand BIS's authority to
limit exports to foreign militaries, intelligence services, and
security forces.
And we took action last year to remove most-favored-nation trade
status from Russia. Actions have economic consequences.
I hope that we'll continue this strong history of bipartisan work
on important national and economic security issues in this Committee's
jurisdiction over the next 2 years with Ranking Member Scott.
Today, in this hearing, we have a chance to take that first step by
examining how we use our economic toolkit to advance the breadth of
issues that impact our U.S. national security and foreign policy.
We must use the tools we have to deter or disrupt behavior that
undermines U.S. national security.
We need to do that while we strengthen our partnership with
countries that share our values for free markets and democracy. And we
need to do that while not harming U.S. economic and technological
leadership.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
The topic of today's hearing could not be more timely. Last [week]
marked the 1-year anniversary of Russia's invasion of Ukraine. Over
this past year, we've seen the horrors of war and the brutal loss of
life, but we've also seen the strength of the Ukrainian people. Their
fight against tyranny and oppression to seek and maintain their
independence is inspiring and reminds me of our own intrinsic values
that inform American patriotism--the hope for a better future.
We are fortunate enough to live in the greatest Nation on earth and
must always be vigilant to protect and promote national and economic
security--the underpinnings of our Nation.
Preserving our status as a world leader requires the continual
honing and sharpening of our economic security tools in order to
preserve and protect the role of America at home and abroad. These
tools are often pushed beyond our everyday conversations. Folks don't
always bring up sanctions at the dinner table, at least not in my
house, but they are important to protecting and promoting American
interests.
We've seen firsthand, whether it's with Russia or North Korea, that
the tailored use of sanctions can be an effective foreign policy and
economic security apparatus.
Unfortunately, these same tools have been wielded as hammers
instead of scalpels. Resulting in pushing our adversaries toward closer
cooperation with each other and further away from us.
Much like the Obama administration's famous ``red line,'' the Biden
administration's failure to enforce existing sanctions manifests
weakness--which is an unacceptable abuse of our Nation's global
leadership and signals to friend and foe alike that, when we are saying
something, we may not actually mean it.
Recent reports of Chinese and Iranian support for Russian weaponry,
flouting U.S. sanctions, is just another example. If there was ever a
time to kowtow to our adversaries and their supporters, I assure you:
it is not today, nor ever.
National security efforts should support, not detract from,
American industrial leadership--a commonsense principle. However,
instead of using American oil and natural gas resources to aid our
European allies' efforts to cut ties with Russian oil, the Biden
administration restricted American energy production to promote liberal
climate change policies--punishing not only our allies, but everyday
families stuck with higher and higher energy bills.
When looking at tools like export controls and our investment
security review process, our goal should be a holistic one that combats
malign economic aggression.
Specifically, the Chinese Communist Party has enacted laws
facilitating the theft and unfair treatment of American innovation. We
must use our export controls to ensure sensitive technologies are not
being shared with foreign adversaries--much like we must use the CFIUS
process to ensure bad actors are not granted undue access under the
guise of benign foreign investment.
Economic security requires precision and strength. We must champion
American economic opportunity. Hard work and ingenuity are two of the
main drivers of the American dream, the same dream that our adversaries
are working to stop.
I look forward to hearing from our witnesses on this important
topic. Thank you.
PREPARED STATEMENT OF DALEEP SINGH
Former Deputy National Security Advisor for International Economics,
and Former Deputy Director, National Security Council and National
Economic Council
February 28, 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF CLAY LOWERY
Former Assistant Secretary for International Affairs, and Former
Director of International Finance, Department of the Treasury and
National Security Council
February 28, 2023
Chairman Brown, Ranking Member Scott, and Members of the Committee,
I would like to thank you for the opportunity to testify on Advancing
National Security and Foreign Policy through Sanctions, Export
Controls, and other Economic Tools.
My name is Clay Lowery, and I am currently Executive Vice President
of the Institute of International Finance (IIF), a trade association
that represents 400 financial services firms in roughly 65 countries
across the globe. My testimony today is not on behalf of IIF or any of
its members and should be considered my own views.
I served in the U.S. Government from 1994 to 2009, principally with
the Treasury Department, although I also was the Director of
International Finance at the National Security Council. From 2005 to
2009, I served as the Assistant Secretary of International Affairs for
the Treasury Department, and one of my primary responsibilities was
overseeing the Committee on Foreign Investment in the United States
(CFIUS).
I am pleased to be testifying alongside Kevin Wolf and Daleep
Singh, both of whom I respect deeply and of whose views and expertise I
think highly.
In my testimony, and as requested by the Committee, I will discuss
briefly:
i. the economic impact on Russia due to the sanctions regime put in
place in 2022,
ii. some of the lessons that can be drawn for thinking about China,
and
iii. the idea of an outward-bound investment screening mechanism
using the prism of CFIUS.
Sanctions on Russia
A year ago, Russia invaded Ukraine. In response, the United States,
along with a number of allies, imposed a set of financial sanctions,
export controls, and a myriad of other measures to both punish Russia
and to influence its decision-making. It is arguably the most robust
financial sanctions package in history: unprecedented in terms of the
size of the economy being sanctioned, the comprehensiveness of the
sanctions regime, the multilateral cooperation and implementation, and
the speed in which the program had been put in place.
A year later, this has had a substantial economic and financial
impact on Russia, but it has neither been as dramatic nor as sweeping
as was estimated last year. While early forecasts--including by my own
organization--suggested Russia's real GDP would fall by 8 to 15 percent
of GDP in 2022, it instead contracted by 2 to 3 percent of GDP.
Why is this the case?
There are a number of factors that have allowed Russia to overcome
the most dramatic impact of these sanctions:
Expansiveness: Although the sanctions regime was expansive,
there are still major carve-outs most clearly seen in what was
not sanctioned: Russia's major exports--natural gas, oil, and
petroleum products. With the rise of prices in those markets
and some increase in volumes, it still led to Russia's current
account surplus nearly doubling in 2022, which means an extra
$100 billion. As an example, just looking at oil exports, my
colleague Elina Ribakova, estimates that price differentials
accounted for over 85 percent of Russia's oil export revenue
growth from 2021 to 2022.
A significant percentage of the Russian banking system,
including the central bank, had their assets frozen, lost
access to dollar and euro funding, and eight Russian banks have
been removed from the SWIFT messaging system. However, the
Russian state--particularly the central bank--adjusted, and
assets were diverted to other parts of the financial system
that were not sanctioned.
In short, a current account surplus provided much-needed
liquidity to Russia's economy, even though its central bank
assets had been frozen. Just as importantly, it also provided
revenue to prop up Russia's fiscal position.
Multilateral Coordination: The Biden administration quickly
and successfully put together a multilateral coalition for both
sanctions and export controls--impressive, considering that
many of these countries' economies are quite dependent on
Russian energy. That said, this coordination has neither been
consistent enough nor broad enough.
This can take a number of forms but for brevity, the two most
common are the less well-known issues of jurisdictional
disparities among sanctions regimes across the world that lead
toward deleterious consequences for compliance, and the more
prominent issue of significant jurisdictions simply not joining
the ``coalition.''
Addressing the first issue continues to evolve and the G7 has
focused on improving consistency, which should help with
sanctions avoidance. Whereas the second problem is the area
that shows up in the numbers.
For example, Russian oil export volumes fell across the EU,
Japan, Korea, and several other countries. Yet, Russian oil
export volumes overall were still up in 2022, as countries such
as China, India, and Turkey increased their purchases by enough
to make up for these volume losses--and, of course, this does
not count my earlier point about price effects.
Adaptability: The 2022 sanctions package was an extensive
expansion of the sanctions package against Russia that has been
in place since the 2014 annexation of Crimea. During that time,
Russia had built up what has been called ``Fortress Russia''--
measures to insulate its economy from Western sanctions.
In addition, the Central Bank of Russia took swift and decisive
measures--providing liquidity, doubling its interest rates,
putting in place capital controls, and forcing foreign currency
deposits to be converted to rubles--that allowed the exchange
rate and the banking system to stabilize. And as this stability
was realized, a number of these measures were removed.
Russia's economic and financial resilience in the face of such a
major sanctions program does not mean that the program was a failure.
In fact, it seems to be having an impact on Russia's ability to obtain
war-fighting materials, has led to a ``brain drain'' of skilled Russian
workers, and is likely to lead to a slow but steady decrease in
productivity and economic activity for years to come.
Lessons Learned
Although it is early, the lessons that can be drawn from the
results of the latest Russian sanctions regime are important. And in
the context of China, as you have asked me to consider today, they are
even more stark.
The key difference, of course, between China and Russia is China's
economy and overall engagement in the world economy is simply
magnitudes bigger than Russia's in both scope and scale. To an extent,
we are comparing an apple to an orange.
China's GDP is 10 times larger than Russia's;
China exports are roughly 7 times greater than Russia's and
its imports are almost 9 times greater;
China's Foreign Direct Investment (FDI) stock is about 6
times greater than Russia, while Its outward-bound investment
stock is 5 times the size of Russia's;
While Russia is a global exporter of natural resources,
China has a much more diverse economy, and is much more
interconnected with the United States, and most other
economies;
China's commercial banking sector is many times greater
than the assets of Russia's banking system and its domestic
bond market is much, much larger; and
Many of the sanctions that were implemented on Russia in
2022 were extensions of earlier sanctions imposed in 2014--
meaning that the U.S. private sector's engagement and
investment in the country was already limited. That is not the
case in China.
However, I think we can still draw three key insights from Russia
as they relate to China:
1. China--like Russia--has a significant current account surplus,
but instead of being a major commodity exporter, they are the
top exporter of manufactured goods. In the last year, the
importance of Russia to energy and commodity markets has been
clear. Researchers at the Center for Strategic and
International Studies estimate that China's share of
manufactured exports are more than twice the share of Russia's
share of Russia's energy and fuel exports. \1\ Again, a current
account surplus is a major reason Russia was able to overcome
the most dramatic impact of Western sanctions.
---------------------------------------------------------------------------
\1\ 1 Gerard DiPippo and Andrea Leonard Palazzi, ``Bearing the
Brunt: The Impact of the Sanctions on Russia's Economy and Lessons for
the Use of Sanctions on China'', CSIS, February 2023.
2. International coordination may be more difficult as it relates to
China. Throughout the war between Russia and Ukraine, we have
seen unprecedented cooperation across the G7 countries and
beyond. Where there is common cause among countries to use such
tools, it is vital that the official sector is internationally
coordinated and coherent, and that certain elements are
harmonized across regimes. That said, the design and
implementation of sanctions may always elicit differences
dependent on wider geopolitical considerations. Each country
naturally considers its own interests when participating in a
sanctions regime. And while many jurisdictions have been highly
motivated to implement sanctions on Russia, we have often seen
that it has been a struggle. China's much broader and deeper
engagement in the international economic system suggests that
this struggle will be much greater and that the motivation to
---------------------------------------------------------------------------
implement sanctions is likely to be weaker.
3. This brings me to a third point, which is implementation risk.
Even if international coordination is high, sanctions regimes
are always complex, and executing them is not like flipping a
switch. At the IIF, we have heard from financial services firms
across the globe who have been diligently working to understand
and properly implement the sanctions regime. From that, we have
noticed that there should be a clear focus by authorities on
international alignment for such things as prohibitions/lists
of sanctioned individuals, sectoral application, and the timing
of designations across jurisdictions, alongside coordinated
communication on guidance concerning sanctions on a cross-
border basis. This should be coupled with discussions on how
financial crime risk management efforts can be deployed
effectively to mitigate the circumvention of sanctions--
including, inter alia, beneficial ownership transparency,
public/private sector information exchange, and the deployment
of standards for non-financial businesses and professions.
The bottom line is that sanctions regimes are difficult to
implement, multilateral cooperation is complicated--particularly for
larger economies, and you can't plug every leak. We also know China's
capability to retaliate economically is significantly greater than
Russia's.
CFIUS and Outward-Bound investment
One of the tools that the Administration and Congress has been
considering to influence our economic relationship with China is an
outward-bound investment screening mechanism. Some have called it a
``Reverse CFIUS''. As an individual who oversaw CFIUS for a time in my
career, I thought I'd try to suggest lessons that could be learned as
this Congress thinks through it.
The most important thing to understand about CFIUS is its
objective: ensuring national security while promoting foreign
investment. From a policy perspective, this meant to me that
legislation, operations, and implementation should:
i. minimize the opportunity for politicizing transactions,
ii. keep CFIUS narrowly focused on national security and resist the
impulse to use it for broader economic policy goals, and
iii. ensure accountability of the executive branch for protecting
national security while welcoming foreign investment.
I realize that there have been numerous attempts to design
legislation for an outward-bound investment mechanism in the past few
years and that the Administration is considering an Executive order to
create a system. It is not my place--at this time--to make a judgment
on any specific proposal, but besides the policy goals I note above for
CFIUS--I think there are a few other lessons that could be drawn as
either legislation or executive branch action is considered:
i. avoid the temptation to use vague and ill-defined terms;
ii. don't duplicate existing authorities in an agency or committee
with little experience or expertise;
iii. understand that there is a resource burden on the Executive
branch that makes implementation difficult; and maybe most
importantly
iv. realize that placing such government controls on private-sector
transactions--particularly in cases that have nothing to do
with national security--is likely to harm our competitiveness
and may prove to be counterproductive to our national security.
Conclusion
Thank you again for the opportunity to testify today. I stand ready
to serve as a resource to the Committee on important issues related to
economic sanctions and cross-border investment restrictions, and I'd be
pleased to take any of your questions.
PREPARED STATEMENT OF KEVIN WOLF
Former Assistant Secretary of Export Administration, Department of
Commerce
February 28, 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM DALEEP SINGH
Q.1. The Treasury Department has taken action against thousands
of small and large Russian entities in the last year.
Considering our Nation's approach to other bad actors in the
world, are there applications to how we might look to apply
lessons from the Russia sanctions to other issues, such as the
traffickers and cartels in Mexico and chemical companies in
China that facilitate the deadly flow of fentanyl to the United
States? Would it be possible to surge analytic resources to our
economic statecraft tools, similar to how we target Russia, to
address the deadly flows of fentanyl?
A.1. Response not received in time for publication.
Q.2. When you were in the White House, was there any
consideration as to how the overuse of sanctions with a
nonstrategic purpose could affect U.S. standing and business
development in growing economies such as Brazil and Indonesia?
A.2. Response not received in time for publication.
Q.3. I have been alarmed by reports of Iran's cooperation with
Russia by providing military aid. If evidence is presented that
the Central Bank of Iran facilitated any of these transactions,
should the U.S. sanction Iran's Central Bank?
A.3. Response not received in time for publication.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM DALEEP SINGH
Q.1. Chinese Money Laundering for Fentanyl in Mexico--What is
the role of Chinese money launderers in underwriting the
fentanyl drug trade?
A.1. Response not received in time for publication.
Q.2. What techniques are employed by these launderers, and what
platforms are they utilizing?
A.2. Response not received in time for publication.
Q.3. What is needed for Federal law enforcement to back-trace
these transactions to operators in China and identify them?
A.3. Response not received in time for publication.
Q.4. What is the role of the Chinese Communist Party in
enabling this transnational money laundering?
A.4. Response not received in time for publication.
Q.5. Cooperation with China--In August 2022, China announced
that they are suspending bilateral cooperation with the United
States in a variety of areas, including counternarcotic
operations.
Has China's decision to suspend bilateral cooperation in
counternarcotic operations significantly impacted our ability
to counter fentanyl trade? Is current reporting on China's role
accurate without this relationship?
A.5. Response not received in time for publication.
Q.6. Maintaining and Advancing Multilateralism--How should
Congress consider the negative impact of sanctions on partners
and allies?
A.6. Response not received in time for publication.
Q.7. How can sanctions or other economic actions be
complemented with other economic actions to bolster partners
and allies?
A.7. Response not received in time for publication.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM DALEEP SINGH
Q.1. Sanctions and Human Rights in Iran--In your testimony, you
mention how sanctions have been successful in holding Russia
accountable for its unjust invasion of Ukraine. However, the
United States has also used sanctions as a tool against
violators of human rights such as Iran following its brutal
crackdown on protests sparked by the killing of Mahsa Amini.
To what extent are targeted sanctions against authoritarian
regimes an effective tool for promoting democracy and human
rights?
A.1. Response not received in time for publication.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR FETTERMAN FROM DALEEP SINGH
Q.1.As displayed by the United States in response to Russia's
invasion of Ukraine, economic sanctions are a critical tool in
advancing foreign policy and national security objectives.
Other economic tools such as export controls and inbound
investment screening play a critical role as well. In your
'Written testimony, you highlighted the need for the United
States to balance its increased use of sanctions and related
measures, which are designed to cause economic pain, with an
even greater increase in measures that offer mutual economic
gain. For countries of concern, Congress and the Administration
are considering screening and restrictions on outbound
investments that support those countries' development of
critical capabilities that have national and economic security
implications. Without these measures, the United States risks
allowing countries like the People's Republic of China to
accelerate their access to our critical capabilities and
technology. Furthermore, we risk surrendering even more
manufacturing strength and jobs to the detriment of American
workers, manufacturers, and innovators.
How will an outbound investment screening mechanism help
the United States protect our national security and supply
chains?
A.1. Response not received in time for publication.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM DALEEP SINGH
Q.1. Chinese Military Companies Sanctions--Mr. Singh, as
someone who served in this Administration, do you have an
explanation for why your colleagues have failed to expand the
Treasury Department's Chinese military companies sanctions list
in over 14 months?
A.1. Response not received in time for publication.
Q.2. Expanding the Restrictions--Should dangerous Chinese
military companies be able to freely access and exploit the
United States?
A.2. Response not received in time for publication.
Q.3. Then shouldn't we consider more stringent sanctions
against these companies beyond a narrow investment ban?
A.3. Response not received in time for publication.
Q.4. Export Controls--Export controls have been a key U.S.
foreign policy and national security tool, and the Biden
administration has been using this policy lever. BIS leaders
have said, ``Russia and China will continue to be at the
forefront of BIS policy actions, frankly for years to come.''
Earlier last year, the focus included working with a robust
group of U.S. allies and partners to implement controls on
Russia due to their unprovoked invasion of Ukraine. In October
2022, significant controls were placed on advanced
semiconductors, machinery and computers, largely with regard to
China. There have been reports that the Administration is close
to securing multilateral cooperation on the Oct. 7
semiconductor controls with Japan and the Netherlands.
Could you address the importance of working with our allies
on export controls?
How successful has the multilateral coordination been with
regard to Russia, in your opinions, and do you think this
coordination can happen with regard to China--as well?
What are the consequences our international partners do not
agree to cooperate on export controls?
A.4. Response not received in time for publication.
Q.5. There has been a lot of discussion, both in Congress and
in the Administration, regarding the creation of an outbound
investment screening regime to ensure that U.S. investments are
not enabling Chinese military technological advantages that may
harm U.S. national security.
The United States already has a robust export controls
regime that makes sure sensitive technology and know-how does
not end up in adversaries' hands.
Can you address any gaps there might be in U.S. export
controls that an investment screening regime might fill?
Can you speak to any unintended consequences that may arise
if this Executive order or potential legislation is too broad
in scope?
Is it important that this effort is also coordinated with
U.S. allies and partners?
A.5. Response not received in time for publication.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM CLAY LOWERY
Q.1. Does Europe need to break up with Russia on all forms of
energy, including nuclear? Could the United States replace much
of the demand by expanding U.S.-produced energy, including oil,
liquified natural gas, and nuclear power? Is there anything
that needs to be done on our trade export finance side to
accomplish this?
A.1. Speaking on my own behalf--and not for my employer or its
members--the faster that Europe becomes less dependent on all
Russian energy--the better off it will be. Europe has taken
some important steps over the past year to wean itself off
Russian energy supplies, including an oil embargo and the
building of infrastructure to receive liquified natural gas
(LNG) from outside of Russian exports. The United States is
clearly one of the countries that can produce LNG and export it
to Europe. This, I think, is a win for Europe and for the
United States.
If the U.S. Government can help facilitate such overseas
sales--via regulatory issues, trade facilitation, or even
financing--then this should be pursued.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM CLAY LOWERY
Q.1. Chinese Money Laundering for Fentanyl in Mexico--What is
the role of Chinese money launderers in underwriting the
fentanyl drug trade?
A.1. I have no knowledge of this issue, I'm afraid.
Q.2. What techniques are employed by these launderers, and what
platforms are they utilizing?
A.2. I have no knowledge of this issue, I'm afraid.
Q.3. What is needed for Federal law enforcement to back-trace
these transactions to operators in China and identify them?
A.3. This is outside of my expertise.
Q.4. What is the role of the Chinese Communist Party in
enabling this transnational money laundering?
A.4. I have no knowledge of this issue, I'm afraid.
Q.5. Cooperation with China--In August 2022, China announced
that they are suspending bilateral cooperation with the United
States in a variety of areas, including counternarcotic
operations.
Has China's decision to suspend bilateral cooperation in
counternarcotic operations significantly impacted our ability
to counter fentanyl trade? Is current reporting on China's role
accurate without this relationship?
A.5. I have no knowledge of this issue, I'm afraid.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM CLAY LOWERY
Q.1. Multilateral Coordination on Economic Statecraft--As you
mentioned in your testimony, multilateral coordination with
U.S. allies is crucial to ensuring that sanctions and other
tools of economic statecraft are effective. Sanctions from the
European Union, Japan, and Korea have been helpful in
decreasing Russian oil exports, however, increases in purchases
of Russian oil by India and Turkey has undermined the economic
impact of these efforts.
What more can the United States do to incentivize our
allies and partners to join our economic efforts to hold our
adversaries accountable for their actions?
A.1. Speaking on my own behalf--and not for my employer or its
members--I think this is a very good and very difficult
question. The primary approach I believe is continued diplomacy
and ``carrots'' that make sense for the countries in question.
There are sticks that may be unrelated to the sanctions regime
that I'm not as familiar with that could potentially be used;
however, the one stick that I know is advocated by some--
including people I have deep respect for--is a secondary
sanctions regime. This approach can have an impact, but it
could undermine the ability of holding a coalition together,
which suggests much caution before taking such an approach,
particularly at a time where we are seeing greater signs that
the energy embargo that the EU put in place over the winter on
Russia is starting to have an impact.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM CLAY LOWERY
Q.1. Expanding the Restrictions--Should dangerous Chinese
military companies be able to freely access and exploit the
United States?
A.1. No.
Q.2. Then shouldn't we consider more stringent sanctions
against these companies beyond a narrow investment ban?
A.2. Speaking on my own behalf--and not for my employer or its
members--I'd say the answer is ``potentially.'' I choose that
word because when addressing specific companies, I believe
basing it on an evidence-based regime remains core to our own
values and, frankly, ``getting it right.''
Q.3. Investment Policy--There has been a lot of discussion,
both in Congress and in the administration, regarding the
creation of an outbound investment screening regime to ensure
that U.S. investments are not enabling Chinese military
technological advantages that may harm U.S. national security.
The United States already has a robust export controls regime
that makes sure sensitive technology and know-how does not end
up in adversaries' hands.
Can you address any gaps there might be in U.S. export
controls that an investment screening regime might fill?
A.3. Speaking on my own behalf--and not for my employer or its
members--I think this is an excellent question and one of the
key points I tried to make in my testimony, which is that if
Congress and the Executive branch consider creating an outbound
investment screening mechanism, they should avoid duplication
of existing authorities, such as export controls. If there are
current gaps in our existing export control regime, then by all
means--let's try to close them either with executive reforms
or, if necessary, by legislative means. An outward-bound
investment regime should be narrowly tailored to avoid becoming
a supra export control regime.
Q.4. Can you speak to any unintended consequences that may
arise if this Executive order or potential legislation is too
broad in scope?
A.4. Speaking on my own behalf--and not for my employer or its
members--I believe that an overly broad outward-bound
investment regime could be difficult to implement, threaten
U.S. competitiveness, undermine the ability to develop allies/
partners, and could harm U.S. investors more than the actual
target of the regime--thus being counterproductive to U.S.
interests.
Q.5. Is it important that this effort is also coordinated with
U.S. allies and partners?
A.5. Speaking on my own behalf--and not for my employer or its
members--there is little question that if we don't find a way
to coordinate with allies and partners, then an outward-bound
investment regime will be akin to a unilateral export control:
we could essentially cut the U.S. companies and individuals
from markets while having little impact--if any--on the
national security threat that we are trying to address.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM KEVIN WOLF
Q.1. Do you believe our export controls regime is currently
equipped to address attempts by foreign Governments, like
Russia and China, to misappropriate American goods and
technologies while also ensuring we're promoting the interests
of American citizens and businesses?
A.1. Response not received in time for publication.
Q.2. Although Russia's economy is still functioning as Mr.
Lowery described during the hearing, it appears that our
sanctions and export controls have successfully limited
Russia's ability to resupply military equipment damaged or
destroyed in the war. Do you believe that export controls are
effective or targeted enough to prevent the development of more
advanced systems from Russia and China? If not, should we be
doing more with our export control regime?
A.2. Response not received in time for publication.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM KEVIN WOLF
Q.1. Chinese Money Laundering for Fentanyl in Mexico--What is
the role of Chinese money launderers in underwriting the
fentanyl drug trade?
A.1. Response not received in time for publication.
Q.2. What techniques are employed by these launderers, and what
platforms are they utilizing?
A.2. Response not received in time for publication.
Q.3. What is needed for Federal law enforcement to back-trace
these transactions to operators in China and identify them?
A.3. Response not received in time for publication.
Q.4. What is the role of the Chinese Communist Party in
enabling this transnational money laundering?
A.4. Response not received in time for publication.
Q.5. Cooperation with China--In August 2022, China announced
that they are suspending bilateral cooperation with the United
States in a variety of areas, including counternarcotic
operations.
A.5. Response not received in time for publication.
Q.6. Has China's decision to suspend bilateral cooperation in
counternarcotic operations significantly impacted our ability
to counter fentanyl trade? Is current reporting on China's role
accurate without this relationship?
A.6. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM KEVIN WOLF
Q.1. Export Controls and Human Rights--Export controls through
multilateral coordination between the United States and its
allies can be an effective tool for promoting national and
economic security. However, it is important that these tools
are used in a fashion that does not encourage human rights
violations.
How can we strike a balance between utilizing export
controls and sanctions against authoritarian regimes while also
promoting human rights for everyday citizens in these
countries?
A.1. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM KEVIN WOLF
Q.1. Expanding the Restrictions--Should dangerous Chinese
military companies be able to freely access and exploit the
United States?
A.1. Response not received in time for publication.
Q.2. Then shouldn't we consider more stringent sanctions
against these companies beyond a narrow investment ban?
A.2. Response not received in time for publication.
Q.3. Export Controls--Export controls have been a key U.S.
foreign policy and national security tool, and the Biden
administration has been using this policy lever. BIS leaders
have said, ``Russia and China will continue to be at the
forefront of BIS policy actions, frankly for years to come.''
Earlier last year, the focus included working with a robust
group of U.S. allies and partners to implement controls on
Russia due to their unprovoked invasion of Ukraine. In October
2022, significant controls were placed on advanced
semiconductors, machinery and computers, largely with regard to
China. There have been reports that the administration is close
to securing multilateral cooperation on the Oct. 7
semiconductor controls with Japan and the Netherlands.
Could you address the importance of working with our allies
on export controls?
How successful has the multilateral coordination been with
regard to Russia, in your opinions, and do you think this
coordination can happen with regard to China as well?
What are the consequences our international partners do not
agree to cooperate on export controls?
A.3. Response not received in time for publication.
Q.4. Investment Policy--There has been a lot of discussion,
both in Congress and in the administration, regarding the
creation of an outbound investment screening regime to ensure
that U.S. investments are not enabling Chinese military
technological advantages that may harm U.S. national security.
The United States already has a robust export controls
regime that makes sure sensitive technology and know-how does
not end up in adversaries' hands.
Can you address any gaps there might be in U.S. export
controls that an investment screening regime might fill?
Can you speak to any unintended consequences that may arise
if this Executive order or potential legislation is too broad
in scope?
Is it important that this effort is also coordinated with
U.S. allies and partners?
A.4. Response not received in time for publication.
Additional Material Supplied for the Record
LETTER SUBMITTED BY AMERICAN SECURITIES ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]